Small Caps | Dec 22 2014
-Significant growth profile
-Earnings margins to improve
-Risk in high client concentration
By Eva Brocklehurst
In the booming cloud services sector, Bulletproof ((BPF)) is at the fore as recurring revenue accounts for 85% of the total and provides a high level of predictability to broker forecasts.The company is a consulting partner with Amazon Web Services (AWS) and this provides significant new client referrals and potential for large enterprise customer accounts. Industry research suggests the cloud services market will grow at 25-30% per annum for the foreseeable future. The industry is moving out of the early adopter phase as businesses look to significantly increase their cloud services spending and move a larger part of their IT infrastructure to the cloud.
Micro Equities expects significant growth in the AWS division and for this to account for 42% of FY15 recurring revenue. Bulletproof has had consecutive years of positive operating profit and the broker has initiated coverage with a Strong Buy recommendation and 33c price target. Bulletproof is considered one of the few options in a pure play, ASX cloud exposure for Australian investors. The company has developed a recognised domain expertise, with sophisticated consulting and automated processes across an array of cloud-based offerings. Compound annual growth in revenue for the next two financial years is forecast at 50%, with 24% forecast over the next five years. The broker expects earnings margins will improve to around 20% in the medium term from the current 15%.
Risks which the broker has identified include a concentration of revenue within top clients. November accounted for around 15% of FY14 revenue and the second largest customer accounts for 5.5% of revenue. Dependence on Amazon Web Services is also a risk factor. Customers on this hosting service are typically on month-to-month, pay-as-you-go contracts as opposed to the multi-year traditional managed hosting services. Shorter duration contracts could lead to increased customer churn. Increased competition and a reliance on key personnel also add to the risk factors.
Bulletproof provides traditional managed hosting and cloud hosting services to business and government customers. It was founded in 2000. The company is one of just four premier consulting partners with AWS in the Asia Pacific and was an early innovator, announcing Australia's first VMware public cloud service in 2006 and launching the AWS partnership in 2012. Bulletproof has a core business in managed web hosting, VMware, and an AWS-managed service offering. VMware has been growing at mid single digits whilst the AWS managed service is growing aggressively and Micro Equities expects it will exceed VMware revenue by FY16.
There are three segments of the cloud computing market. Platform-as-a-service provides computational and data storage capacity, such as AWS. Software-as-a-service provides enterprise software, cloud hosted. Infrastructure-as-a service allows the client to load all applications onto the infrastructure owned by the cloud provider such as Bulletproof. This is similar to another ASX-listed company UXC ((UXC)) The supplier manages the service layer all the way to the hardware, thus negating the need for the customer to purchase physical IT hardware.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
