MAISTRO PLC Finding its sweet spot
Software & comp services
blur Group's focus has moved towards growth and operational leverage, driven by business from enterprise customers within the company's sweet spot transaction value of $5-100k. While we expect growth to remain very strong, we have reduced our sales and cost estimates to reflect the increased focus on efficiency, retaining our forecast for EBITDA break- even for FY16. The opportunity for blur remains significant. Continued delivery to our estimates and key KPIs should deliver substantial upside.
19 November 2014
Price | 60.00p |
Market cap | £28m |
UK£/US$1.57 | |
Net cash ($m) 30 June 2014 | 24.4 |
Shares in issue 47.1m
Free float 70%
Year end Revenue
($m)
EBITDA ($m)
PBT* ($m)
EPS* (c)
EV/sales
(x)
P/E (x)
Code BLUR
Primary exchange AIM
12/12 2.8 (1.6) (1.7) (8.1) 6.3 N/A
12/13 4.8 (5.9) (6.0) (19.1) 3.7 N/A
12/14e 12.3 (8.3) (9.0) (20.8) 1.4 N/A
12/15e 25.5 (4.0) (5.1) (10.0) 0.7 N/A
12/16e 50.3 0.4 (1.2) (1.9) 0.4 N/A
Note: *PBT and EPS (fully diluted) are normalised, excluding intangible amortisation, exceptional items and share-based payments.
Focused on improving exchange efficiencyWhile blur's initial focus on building scale resulted in a rapid inflow of large deals, as planned the focus has now shifted towards driving operational leverage. This means growing repeat business from Enterprise customers and focusing on projects within the company's $5-100k sweet spot; these progress through the exchange quickly and with little manual intervention. The appointment of Stephen Harvey as CFO should also add impetus to the drive to control costs and tighten working capital.
Encouraging signs - KPIs to measure progress
The H1 results and today's trading statement point to a number of encouraging developments. The share of repeat business represented a third of bookings in Q314 and most bookings so far in Q4 are from enterprise customers. blur 4.0 appears to be working well and has been instrumental in raising company's 'sweet spot' project value from $5-10k two years ago to $100k now. We reflect the change in emphasis in our forecasts and reduce both our revenue and cost estimates. While these developments are clearly positive, until there is more visibility that this progress is sustainable, our forecast EBITDA break-even in 2016 is more
conservative than management's target for Q415. Key metrics to measure progress include: levels of business coming from repeat and enterprise customers; conversion rate of projects progressing from submitted to booked, then completion; improving revenue per head; and improving working capital profile.
The current share price implies the exchange remains largely a niche proposition, with growth tapering out once break-even is reached. Given the global opportunity and network effect business model, such a scenario seems cautious. DCF suggests a valuation of 300p+ if blur can deliver our forecasts and maintain its progress into the medium term. The key catalysts for such a scenario to become priced in are delivery to our estimates as well as on the KPIs above.
Secondary exchange N/A
Share price performance
52-week high/low 780.9p 59.5p
Business description
blur Group is an international e-commerce company that has developed and operates an online platform to provide a better way for businesses to buy or sell services. More than
50,000 businesses have used blur including
Amazon, Argos, Caterpillar, eBay, GE and Regus.
Next event
FY results April 2015
Analysts
tech@edisongroup.com
Edison profile page
blur Group is a UK-based, international e-commerce company, which was founded with the explicit remit of providing a better way for businesses to buy and sell services. The company has built,
owns and operates the Global Services Exchange, a cloud-based B2B services exchange platform,
on which businesses buy, sell, manage and pay for services. To date 50,000 businesses have used blur to buy or sell services online, including companies like Amazon, eBay, Regus, Caterpillar, Argos, Danone and GE submitting over $300m of services requirements to blur's platform.
more rigorous customer screening, improving the conversion rate of projects listed to those booked
then completed, and further developing the exchange to improve automation.
Driven by an inflow of large projects, bookings (the value of projects that have a signed SOW) showed a marked step up in the second half of 2013, from $5.2m in H113 to $17.0m in H213. This higher level was broadly maintained in H114 ($16m), but was less dependent on large projects as the emphasis shifted towards business within the $5-100k sweet spot. A significant proportion of these bookings are yet to be progressed through the exchange. In H114, revenues were $5.6m (+303% y-o-y) and today's trading update shows a small number of large projects previously expected to kick off in 2014 are now likely to start in early 2015. However, with a higher proportion of enterprise customers using the exchange, management is ahead of plan on costs.
