Monitise FY14 growth on track H114 results Software & comp services In H114, Monitise made progress in signing new customers, expanding geographically, enhancing its product offering and increasing its sales reach through partnerships. With H1 revenues up 67% year-on-year, the company maintains its FY14 guidance; we have revised our forecasts to reflect the Pozitron acquisition, a different revenue mix and higher operating costs. We continue to forecast positive EBITDA in FY15, although we have reduced our forecast by 38% to reflect the company s continued focus on investing to gain market share. 26 February 2014 Price 78.88p Market cap 1,325m Net cash ( m) at end H114 66.2 Shares in issue 1,679.8m Free float 86% Code MONI Year end Revenue ( m) PBT* ( m) EPS* (p) 06/12 36.1 (18.8) (2.4) 0.0 N/A N/A 06/13 72.8 (32.5) (2.4) 0.0 N/A N/A 06/14e 111.6 (25.5) (1.5) 0.0 N/A N/A 06/15e 146.0 (9.7) (0.5) 0.0 N/A N/A DPS (p) Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. P/E (x) Yield (%) Primary exchange Secondary exchange Share price performance AIM N/A Focus on expanding the network Monitise continues to focus on building out its network to support financial institutions, mobile network operators, payment networks and retailers in providing mobile banking, payments and commerce services to their customers. It is working on the implementation of several large contracts that should lead to material usergenerated revenues in the medium term, and recent sales partnerships have yet to generate significant new business. In H114, Monitise strengthened its offering by geography (Pozitron acquisition; Asia Pacific JV buyout) and product (Grapple acquisition, Vantage 5.1 launch in US). Registered users stand at 28 million (+40% y-o-y) with users signing up at a similar rate to H213. Guidance maintained for FY14 With 67% revenue growth and gross margins of 72.7% achieved in H114, the company continues to target 50% revenue growth and gross margins above 70% for FY14. We have revised our forecasts to reflect H114 results and the recent Pozitron acquisition; revenues increase by 2.3% in FY14 and 1.1% in FY15. Due to revenue mix and higher operating expenses, our FY14 EBITDA forecast falls from - 8.2m to - 12.0m and our FY15 EBITDA forecast falls from 8.2m to 5.1m. Valuation: Reflects growth potential Monitise trades on an EV/sales multiple of 11.5x FY14e and 9.0x FY15e. In the absence of profitability metrics to support the valuation (we forecast EBITDA breakeven in FY15), share price appreciation will depend on Monitise achieving its stated targets. Future milestones include Visa Europe s and Visa Inc s customers adopting their services, direct sales progress in the US, leverage from sales partners such as IBM, service launches in Asia Pacific and evidence of adoption of m-commerce services. The planned move in CY14 to the London Stock Exchange s main market should provide support to the share price. % 1m 3m 12m Abs 11.6 52.4 111.3 Rel (local) 8.5 48.0 92.7 52-week high/low 79.5p 32.0p Business description Monitise provides a mass-market technology platform that enables banks, card schemes, telcos and other financial providers to offer mobile banking, payment and commerce services. Next event FY14 preliminary results September 2014 Analysts Katherine Thompson +44 (0)20 3077 5730 Dan Ridsdale +44 (0)20 3077 5729 tech@edisongroup.com Edison profile page Monitise is a research client of Edison Investment Research Limited
