Monitise Shifting to a subscription model Fund-raising Software & comp services Monitise is shifting to a subscription-based revenue model to accelerate customer adoption and drive higher long-term recurring revenues. The new Monitise Central Platform should enable easier access to the Monitise Commerce Network, which in turn should accelerate end-user adoption of m-commerce. The shift is being funded by the placing of 160m shares worth 109m with existing and new shareholders, including MasterCard. 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 102.0 (38.8) (2.3) 0.0 N/A N/A 06/15e 122.7 (49.8) (2.6) 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 (%) 26 March 2014 Price 75.50p Market cap 1,270m Net cash ( m) at end H114 66.2 Shares in issue* 1,681.6m *Excludes 160m due to be issued on 28 March. Free float 86% Code MONI Primary exchange AIM Secondary exchange N/A Share price performance Shifting to a subscription-based revenue model Monitise has announced that it has shifted from an up-front licence or integration revenue-based model to a subscription-based model. Reducing the high up-front cost of installing the service should encourage more banks to consider outsourcing their m-banking apps to Monitise or using Monitise s Commerce Platform. This shift is being combined with the accelerated build of the Monitise Central Platform, which will offer a simpler way to connect into Monitise s technology. While this is likely to result in lower revenues in the short to medium term (as subscription revenues spread over multiple years will take time to compensate for the drop in up-front licence and integration revenues), it should accelerate new customer wins and help customers to launch revenue-generating m-commerce services faster. Funding the change The company has placed 160m shares worth 109m with existing and new shareholders and MasterCard. The proceeds will be used to fund platform development and to support the business through the transition in the revenue model, funding the business while the company grows the subscription revenue base. We have revised our estimates to reflect lower revenue growth in FY14 and FY15, the one-year delay in reaching EBITDA break-even and higher development costs. For the first time, the company outlined a five-year target to reach 200m users and EBITDA margins of at least 30% by FY18. Valuation: Reflects the value of the network Monitise trades on EV/sales multiples of 12.4x FY14e and 10.6x FY15e (including shares issued in the placing). In the absence of profitability metrics to support the valuation (we forecast EBITDA break-even in FY16), 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 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 (4.7) 19.8 130.5 Rel (local) (1.6) 20.7 118.4 52-week high/low 80p 32p 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 events FY14 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
Shifting to a subscription model Subscription versus up-front licensing To date, Monitise has typically constructed its contracts with customers to comprise an up-front licence fee, development and integration fees to connect the customer to Monitise s platform, and ongoing user generated fees (monthly subscription fees, transaction-related fees). Today the company has announced that it is now structuring contracts on a subscription basis. This will result in lower up-front licence fees and development and integration revenues, but should lead to higher recurring revenues in the longer term. The move to a subscription-based model should reduce the financial barrier to adopting Monitise s technology (shifting the customer s spend from high initial capex to ongoing opex) and should result in an acceleration in new customer wins. With many banks still developing mobile banking apps inhouse, the availability of a lower initial cost alternative could accelerate the shift to using third-party solutions. Monitise is also making its m-commerce proposition, Buy Anything, available to sit on top of in-house mobile banking platforms. Monitise is not the first company to switch its business model from a traditional perpetual licensing model to a subscription licensing model. Adobe recently started a similar transition, other smaller AIM-listed stocks such as StatPro are part way through the transition, and previously listed FFastFill completed the transition prior to being taken private. The switch typically results in a revenue dip as new subscription revenues recognised over a multi-year period are not able to compensate for the loss of up-front licence fees. However, in the longer term the change tends to result in higher recurring revenues that improve visibility for the company and in Monitise s case offer the company the potential to share in