Monitise. Positive momentum. Trading update: FY13 on track. Recent contract wins highlight service expansion. M-commerce opportunity for banks

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1 Monitise Positive momentum Trading update and contract wins Software & comp services Monitise s trading update confirms that it will meet FY13 guidance, with revenue growth of at least 94% y-o-y and gross margins exceeding 70%. Recent contract wins highlight the shift from mobile banking to mobile payments and m-commerce and bring a large number of potential users that could drive transaction-based revenues in the longer term. Year end Revenue ( m) PBT* ( m) EPS* (p) 06/ (12.3) (1.8) 0.0 N/A N/A 06/ (12.7) (2.3) 0.0 N/A N/A 06/13e 72.2 (29.7) (2.6) 0.0 N/A N/A 06/14e (9.1) (0.7) 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 (%) 24 July 2013 Price 38.0p Market cap 594m Net cash ( m) as at end-h Shares in issue 1,563.0m Free float X% Code MONI Primary exchange AIM Secondary exchange N/A Share price performance Trading update: FY13 on track The company expects to report FY13 revenues of more than 70m (vs our 72.2m) with gross margins for the year above 70% (vs our 70.1%). Net cash of 85.6m at end-fy13 was significantly higher than our 71.6m forecast. Progress in signing up new users continues on track, with more than 23m users registered at year-end. Recent contract wins highlight service expansion Monitise has recently announced several significant contract wins, highlighting progress being made in the mobile payments and m-commerce market. The company announced its first significant contract win with a mobile operator it will develop and manage mobile payment and commerce services for Telefónica Digital in a five-year contract, with the initial focus on the UK market. In India, ICICI Bank (India s largest private sector bank) is the second bank to sign up to use Movida s mobile payment services. In the UK, Lloyds Bank has signed up to use Monitise s mobile point of sale (mpos) technology to develop a service for its small business customer base to enable the acceptance of card payments using smartphones. M-commerce opportunity for banks Recent market research highlights that smartphone users are keen to use m-commerce, but need reassurance around security and want easy-to-use apps. A majority would be happy to use bank-provided apps, highlighting the opportunity for banks to develop m-commerce services. Valuation: Tracking milestones around user adoption Monitise trades on an EV/sales multiple of 7.3x FY13e and 4.7x FY14e. In the absence of profitability metrics to support the valuation (we forecast EBITDA breakeven in FY14), 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, progress with direct sales in the US, the launch of services in Asia- Pacific and India, and evidence of adoption of m-commerce services. % 1m 3m 12m Abs Rel (local) week high/low 43.5p 25.5p Business description Monitise provides a mass-market technology platform that enables banks, card schemes and other financial providers to offer mobile banking, payment and commerce services. Next event Preliminary results 5 September 2013 Analysts Katherine Thompson +44 (0) Dan Ridsdale +44 (0) tech@edisongroup.com Edison profile page Monitise is a research client of Edison Investment Research Limited

2 Trading update: FY13 to meet guidance Monitise expects to report FY13 revenues of more than 70m (our forecast 72.2m) with gross margins for the year above 70% (our forecast 70.1%). Net cash at the end of FY13 was significantly higher than our 71.6m forecast at 85.6m. Progress in signing up new users continues on track, with more than 23m users registered at year-end (our forecast 23.4m). The volume of transactions on an annualised basis has grown 20% to 2.4bn in early July from 2.0bn in early February and the value of payments and transactions initiated using Monitise technology has grown 29% to $40bn (annualised) from $31bn over the same period. Telefónica contract win Monitise has announced a five-year agreement with Telefónica Digital to develop and manage new and existing mobile payment and commerce services for its customers. The deal is estimated to be of a similar size to the recent 45m Visa Europe contract and will generate a mix of development and integration and user-generated revenues. The companies will initially focus on the UK market we note that Telefónica has more than 316m subscribers across 24 countries. The chart below shows the spread of subscribers in the main geographies: Exhibit 1: Telefónica subscribers by geography (millions) Vivo JV (Brazil) 76 Other geographies 136 O2 UK 22 Movistar Chile 10 Movistar Peru 15 Movistar Spain 20 O2 Germany Movistar Argentina Source: Monitise This is Monitise s first major contract outside of financial services and demonstrates the potential for its services to be used for mobile payments and commerce across multiple verticals. When the company raised money in December 2012, the focus was on driving growth in m-commerce, and this contract is a step in this direction. Lloyds mpos contract win At the same time as the fund-raising in December 2012, Monitise acquired emerit Solutions, an mpos device and service supplier. At the end of June, Lloyds Bank Commercial Banking became the first company to sign up with Monitise to develop mpos services for its micro-merchant, startup and small business owner customer base. Lloyds expects to be able to start offering a suite of mobile payment products from this autumn. As previously discussed in More mobile money, mpos services make it easier for individuals and small businesses to take card payments. Monitise 24 July