Review of H114 results Exhibit 1: Monitise half-yearly results H113 H213 H114 y-o-y y-o-y Revenues: Licences 0.0 13.7 11.1 N/A (19.4% Subscriptions 14.2 15.4 16.3 14.4% 5.4% User-generated revenues 14.2 29.2 27.3 92.2% (6.3%) Development and integration revenues 13.6 15.8 19.2 41.2% 21.5% Total revenues 27.8 45.0 46.5 67.3% 3.5% Gross margins: User generated 86% 92% 91% 5% (1%) Development and integration 58% 53% 46% (12%) (7%) Total gross margin 72.1% 78.2% 72.7% 1% (5%) EBITDA (14.7) (4.6) (10.2) Depreciation and amortisation (3.2) (5.5) (5.6) Adj. operating profit (17.9) (10.0) (15.8) Reported EPS (p) (2.6) (1.2) (1.4) Net cash 100.4 85.6 66.2 Source: Monitise Monitise reported strong y-o-y revenue growth of 67%, with the bulk coming from licence revenues. On a sequential basis, licence revenues were lower but subscription-based revenues grew 5.4%. Registered users grew from 24 million to 28 million over the last six months, implying a 670k monthly sign-up rate, unchanged from the previous period. At the gross profit level, user-generated gross margin was at a similar level to H213, whereas development and integration gross margin fell as certain large projects were undertaken. We assume the larger contracts are structured such that long-term subscription revenues are prioritised at the expense of margins on the initial implementation. The EBITDA loss widened sequentially, due to a combination of lower gross profit and a 5m step up in operating expenses (excluding depreciation and amortisation). The value of payments and transfers at year end increased to $71bn in an annualised basis, up from $31bn at the end of H113 and $50bn at the end of FY13. The volume of transactions (annualised) reached 3.5 billion at the end of H114, up from 2 billion a year ago and 3 billion at the end of FY13. This implies the average transaction value has increased from $15.50 a year ago to $20.29 now, and transactions per user have increased from 100 to 125 (annualised). Business update Progress with existing partners Visa Europe More than 30 member banks have signed up to use Visa Europe s person-to-person (P2P) payment solution. Five are live with the service (including RBS, NatWest, Ulster Bank and Allied Irish Bank), implying that registered user numbers will benefit as the other banks go live. To date, Monitise s activity in Europe has been predominantly in the UK. As Visa Europe member banks start to implement the P2P service, this could open up direct relationships for Monitise with European banks, although the more immediate focus is to pave the way for these banks to adopt m-commerce services. Monitise 26 February 2014 2
Visa Inc Monitise is working with Visa Inc to support enhancements to its Visa DPS platform (including mobile deposit capture), Visa PayWave for contactless payments and a new mpos platform. IBM We understand that this relationship (announced in September 2013) has not yet led to any new contracts for Monitise, but with IBM prominently talking about its relationship with Monitise, it is likely to only be a matter of time before this happens. In the longer term, Monitise is keen to continue to focus on developing its technology and does not see implementation services as a core part of the business. This kind of partnership benefits Monitise in two ways IBM has strong relationships in the financial services sector and can sell Monitise s technology as part of its wider suite of services, and once these contracts have been signed, the customer has a strong implementation partner in IBM. In addition, IBM s Smarter Planet initiative, in particular its focus on mobile, data analytics, social business, smarter commerce and security intelligence, make it a key partner for Monitise. Telefonica Monitise continues to work on the implementation phase of this project, so it has not yet gone live with the planned mobile payments and mobile commerce services. Technology update The company has launched the Vantage 5.1 platform in the US. This combines on-premise and cloud-based software as some US banks prefer to keep their mobile banking infrastructure behind the firewall. The company has standardised