more of the upside from end customer adoption of m-commerce and m- payment services. Standardising the platform A key part of moving to a subscription model is making it easier for a customer to connect to Monitise s platform. Customers currently connect to the Monitise Enterprise Platform (MEP) or the Monitise Vantage Platform (MVP on-premise, mainly used in North America) and Monitise has typically charged companies for the time spent developing a semi-customised solution to connect the MEP/MVP to the customer s own banking systems (which tend not to be standardised). The company has been working on the Monitise Central Platform (MCP), a standardised platform into which new customers can connect directly via standard APIs, and which also accommodates existing MEP and MVP customers. This in turn supports the Monitise Commerce Network, an interoperable payment and shopping network with a standard Open API interface to the Monitise Central Platform. The simpler route to connecting with the MCP should result in a shorter sales cycle for Monitise and its partners, as customers will be able to reduce the time and cost involved in launching a service to their end customers. Monitise Signature monetising the network Monitise has launched Monitise Signature, a PCI-compliant bank-grade data analytics engine that combines consumer profiling with transactional and behavioural intelligence. A key feature of Signature is putting the consumer in control of the data that is shared with other parties. The consumer decides which offers he/she is interested in, preventing this from becoming a spam-type service. By analysing the consumer s spending patterns, the engine is able to infer brand preferences, response triggers and genuine interests, and by using geo-location is able to target offers on a real-time basis. Monitise 26 March 2014 2
The Monitise Commerce Network will make it easier for retail and brand partners to connect into and make use of Monitise Signature. Monitise will earn revenues from transactions generated by the targeting enabled by Signature, which it will share with the relevant bank, MNO or partner that has driven traffic. Monitise also announced that Ingenico has signed up as a partner. Ingenico is a leading provider of payment solutions (including payment terminal hardware and software and payment processing). We would expect Ingenico to be interested in the Mobile Commerce Network, as this could provide a way to encourage consumers to visit physical stores and drive use of Ingenico solutions. Funding the shift Monitise is funding the shift to a subscription model through the placing of 160,643,031 shares worth 109m at 68p per share. This equates to 9.5% of shares outstanding and was therefore carried out under the company s existing authority to issue up to 10% of shares without applying pre-emption rights. MasterCard has invested in this fund-raising round, although its stake is unknown. The shares are expected to be admitted for trading on 28 March. Use of proceeds The company is planning to use roughly one-third of the proceeds to fund development of the platform. The remaining two-thirds will be used to fund increased operating expenditure and to fund the revenue shortfall that is anticipated as licence revenues drop off and before subscription revenues have reached a critical mass. Five-year financial model revealed We list below the key financial targets for the end of FY18: Registered users: The company expects to be able to accelerate the sign-up of registered users, through a combination of winning new banking customers and attracting retailers and other companies to its Mobile Commerce Network. The company is targeting 200m registered users by the end of FY18 this compares to the 28m reported at the end of H114 and our previous assumption that user numbers would grow to 92m by the end of FY18. ARPU: The company expects to be able to achieve an ARPU of 2.50 by this time (up from the c 1.30 achieved in H114). This is made up of Bank Anywhere subscription revenues (now in the range 1-5 per user, weighted towards the lower end, which should move to 3-5 for new subscription-based customers) and Pay Anyone, Buy Anything transaction revenues (either fixed fee or percentage of value of transaction, shared with the bank). Revenue mix: Professional Services revenues to make up c 20% of revenues. Gross margin: At least 70% EBITDA: EBITDA break-even to move out by a year to FY16 (with revenue acceleration) and to reach 30% by FY18. Changes to estimates We have revised our estimates to reflect the following: Revenues: we assume that some licence revenues are recognised in H214, but at a lower rate than in our previous forecast. The company has guided to FY14 revenue growth of 40% compared to the previous 50% guidance. We assume from the beginning of FY15 that all new deals are signed on a subscription basis. There is still the possibility that the company may sign one-off licence contracts after this date if the deal is big enough, but we would deal with this on Monitise 26 March 2014 3
