Boku Regulatory News (BOKU)

10 September 2019

Boku, Inc.

("Boku" or the "Company" and, together with its subsidiaries, the "Group")

Interim Results for the six months ended 30 June 2019

Boku (AIM: BOKU), the world's leading independent direct carrier commerce company, today announces its unaudited interim results for the period ended 30 June 2019 ("H1 2019", the "Period").

Financial Highlights

Operational Highlights

*Adjusted EBITDA: Earnings before interest, tax, depreciation, amortisation, share-based payment, foreign exchange gains/(losses) and exceptional items.

Jon Prideaux, Chief Executive of Boku Inc, commented: "Our overall guidance for the year was for $52 million of revenue, gross margins of 93% in Payments and 40% in Identity leading to adjusted EBITDA growth of between 45% and 50%. Overall revenue at $23.5 million and Adjusted EBITDA of $4.3 million represent 45% and 47% respectively of our full year targets. There's no question that we need a good second half in order to deliver; we anticipate one and thus leave our guidance unchanged.

"Gross margins in both segments are ahead of target. Within Payments we expect a stronger second half driven by the game release schedule, the traditional Christmas peak and a spate of new connections. We now have a pipeline of more than 250 deployments - moderated by some extended promotional periods by some customers. In Identity, we expect the investment that we have made in sales resource to start to pay off and also to start generating more non-US revenue as international connections become activated.

"Looking ahead to 2020, the strong pipeline in both Identity and Payments give me confidence in the long-term health of the business".

Enquiries:

Notes to Editors

Incorporated in 2008, Boku is the world's leading independent carrier commerce company. Boku's Platform, which is linked to billing, identity and sales systems of more than 170 mobile network operators, simplifies transacting on mobile devices.

Boku's Payment products enable mobile phone users, of which there are more than five billion worldwide, to buy goods and services and charge them to their mobile phone bill or pre-pay balance. Its Identity Products are used to verify user details. Companies like Apple, Google, Facebook, Microsoft, PayPal, Spotify, Square, Sony and Western Union use Boku to simplify sign-up, acquire new paying users and prevent fraud.

Chief Executive Officer's Report

Strategy

It was twelve years ago that Steve Jobs strode onto the stage at Macworld and announced the iPhone. According to the World Bank, the job of distributing smartphones to the world's population is nearing its completion: there is a mobile broadband connection for just under seven in every ten humans on earth.

Mobile is a new computing paradigm; it is not just a PC with a smaller screen. A smartphone is always in your pocket, always connected, can be endlessly customised with apps, has a microphone, speaker and a camera; it knows where it is. It's also pretty inconvenient to enter large amounts of text due to the touch interface, putting a premium on simplicity.

This combination of capabilities means that when the smartphone touches a new industry, it disrupts it. It's changed the way that we listen to music, board planes, navigate around a city and a whole host of other applications - but it's still in its infancy.

Whilst nearly 70% of the world's population has mobile broadband, less than 5% of global commerce takes place on a smartphone. If you think that people use their phones a lot, "you ain't seen nothing yet".

One thing holding back usage is the tools used by service providers. We still use the email address as the index of identity and the IP address as a proxy for location, tools from the PC era that have not been reinvented for the age of mobile.

One type of company has the key to unlock this potential: the Mobile Network Operator ("MNO"). They have a secure SIM in every phone. Through this, with bank grade security, they can identify your phone number, check your name and address against their files and extract certain characteristics of the account, such as whether it's prepaid or postpaid. All this can be done seamlessly, automatically, in the background, without the need for the user to do anything. It's a great framework for providing payment, identity and fraud management services.

So why haven't carriers' capabilities been widely adopted? In a word, fragmentation. There are more than 150 MNOs around the world with more than 10 million customers. Whilst there are standards governing the making of phone calls or sending of text messages, billing and identity capabilities are not standardised. They need to be integrated one by one, a task that is uneconomic for any single company, including the world's largest.

The Boku Platform has solved this fragmentation problem. Since 2009, when we launched, Boku has built the world's most sophisticated carrier network. It now spans 190 carriers in 59 countries. The degree of sophistication of those connections is unparalleled. Although the capabilities of different carriers vary, amongst other things, we can automatically verify phone numbers and debit from or credit to phone bills or prepaid balances. The network can receive daily files from carriers and automatically reconcile the details. It has the capacity to process more than 600 payment transactions per second, with idempotency. Deployed over multiple data centres and in the cloud, the Boku Platform is reliable with no unscheduled outages in the period and an average response time of one tenth of a second.

