Portfolio company Blue Prism – result analysis

Hi everybody, 

Blue Prism reported preliminary results today, and I dug deep into them and will share my thoughts with you. 

Ok, so let’s look at the front numbers: 

• Blue Prism fiscal 2020 revenue grew 46% YoY.  

• Their SaaS Blue Prism Cloud was one of the main growth contributors as bookings increased by 147%. 

• 98% gross revenue retention rate 

• Closing customers of 2.031 (FY19: 1.677 customers) 

• 39% of opening customer base upsold for more licenses during the year 

Ok, from these numbers, why did the stock drop 25% at some point?

Well, the reason is their guidance. They guided revenue for fiscal 2021 to be in the range of £170 million - £180 million. That represents a top-line growth of 20%-27%.  

So, the guidance at first glance seems like a low number, but I see reasons for it. 

1. First of all, COVID is a big headwind for the whole RPA industry.

 As Blue Prism noted:  

“During the year the Group noted a direct impact from the COVID-19 pandemic, with customers responding to the uncertain macro environment by delaying purchasing decisions or reducing deal sizes. The Group saw some recovery in the second half of the year, with sales activity improving and deal sizes starting to recover, but overall deal sizes remained lower than the prior year.” 

So the pandemic has a negative effect on the growth of the RPA industry, not like many other software industries where the pandemic actually accelerated some growth drivers. 

2. Blue Prism fiscal year is not the same as the end of the calendar year

Blue Prism’s fiscal year ends at the end of October, and a new fiscal year start in November. With that in mind, we have to understand that the guidance that they provided was given for the period of 31. October 2020 –31. October 2021. And if we look at this period, we can see that probably 3 quarters out of 4 will still be affected by the pandemic (as vaccinations have just started to roll in countries). On the contrary, in fiscal 2020, they “only” had 2 quarters that affected their results. So, more COVID means more risk for the business. 

3. There are no signs of the business losing market share.

The guidance in my opinion reflects the risks to the whole industry because of COVID and not because Blue Prism would be losing market share to other competitors. 

In fact, in this report, there are four things that stand out to me in regards to market positioning. 

First is the retention rate: 

“Despite the pandemic driving significant uncertainty for the customer base, overall customer retention remained very strong. The gross retention rate for the year was 98%, with very low levels of revenue churn. The majority of losses were very small in size - 103, or 88% of the losses related to customers with deployments of 5 or less digital workers.” 

So, we can see that they maintained a high gross retention rate of 98% and also that 88% of the losses related to customers were with clients that had 5 or less digital works (digital workers in this sense can be view as “seats” or users.” So, the clients that were leaving were mostly small clients (which are probably more affected by the pandemic). 

Second is the remark on the market share of the cloud business: 

“147% increase in Blue Prism Cloud bookings, the market leader with 20% share of the RPA SaaS market (based on IDC market sizing)”. 

The Blue Prism Cloud was actually the market leader with a 20% share of the RPA SaaS market, which considering the competitiveness of the market, is far from a small number. 

Thirdly the pipeline remains very strong: 

“Significant long-term commitments made - remaining performance obligation, which represents future revenues under contract but not yet recognised as revenue, was £312m” 

And fourthly, the developers/partners are joining and not leaving: 

“Online marketplace 'Blue Prism Digital Exchange' leverages 100 technology partnerships, now has 46,000 users, a 318% increase from 2019, and 1,800 assets” 

Whenever a platform is gaining developers and Blue Prism had a 318% increase, that is a bullish sign and not a bearish. Developers won’t join your platform and use your products if they are not good, and there is no demand for them. 

4. They are spending on R&D, which I like to see.

When a company in a high growth industry like the RPA industry in spending on R&D, I like it. This makes me believe that the company knows its position and has the vision to develop its product and services and continue to catch market share and expand its product offering. 

In the report, Blue Prism noted: 

“In response to uncertainty driven by the COVID-19 pandemic the Group raised £100m (before expenses) to reinforce the balance sheet in the event of prolonged market disruptions. This funding allowed the Group to maintain investments made during 2018 and 2019 while continuing to prioritise spending into product and R&D, positioning the Group favourably as normal market conditions return.”

They also increased their R&D spend by 124%.  

As already said, I like to see companies in high growth industry spending on R&D as this normally converts into higher growth down the line. 

5. The US listing is still in play.

The company said in November it was thinking about a secondary listing in the US. In this report, they noted that that is still in process and no decision was made yet. I find that the US listing would be extremely bullish for the stock as the valuation is, in my view, given the current market conditions very low. With the recent fall, the stock is trading at a 7.6x forward Sales multiple (given the 20-27% rev guidance estimate). Even if the results are indeed what the company guided 20-27% revenue growth with a growing industry like RPA with a high margin should not be trading at such a low multiple given current market conditions. Just for comparison, Alteryx, listed in the US with a similar growth rate in the mid-20s, is trading at a 16x Sales multiple. 

Summary

I find the earnings results good. There were a lot of things I liked. I was quite shocked when I saw the market reaction when the stock fell -25%.  I used the opportunity to add to the position. The stock since then recovered and closed the trading on the London stock exchange with –19%. I remain bullish on the stock.

The full report you can find here: https://www.investegate.co.uk/blue-prism-group-plc/rns/preliminary-results-for-year-ended-31-oct-2020/202101140700076308L/?fbclid=IwAR0HujlyeWNKelgHmOwrHXNb8rvDcYBEuGLdhBEDs4Ugurfy_wOsOsvN75Q 

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