Blue Prism (PRSM) share price: will the 20-bagger continue to deliver?
Blue Prism Group (PRSM) has rewarded investors with a 21 times share price return since listing in 2016. Is revenue growth sustainable?
Blue Prism helps its customers become more efficient by automating labour-intensive IT tasks using what is known as robotic process automation (RPA) software.
RPA software essentially replaces human inputs with 'digital workers' to perform non-complex, repetitive jobs. It is estimated that between 10%-20% of employees time is spent on repetitive computer tasks and RPA can automate 70%-80% of these. RPA helps lower costs, reduces the risk of error and also allows human workers to focus on higher value-add tasks.
Blue Prism have partnered with a number of consultancy firms to distribute their product (29 are certified on their website). These partners highlight opportunities for the use of the RPA technology within a business, help integrate the tech and teach staff how to run and monitor the software. As their sales record shows, this partnership network arrangement appears to be working well.
Sales momentum propels Blue Prism share price
Sales have surged by a compound annual growth rate of 80% since the company’s incorporation in 2013. The bulk of revenues are generated from selling software licences and the right to future software upgrades.
Over 2018 (FY18), Blue Prism penned deals with 528 new clients (FY17: 324) and at the last count provided their services to a total of 992 customers. Even technology firms such as PayPal have signed up to use the software.
And while the new customers are being onboarded at an increasing rate, the company also appears to be successfully up selling to their existing client base. FY18: 723 upsells across 310 customers (FY17: 264 upsells across 131 customers).
Figure 1: BPSM revenues and earnings
|Revenue (£m)||Revenue growth (y/y %)||EBITDA (£m)|
Expansion plans in an expanding market
Blue Prism is in its expansionary phase and like many young tech firms, it is likely that the company will expend cash to aid growth and product development for the foreseeable future.
Expansion looks to be a sensible strategy given the continuously increasing estimates for the RPA market size. According to HFS Research, the global market for RPA software and services is expected to grow to $4.3 billion by 2022.
Figure 2: RPA market size forecast
Blue Prism’s 2018 annual report states that they are engaging in continuous product innovation and long-term research initiatives. They also have a close technology partnership with Google and Microsoft, among others. Research and development (R&D) expenditure and close ties with players at the forefront of automation, artificial intelligence and cloud computing will help drive exciting product improvements, which, in turn, will support sales and provide ongoing opportunities to upsell to existing clients.
A Deloitte survey finds that 78% of current users of RPA software plan to increase their spending over the next three years. Blue Prism are already seeing increased spend from existing clients: completing up-sells to 310 clients in 2018. That’s 65% of their 2017 year-end client base.
Figure 3: Blue Prism client growth
|Clients||Clients up-sold||Up-sell growth %|
Source: Blue Prism
The development of new technologies to create an evolving product for a global market is key to maintaining its impressive sales record.
Cash requirements will dilute Blue Prism shareholders
Global ambitions require cash. Net income for 2018 was minus £26.2 million, with adjusted net cash flows from operating activities at minus £5.4 million. The consensus view is that EBITDA will remain deep in the red for the next three years. It is likely to continue to be negative beyond this horizon too. What this means is that funding requirements to keep the business running to support growth initiatives will be externally sourced.
Blue Prism have twice tapped the equity market in the last two years to raise funds. In 2017, they raised over £40 million by issuing additional shares. This was followed by a £100 million placing in January this year to '…accelerate growth and seize market opportunity'.
Increasing the share base has the undesirable effect of diluting existing shareholders. The number of shares outstanding have risen by 24% since Blue Prism’s initial public offering (IPO). Although existing shareholders are unlikely to have cared much about this to date, given the share price has rocketed from 78p to over £18 in three years, further dilution from probable funding rounds later down the line may start to weigh on investor sentiment.
Figure 4: Blue Prism share price and share count (as at 10 May 2019)
What are the risks?
Porter’s Five Forces theory can be used to understand the competitiveness of the RPA industry and what this could mean for Blue Prism’s share price.
1. Competition in the industry
Two of Blue Prism’s largest competitors are Automation Anywhere Inc. and UiPath Inc., both of which are privately held, US-based firms. Automation Anywhere has over 2800 clients (Blue Prism: 992) and 1600 employees (Blue Prism: 469). UiPath are also larger than Blue Prism, with 1750 clients and 1350 employees (as of September 2018). Winning business against these players is important for continued sales growth.
Interestingly, Blue Prism are bidding on Google search traffic for both 'Automation Anywhere RPA' and 'UiPath RPA' traffic. Generally, this is an expensive method of generating leads, so it will be interesting to see how long they continue to spend on this method of client acquisition.
2. Potential of new entrants into the industry
Given the sheer size of the growth predicted for the RPA market, it is likely that new entrants will be attracted to the industry. As well as competing for market share, it is likely that pricing will become more competitive for the more generic RPA tools. This means that future revenue estimates should be discounted for the possibility of lower margins.
3. Power of suppliers
Since revenue is generated from internally developed software, Blue Prism have limited exposure to the pricing power of suppliers. Instead, this section could be changed to 'Power of distributers', given that Blue Prism and many other RPA providers use third parties to sell their software. Any change to a partners’ propensity to sell Blue Prism’s software over another competitors or demands for a greater chunk of sales will negatively impact revenue.
4. Power of customers
Customer retention rates in the software industry are typically high given the large cost of initial deployment. Evidence of companies switching between RPA provider has proven to be limited to date. In 2018, Automation Anywhere reported annual retention rates of 98%, which may justify Blue Prism’s attempts to hijack their competitors’ onboarding efforts through the use of Google paid search.
5. Threat of substitute products
Using RPA is a low-cost way to improve efficiency in certain IT processes. The main substitute for using this software is a systems overhaul, which is vastly more expensive in the short term and not as quick to implement. Critics say that a company’s use of RPA software instead of making necessary structural changes to back end systems is an example of management kicking the can down the road. There is a trade-off between achieving efficiency gains in the short term and making necessary, structural changes that may improve efficiency by a greater margin over the longer term.
Overall, while the industry appears to be highly competitive and the probability of new entrants is large, Blue Prism currently enjoy an ultra-high margin (although the accounting rules behind how it measures gross margin is up for debate) and a low churn rate.
Blue Prism left with little room for disappointment
A market cap of £1.3 billion values PRSM shares at 13.8 times predicted sales for 2019. A recent funding round at Automate Anywhere of $300 million values the company at $2.6 billion (£2 billion). At a similar time, UiPath raised $265 million at a $3 billion (£2.3 billion) valuation. These two privately-held companies do not disclose their financials but based on Automation Anywhere having nearly treble the number of clients, it leaves Blue Prism with little room for disappointment.
There have also been murmurs of insiders selling stock. Admittedly, Blue Prism founders Alastair Bathgate and David Moss have both sold a chunky number of shares over the last 18 months (1.65 million and one million shares, respectively). But they still own a sizeable amount of the company - close to 9.5% combined. Sometimes people forget that founders have the right to diversify their new found wealth by cashing in a portion of the shares in the company they worked hard to build!
If, like Messer’s Bathgate and Moss, you are seeking a little diversification: Blue Prism is included in the WisdomTree Artificial Intelligence UCITS ETF. This exchange traded fund trades under the ticker WTAI, has $12 million in assets and an annual expense ratio of 0.40%. At the time of writing it holds a 3.39% holding in Blue Prism.
Figure 5: Top 10 Holdings: WisdomTree Artificial Intelligence UCITS ETF
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