The Boku Platform is the strategic asset that sits at the centre of our value proposition. It is on this platform that we build our products.

The first application was Payment. Although, when measured against conventional payment characteristics, like cost or speed of settlement, charging services to your phone bill did not compare well, it does a great job at helping to acquire new users. The ability to tap-once-to-pay or, better yet, tap-once-to-register, has meant that companies like Apple, Sony, Spotify, Netflix, Facebook and Microsoft acquired millions of new paying users through Boku. Not only can we remove friction from the payment, thus reducing Customer Acquisition Cost ("CAC"), but also we can deliver longer Life Time Value ("LTV") to our merchants; unlike cards, phone numbers don't expire and can be used to prompt users to fix problems when transactions fail.

In a speech in 1859, Abraham Lincoln referred to the fable of the Eastern Monarch who asked his wise men to come up with a sentence that was true at all times and in all situations. They presented him with the words "And this too, shall pass away".

As in politics, so in business. The corporate graveyard is littered with the hulks of companies who thought that the path to future success was simply continuing with the thing that had made them successful. To thrive is to change. Boku cannot carry on growing indefinitely by doing the same thing. Eventually all merchants will be connected to all carriers and growth will attenuate. We need to devise new ways of growing. Our platform gives us the ability to double down on the merchant side of our business, by finding ways to increase the share of checkout that we process and, simultaneously, to double down on the carrier connections that we've built by launching new products across those same connections to serve new merchant segments.

Our mobile wallets initiative, exemplified by the announcement of our partnership with Grabpay, is a good example of how we aim to inject new growth into Payments. With more than 68 million mobile app downloads across eight South East Asian countries, Grabpay users are really attractive to our merchants.

The acquisition of Danal Inc.("Danal"), now Boku Identity, allows us to simplify sign up and address fraud for the financial services sector without moving money. When acquired, Danal had customers such as PayPal, Western Union and Uber, but relatively limited coverage outside the US. As Boku Identity, we have invested heavily in more sales and in increasing the carrier coverage, especially exploiting the latent capability in our existing Payments network. Progress has been acceptable, rather than extraordinary. Non-financial indicators have shown real growth, with a doubling in billable transactions. This translated into growth in revenues of 37%, as growth was concentrated in lower value phone number verifications. Progress on contracting with new carriers has been slower than our most ambitious plans. With a restructured organisation, we will be more focused on international coverage and specific high demand products.

Within Payments, TPV grew 47% to more than $2.3 billion. Revenue growth was 19%, as more of the value was processed at higher bands on volume-based tariffs - a problem of success, sharing the benefits of scale with our merchants, who comprise most of the Western World's digital entertainment companies and a growing portion of the Chinese internet ecosystem too.

These results were achieved despite battling some headwinds from the games release schedule - in the first half of last year the Fortnite craze was at its peak, making for a tough comparable. The weakness of both the Euro and Pound against the US Dollar (in which we report) has also taken some of the shine off the figures. 19% revenue growth needs to be seen in this context.

Boku is now starting to evolve from being a play on the growth of digital entertainment, towards a broader exposure to the growth in the mobile ecosystem.

Our immediate strategy is simple: to get more merchants using more services across more connections. Our ultimate aim is to touch every mobile interaction and extract value from it.

Current trading and outlook

Our overall guidance for the year was for $52 million of revenue, gross margins of 93% in Payments and 40% in Identity leading to adjusted EBITDA growth of between 45% and 50%. Overall H1 2019 revenue at $23.5 million and adjusted EBITDA of $4.3 million represent 45% and 47% respectively of our full year targets. There's no question that we need a good second half in order to deliver; we anticipate one and thus leave our guidance unchanged.

Gross margins in both segments are ahead of target. Within Payments we expect a stronger second half driven by the game release schedule, the traditional Christmas peak and a spate of new connections. We now have a pipeline of more than 250 deployments - moderated by some extended promotional periods by some customers. In Identity, we expect the investment that we have made in sales resource to start to pay off and also to start generating more non-US revenue as international connections become activated.

Looking ahead to 2020, the strong pipeline in both Identity and Payments give me confidence in the long-term health of the business.

