Blur Group - Rolling Out S-Commerce

http://blurgroup.com/
Blur Group Logo

Blur Group (LSE:BLUR) is an interesting technology proposition. The company was founded in 2008 and is run by CEO Philip Letts who believes the company has huge potential to transform the way in which businesses source services. Addressing this, the company has set itself a target to 'become a billion dollar technology company by 2020'. S-Commerce stands for Services Commerce, and much like E-Commerce and ebay, Blur has created an online exchange, but this time it is services-based and for businesses. The exchange is already making rapid progress in terms of usage which is proved by excellent growth across all their metrics. The company has seen the market take a liking to its business model having listed on AIM in late 2012 with the share price advancing from sub-100p levels to currently stand at 320p/share. With just under 30m shares in issue, that gives Blur a market cap of £94.8m. With Blur's exchange gaining traction, the all-important question is whether the company has what it takes to succeed in the long-run.


From the chart above it is clear to see that any investment now would be investing in Blur near its all-time highs. Looking back over the period is has been listed for, there have been no major pullbacks and all dips have been bought into, which is a positive signal. The indicators have all re-adjusted recently meaning that new upside can be created should market conditions allow. Considering a recent influx of company news, I would expect any re-test of 350p see the level being broken through. It is often the case that shares break through resistance on their third attempt. However,  should the shares top out at 350p again, that would be a bearish triple-top pattern and it would be wise to reconsider the company's position at that time as it would imply a fall back to 260p-280p. However, the current picture remains bullish even with the fast share price appreciation. Volumes have been growing even in spite of the rising share price also.

Directors hold a large proportion of Blur's shares with CEO Letty alone holding 15,000,000. The board clearly has an incentive to see the share price grow so this is reassuring. A few institutions are also involved in Blur with Investec Asset Management and Octopus Investments being a couple of the major shareholders. Normally you would expect a share like this to be very illiquid, but that is not entirely the case with Blur. The spread on the stock is a few percent which is not too wide for a relatively recent IPO stock and daily volume turnovers usually exceed £100,000.

Figures valid as of 05 September 2013 21:00 UK Time
As I noted before, Blur operates a Global Services Exchange for businesses. How does it work? Well, companies sign up to Blur's website and submit a brief for a service they want completing. There are currently 8 services categories; Design, Marketing, Content, Art, Innovation, Technology, Legal and Accounting. They specify the price they are willing to pay along with a description of the task required and the time span for the project. 'Experts' in the sector required (from all over the world - 141 countries presently) then submit pitches for completing the service. The Exchange then shortlists the best pitches which then reduce the number to a handful. The company then reviews the pitches and selects the company that they want to complete their service for them. A shared area is then created for the buyer and the seller where they can work together online to complete the project. Similarly to ebay, there is a ratings system that helps maintain the integrity of the exchange. Blur's platform fully manages the invoicing and payments with 50% of the payment made up front to the seller. Effectively, what the Exchange does is transfer what was previously done offline, onto an online platform, and Blur Group is the middleman that organises it.

In exchange for being the middle party, the company generates revenues through two main avenues. The first is because there is a listing fee. The listing fee amounts to $375 or 10% of the total project fee dependent on which is greatest. The second avenue is project revenues:  "Corporate Buyer pays 100% of the brief value to blur Group and up to 80% of this is passed onto the expert supplier". Taking that into account, Blur's revenues on a $12,000 project would amount to $1200 plus a further $2400 at 80%. Therefore to grow the business the company has two options: drive brief volumes or drive higher value briefs. Another smaller revenue stream has been created through the introduction of premium accounts for users.

Since Blur Group officially started operating in 2007, there has been significant growth in both the expert numbers and projects. Indeed in 2007, only 50 experts were listed on the exchange. This figure has grow substantially to over 30,000 today and since the 2012 figure, that figure is up 32%. In tandem with this, the average brief value has risen from over ten-fold from $1500 in 2010. The company has already rolled out the exchange to a number of well known companies including Danone, Tyco and CNN.