In our forecasts, we reflect the increased emphasis on efficiency, with lower revenue and costs, retaining our forecast EBITDA break even point in 2016. At the end of H1 it reported $24m of net cash ($20m as of 17 November) and we believe that, provided collection is improved, this should
be ample to see the group to break even - we forecast trough cash of $12.8m in 2015.
Exhibit 1: Summary forecast changes
2014 2015 2016
$000s Old New Change Old New Change Old New Change Bookings 50,000 38,000 -24% 77,723 52,250 -33% 156,391 79,800 -49% Revenues 17,021 12,298 -28% 39,432 25,456 -35% 72,538 50,349 -31% EBITDA (6,991) (8,303) 19% (4,328) (4,047) -7% 181 356 97% PBT (normalised) (7,575) (8,962) 18% (5,337) (5,105) -4% (1,377) (1,156) -16%
Source: Edison Investment Research
Valuation: Scaling in its 'sweet spot' drives valuation
blur Group's valuation will ultimately be driven by its ability to scale efficiently, which in turn is a function of the network effect coming into play, and the 'efficiency' of the exchange. Success on both fronts should still create a business worth very substantially more than the current £28m valuation. It is early in its development and progress is unlikely to be uniform, but there are some encouraging early signs. The current share price implies that the company remains largely a niche proposition, with growth tapering out soon after break-even is reached. This seems counterintuitive given the company's addressable large market and network-effect business model. A scenario that in the company performs according to our forecasts to 2016, followed by 50% annual revenue growth to 2020 (to $250m) and peak EBITDA margins of 12.5% returns a value of 300p+.
blur Group | 19 November 2014 2
blur was founded with the explicit remit to leverage advances in social networking, broadband penetration and cloud technology to provide a better way for businesses to buy or sell services. The aim of the business is to make buying and selling services on-line as easy as buying goods. The company's Global Services Exchange is an e-commerce platform, which brings together large communities of corporate customers seeking to procure services, and service providers (referred to as experts) that want to provide them. Importantly, the offering covers the entire service
procurement and delivery process, from submission of a project, advertising it to a large, vetted universe of service providers, short-listing the best bids/pitches, providing project management/collaboration tools and a payment mechanism. The group currently runs nine categories - design, marketing, content, video, art, innovation, technology, legal and accounting - and is in the process of launching its 10th (HR). It has registered over 46,000 experts in 145 countries and has listed over 6,000 projects (at October 2014).
blur's exchange runs on a technology platform known as blur 4.0. The platform architecture is component based and has been built to enable the scalability to transact extremely large volumes of projects with the flexibility to enable the company to maintain a rapid rate of innovation. The platform is entirely cloud based, both hosted in the cloud and leveraging third-party cloud; and open-source technology to help deliver a scalable cost-effective solution. The company employs a team of 22 engineers and development work is continual, with a focus on improving the user
experience, ensuring system performance and Exchange Support efficiency as volumes grow. The latest iteration (blur 4.0) has been designed with a 'mobile first' interface (in September 12% of projects were submitted via smartphones) and with larger enterprises in mind; there is no longer an upper limit on the value of a project submitted and multiple individuals in an organisation can participate.
The journey of a project through the platform is largely automated. However, unlike some exchanges, the company's Exchange Support team monitors and support the process to ensure projects are well constructed and to provide quality control on pitches, create pitch shortlists and help keep projects moving smoothly to completion.
The project lifecycle can be broken down into a number of steps: project mandate submitted, pitch selection, project management and payment.
blur Group | 19 November 2014 3
Exhibit 2: Key steps in the project lifecycle Exhibit 3: blur's solution
Buyer opens account or logs in
Buyer plans and refines their services requirements within
'project space'
Buyer initiates their project with a defined brief using the 'brief app'
Buyer lists the brief on the 'exchange' with a commitment to pay a 'listing fee'
Service providers pitch for the project using blur's 'pitch app'
blur manages the pitch process and uses its blurSense algorithm to automatically present the buyer with a shortlist of the best matches; buyer makes a choice
Buyer and seller agree a digital 'Statement of Work' which dictates the invoicing schedule. The project is 'kicked off', and an online "collaboration space" is opened, providing online communication and scheduling tools that, along with Exchange Support, help projects to progress to plan.