its offering to make it easier to implement, which has the advantage of reducing both the cost and the time to market for the customer. New contract wins At the end of H114, the company won a five-year contract to supply mobile banking, payments and shopping services to a UK bank and financial services company. We would expect this to generate development and integration revenues in H214 before the service is launched. Post period-end, the company won a three-year contract to supply multi-language mpos services for the business customers of OP-Pohjola Group (Finland s leading banking group). Monitise Create (which incorporates the Grapple acquisition) helped create the Official FIFA App for this year s World Cup in Brazil. Outlook and changes to estimates The company continues to see increasing demand for its services and positive momentum across the group. Therefore, it sees the need for continued investment to maximise growth opportunities we assume this implies that the company is not wedded to a specific EBITDA break-even target date, and would rather continue to invest opportunistically to win market share. FY14 guidance is maintained: revenue growth of c 50% (we understand this is an organic growth target) with gross margins of at least 70%. The company continues to consider a move to the main market in CY14. Monitise 26 February 2014 3
Changes to estimates Revenues: we have increased FY14 revenues by 2.5m to reflect the recent Pozitron acquisition (equivalent to y-o-y growth of 53.4%). We have increased our licence revenue forecast from 10m to 20m and reduced our subscription revenue forecast from 53.1m to 44.6m, reflecting slower growth in registered user numbers and ARPU than we were forecasting (as some larger contracts are still in the implementation phase). For modelling purposes, it is worth noting that increased usage of the Monitise service does not automatically result in high subscription revenues. In many cases, licences include transactions for a certain number of users, with additional subscription revenues only being earned above agreed levels, and some subscription agreements are structured in bands, distorting ARPU as user numbers move from one band to the next. We have increased our FY15 revenue forecast by 1.6m. Gross margin: FY14 gross margin increases from 72.4% to 73.2% reflecting a higher proportion of user generated revenues (which we estimate will achieve gross margins of 90%) and partially counteracted by lower gross margins for development and integration revenues (from 55% to 50%). Operating expenses: we have increased our FY14 forecast for operating expenses (excluding depreciation and amortisation) by 6.5m, reflecting the Pozitron acquisition and a higher runrate in the underlying business. EBITDA: our EBITDA loss forecast increases from 8.2m to 12.0m in FY14. We continue to expect EBITDA break-even in FY15, but reduce our forecast from 8.2m to 5.1m, reflecting a higher opex run-rate. EPS: we have factored in payment of the first tranche of contingent consideration for Grapple we assume this will be settled via the issue of shares in H115. Our FY14 EPS forecast widens from -1.37p to -1.48p and for FY15 from -0.43p to -0.54p. Exhibit 2: Changes to forecasts FY14e old FY14e new FY15e old FY15e new Revenues y-o-y y-o-y y-o-y y-o-y User-generated revenues 63.1 45.4% 64.6 49.0% 99.4 53.8% 91.0 40.8% Development & integration services 46.0 56.4% 47.0 59.8% 45.0-4.3% 55.0 17.0% Total revenues 109.1 49.9% 111.6 53.4% 144.4 29.3% 146.0 30.8% Gross profit Margin Margin Margin Margin User-generated revenues 53.6 85.0% 58.2 90.0% 83.5 84.0% 80.8 88.7% Development & integration services 25.3 55.0% 23.5 50.0% 24.8 55.0% 28.6 52.0% Total gross profit 78.9 72.4% 81.7 73.2% 108.2 75.0% 109.4 74.9% EBITDA (8.2) -7.5% (12.0) -10.7% 8.2 5.7% 5.1 3.5% Normalised operating profit (20.2) -18.5% (23.5) -21.0% (5.8) -4.0% (8.4) -5.8% Normalised PBT (22.2) (25.5) (7.0) (9.7) Normalised net income (22.2) (24.2) (7.0) (9.2) Normalised EPS (p) (1.37) (1.48) (0.43) (0.54) Net cash 41.0 41.2 14.0 15.0 Source: Edison Investment Research Monitise 26 February 2014 4
