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Pelatro: Big Data, big growth drivers

Pelatro: Big Data, big growth drivers
Revenue enhancing software for the telecom industry

Pelatro PLC (LON:PTRO) is a software provider focussed on the telecom sector, offering telecom operators solutions for increasing revenue per subscriber, retaining subscribers, and monetising data.

The customer base includes major global telecom operators, with the biggest geographies being Southeast Asia and South Asia. The company has achieved a compounded annual growth rate (CAGR) in revenue of 78% since 2016 with consistent profitability (2019 EBITDA margin 43%).

The growing need for Pelatro’s software-based solutions is driven by the maturation of the global telecom industry. Telecom operators can no longer rely on growth in the subscriber base and need to focus instead on average revenue per user (ARPU) and customer retention. Pelatro’s suite of solutions addresses these needs.

Competitive position:

Pelatro has a customer base of 19 major telecom operators. This has grown every year since inception in 2015 and now covers about one billion underlying mobile phone users. The company has won business away from the big software companies as well as from other telecom specialists. Some of Pelatro’s competitive advantages include:

  • Big Data enabled solutions that can handle data from billions of customer transactions to tailor and target offers from the telco (telecommunications company) to the customer at an individual level in a contextual, relevant, personalised and real-time manner
  • Domain expertise and specialisation in the telecom space
  • A strong customer service capability

We expect growth in the customer base to continue in 2020, and the company has reported that the COVID crisis is not leading to customers cancelling their investment plans. We examine the business drivers in this report.

Financials and valuation

Pelatro has begun the transition of its business towards a multi-year subscription model, and this is a very important aspect of the investment thesis. This subscription model offers Pelatro increased value per contract, increased revenue visibility and a deeper level of customer engagement. Among the financial benefits, the company has an objective, within the next two years, to ensure that the recurring revenue run-rate at the start of each year is equal to or higher than the cost base for that full year.

In profit & loss terms in the short-term, the business model transition creates a lag in revenue recognition, as there is less upfront licence fee income being booked. We expect to see a significant re-acceleration in reported revenue growth starting in 2021.

We argue that what looks at first glance like a slowdown in revenue growth has hit the Pelatro share price. We examine this valuation discount in this report, and we argue that this represents an opportunity for investors.

Year end Dec 31 Current 2019 2020 2021
         
Revenue (US$M) 6.1 6.7 7.3 9.1
EBITDA (US$M) 3.8 2.9 3.0 4.3
Net Cash 1.8 0.5 1.4 2.1
         
 
The Pelatro Product offering
 
Source: Proactive Research

 

Enabling telcos to target offers at an individual level

 

mViva Contextual Marketing Solution (CMS)

The CMS allows telcos to target offers to a customer using a detailed individual customer profile based on analysis of that individual’s transactions. The CMS includes cutting edge AI/ML (artificial intelligence / machine learning) features in the form of descriptive, predictive and prescriptive analytics and provides end-to-end capability of segmentation, campaign design, configuration, execution, fulfilment, provisioning, reporting and analytics.

mViva Data Monetisation Platform (DMP)

The DMP organises customer data into an individual profile detailing the behaviour and demography of each customer. This allows telcos to monetise this asset through targeted third-party advertisements, while remaining within relevant data protection laws, for consenting subscribers. For enterprises that partner with telcos, this allows them to get better value for money from their advertising. The DMP offers a complete solution with partner management, portal, offer design, execution and reporting.

mViva Loyalty Management Solution (LMS)

The LMS is a tool for customer retention. It rewards each customer with points based on various activities such as revenue generation, early bill payment, referral etc. and these points can then be exchanged for various rewards. It is a comprehensive solution that provides for points earning, redemption, segmentation, tiering, campaigning, fulfilment, provisioning and reporting.

mViva Unified Communication Manager

The telco customer may be targeted with numerous different types of messages, such as emergency messages, informational messages, offers for third party products etc. The telco must, therefore, employ a policy governing the number of such messages together with priority for each type of message. The mViva UCM ensures that telcos have centralised control of their messaging policy and privacy settings of customers.