Buyers and sellers manage the project online through 'Project
Space'
Submit a project brief
If a project 'fails' and no expert is matched, 10% of project value paid as listing fee
blur expert support staff
blur trading platform
Project listed
Pitch space opened
Submit pitch
Short list compiled (blurSense algorithm)
Pitch selected by corporate
Statement of work (milestones)
Project kick off
Invoiced to milestones
Collaboration space opened
Quality control and support
Algorithm driven with expert
'sanity check'
blur's 'billing app' manages invoicing and payments and blur pays the service provider
blur evaluates project success and rates the service provider
Monitoring, guidance, advice
Project scheduling, management tools
Payment status, expert rating
Project completion and final
payment
Source: blur Group, Edison Investment Research Source: Edison Investment Research
'80:20 rule' for sourcing services
The sourcing of services by corporates has changed very little over the last 20 years and the scope to improve the procurement model is significant. The costs and time involved in the vendor
selection process mean that large service companies typically seek to lock in retainer relationships
with suppliers, where contracts to supply services can last several years. For ad hoc or more specialist work, companies may have a roster of preferred suppliers where the security and lower costs associated with choosing a known supplier often outweigh the benefits of seeking a new supplier with experience and skills that more directly match the project in hand. Where this is not possible, companies will spend considerable resource in sourcing a new supplier. blur points to an
'80:20' rule for time spent procuring services, where 20% of a company's time spent procuring services is with 80% of its suppliers, but the remaining 20% of suppliers can take up 80% of time. While the retainer model may work fairly well for large annual and rolling service relationships (eg multinational advertising agency agreements), for the 'tail spend', the sourcing of service providers for one-off or more specialist projects can be very inefficient. This is where blur's exchange offers most value.
lower business development costs. These are explored in more detail in Exhibit 4.
blur Group | 19 November 2014 4
Exhibit 4: Value proposition
Benefits for customers
Greater choice Experts from all over the world can submit pitches cost effectively, giving the customer much more scope to find a supplier that meets its skill set and price requirements
Reduced complexity Through providing the network and user friendly tools to select providers, manage and pay for projects
Faster project lifecycles The tendering process typically shortens the service provider selection process. Management also believes projects are completed more quickly, benefiting from more precise vendor selection, project management and monitoring tools, as well as the input from the Exchange Support team
Cost transparency Through gaining visibility on rates paid for similar projects. the ability to submit projects for competitive tender on a project-by-project basis
Supplier vetting blur vets suppliers so the customer does not have to. It also uses its economies of scale and tools to monitor suppler effectiveness
Improved Collaboration Tools facilitate project management and collaboration with the client, while blur also monitors progress and provides 24/7 exchange support
Benefits for suppliers Broadens addressable client base
Low cost way to source new business
Reduces geographical restrictions and provides access to projects that previously may only have been made available to larger or local service providers
SME service businesses typically spend a significant proportion of time and resources on business development, which could be substantially reduced for successful exchange users
Faster and secure payment A structured and monitored payment mechanism can offer attractions to companies that have not previously conducted business
Source: Edison Investment Research
Competitive positioning - end-to-end, all-service provider
Although other service exchanges exist, we are not aware of a formal structure that directly challenges blur's model.
Exhibit 5: Market positioning
blur Group
Elance, oDesk, SAP Ariba
GetApp.com. Hitechpros.com, Amazon Mechanical Turk, Expertbids
Resource Nation, Buyerzone, Alibaba
oDesk, guru
Freelance.com
99 designs, Craigslist, Uber
Go Compare, Angies List, Rightmove, Zillow, Designcrowd, findatradesman.co.uk
Discovery Match making Delivery/project management
Payment
Source: Edison Investment Research
blur differentiates itself on a number of levels:
End-to-end services platform - it covers the entire service procurement and delivery process.
Other exchanges tend to be involved only at the discovery or match-making stage (eg
Resource Nation), or procurement platforms that automate negotiation, bidding and parts of the selection process, but do not offer project management and collaboration tools.
Exchange Support team - the individual level of support could present an obstacle to scaling
the business, however, it is essential to ensuring higher success rates and attracting larger projects; key attractions of the exchange. It also serves as an effective barrier to competition.
A one-stop shop - management aims to cover all the key service verticals to ensure broad
enterprise appeal. As a vertical grows, it may build a dedicated vertical around sub categories,
blur Group | 19 November 2014 5
or launch into new verticals, eg video was carved out of the content vertical and management hopes it will enable it to expand into the advertising vertical in the future. With nine live verticals, many business services are addressed. Other B2B service exchanges, such as GetApp.com or Hitechpros.com, operate in only one vertical.