Jon Prideaux

Chief Executive Officer

9 September 2019

Chief Financial Officer's Report

In a period during which Boku became a multi-product organisation following the acquisition of Danal in January 2019, we are pleased to report steady growth in Payments and encouraging early progress on Identity.

It's my pleasure to report the following unaudited financials for the first half of 2019:

*Adjusted EBITDA (Earnings before interest, taxation, depreciation and amortization): adjusted, stock option expenses, forex gains/losses and exceptional items).

** Cash balances include $1.7 million restricted cash items

*** excluding Operating Lease items shown as Loans & Borrowings following IFRS16 adoption

Adjusted EBITDA turning into cash

With the completion of the acquisition of Danal in January 2019, Boku truly became a multi-product business. As previously signalled, the investment in operating expenses required to scale up Boku Identity has not stopped the adjusted EBITDA growth in 2019.

We are pleased to report Group adjusted EBITDA of $4.3 million for the first half of 2019, up 69% on H1 2018 ($2.5 million), with $6.6 million adjusted EBITDA delivered from Payments, up 130% on H1 2018 (FY 2018 total of $6.3 million) being offset by $2.3 million adjusted EBITDA loss in Identity, up 23% on H1 2018 adjusted EBITDA.

The company generated $2.8 million of cash during H1 2019, net of funding the Identity business (prior to movements in working capital).

Revenue and Gross Margin

Following a re-negotiated Payment customer contract and taking account of the requirements of IFRS15, the Company was able to report revenues above the previously issued trading statement at $23.5 million.

Within Payments, average weighted take rates reduced in line with expectations to 0.9% against some tough 2018 comparables (1.1%) which included more Settlement business in the mix, thanks partly to an earlier game release season last year.

Payments revenues grew by 19% to $20.2 million on the back of solid TPV growth, up 47% to $2.3 billion.

In our first reported period for Boku Identity, revenues of $3.4 million were up 36% on 2018 revenues. It is still very much early days for Identity and we have yet to see fully the benefits from Boku's ownership of the business within the revenue line.

Gross Margins across both Payments and Identity performed well at 95% and 43% respectively. Identity margins may reduce over the remainder of the year as larger volume pipeline deals land.

Operating Expenditure

Adjusted Operating Expenditure* of $16.3 million for H1 2019 is 25% higher than the same period due to the additional expenses relating to the acquired Danal business.

Investments have been made in growing the sales, product and marketing teams within Boku Identity (net of any organisational restructuring), both within the US and Internationally. Elsewhere, operating costs are broadly flat (with lower [amortised] lease expenses following the implementation of IFRS16). We expect to make continued investments in revenue generating resources over the course of H2 2019.

$0.7 million of development expenditure was capitalised in H1 2019 reflecting the work undertaken to integrate and enhance the Identity aspects of the Boku platform

Operating Profit

Below adjusted EBITDA, reported operating losses of $2.3 million in H1 2019 were driven by the following (largely non-cash items):

Financing Expenses

Financing costs reduced to $0.2 million in H1 2019 from of $0.5 million for H1 2018 following pay down of debt and removal of factoring arrangements previously utilised.

The Company reduced the draw down on our working capital facility from $2.2 million to $2.0 million within the period.

Balance Sheet and Cashflow

Cash balances remained strong throughout H1 2019 whilst absorbing the requirement to ramp up sales activity in Identity and the obligation to take on $1.6 million of working capital as part of the deal terms for the Danal acquisition (the company remained adjusted EBITDA positive).

Closing cash balances of $27.9 million are depressed by the timing of payment cycles within the Settlement business - less Receivables turned into cash at the end of the accounting period. A fairer representation of underlying cash is the average monthly cash balance which dropped to $22.2 million in June 2019, down from $24.4 million in December 2018 (largely reflecting the aforementioned working capital requirement).

MNO Receivables and Merchant Payables fell between Dec 2018 and June 2019 - however, as previously mentioned, these are also impacted by the cut off timing of month end receipts and payments.

The value of Intangible Assets increased on our balance sheet to $47.4 million, following the $25.1 million Purchase Price Accounting valuation of the Danal business (acquired 1 January 2019).

Looking Ahead

The Company will continue to invest in growth opportunities throughout H2 2019, with particular focus on expanding the revenue generating staff to help maximise the global opportunity that presents itself in Identity.

