BANGO - Trading Update - 19/01/24

Well, we are just a few weeks into the New Year and on a personal level I am already experiencing some real ups and downs on the market.

Very much a case of two steps forward and one back, as shares in three of my big hopes for 2024 have moved in different directions.

On a positive note, Concurrent Technologies issued further welcome news which will hopefully carry on throughout 2024 and the shares are now 40% up from when I covered the company here back in July of last year.

Another that has also delivered a run of positive news is Windward, where I took a close look and also invested at circa 47p back in late August. Pleasingly, the shares are currently standing at £1.15p representing a 140% increase.

But, now for the bad news, Cambridge based Bango which I visited and subsequently covered here in October of last year has dealt something of a googly with a pre-close Trading Update that has sent the shares crashing from the then £1.80p price to a current £1.06, representing a 40% retrace.

Ho hum, swings and roundabouts where momentum and falling knives appear to be contrasting orders of the day.

Aside from CNC and WNWD, it is BGO that I want to focus on today, not least as I mention falling knives, which springs to mind in the context of averaging down, or providing an entry point for those sitting on the sidelines.

It is of course, as I always say, down to the individual and just how they assess the situation, where importantly only investing what one can afford to lose is always key.

In the case of BGO, the news yesterday for me at least came out of the blue, where it was announced that guidance would be missed not merely for the year now ended, but for 2024 too.

The latter is perhaps more instrumental in driving the share price southwards for me, as there has been a significant and marked downgrade on those numbers for the new financial year.

To compound the former, from a personal level, management were confident as recently as October on delivery and meeting market expectations, thus making yesterday’s news all the more difficult to swallow.

It is what it is though and the big question I have to ask myself now, is whether the news has changed the story here, or whether it has merely been derailed before getting firmly back on track.

My conclusion after taking a good look again yesterday along with speaking with co-founder Ani Malhotra is that the overall story remains intact and that at current levels the shares look potentially very good value.

I say potentially, as the jam has still to be delivered here and understandably some investors who have been in the stock longer than myself, are no doubt losing patience.

Before taking a look at the revised numbers in the market from both Singer and Stifel, it is worth my running over the catch up with Anil Malhotra yesterday which will hopefully provide at least some further flesh on the bones.

The point here is as always, in not providing any advice, but rather information that may be of use in one’s own research.

I’ll add that this blog remains a labour of love and I do not, or ever have received any payment regarding the interviews or articles I undertake.  

So, my opening gambit, was to ask as to why the news was not released earlier and within that, has there been a major issue within the Docomo acquisition that has effectively blind sided the board.

Malhotra who I have spoken with a number of times over the years, explained to me, where he said, “It wasn’t until we started crystallizing the numbers at the beginning of January after the year end that we discovered a couple of things.

One thing we had visibility of, was that Docomo Digital was quite a complex multi company group and we were aware of this before the acquisition through due diligence exposing that.”

This, Malhotra said included a number of inter company loans that had been made which Bango has never really done, but which appeared the norm at Docomo. This saw loans being made in one currency and which Bango then had to ultimately translate back into US dollars. “One of those loans” added Malhotra, “was of a reasonable size and was lent in Swiss Francs. So, when we came to do the accounting of that at the end of the year into dollars there was an adverse foreign exchange hit on it.”

Although this was an accounting issue as opposed to a cash element, it nevertheless represented one million within the bigger picture, although that particular loan will be gone through the course of this year I was told.

Malhotra also spoke of a second element within Docomo which he admits that they probably should have foreseen, but didn’t appear to, in that some of the Docomo DCB business in specific countries is more complicated.

Partly, he said this is because of the way they had structured things which saw them having a data centre-based system architecture base as opposed to one that is cloud focused. As a result, some of those data centres in different countries accrued other costs such as software licenses and other business costs that are unique to the particular countries.

Expanding further Malhotra said they had thought that they could migrate those over more rapidly, but there were actually some additional costs associated with that.

“It is perhaps one of the things we should really have seen and built into our model and that accounted for one to two million, so it was a hit that was down to us”. 

Although much of the Docomo operation has migrated over to the Bango platform it isn’t as yet complete, but will be concluded this year I was informed.

Aside those issues impacting the numbers the rest of the shortfall on EBITDA was, Malhotra says more or less down to the small revenue shortfall, where he added that because Bango is operating on 90% gross profit such a revenue shortfall translated on to the negative.

Clearly a number of things have conspired to impact on the previous expectations, which at least sees an acknowledgement from management of arguably, to a degree taking an eye off the ball.

Another key factor within the update and the revenue issue was also explained by Malhotra, where he pointed out that it was actually a revenue recognition issue rather than a real sales revenue shortfall which appears to have arisen by their being urged by auditors to switch to a super conservative model.

A board meeting earlier this week saw them accepting that differing revenue recognition, which culminated in the releasing of the news.

Looking at the current picture of the balance sheet, I had to enquire about the possibility of a raise, which given where the share price now stands and the prevailing economic climate would be extremely unwelcome.

Malhotra was happy to expand on this key area, “what we have done this year is that we have decided to build a more conservative forecast on revenue growth and the cost base and the brokers have come out with new forecasts for 2024.

On that basis, it shows we will end up being roughly cash neutral during the course of this year and in terms of free cash flow we will actually generate a bit of money with enough cash to start paying off the NHN loan.

We have also changed our banking arrangements to Barclays from HSBC and we have a facility of three million which we haven’t used, but it is there in case even with these very conservative projections we end up needing any cash at any particular point.

What people really care about when they look at the cash position is, do we need to go back and raise working capital and the answer, even on this conservative model is no.”

One area that wasn’t touched upon in the market update was that of end user spend and the DCB business which was a key measure in previous years.

Malhotra says that they treat the DCB business as something of a cash cow and that it has seen upper end single digit growth, but there is no platform investment in it as it remains hugely cash generative.

Looking at the numbers for full year 2023, despite the miss, there was still significant progress made with a real progression on ARR, which sees broker Stifel comfortable with its $16m ARR expectation this financial year from DVM.

Additionally, across this space Bango signed 9 new DVM contracts throughout last year with 5 closing in December.

In terms of overall full year 2024 numbers Stifel now expects revenue of $53.1m with EBITDA at $16.6m providing for adjusted pre-tax profits of $3.6m.

As other holders or watchers will know, these are significantly below the previous guidance, so one hopes that these can be delivered with a degree of comfort and provide for a springboard into the next financial year.

Speaking with Malhotra on the new expectations, he was happy to comment, where he said that he personally had still been confident on delivering the previous numbers for 2024, but acknowledged that as CMO he is naturally an optimist.

Whilst the under promise and over deliver theme that so many of us like to see hasn’t been evident as yet at Bango, one hopes that a reset on expectations may now turn the tide.

Malhotra in part does confirm such a view and acknowledges that the forecasts have been set so that there isn’t a replay of yesterday, the result of  which provides for upside risk.

Malhotra remains upbeat in the belief of the model and major ongoing opportunities ahead for the company and feels that despite the negatives of yesterday there were actually some real positive takeaways.

Every investor will have their own take on Bango as to its investment credentials and what the future may provide in relation to continued growth translating into significant cash generation and notable profits and as a result there will be differing opinions.

For now, the shares are likely in my view to trade in a fairly narrow range, despite the often volatile nature that prevails, at least until there is further substantial or notable news forthcoming.  

My own feelings are that we should see further positive news emerge and as a result draw a line under yesterday as we move through the year.

That said, now is clearly the time for a long overdue delivery on the hard numbers, which would go a long way to rebuild investor confidence and ultimately provide for some welcome investor returns.