Operating only in the B2B space and on a project basis rather than on staff or time, blur
differentiates itself from freelance exchanges such as oDesk, freelance.com and Guru.
Business modelblur's interests are aligned to the exchange users: blur Group's principal source of revenues comes from charging a 20% margin on the value of projects executed. Smaller projects tend to be invoiced entirely at 'kick off' with 50% payable upfront and the rest on completion. Larger or more complex projects are invoiced according to a pre-determined statement of work (SOW) as project milestones are reached or on a time basis. For standard projects, management estimates the typical time frame from the project being listed to completion is three months. Larger projects may take several years. It also charges a 10% fee for listing projects (subject to a minimum of $395), which is waived if they are booked (when the listing fee is reversed out and instead blur will start to accrue project revenues). The listing fee is recognised upfront, and is due where companies choose not to select any of the pitches proposed by the exchange. By taking a larger share of revenues on successful projects, blur Group has neatly aligned its interests with those of the exchange users.
Network effect business model: blur's online services exchange is a classic network effect business model where the strength of customer proposition grows with the number of people who use it. If the network effect kicks in customers would gravitate toward the platform, improving the value proposition, and the virtuous growth circle. To drive a critical mass of enterprise customers, blur has a direct sales force to 12 with 'on the ground' presence in London and Dallas. It plans to add approximately five salespeople over the next year and potentially to open an Asian hub from Hong Kong. SMEs are reached mainly via digital marketing initiatives and blur hopes to widen its reach via its partner programme; over the last year, it has announced agreements with Alibaba, AMIS, CBRE, GAIN and Compass Group.
Automation drives operational leverage: scalability is arguably limited by the capacity of the Exchange Support team to support increasing volumes and more complex projects across multiple territories. A number of improvements to the platform have been made to support the team's efficiency. The 'project space' has enabled customers and experts to interact more effectively (it features project management tools, communication and file-sharing facilities, the ability to invite outside collaborators, automatic triggering of milestone-based invoices). The development of
'blurSense', a machine intelligence solution (drawing on the exchange's accumulated data), which automatically matches the most appropriate pitches and projects, is helping teams streamline the pitch selection process.
Optimising project acquisition costs: scale itself is a key factor in the cost of customer acquisition due to the network effect, and building scale will ultimately be a result of a positive user experience; a satisfied exchange user is likely to use the exchange repeatedly (with little marginal acquisition cost), and contribute to the viral marketing. User experience is affected by the platform's ease of use, the quality of projects and experts on the exchange and the 'success rate' of projects, ie the smooth progression of a project to completion.
Evolving business - finding its sweet spot
2014 has been a transitional year for blur - the company, the platform and its usage have evolved considerably. The fourth iteration of the platform (blur 4.0) was successfully launched and the global HQ move to Exeter, which started in 2013 was completed. The value and volume of projects being submitted to the exchange has increased rapidly, particularly towards the end of 2013 when
blur Group | 19 November 2014 6
the number of enterprise class customers started to increase and when the exchange started to receive more larger and multi-year projects. In H114, projects were submitted from 70 different countries and started from 17 (the UK and the US still contribute the majority). The cumulative number of projects submitted to the exchange increased to 6,329 as of 17 November 2014 (a four fold increase on the previous year); the total value of these submitted projects reaching $310m. blur has had to evolve its systems and procedures to deal with this and support the exchanges' efficiency.
Evidence of the network effect: management believes that early signs of the network effect are emerging; sourcing experts is becoming increasingly viral and several have also become customers of the exchange for their own businesses - there are now over 46,000 experts registered, up from
34k at the end of 2013. Repeat business increased 170% in H114 with an increasing number of
customers using multiple verticals on the exchange (Amazon, Sabre, Incisie Media and Menard) and other blue-chip names starting out on the exchange (eg Amazon, Argos and Tesco, which joined in Q414), pointing to customers accepting the exchange. We estimate the ratio of bookings to S&M headcount increased seven times between 2012 and H114.
Larger more complex projects: when blur initially launched its platform, average project values were $5-10k. The recent take up by enterprise customers has seen this value increase significantly (eg two projects for over $500k were booked in Q414). Through H114, the rate at which enterprise- scale customers used the exchange increased from one a month to one a week representing the majority of bookings so far in Q4. While clearly positive for the business, larger projects are more complex, last much longer and require greater involvement from Exchange Support to move them
to completion. blur is having to evolve its systems and procedures to deal with this challenge; earlier this year it changed its revenue recognition policy to better reflect this new dynamic, new financial systems have been introduced that can handle the complexity of large projects and a specialist team of nine ('customer success') has been created to deal with project management of more complex projects.