The Identity business generated a $2.3 million adjusted EBITDA loss in H1 2019 against a full year guidance, at the time of acquisition, of $5.0 million adjusted EBITDA loss. We remain confident that the $5.0 million figure is realistic.

We are similarly optimistic that significant revenue opportunities lie ahead for the Payments business, as highlighted by our previously announced partnership with Grabpay in SE Asia. It is true that revenue growth may not continue in a straight line, especially as the comparables become more challenging, however we maintain our previously announced full year outlook for revenue and adjusted EBITDA.

We retain confidence that the pipeline of opportunities within both Payments and Identity constitute material revenue potential.

Stuart Neal

Chief Financial Officer

9 September 2019 

Consolidated Statement of Comprehensive Income

*Earnings before interest, tax, depreciation, amortisation, share-based payment, foreign exchange gains/(losses), and exceptional items.

Consolidated Statement of Financial Position

Consolidated Condensed Statement of Cash Flows

Notes to the Consolidated Financial Information

1. Corporate Information

The consolidated financial information represents the results of Boku Inc. ("the Company") and its subsidiaries (together referred to as "the Group").

Boku Inc. is a company incorporated and domiciled in the United States of America. The registered office of the Company is located at 735 Battery St, 2nd Floor, San Francisco, CA 94111, United States.

On 20th November 2017, the Company's shares were listed on the Alternative Investment Market of the London Stock Exchange ("AIM").

The principal business of the Group is the provision of mobile billing and identity solutions for mobile network operators and merchants. These solutions enable merchants to accept online payments, simplify transactions and avoid fraud, especially on mobile devices.

The Board of Directors approved this interim financial information on 9 September 2019.

2. Basis of preparation and accounting policies

These interim consolidated financial statements have been prepared using accounting policies based on International Financial Reporting Standards (IFRS and IFRIC Interpretations) issued by the International Accounting Standards Board ("IASB"). They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the 31 December 2018 ('2018') Annual Report. The financial information for the half years ended 30 June 2019 and 30 June 2018 does not constitute full financial statements. The financial information for the half years ended 30 June 2018 and 30 June 2019 is unaudited.

The annual financial statements of Boku Inc ('the Group') are prepared in accordance with IFRSs as issued by the IASB. The comparative financial information for the year ended 31 December 2018 included within this report does not constitute the full Annual Report for that period. The Annual Report and Financial Statements for 2018 have been issued and are available on the group's investor relations' website: https://www.boku.com/investor-relations/reports-documents. The Independent Auditors' Report on the Annual Report and Financial Statements for the year ended 31 December 2018 was unqualified and did not draw attention to any matter by way of emphasis.

Changes in accounting policies and disclosures

(a) New and amended standards adopted by the Group

The Group has applied the same accounting policies and methods of computation in its interim consolidated financial statements as in its 2018 annual financial statements, except for those that relate to new standards and interpretations effective for the first time for periods beginning on (or after) 1 January 2019 and will be adopted in the 2019 financial statements. New standards impacting the Group that will be adopted in the annual financial statements for the year ended 31 December 2019, and which have given rise to changes in the Group's accounting policies are:

IFRS 16 leases.

Details of the impact of this standard are given below. Other new and amended standards and interpretations issued by the IASB that will apply for the first time in the next annual financial statements are not expected to have a material impact on the Group.

The group adopted IFRS 16 from 1 January 2019, replacing the existing guidance in IAS 17 - "Leases" (hereafter - "IAS 17"). IFRS 16 changes the existing guidance in IAS 17 and requires lessees to recognise a lease liability that reflects future lease payments and a "right-of-use asset" in all lease contracts within scope, with no distinction between financing and capital leases. IFRS 16 exempts lessees in short-term leases or the when underlying asset has a low value. The Group has elected to apply the practical expedient not to recognise right-of-use assets and lease liabilities for leases of low-value assets only.

The adoption of IFRS 16 has resulted in the Group recognising right of use assets and lease liabilities for all contracts that are, or contain, a lease. For leases historically classified as operating leases, under legacy accounting requirements the group does not recognise related assets or liabilities, disclosing instead the total commitment in its annual financial statements. The Group has elected to apply the modified retrospective method. Therefore, there will be no impact on any comparative accounting period (interim or annual), with any lease liabilities and right-of-use assets recognised on balance sheet on the date of initial application of IFRS 16, being 1 January 2019, in the amount of $3,950,738.

