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Blink acquisition to expand Mphasis’ UX capabilities

Mphasis has acquired Blink Interactive, a Seattle-based user experience research and design firm. Blink operates in the high growth CX/UX segment and works with marquee clients in the US. The purchase consideration stands at USD94m, along with talent retention cost over the next two years. Acquisition is margin dilutive by 100bp due to higher amortization and retention cost. Around 2.8x CY21 revenue, valuations are reasonable, given the robust growth and strong synergies.

Enhancing front-end capabilities and strategic positioning Design-led experience services company: Blink is a US-based company founded in CY00. It provides design consultancy services around User Experience (UX), user research and strategy, and Customer Experience (CX) design for marquee brands.

* Opens up the upstream addressable market: Blink’s services are focused around upstream research and design, which is growing by 25-30% YoY. This enhances Mphasis’ positioning in addressing opportunities around product, experience, and service design. It enables Blink to expand outside the US, which can open up significant growth avenues.

* Synergies from capturing downstream opportunities: Acquisition of Blink provides Mphasis an opportunity to add to its front-end design capabilities and engineering-related work, and also capture more downstream revenue opportunities, which in many cases is ~10x of upstream revenue. This perfectly aligns with Mphasis’ Front2Back transformation strategy.

* Marquee customer base: Blink has a marquee customer base in the Hi-Tech industry, with Facebook, Amazon, Microsoft, and Google featuring in its client list. With limited overlap in clients, the management sees strong crosssell opportunities within Blink’s client base. The cross-sell initiatives would significantly enhance Mphasis’ Hi-Tech portfolio.

* Cross-sell of services within existing verticals of Mphasis: Capabilities acquired from Blink can be used to cross-sell to Mphasis’ existing customers by moving upstream. Hi-Tech and BFSI are key beneficiary verticals for crossselling.

* Margin dilution on retention costs and amortization: Blink’s gross margin is above Mphasis, but elevated SG&A (on a smaller revenue base) resulted in a similar EBITDA margin. The management guided at an impact of ~100bp on Mphasis’ margin from retention cost (over two years) and higher amortization (over five years). Excluding this 100bp impact, the acquisition would have been margin accretive. The management expects early realization of revenue synergies to pare down margin headwinds.

* Valuations reasonable given the growth trajectory: Mphasis is paying USD94m, including earn-outs, but excluding retention bonuses. Blink has clocked ~42% revenue CAGR over CY17-21 and has guided at a revenue of USD33-35m in CY21. This implies a trailing EV/sales of 2.8x, which we view as reasonable, given the strong growth and cross-sell opportunities.

Valuations and view

We like the Blink acquisition and expect its cross-sell synergies to drive accelerated growth within Mphasis’ BFSI and the Hi-Tech portfolio. We have not factoring in Blink numbers in our estimates as we await more clarity and completion of the acquisition. We continue to expect strong momentum in the organic business, given the impressive deal wins over the last three quarters and a healthy deal pipeline. DXC’s contribution to revenue is diminishing and will be insignificant in the near term. The management’s ability to defend its margin guidance is a key positive. We value the stock ~36x FY23E EPS. We maintain our Buy rating.

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