Finding its sweet spot: while larger projects can move the dial in terms of total bookings value, they represent a fairly small proportion of bookings volumes and it is the projects below $100k that drive the operational leverage of the business; here blur has experienced a significant increase in automation and Exchange Support efficiency. According to management, in this 'sweet spot', the blurSense algorithm is increasingly taking a lead role in matching projects to pitches and they move smoothly through the exchange with relatively little support required. This is evidenced by the fact that headcount in the Exchange Support team has remained flat over the six months to June 2014 and group headcount is down to 67 from 78 at the start of the year. The 'sweet spot' is likely to increase as new procedures are bedded down. Two years ago projects below $10k were
considered to be 'fully automated'; this has now increased to c $100k and is likely to continue to evolve.
Management and background
blur Group was founded by CEO and Chairman Philip Letts (30% of the shares, locked in until October 2016). With an initial focus on the media and creative industries, the first expert creative crowd was launched in 2007 and the first full version of the exchange platform was launched in January 2010. The company listed on AIM in October 2012, raising $5.6m (at 82p). It has subsequently raised a further $31.5m ($11.5m at 150p in June 2013 and $22m at 75p per share in June 2014) to support the rapid scaling of the business. During 2013, it moved its global headquarters to Exeter (UK) from London and opened an office in Dallas. After a period of instability in the senior finance function, Stephen Harvey recently joined as CFO and KPMG has
recently been appointed as the company's new auditor. The biographies of key staff are included on
page 12.
blur Group | 19 November 2014 7
blur acts as principal on the trade transacted through the exchange and therefore the full value of projects is recognised as revenue. Gross margin is a function of the percentage of projects listed (100% margin on listing fees) and the percentage successfully converted into billable projects (20% margin on project values). Thus, somewhat counterintuitively, a higher success rate at converting projects listed to projects billable will result in a reduction in gross margin, but higher overall gross profit and significantly higher revenues. At the operating level, the efficiency of the sales and marketing team and the Exchange Support team are key drivers of EBITDA margins. As outlined above, this should be principally determined by the timing of the network effect coming into play, along with the percentage of repeat business, the conversion rate of projects submitted to those booked and the share of projects that are in the company's 'sweet spot'.
The value of bookings provides the best visibility on the conversion of projects listed to future revenues. Bookings showed a marked step up in the second half of 2013, from $5.2m in H113 to
$17.0m in H213; this higher level was broadly maintained in H114 ($16m) and today's trading update indicates that new project bookings are progressing to plan in H214. However, the progress the group has made is not yet evident in reported results. In H114, $5.6m (+303% y-o-y) of revenues were recorded and it today announced that a small number of large projects, previously expected to kick-off in 2014, are now likely to start in early 2015. This suggests there is a considerable share of bookings still to be recorded as revenues. In H1 the gross margin was 27%, implying that approximately 45% of projects listed are being booked, leaving plenty of room for improvement. The H1 EBITDA loss was $4m (H113 $2m, FY13 $5.9m), reflecting the recent geographic expansion, a higher average staff cost as the mix of employees skews towards salespeople and a 'transitional phase' as the group moved to Exeter. The receivables balance, at
$4m, showed little movement on the year end. However, the increase in the bad debt provision fell to $109k, 2% of revenues (vs $644k, 13% revenues in FY13).
Now that the group has built a credible scale, we expect a more measured pace of expansion and a
tighter focus on driving efficiency metrics. This can already be seen in the front office, with an improving share of repeat business, efforts to improve conversion rates and platform developments to enable a lighter touch from the Exchange Support team. With the recruitment of Stephen Harvey as full-time CFO, based in Exeter, we expect the back office to catch up. An integrated financial reporting system has been implemented; this is capable of handling more complex projects and a higher volume, giving management greater visibility. New credit control procedures have been implemented to improve collection of listing fees and blur's trade receivables.