3 New customer for Indian JV Monitise s joint venture with Visa in India, Movida, has signed up its second Indian banking customer, ICICI Bank. ICICI Bank is India s largest private sector bank and the second largest by assets. ICICI will use the Movida service to enable its account holders to access the following mobile services: Pay bills Recharge prepaid airtime Buy cinema tickets Reflecting the widespread use of basic and feature phones, with lower smartphone penetration than in Europe and North America, the service is available through menu-based USSD (unstructured supplementary service data) technology or through interactive voice response (IVR) technology in multiple languages. The service will work with both Visa and non-visa based payment cards. The joint venture will start earning transaction-based revenues when the ICICI service starts Monitise will recognise this through the associates line in the P&L. Attitudes towards m-commerce Monitise s technology allows consumers to Bank Anywhere, Pay Anyone or Buy Anything. Monitise s first offerings were developed to provide mobile services such as alerts and account management to banks. Once banks customers had started to adopt mobile banking services, the move to using mobile payment services (ie bill payments, peer-to-peer payments, transfers) was a natural step. Monitise already supports mobile payments for a range of customers including Visa Inc, Visa Europe, NatWest, HDFC Bank and Standard Chartered. The next step up from mobile payments is to add the ability to shop on the phone the recent fund-raising and acquisitions were undertaken with this in mind. M-commerce functionality includes shopping, rewards, NFC and coupons/offers/vouchers. Monitise recently hosted a presentation of data produced by the Future Foundation (published in a report called M-commerce: What consumers want from financial institutions ). The survey data covered three countries the UK, Germany and Spain and measured attitudes to mobile banking, payments and commerce across a sample group of smartphone owners. While it is possible to access some mobile banking services without a smartphone, consumers tend to make much more use of mobile banking and payment services when they are accessed via smartphone apps. As a starting point for driving adoption of these services, smartphone ownership ranges from 29% in Germany to 39% in the UK and the majority of mobile phone subscribers are expected to own a smartphone by 2018 (from 52% in Germany to 65% in the UK). Looking at the statistics for the UK market, where Monitise already has a significant presence, notable data points gleaned from the research include: More than 40% of smartphone users say they use their phones for banking and 22% of smartphone users who have accessed the mobile internet in the last six months have accessed mobile banking services, The most common banking service (accessed via an app or SMS) is balance checking, followed by statement checking, bill payments, balance transfers, paying friends/family and checking for overdraft alerts. When it comes to buying things with the phone (excluding apps), 52% of smartphone users have done so and a further 27% would consider doing so, resulting in a large majority that has Monitise 24 July

4 the desire to use the phone for shopping. The most common purchases were books, CDs, and DVDs, with Amazon the most common destination. For m-commerce, smartphone users value ease of use the highest, followed by fast service and then a trusted brand. Barriers to using m-commerce are predominantly security related, relating to the transaction itself and also the security of the handset. The most trusted transaction provider is PayPal, followed by the user s bank, and very closely followed by card providers (eg Mastercard, Visa). When questioned about the role of a user s bank in m-commerce, more than 50% of smartphone users would feel confident buying goods and services through a bank-provided app, and 57% would trust websites endorsed by the bank, but only 28% would find it useful to receive recommendations from the bank based on previous transactions. This perhaps highlights that users trust the security offered by their own bank, but are less keen to be marketed to. When asked what it would take for the user to buy products and services via the user s banking app, the majority want an easy to use app, followed by a financial incentive and a link to the user s bank account (in order to check availability of funds). In conclusion, there is appetite from smartphone owners to use their phones for m-commerce, but they need transaction providers they can trust and they want a fast, easy-to-use service. Banks are still trusted by their customers and the survey highlights the opportunity for them to develop m-commerce services that meet the needs of their customers. Monitise 24 July