The four software solutions are integrated with various elements of the telecom provider’s network to allow them to gather information on every transaction that each end customer generates.

Pelatro’s customer base:

Pelatro has achieved strong growth in its customer base since signing its first customer in 2015, and now serves 19 major telcos globally. This encompasses some 850 million underlying individual subscribers, with its strongest positions in Southeast Asia and South Asia. The following map shows the current customer base.

 

19 customers across a range of geographies

 

Pelatro customer base
 
Source: Pelatro

Pelatro is differentiated from some of its larger rivals (details p6) because it has always had a pure focus on the telco customer base. It, therefore, offers deep domain expertise and a product which is built around the demands of Big Data in order to handle the billions of customer data points generated by telecom operators.

The company has achieved market share gains in each year 2015-2019.

The financial outlook and valuation

Pelatro has achieved a revenue CAGR of 78% since 2016, and delivers strong profitability with an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 43% (2019 actual).

The subscription model is a key part of the investment thesis

As Pelatro has established significant market positions across its initial target regions, the company has made a strategic decision to shift its business model from a one-off licence model to a subscription model. This is a crucial factor in understanding the financial model and the valuation case.

Under the subscription model, Pelatro offers a multi-year contract encompassing software provision and support services. Under the licence model it was a one-off software licence fee followed by separate payments for services.

The subscription model offers:

  • A higher net present value per contract for Pelatro
  • Greater visibility over revenue and earnings
  • A deeper level of engagement with the customer, cementing the relationship and allowing Pelatro to offer additional solutions as the Pelatro product offering expands

The subscription model does, however, mean that some revenue recognition is deferred. This led to slower revenue growth in 2019, at 9% versus 95% reported in 2018.

We examine the financial implications of the change in business model on page 7-8. We conclude that the subscription model enables greater value creation for Pelatro, albeit at the expense of deferral in revenue recognition.

Valuation multiple does not reflect Pelatro's ongoing growth trajectory

The shares are now trading on an enterprise value (EV)/EBITDA ratio of 5.7x. In comparison with the wider speciality software space; we argue that this is a low valuation multiple particularly in light of Pelatro’s prospective EBITDA growth in 2021 and onwards. We believe that during the next six-24 months the market will have an opportunity to better understand the business model transition and to see proof of the financial benefit to Pelatro. We argue that this could potentially trigger a re-rating in terms of the valuation.

 

Mobile telephony is now a mature market

The market need

 

The mobile telephone industry is now a mature market globally. This means that telcos can no longer rely on growth in subscriber numbers to drive revenue growth. Furthermore, in a commoditised market for mobile phone services, providers contend with aggressive competition for their existing customers.

The following diagram illustrates the approaching saturation of the mobile phone market.

Mobile phone users globally
 
Source: Proactive Research, composite of market sources

In this environment, the telecom operators must focus on:

  • Retention of existing customers
  • Maximising the revenue from their existing customer base
  • Seeking additional ways to monetise their position, such as third party advertising

These imperatives play exactly to the strengths of Pelatro’s mViva suite of products.

In terms of the specific geographic markets addressed by Pelatro, the biggest geographies are South Asia and Southeast Asia. The following chart shows Pelatro’s customer geographic profile for 2019:

 

A high degree of emerging market exposure

 

Pelatro customer base, FY 2019
 
Source: Pelatro data

Although Pelatro’s customer base has a more emerging market focussed end subscriber base they are experiencing the same issues as European or North American telecom operators in terms of markets maturing and customer base approaching saturation. They do, however, have more headroom in terms of revenue per customer.