In light of the company's current focus, we are updating our forecasts. Broadly speaking, we reflect a more measured pace of sales force expansion (ie a lower cost base), but with a higher revenue per S&M head. The net effect of our changes does little in terms of our forecast EBITDA break-even for 2016; however, we consider the current strategy a less risky road to achieving it. We remain on the conservative side of management's targeted EBITDA break even in Q415 until we have more evidence that the improving operational efficiencies are a sustainable trend - we hope to hear more from management on this subject at the time of the full-year results. More specifically, we assume:
Revenues: the value of projects listed per S&M employee increases by 40% pa as the network effect takes hold and as the percentage of repeat business from Enterprise customers in its sweet
spot increases; we forecast the share of repeat bookings to increase from 20% in 2013 to 45% by
blur Group | 19 November 2014 8
2016. This drives our forecast bookings of $38m in FY14 ($22m in FY13) and $80m by 2016. We assume that, on average, bookings are recognised over three years and that 30% of bookings fail to complete (decreasing to 22% by 2016). This drives our revenue forecast of $12.3m this year (previously $17m) increasing to $50m by 2016 (reduced from $73m), doubling each year.
Gross margin: listing fees are recognised when there is an expectation of collection; with a more rigorous collection policy in place, we expect the share of revenues coming from listing fees to increase in the current year. Consequently we forecast the gross margin to remain at 27% in the full year (in line with H1, but up on the 24% reported last year). However, it is management's priority to increase the conversion rate of projects listed to booked, and there is plenty of scope to do this; we forecast this to increase from c 45% in 2013 to 60% by 2017 - consequently, our gross margin forecast decreases from 27% in 2014 to 25% in 2016.
Operating margin: we expect a more measured pace of expansion and forecast headcount to be broadly flat in FY15 (70) on FY14, rising to 80 in FY16. With tighter controls in place, and a higher share of repeat business from enterprise customers, we would expect the bad debt charge to normalise and we reduce our full year assumption from 7% of revenues to 3% of revenues.
Cash flow and balance sheet: with a wholly cloud-based infrastructure, capital expenditure requirements are modest (we assume 1% sales). The company capitalises development costs - we forecast $1.4m in 2014, which we forecast to rise to $1.8m by 2016. Following the IPO and subsequent fund-raisings, blur reported $24.4m of net cash at 30 June 2014. On our forecasts, provided collection improves in line with our estimates (receivable days halving by 2016), this
should comfortably see it to cash flow break even, with trough cash reserves at $13m in 2015, leaving a good margin of flexibility. Full forecasts are presented on page 11.
Sensitivities
blur is still at relatively early stage of development commercially, with an innovative business model predicated on gaining critical mass. Success is not a given, challenges will be faced and the business model is likely to continue to evolve. For instance:
Network effect and efficiency: the extent to which efficiency can be improved is unknown. If
sales and marketing efficiency improve by 60% a year in 2015 and 2016 instead of our 40% assumption, it would add 18% to revenues by 2016 and 2pp to the EBITDA margin by 2016 (c $3m of EBITDA). On the other hand, if it improves by only 20% pa, revenues would be
c 16% below our forecast in FY16, with EBITDA margins c 3% behind forecast (reducing
EBITDA by c $2m in FY16).
Conversion of projects listed to those booked and completed: we forecast the ratio of projects listed to those booked to improve from 45% in FY13 to 60% in FY16 with a rising completion ratio - this drives a forecast of a larger overall gross profit (although at a reducing margin). If blur cannot improve this ratio, our revenue forecast would be c 13% lower by 2016.
Evolving business: premium and other advanced service revenues are nascent and we do
not include them in our forecasts, but management hopes they will come to represent a core revenue stream. With close to 100% margin, if they can be monetised it could significantly affect forecasts.
Bad debt: tighter controls and a higher share of repeat business should help reduce the
incidence of bad debt. However, blur is a young business that needs to build critical mass and there is a risk that debt could remain elevated for some time. We are also conscious of the $4m receivables on the balance sheet. Management continues to pursue these debts; however, given the maturity of this balance, an exceptional write down is possible.
Other: limited free float - founder and CEO, Philip Letts, holds 30% of shares in issue with free
float standing at 70%. Currency - revenues and costs are incurred across the US and the UK, but with a UK listing, the company is exposed to $/£ exchange rate movements.
blur Group | 19 November 2014 9
Over the two years since it listed, blur Group has evolved from an innovative approach, to being an accepted way of sourcing service providers by many blue-chip enterprises. The global services industry (for IT services, legal, creative and accounting) is estimated to be worth $2tn.1 Assuming
20% of this is suitable for service exchanges (based on the 80:20 rule), this puts blur's and its competitors' theoretical addressable market at close to $400bn - even a very small share of this could create a valuable business. blur's valuation will ultimately depend on the speed at which the network effect comes into play, its ability to break into other geographies and the potential to improve the overall efficiency of the exchange. Although not yet evident in reported results, as discussed in this report, there is early evidence that it is on the right track and provided management can provide ongoing evidence of 'efficient scaling', we believe there should be considerable upside to the share price, which currently discounts little progress beyond break-even.