Finally, instead of recognising an operating expense for its operating lease payments, the group now recognises interest on its lease liabilities and amortisation on its right of use assets. This has increased the reported adjusted EBITDA by the amount of its current operating lease cost, which for the 6 months ended 30 June 2019 was approximately $910,000.

Going concern

The Directors have prepared a cash flow forecast covering a period extending beyond 12 months from the date of this financial in- formation.

After considering the forecasts and the risks, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the interim financial information.

3. Segmental analysis

(b) Operating segments

Following the acquisition of Danal Inc. (Note 7), the Group has revised its activities into two operating segments (only one segment in H1 2018) as disclosed below. The segments are based on the Group's main revenue generating activities. For each of the segments, the Group CEO and CFO reviews internal management reports to a gross margin level on a monthly basis. The following summary describes the operations in each of the Group's reportable segments.

Payments business segment: provision of a payment platform which enables mobile phone users to buy goods and services and charge them to their mobile phone bill or prepaid balance.

Identity business segment: Provision of identity services which are used to simplify transactions or combat fraud.

Operating segment information under the primary reporting format is disclosed below:

4. Finance income and expenses

The interest payable in the six months to 30 June 2018 includes a $266k one off costs associated with early termination of the factoring agreement.

5. Cash and cash equivalents and restricted cash

The restricted cash primarily includes e-money received but not yet paid to merchants (in transit), cash held in the form of a letter of credit to secure a lease agreement for the Company's San Francisco office facility and a certificate of deposit held at a financial institution to collateralise Company credit cards.

6. Loans and borrowings

Principal terms and the debt repayment schedule of the Group's loan and borrowings are as follows:

In November 2013, the Group entered into a Loan and Security Agreement (the Agreement) with a financial institution that allows for borrowings of up to $15,000,000 under a revolving line of credit through to February 2015. This was extended first, through to March 2017 and subsequently through to September 2019. However, the amounts borrowed under this Agreement were partially repaid after the IPO; the balance outstanding at 30 June 2019 was $2,000,000 (December 2018: $2,150,000). Introduction of IFRS 16 increased the current liabilities by $1,883,311 and non-current liabilities by $2,183,660.

7. Business acquisition

On 1st January 2019 the Group acquired a 100% interest in the Danal Inc. Group from Danal Korea and other shareholders.

Headquartered in San Jose, California, Danal Inc is a provider of mobile identity and authentication solutions through real-time connections to mobile operator networks and data. It has employees in the US and Ireland. In Europe it operates through a subsidiary Danal Mobile Solutions Ireland Ltd (renamed to Boku Mobile Solutions Ireland Ltd). Subsequent to the completion of the acquisition, Danal Inc was renamed Boku Identity Inc.

The purchase consideration included the following: 26.7 million Boku shares (10.7% of the total Boku Inc shares) valued at 1 Jan 2019 share price, $1.0m in cash and a five year warrant exercisable at $1.8352 share price.

Details of the purchase consideration of Danal Inc., the net assets acquired, and goodwill are as follows:

\* The trade and other receivable include $8.5m receivable from Danal Korea, which was received in June 2019.

** The property, plant and equipment include $620,909 right-of-use assets.

*** Trade and other payables include $8.5m bank loan, which was repaid in June 2019 and $620,909 lease liabilities.

The transaction will help the company to springboard plans to widen its addressable target market exponentially, beyond digitally downloaded content and into broader m-commerce.

Revenue upside will be delivered through accelerated global roll out to carriers with whom Boku already has a relationship and cross sell opportunities into Boku's existing merchant base as well as through a material Identity sales pipeline.

8. Post balance sheet events

There have been no material post balance sheet events.

9. Cautionary Statement

Boku has made forward-looking statements in this financial information, including statements about the market and benefits of its products and services; financial results; product development plans; the potential benefits of business relationships with third parties and business strategies. The Group considers any statements that are not historical facts as "forward-looking statements". They relate to events and trends that are subject to risk and uncertainty that may cause actual results and the financial performance of the Group to differ materially from those contained in any forward-looking statement. These statements are made by the directors in good faith based on the information available to them and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors underlying any such forward-looking information.