Exhibit 3: Financial summary 000s 2009 2010 2011 2012 2013 2014e 2015e Year end 30 June IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 2,658 6,019 15,277 36,087 72,796 111,640 146,040 Cost of Sales (1,167) (2,213) (5,878) (12,132) (17,588) (29,964) (36,687) Gross Profit 1,491 3,806 9,399 23,955 55,208 81,676 109,353 EBITDA (11,767) (13,168) (11,888) (10,412) (19,305) (11,964) 5,096 Operating Profit (before GW and except) (11,977) (14,053) (12,558) (13,151) (27,924) (23,464) (8,404) Amortisation of acquired intangibles 0 (235) (281) (532) (6,555) (7,500) (7,500) Exceptionals 0 956 0 5,100 (6,627) 1,323 0 Share based payments (1,754) (3,776) (1,740) (2,707) (5,333) (6,300) (6,300) Operating Profit (13,731) (17,108) (14,579) (11,290) (46,439) (35,941) (22,204) Share of post-tax loss of 0 0 (2,925) (6,034) (4,440) (2,500) (1,500) joint ventures Net Interest 604 65 288 412 (173) 500 250 Profit Before Tax (norm) (11,373) (13,988) (15,195) (18,773) (32,537) (25,464) (9,654) Profit Before Tax (FRS 3) (13,127) (17,043) (17,216) (16,912) (51,052) (37,941) (23,454) Tax 0 273 2,738 527 (251) 1,290 489 Profit After Tax (norm) (11,373) (13,715) (12,457) (18,246) (32,788) (24,174) (9,165) Profit After Tax (FRS 3) (13,127) (16,770) (14,478) (16,385) (51,303) (36,651) (22,965) Average Number of Shares 329 453 686 776 1,350 1,630 1,687 Outstanding (m) EPS - normalised (p) (3.5) (3.0) (1.8) (2.4) (2.4) (1.5) (0.5) EPS - FRS 3 (p) (4.0) (3.7) (2.1) (2.1) (3.8) (2.2) (1.4) Dividend per share (p) 0 0 0 0 0 0 0 Gross Margin (%) 56.1 63.2 61.5 66.4 75.8 73.2 74.9 EBITDA Margin (%) N/A N/A N/A N/A N/A N/A 3.5 Operating Margin (before amort. and except.) (%) N/A N/A N/A N/A N/A N/A (5.8) BALANCE SHEET Fixed Assets 992 3,986 11,739 179,302 200,741 258,319 263,319 Intangible Assets 659 2,725 6,636 169,588 192,648 245,874 248,874 Tangible Assets 333 874 2,827 5,621 8,049 10,549 12,549 Investments 0 387 2,276 4,093 44 1,896 1,896 Current Assets 15,798 16,549 29,341 34,474 104,133 78,217 66,063 Stocks 0 0 0 0 0 0 0 Debtors 1,227 3,945 7,174 14,908 17,363 36,000 50,000 Other 4,426 0 0 0 0 0 0 Cash 10,145 12,604 22,167 19,566 86,770 42,217 16,063 Current Liabilities (7,399) (5,218) (7,742) (42,070) (39,736) (51,736) (55,617) Creditors (4,020) (5,218) (7,742) (32,380) (39,482) (51,482) (55,363) Short term borrowings (3,379) 0 0 (9,690) (254) (254) (254) Long Term Liabilities (57) (1,098) (551) (26,554) (24,189) (29,627) (29,627) Long term borrowings (57) 0 0 0 (880) (774) (774) Other long term liabilities 0 (1,098) (551) (26,554) (23,309) (28,853) (28,853) Net Assets 9,334 14,219 32,787 145,152 240,949 255,173 244,138 CASH FLOW Operating Cash Flow (11,396) (14,071) (12,597) (11,605) (23,796) (19,773) 1,096 Net Interest 604 70 173 375 (102) 500 250 Tax 0 207 724 0 (462) 0 0 Capex (307) (1,104) (6,815) (10,802) (14,158) (25,000) (26,000) Acquisitions/disposals 0 71 (500) (8,634) 749 1,554 0 Financing (including demerger 11,548 17,915 31,477 25,296 119,391 772 0 adjustments) Dividends 0 0 0 0 0 0 0 Net Cash Flow 449 3,088 12,462 (5,370) 81,622 (41,947) (24,654) Opening net debt/(cash) (7,213) (6,709) (12,604) (22,167) (9,876) (85,636) (41,189) HP finance leases 0 0 0 0 0 0 0 initiated Other (953) 2,807 (2,899) (6,921) (5,862) (2,500) (1,500) Closing net debt/(cash) (6,709) (12,604) (22,167) (9,876) (85,636) (41,189) (15,035) Source: Monitise accounts, Edison Investment Research Monitise 26 February 2014 5
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