5 Exhibit 2: Financial summary '000s e 2014e Year end 30 June IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 2,658 6,019 15,277 36,087 72, ,750 Cost of Sales (1,167) (2,213) (5,878) (12,132) (21,562) (32,189) Gross Profit 1,491 3,806 9,399 23,955 50,622 84,561 EBITDA (11,767) (13,168) (11,888) (10,412) (20,078) 4,361 Operating Profit (before GW and except) (11,977) (14,053) (12,558) (13,101) (29,578) (9,639) Amortisation of acquired intangibles 0 (235) (281) (532) (5,000) (5,000) Exceptionals , Share based payments (1,754) (3,776) (1,740) (2,707) (4,000) (4,000) Operating Profit (13,731) (17,108) (14,579) (11,240) (38,110) (18,639) Net Interest (131) 500 Profit Before Tax (norm) (11,373) (13,988) (12,270) (12,689) (29,709) (9,139) Profit Before Tax (FRS 3) (13,127) (17,043) (14,291) (10,828) (38,241) (18,139) Tax , (854) 0 Profit After Tax (norm) (11,373) (13,715) (9,532) (12,162) (30,563) (9,139) Profit After Tax (FRS 3) (13,127) (16,770) (11,553) (10,301) (39,095) (18,139) Share of post-tax loss of joint ventures 0 0 (2,925) (6,034) (4,000) (2,000) Net income (norm) (11,373) (13,715) (12,457) (18,196) (34,563) (11,139) Net income (FRS 3) (13,127) (16,770) (14,478) (16,335) (43,095) (20,139) Average Number of Shares Outstanding (m) ,349 1,575 EPS - normalised (p) (3.5) (3.0) (1.8) (2.3) (2.6) (0.7) EPS - FRS 3 (p) (4.0) (3.7) (2.1) (2.1) (3.2) (1.3) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) N/A N/A N/A N/A N/A 3.7 Operating Margin (before GW and except.) (%) N/A N/A N/A N/A N/A (8.3) BALANCE SHEET Fixed Assets 992 3,986 11, , , ,342 Intangible Assets 659 2,725 6, , , ,128 Tangible Assets ,827 5,621 10,121 15,121 Investments ,276 4,093 4,093 4,093 Current Assets 15,798 16,549 29,341 34,474 99,609 84,470 Stocks Debtors 1,227 3,945 7,174 14,908 28,000 36,000 Other 4, Cash 10,145 12,604 22,167 19,566 71,609 48,470 Current Liabilities (7,399) (5,218) (7,742) (41,263) (37,573) (49,573) Creditors (4,020) (5,218) (7,742) (31,573) (37,573) (49,573) Short term borrowings (3,379) 0 0 (9,690) 0 0 Long Term Liabilities (57) (1,098) (551) (10,849) (10,849) (10,849) Long term borrowings (57) Other long term liabilities 0 (1,098) (551) (10,849) (10,849) (10,849) Net Assets 9,334 14,219 32, , , ,390 CASH FLOW Operating Cash Flow (11,396) (14,071) (12,597) (11,605) (31,541) 8,361 Net Interest (131) 500 Tax (193) 0 Capex (307) (1,104) (6,815) (10,802) (20,500) (30,000) Acquisitions/disposals 0 71 (500) (8,634) Financing (including demerger 11,548 17,915 31,477 25, ,349 0 adjustments) Dividends Net Cash Flow 449 3,088 12,462 (5,370) 65,733 (21,139) Opening net debt/(cash) (7,213) (6,709) (12,604) (22,167) (9,876) (71,609) HP finance leases initiated Other (953) 2,807 (2,899) (6,921) (4,000) (2,000) Closing net debt/(cash) (6,709) (12,604) (22,167) (9,876) (71,609) (48,470) Source: Monitise and Edison Investment Research Monitise 24 July

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