I have started a very small position in Beeks Financial Cloud, but would like to discuss the company. Open to criticism of my thesis. The company currently trades at a rich market cap of 59.46M at a price of 118p. While I feel this is too high at 6.4x last year’s revenue of 9.3M, I feel the company does operate in a interesting space and if successful could be like the AWS of FX and futures trading markets.
Beeks Financial Cloud is a cloud computing & infrastructure provider for the financial services industry. It was founded by current CEO Gordon McArthur in 2010 and provides virtual private servers with direct, cross connects (fibre optic cable) into financial exchanges. The Company is focused on supporting automated traders in the foreign currency and futures markets. The value proposition they provide is server infrastructure for direct connectivity with low latency to financial trading exchanges. In automated trading, milliseconds matter and a direct cross connects connection is vital for many machine driven trading strategies. Beeks’s clients include IG, Forex Capital markets, Playtec PLC and various other hedge funds and market participants. Beeks has 18 datacenters. Some of the prominent ones are in Singapore, London, NYC, Paris, and Sydney. They recently acquired Velocimetrics which provides trade analytics software. I believe adding analytics software is smart because it enables you to gain more wallet share from existing customers and should usher in higher GM%.
Gordon is an owner operator who owns 53.63% of the company per the latest Annual Report listed below:
Revenue grew 27% to 9.36M, though it is important to note that the rate of revenue growth has decelerated every year since the company floated in 2017 (revenue grew 41% to 5.58M in 2018, 32% to 7.32M in 2019). Gross margins have been around the 50% range (good but not great, as the business is an infrastructure business, not a SaaS business). EPS was 2.37p in the most recent financial year. Earnings are not impressive as the company has had to invest a lot in the equipment at the 18 datacenters. As a result ROCE will not be impressive, at 7.9% based on the last annual report. The company has approximately 0.75M in net debt has been used to acquire Velocimetrics and pay a dividend. I do question the wisdom of paying a dividend, as the company has mostly been in investment mode over the last 3 years. This is evidenced by the lack of meaningful free cash flow. Will monitor how management views capital allocation going forward.
The silver lining is that management has mentioned the buildout of datacenter capacity is mostly complete. The company has a footprint in North America Europe, and Asia, but does not have any coverage in Africa or South America. If the buildout is mostly complete, the company may benefit from higher margins due to the Velocimetrics software. In addition, the company has recently signed on two “Tier 1” clients. (these are not mentioned, but we must assume they are very large banks/institutions). The pandemic has posed a challenge to the company as to win large clients the company must perform and present its value proposition directly with the client. The goal for management is to sign up more Tier 1 clients and get in the door for more infrastructure outsourcing discussions.
The bull case is that growth continues and due to operating leverage more revenue hits the bottom line with a decrease in investment spending. The business is a capex intensive business to get into, and one must have a deal with the financial exchanges to be co-located to have direct access to the exchanges. How many companies can get this?
The bear case is that the company must continue to perennially invest in the business to fend of competitors. Can Amazon Web Services, Google Compute, and Azure get into this space? Management did mention on a 2018 Mello Derby day that customers who did switch to an AWS usually switch back to Beeks (see below link to the Mello Derby Day video from Piworld, discussion of compeition is 21:50):
The company also competes against Fixnetix (owned by DXC who outsources bank’s infrastructure needs) and Lucera (owned by Cantor Fitzgerald). Both competitors are impressive, however DXC has faced its own management challenges in its acquisition of the HPE Enterprise Services business made a few years ago. A ctrl+f search on the DXC annual report yields no result for Fixnetix.
From a Regulatory perspective, some folks may worry about regulation of high frequency trading. Gordon addressed this in the Mello Derby day. He mentioned it was not scalable to do HFT on a shared platform like Beeks and that Beeks’s focus is automated trading, not HFT. Not sure how to view this. Governments are capricious, time will tell if this is an issue.
One accounting risk to watch is the intangible assets related to acquisitions like Velocimetrics. I will be watching to see how the deferred consideration pans out for the acquisition. There is approximately $1.8M in Goodwill related to this transaction and the discount rate for the good will was set at 29.5%. I will be scrutinizing future reports to see if this discount rates creep down to maintain the goodwill, or if any impairments occur.
In terms of longevity of demand, I don’t question that Hedge Funds, and banks will still be around decades from now. Human nature and the desire to play the markets will not disappear. The question is whether Beeks can serve as the computing platform for this behavior and sign on more Tier1 Banks and scale the business while controlling costs.