That is all good, but this has to be funded and that means Blur is loss making, albeit to forecasts Letts insists. I would agree though that investment is of utmost importance to the success of Blur. Should investment cease, the number of briefs may diminish over time. Even with the success of the fast few years, it remains the case that the Exchange is unlikely to be self-sustaining. More experts are ultimately needed, and to be profitable in the long-run, the company needs to push for a sustained increase in the number of briefs per months (currently around 100/month). Admittedly there are rivals out there, but what they lack is the scalability that Blur has. Some of the rivals don't charge for there services, but the benefit of these is completely lost by the comparatively poorer system of the project control. Blur has a much stronger hand in that respect, and will likely continue to do so.

Looking at the news since the start of 2013 sheds some light on Blur's situation. The first thing to do is look at the Metrics for the business.


From this alone it is quite easy to see that the business has gained traction in Q1 2013 and that is likely to have been helped by the IPO. However, aside from the numbers, there are other positives to draw upon. During Q4 2012 the largest project completed through the exchange was worth over $100,000. Today it was announced that a $900,000 project had passed through the exchange, yet the biggest brief came in July and totalled $3.6m. This signals wider acceptance by the industry and that is absolutely critical to Blur's success. It has been widely touted that once Blur's exchange is up and running, a faster rate of growth will be reinforcing providing that investments levels are continued. That is because the exchange gains credibility and due to the simple fact that there are more buyers and service providers. Rather like ebay, once properly established, the business will be self-sustaining. To help the cause, Blur launched an improved platform (blur 3.0) in April which included a series of updates that were catered to client requests. A further upgrade to this was done more recently that added an automated billing function that was said to help with larger corporate requests for any future projects with higher values ($5m+).

"Building on blur's 3.0 platform launch earlier this year, the new billing system will automate the statement of work and payment schedule within the Global Services Exchange. This move is specifically designed to help blur Group continue to scale to facilitate SME volumes as well as new corporate customers with project values of $5m+. The advanced billing system will in the future enable blur to consider self service solutions and multi-device operations as well as very high volume auto-payment mechanisms."

In April the 2012 Final Results were announced. The key points were as follows:
- Revenues up 216% to $2.81m
- Gross profit up 66% to $0.73m
- Cash Balance up 2867% to $4.45m but includes a placing of $6.11m in October 2012
- Gross margin at 26% of sales
- Loss after tax of $1.75m with a cash outflow of $2.16m

Clearly these results in usual market valuations simply don't support a £95m market cap, and I would agree that in most cases the company would be massively overvalued. However, as investors have seen with tech firm Wandisco (LSE:WAND), when potentially huge growth opportunities exist financials go somewhat out of the window. Indeed, Blur is not expecting to become profitable for another year, but that has not damaged investor sentiment. And there is a good reason for that. In simple terms, I believe that Blur will either (over the period of the next five years) fail to see long-term profits and remain loss-making and therefore see a reversal in its market cap, or flourish. I certainly don't see it as even possibly being the next ebay, but if it can turn potentially high revenues into profits, then it should prosper. The US market remains a huge market that the company should be able to continue exploiting. "The majority of projects came from the US, meaning that for the last 12 months the US has been the primary market for blur Group. This region represented 56% of all projects submitted. In total, projects were received from 17 different countries in the quarter."

Looking recently, to outline the increasing confidence in the exchange, in addition to the $900k project I alluded to earlier, a $480k project and $750k project were also both recently announced (remember that Blur only gets a slice of these project values).

courtesy of freedigitalphotos.net
That is the investment proposal here - it very much is a two-way game as far as I can see. The technology will either catch on, or it won't. My own opinion is that is is more likely to succeed than fail, but that is mostly down to the product itself and thus I remain cautious that Blur is still a risky play. The current business model seems fragile. However, the currently bullish sentiment was proved in May when the company completed a share placement to raise $11.5m. The placement was oversubscribed and to prove that, the share price discount was only a small 2%. That improved the market liquidity as well.

