We invested in a new company that joined our portfolio. It’s a software company named Blue Prism (PRSM) operating in the Robotic Process Automation (RPA) market.
Automation of repetitive tasks and workflows is what is on the minds of many businesses, and RPA is addressing this exact problem.
Three leading players dominate the market: UiPath, Blue Prism, and Automation Anywhere. They are the ones that “count” on the RPA market. And although the competition will intensify in the years ahead (Microsoft has plans on the RPA industry), we believe these companies have a great first-mover advantage over other software products. Clients that are using RPA solutions come from Healthcare, Telecommunications, Retail, Banking, Insurance, and Manufacturing. We like software solutions that address these industries as they are at the forefront of digitalization. For the years ahead, they will have to be the ones investing big in adopting new technologies and optimization of their processes.
RPA platforms also provide a great architecture for applying machine learning, natural language processing, and other AI decision making solutions that help businesses lift productivity. RPA providers are offering marketplaces, where developers can post their integrated solutions. We believe the marketplaces will provide significant revenue opportunities in the years ahead for the RPA providers besides their primary offering. The TAM of RPA is expected to grow to $25.66 billion by 2027, expanding at a CAGR of 40.6%. Piper Sandler’s Future of Work: SaaS & Service Industry note published in May 2020 forecasts RPA could have a potential TAM of $170 billion.
Now, if we dive deeper into Blue Prism, from a technology point of view, we like Blue Prism and UiPath most. UiPath is better suited for smaller companies and non-developer types of users, while Blue Prism is more suited for a bigger corporation that needs more tech flexibility. Because of the different clients that these companies are addressing, UiPath provides a lot of features for free, while Blue Prism has higher costs for clients to start. Blue Prism had a “weakness” not so long ago when it didn’t have a sound cloud offering, but with the acquisition of Thoughtonomy in 2019 and rebranding it to Blue Prism Cloud, they now offer a good on-premise, hybrid and cloud solution.
From a business model, Blue Prism has a reoccurring licensing model and a gross retention rate of 98%. Most of their clients also pay in advance for an annual plan.
Despite COVID, they are growing in revenues. In the first half of 2020, they increased revenue by 70% even though at the start of COVID, they saw some delays to pipeline conversions and reduced average deal sizes. This is what management said in their note:
“And we estimate that the onset of COVID-19 pandemic had around a 15 to 20% negative impact on bookings for the half. Most of the large deals that we had expected to close either closed at lower deal values or were postponed into the third or fourth quarter.”
Regarding the revenue growth, we like their significant Upsell track record as clients first start with smaller spending and then increase it over time. In the last half of the year, Upsells accounted for 60% of MRR growth. On The 30. April 2020, they had 1864 customers up from 1337 in the year-ago period. Regarding the Upsells the management said this in their last note:
“Upsells are important for two main reasons. First, they’re typically larger than initial deals, so contribute more revenue per deal. Historically, upsell deals has been three to four times larger than new logos in terms of the number of digital workers. The second, upsells strengthen our long-term relationship with customers, significantly increasingly the likelihood of renewals and therefore, the lifetime value of the customer”
We also like their Gross Margin, which is around 85%-90%. We don’t mind the fact that the company is not profitable, because the bulk of the costs is related to expansion (with marketing and sales costs). In the stage of the RPA market, we like to see that the company is investing in growth rather than focusing on turning a profit.
Breaking down the revenue, 48% of revenue is tied to the financial industry (banks, insurance). This is a great space to have as clients as banks increase their spending on technology as they have to transform and catch up with the fintech competition.
The management also prepared well in case of bad economic conditions because of COVID with increasing their cash position:
“In April, we raised 100 million pounds before expenses. This has significantly strengthened our balance sheet as we close the first-half with 140 million of cash on the balance sheet. And puts the business in a strong position if the broader macroeconomic disruptions continue or worsen.”
From a valuation stand, this is what “sold” us most into investing in Blue Prism.
Their P/S ratio stands just shy of 10 and has dropped significantly from 2-3 years ago while the stock price has not. The reason is the growth rate at which the revenue is growing.
For a stock with 70% revenue growth 90% gross margin and big TAM to trade at 10 in this environment, we find the stock attractive. Not many US-listed software stocks trade at a compelling valuation as this one.
DISCLOSURE:
The author of this post is long PRSM. I wrote this article myself, and it expresses my opinions. I am not receiving compensation
for it. I have no business relationship with any company whose stock is
mentioned in this article. This is not financial advice. Please read the
Disclaimer.
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