Monthly revenue per mobile user
 
Source: Proactive Research, composite of market sources

A suite of products fulfilling an essential need in any geographic market

We argue that the mViva suite of solutions offers essential utility for telecom operators across any geographic region or customer demographic. Pelatro added additional sales resource for the Latin America and Caribbean region during 2019 and added to its Asian sales force. We expect the company to continue growing both within its existing geographies and by adding additional geographies.

The company increased its underlying subscriber base (the customers of Pelatro’s customers) to about 1 billion in 2020 from 325mln at the end of 2018. We expect Pelatro’s growth to continue in the coming years, and we expect this to come from market share gain as more telecom operators switch to the mViva solutions.

Telecom companies continue to become more focussed on maximising value capture from their existing customer base, and mViva has now proven itself to be a valuable tool in facilitating this value capture.

Pelatro market position

The space that Pelatro plays into is populated by specialist software providers focussed on the telecom market as well as the big software generalists. The following diagram shows some examples of competitors.

Pelatro and the competitor base - illustrative positioning, not to scale
 
Source: Proactive Research

Pelatro has been winning market share from the big software generalists and also the telco specialists

In recent years Pelatro has won customers from the big generalists as well as from some of its specialist peers.

These market share gains are driven by the value-added capabilities that the mViva suite of products offers to the telco customer. These have been shown to generate up to 5% incremental revenue for the customer while reducing churn.

We highlight three differentiating features of Pelatro’s customer offering:

 

Big Data is a fundamental characteristic of the telecom industry

 

Telecom-specific products – Big Data enabled

Pelatro has only ever focussed on the telecom customer base. As a result the company has produced a suite of products that are specifically evolved to meet the needs of telecom operators. In particular, the mViva solutions employ a stateless computer architecture that is inherently suited to handling Big Data.

Pelatro’s biggest customer has 350+ million subscribers. A customer base of this size generates tens of billions of transactions per day. The systems that Pelatro offers can handle and analyse this volume of data and enable marketing campaigns to be targeted at various levels of granularity right down to a single user.

Flexible solutions that can be tailored to the customers’ need

The mViva suite is built on a modular platform, meaning that once a customer has had the system installed it is easy to add further modules to meet the customer’s evolving requirements.

Furthermore, the analytical system itself is designed to provide the customer with a flexible tool for designing and implementing new campaigns. Users may configure complex flows with hundreds of symbols and connectors depicting a typical customer journey with branches, conditional logic, splits and regrouping including timers and waits for customer events in isolation or in combination.

Customer Service

Based on its deep domain expertise in the telecom space, Pelatro understands the complex needs of the customer base and the importance of a responsive customer service capability. The company cites the quality of its customer service personnel as the biggest differentiating factor leading customers to choose Pelatro over its competitors.

Market share gains have driven continual growth in Pelatro’s customer base. The following chart illustrates this in terms of the number of enterprises using mViva.

 

The strength of the product offering drives continual growth in the customer base

 

Pelatro customer numbers
 
Source: Pelatro data

Pelatro continues to gain new customers on the strength of its product offering. We expect this to continue in the coming year and for this to be reflected in revenue and earnings growth.

 

Revenues are driven by both software and the service element

Changing revenue mix

 

Pelatro’s offering to the customer comprises the provision of software together with a service element. The services provided can be broken down as follows:

Implementation and support services. These encompass the installation of the software within the customer’s network, and technical support services thereafter.

Managed services. These go beyond product support and include campaign design and implementation and 24/7 information technology (IT) support, as well as business consulting. Managed services are provided by a dedicated team for the customer offering a fully outsourced solution.

Change requests. Customer can request bespoke configurations and customisation that are provided for a fee.

Under the licence model, which has historically been the main type of contract for Pelatro, software is sold under a one-off perpetual licence, with additional services under a separate contract.

Under the subscription model, which the company is increasingly moving towards, the software is provided under a multi-year subscription, with a prescribed set of services covered by the contract. Under the subscription model, Pelatro is evolving more towards an increased level of managed services provision.

The subscription model provides Pelatro with higher overall contract value, increased revenue visibility, and deeper customer engagement.