Broker estimates are therefore what should be looked at considering the current picture is not what is driving the share price, it's the future picture. Consensus estimates from Shore Capital and N+1 Singer predict total revenue at $8.4m for FY 2013 amounting to 200% Y.O.Y growth with a gross profit of $2.5m. Those figures pretty much double for FY 2014. Realistically these estimates are probably not very accurate the further in the future you go, for the reasons outlined earlier (i.e. growth will be exponential or tail off).

When researching a company like Blur Group it is easy to get excited about the company's prospects. They have visibly increasing metrics and what I believe to be a very sound business idea. However, the bottom line for investors is profit, either through dividends or share price appreciation. Turning back to rational thinking, dividends are not forthcoming and even various brokers have had to readjust their forecasts to show that profitability will now be set back until 2015/2016 following the likely round of investment stemming from the last fundraising (for overheads, advertising and working capital). For now, the sensible and rational option would be to wait on the sidelines. it's easy enough to get caught up in market bullishness. Profits are too far away for my liking and that really does dampen the share price prospects. If the company does flourish and starts producing profits in 2015/16, then it should definitely be re-evaluated. After all, looking at ebay, between 1997 and 1998, revenues for Q4 alone jumped from $2.6m to $19.5m. Once again I note that is because the site had full market acceptance. Should Blur gain the same acceptance, then the potential is phenomenal. In my opinion the Blur platform will continue to grow, primarily because it's being backed by high levels of investment and also due to it's build quality. Until the profits materialise, even though the company does have the first-mover advantage within the S-Commerce market, it remains highly speculative. No Rating.

7 comments:

  1. This is slightly similar to another smashing share called ATUK. ATUK also focuses on B2B Service provision. Unfortunately, both look expensive!

    CraigJ

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  2. I tend to sgree with you on that. I have met Letts and he is very very ambitious. The issue is that shareholders at the moment know that the only returns they can get is price movement and that really doesn't look likely in the long-run. More dilutions will occur over the next few years until it turns profitable.

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  3. I think its plain overvalued.

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  4. I disagree. There seems no reason why turnover won't continue to triple annually as it has done for the last few years. There are even signs that growth is accelerating with the higher value projects coming through. Assuming profits will grow on a similar trajectory then the business is not overvalued with a £100m market cap and it is very easy to imagine a billion dollar mkt cap well before 2020, especially if blur gets a listing on NASDAQ.

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    1. That is what remains to be seen. Currently turnover is doubling annually and that is expected for the next full year of results, but after that, they are forecasting the percentage increase to drop back to around 100% afterwards. That is fair enough considering currently the turnover is quite small. The second issue is the profit. With the continued investment, no profit is now expected for another couple of years, and that can't hold the current market valuation. And there is the case that they will probably need to raise funds during the next two years as well. When profits materialise, then it will be a more attractive investment proposition.

      The last question mark I have is whether this really will be adopted by the largest companies. The exchange makes sense for SMEs, but for multi-nationals (where the important money lies) it may be a harder sell because you would expect they have long-running relationships or even in-house departments who do the services required. That remains a stumbling block in my opinion, but if they can prove that is not the case (on 10+ occasions), then the future is a lot brighter.

      El1te

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    2. Thanks, El1te. Good to hear your views on this. As you say it's easy to get caught up in bullish sentiment. Hope you follow up with an analysis of another B2B company - @UK (ticker ATUK). This is a very experienced UK B2B operator where I gather profits have been held back by a cap on charges imposed by UK public sector clients such as the NHS. They are using their platform to launch in Asia-Pacific in partnership with Visa, using a different charging model, a percentage of the payments flowing through their system. The immediate savings gained by users of the platform together with the support from Visa makes this an attractive business I think. The potential looks vast.

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  5. I don't think that growth need depend entirely on acceptance by the largest companies. Use by a sprinkling of the large corporations will provide welcome credibility but the main volume must come from SMEs as companies of that size have the most to gain from smooth outsourcing of one-off projects, whilst the large corporations will already have their inhouse procurement teams.

    Use by middle size companies (who are not big enough to have a procurement team, but with projects of reasonably large value) is therefore the key to success by BLUR I think.

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