We present three valuation scenarios. In each scenario we assume a 12.5% discount rate and a
'fade' period where the growth rate decreases at a uniform rate from the exit rate in 2020 to a 2%
terminal growth rate from 2025 ($:£ exchange rate of 1.65).
Continuation of current performance: our base-case DCF builds on our forecast, which assumes an annual doubling of revenues until break-even in 2016, driven by the assumption of a 40% annual increase in bookings per S&M head. If this performance continues to 2020, this would drive annual revenue growth of c 50% pa and we believe EBITDA margins of 12.5% would be achievable. Under this scenario, our DCF returns a value of over 300p per share.
Growth tapers off: the current share price seems to imply that the exchange remains largely a niche way to source business services. If we assume our forecasts break even in 2016, followed by 25% revenue growth for the years to 2020, EBITDA margins would peak at 10% - driving a DCF per share of 68p - broadly in line with the current share price.
Network effect takes hold: companies where the network effect has taken hold typically double (or more) their revenues annually after reaching a critical mass (Exhibit 7). If blur can continue to double revenues each year to 2020, we believe peak EBITDA margins of 15-17.5%
are achievable and the business could be worth over £1bn.
Exhibit 6: DCF scenario analysis - value per share (p)
peak EBITDA margin in 2020 Edison forecast to 2017, followed by revenue growth of x% for three years to 2020
x = 10% x = 20% x = 50% x = 60% x = 80% x = 100%
6.0% 11 28 104 166 384 816
8.0% 20 48 167 259 586 1221
10.0% 30 68 229 353 787 1625
12.0% 42 93 307 471 1039 2131
15.0% 53 119 384 588 1291 2636
Source: Edison Investment Research
Exhibit 7: Revenues of successful network effect businesses
500
400
300
200
100
0
YR0 YR1 YR2 YR3 YR4 YR5
Amazon ASOS EBAY LinkedIn RightMove Zillow
blur (Edison estimates)
Source: Thomson Datastream, Edison Investment Research. Note: Year 0 = last financial year with revenues
1 blur based on Gartner and Marketline data.
blur Group | 19 November 2014 10
Exhibit 8: Financial summary
$'000s 2012 2013 2014e 2015e 2016e
Year end Dec IFRS IFRS IFRS IFRS IFRS
PROFIT & LOSS
Revenue 2,807 4,779 12,298 25,456 50,349
Cost of Sales (2,080) (3,614) (8,944) (18,825) (37,762) Gross Profit 728 1,165 3,354 6,631 12,587
EBITDA (1,616) (5,868) (8,303) (4,047) 356
Operating Profit (before amort. and except.) (1,658) (6,061) (9,039) (5,232) (1,258) Intangible Amortisation 0 0 0 0 0
Exceptionals (97) 0 0 0 0
Share based payments (105) (503) (1,000) (500) (525) Operating Profit (1,860) (6,564) (10,039) (5,732) (1,783) Net Interest (13) 31 76 127 103
Profit Before Tax (norm) (1,671) (6,030) (8,962) (5,105) (1,156) Profit Before Tax (FRS 3) (1,872) (6,533) (9,962) (5,605) (1,681) Tax 128 241 200 200 200
Profit After Tax (norm) (1,612) (5,426) (8,229) (4,905) (956) Profit After Tax (FRS 3) (1,745) (6,292) (9,762) (5,405) (1,481)
Average Number of Shares Outstanding (m) 19.8 27.3 38.4 47.1 47.1
EPS - normalised (c) (8.1) (19.9) (21.45) (10.4) (2.0) EPS - normalised fully diluted (c) (8.1) (19.1) (20.8) (10.0) (1.9) EPS - (IFRS) (c) (8.8) (23.1) (25.4) (11.5) (3.1) Dividend per share (c) 0.0 0.0 0.0 0.0 0.0
Gross Margin (%) 25.9 24.4 27.3 26.1 25.0
EBITDA Margin (%) -57.6 -122.8 -67.5 -15.9 0.7
Operating Margin (before GW and except.) (%) -59.1 -126.8 -73.5 -20.6 -2.5
BALANCE SHEET
Fixed Assets 248 1,135 2,172 2,761 3,170
Intangible Assets 208 961 1,726 2,227 2,408
Tangible Assets 40 174 446 534 762
Investments 0 0 0 0 0
Current Assets 6,138 15,048 30,913 31,928 38,991