The transition towards a subscription model has driven an increase in the level of recurring revenue versus non-recurring. The following chart illustrates this point.

 

Recurring revenues make up an increasing part of the mix

 

Proportion of recurring revenue
 
Source: Pelatro data

In terms of the increased contract value to Pelatro, we present the following illustrative example showing how a contract would look under the subscription model versus the licence model.

 

Higher contract NPV under the subscription model

 

Illustration of contract as subscription versus licence
 
Source: Proactive Research

We believe that the subscription model offers a material uplift in net present value (NPV) per contract for Pelatro.

In terms of upfront revenue recognition, Pelatro takes an impact from the transition towards the subscription model. This was particularly noticeable in 2019. During the year the three biggest customer wins were all signed on a subscription basis. Had the three customers signed up on a licence basis we believe that the full-year revenue total for the company would have been some 64% higher, with a higher gross profit recorded in-year also. The following chart illustrates:

 

Reported revenues would have been 64% higher if the biggest contracts had been booked as licences (but with lower lifetime contract value)

 

Revenue impact
 
Source: Proactive Research

We believe that the business case for moving to a subscription model is very clear; however, we believe that the slowdown in reported revenue growth has contributed to a de-rating of the shares in valuation terms. We examine the valuation on p10.

We believe that the valuation discount will prove to be temporary as ongoing subscription fees will bring a catch-up in revenue and earnings in the coming years.

 

We forecast acceleration in reported revenues in 2021

Financials and Valuation

 

We are forecasting revenue growth in 2020 and an acceleration in 2021. This acceleration occurs based on a steady continuation of new customer wins, with repeat revenue from the 2019 and 2020 customer wins now cumulating together with the revenue from new 2021 customers. This is the catch-up effect from the initial revenue lag arising from the switch from licence (non-recurring) to subscription (recurring) customers.

The following chart shows our revenue forecast, split into recurring and non-recurring revenue.

Revenue forecast
 
Source: Proactive Research

In profitability terms this leads to a broadly flat year in 2020 with reacceleration being felt in 2021. The following chart shows our profit forecast, in terms of EBITDA.

EBITDA forecast
 
Source: Proactive Research

 

Valuation discount compared with the UK-listed software space

 

Valuation

We consider the valuation of Pelatro based on the enterprise value to EBITDA ratio (EV/EBITDA). On a 2020 basis, the shares trade on an EV/EBITDA of 5.7x. We argue that there are relatively few UK-listed software companies trading on less than 8x. Looking to 2021, the multiple for Pelatro is even more compressed at 4.0x.

The following table compares Pelatro to a selection of other UK listed software names with some business characteristics in common.

Valuation multiples
 
Source: Proactive Research, consensus forecasts for peers

We believe that there is strong potential for the valuation discount to narrow as the market becomes more confident in the benefits of Pelatro’s changing business model. We expect that this confidence will be reinforced as the company continues to register further customer wins and a reacceleration in reported revenue and profit growth.

Our confidence in Pelatro’s ability to continue growing is underpinned by:

Strong differentiators underpin the Pelatro investment case

  • A compelling need for telecom operators to use solution such as mViva in a maturing and competitive market space
  • Strong competitive advantages to sustain ongoing market share gains for Pelatro, including deep domain expertise, solutions evolved to handle Big Data, and a strong customer service capability
  • A track record of continuous growth since inception and strong profit margins

Quick facts: Pelatro PLC

Price: 49 GBX

AIM:PTRO
Market: AIM
Market Cap: £15.94 m
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Pelatro PLC: Analyst expects growth and profitability to continue in 2020

Proactive Research analyst Ed Stacey says Pelatro PLC (LON:PTRO) is a software provider focussed on the telecom sector, offering telecom operators solutions for increasing revenue per subscriber, retaining subscribers, and monetising data. He's expecting growth in its customer base to continue...

1 week, 5 days ago

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