Stocks 0 0 0 0 0
Debtors 1,685 5,486 15,000 19,092 25,175
Cash 4,453 9,561 15,913 12,836 13,817
Other 0 0 0 0 0
Current Liabilities (1,424) (5,309) (9,854) (16,562) (25,190) Creditors (1,424) (5,294) (9,838) (16,547) (25,175) Short term borrowings 0 (15) (15) (15) (15) Long Term Liabilities (15) 0 0 0 0
Long term borrowings (15) 0 0 0 0
Other long term liabilities 0 0 0 0 0
Net Assets 4,947 10,873 23,231 18,126 16,971
CASH FLOW
Operating Cash Flow (2,163) (5,523) (12,995) (1,303) 3,004
Net Interest 0 0 0 0 0
Tax 0 0 0 0 0
Capex (275) (1,089) (1,773) (1,775) (2,023) Acquisitions/disposals 0 0 0 0 0
Financing 6,735 11,353 21,120 0 0
Dividends 0 0 0 0 0
Net Cash Flow 4,297 4,741 6,352 (3,078) 981
Opening net debt/(cash) 99 (4,438) (9,546) (15,898) (12,820) HP finance leases initiated 0 0 0 0 0
Other 241 367 0 0 (0) Closing net debt/(cash) (4,438) (9,546) (15,898) (12,820) (13,801)
Source: blur Group (historics), Edison Investment Research (forecasts)
blur Group | 19 November 2014 11
Contact details Revenue by geography H114
Eagle House, 1 Babbage Way, Exeter Science Park
Exeter, Devon
EX5 2FN
www.blurgroup.com
%
0% 20% 40% 60% 80% 100% UK ROW US
CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation
EPS 2012-2016e 1.9% EPS 2014e-2016e NA EBITDA 2012-2016e 13.2% EBITDA 2014e-2016e NA Sales 2012-2016e 112.9% Sales 2014e-2016e 102.4%
Management team
ROCE 2015e NA Avg ROCE 2012-2016e NA ROE 2015e -39.2% Gross margin 2015e 26.1% Operating margin 2015e -20.5% Gr mgn / Op mgn 2015e -1.3
Gearing 2015e -64% Interest cover 2015e 85.5
CA/CL 2015e 1.7
Stock days 2015e 0.0
Debtor days 2015e 273.8
Creditor days 2015e 237.3
Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices
Chairman and CEO: Philip Letts (board position) CFO: Stephen Harvey
Mr Letts has run a number of high-profile web ventures operating across the US and Europe, including an established Silicon Valley venture. He co-founded Beenz.com in 1998, an internet currency programme valued at $300m when he left in 2000. Before starting the predecessor of blur Group (b-uncut.net) in 2007, he held positions as CEO of Tradaq and Surfkitchen.
Mr Harvey joined as CFO in September 2014. From 2004 and prior to joining blur he was CFO of Acision (a messaging company) following its spin out from Logica plc working both in the UK and internationally. Before this, he was CFO of Microsoft UK.
Executive director: Barbara Spurrier (board position) Head of exchange support: Kara Cardinale (board position)
Ms Spurrier has over 25 years' experience in financial, strategy and accountancy roles with a wide range of experience in fast-growing companies in both the public and private markets. Before joining blur Group in April 2012, she was CFO of AIM-listed Water Intelligence, CFO of a fast-moving consumer goods business and CFO of a fast-growing biotech company. Earlier in her career, she was a portfolio manager at Rothchilds in Australia.
Ms Cardinale has experience in the media industry and before co-founding
b-uncut.net with Mr Letts, she built her own design firm and managed artists. Earlier in her career, she worked in PR at Bergdorf Goodman and Giorgio
Armani, after which she worked in format development at Radiotelevision
Italiana.
Principal shareholders (%)
Letts Philip Leslie 30.1
Jo Hambro Capital Management 11.1
River & Mercantile Asset Mgmt 9.5
Majedie Asset Management Ltd 5.6
Keith Robert 3.1
Investec Asset Management Ltd 3.8
Octopus Investment Ltd 2.0
Companies named in this report
Amazon, Linked In, eBay, Zillow, Hitechpros.com, ASOS
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