an ad hoc basis. We assume that development and integration revenues are lower as the company rolls out its new Monitise Central Platform with standard APIs. Our FY14 revenue forecast falls from 111.6m (+53% y-o-y) to 102.0m (+40% y-o-y). Our FY15 revenue forecast falls from 146.0m (+31% y-o-y) to 122.7m (+20% y-o-y) company guidance is for revenue growth at a lower level than in FY14. R&D costs: we assume these will increase as the company works on standardising its platform and APIs to make it easier for customers to connect into the platform. A proportion of the increased costs will be capitalised. We have increased our operating cost assumptions for FY14 and FY15 for that portion that will be recognised in the P&L. Our FY14 capitalised development costs forecast is unchanged at 18m and in FY15 increases from 18m to 28m. EBITDA: the lower revenues and higher operating costs combine to increase the FY14 EBITDA loss from 12.0m to 23.8m (assumes an increase in H214 EBITDA loss from 1.8m to 13.6m; company guidance is for H214 EBITDA loss greater than in H114). For FY15, we move from an EBITDA forecast of 5.1m to an EBITDA loss forecast of 30.1m. Capex: the company has guided to capex of 20-30m in FY14 we have increased our forecast from 25m to 28m. For FY15, the company expects a range of 30-40m based on increased capitalised development spend our total capex forecast increases to 36m (up from 26m). Exhibit 1: Changes to forecasts ( m) FY14e Growth FY14e Growth FY15e Growth FY15 Growth old new old new Revenues y-o-y y-o-y y-o-y y-o-y User-generated revenues 64.6 49.0% 60.0 38.2% 91.0 40.8% 77.7 29.6% Development & integration services 47.0 59.8% 42.0 42.8% 55.0 17.0% 45.0 7.1% Total revenues 111.6 53.4% 102.0 40.0% 146.0 30.8% 122.7 20.4% Gross profit Margin Margin Margin Margin User-generated revenues 58.2 90.0% 50.4 84.0% 80.8 88.7% 64.1 82.5% Development & integration services 23.5 50.0% 21.0 50.0% 28.6 52.0% 22.5 50.0% Total gross profit 78.9 70.7% 71.4 70.0% 108.2 74.1% 86.6 70.6% EBITDA (12.0) -10.7% (23.8) -23.3% 5.1 3.5% (30.1) -24.5% Normalised operating profit (23.5) -21.0% (36.8) -36.1% (8.4) -5.8% (48.6) -39.6% Normalised PBT (25.5) (38.8) (9.7) (49.8) Normalised Net income (24.2) (38.8) (9.2) (49.8) Normalised EPS (p) (1.48) (2.32) (0.54) (2.64) Net cash 41.2 135.4 15.0 79.6 Source: Edison Investment Research Monitise 26 March 2014 4
Exhibit 2: 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 72,796 101,950 122,700 Cost of Sales (1,167) (2,213) (5,878) (12,132) (17,588) (30,592) (36,098) Gross Profit 1,491 3,806 9,399 23,955 55,208 71,358 86,603 EBITDA (11,767) (13,168) (11,888) (10,412) (19,305) (23,782) (30,073) Operating Profit (before GW and except) (11,977) (14,053) (12,558) (13,151) (27,924) (36,782) (48,573) 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) (49,259) (62,373) 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) (38,782) (49,823) Profit Before Tax (FRS 3) (13,127) (17,043) (17,216) (16,912) (51,052) (51,259) (63,623) Tax 0 273 2,738 527 (251) 0 0 Profit After Tax (norm) (11,373) (13,715) (12,457) (18,246) (32,788) (38,782) (49,823) Profit After Tax (FRS 3) (13,127) (16,770) (14,478) (16,385) (51,303) (51,259) (63,623) Average Number of Shares 329 453 686 776 1,350 1,671 1,889 Outstanding (m) EPS - normalised (p) (3.5) (3.0) (1.8) (2.4) (2.4) (2.3) (2.6) EPS - FRS 3 (p) (4.0) (3.7) (2.1) (2.1) (3.8) (3.1) (3.4) Dividend per share (p) 0 0 0 0 0 0 0 Gross Margin (%) 56.1 63.2 61.5 66.4 75.8 70.0 70.6 EBITDA Margin (%) N/A N/A N/A N/A N/A N/A N/A Operating Margin (before amort. and except.) (%) N/A N/A N/A N/A N/A N/A N/A BALANCE SHEET Fixed Assets 992 3,986 11,739 179,302 200,741 259,819 269,819 Intangible Assets 659 2,725 6,636 169,588 192,648 244,374 252,374 Tangible Assets 333 874 2,827 5,621 8,049 13,549 15,549 Investments 0 387 2,276 4,093 44 1,896 1,896 Current Assets 15,798 16,549 29,341 34,474 104,133 172,399 130,664 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 86,770 136,399 80,664 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 32,787 145,152 240,949 350,855 315,239 CASH FLOW Operating Cash Flow (11,396) (14,071) (12,597) (11,605) (23,796) (31,591) (34,073) 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) (28,000) (36,000) Acquisitions/disposals 0 71 (500) (8,634) 749 1,554 0 Financing (including demerger 11,548 17,915 31,477 25,296 119,391 109,772 15,588 adjustments) Dividends 0 0 0 0 0 0 0 Net Cash Flow 449 3,088 12,462 (5,370) 81,622 52,235 (54,235) Opening net debt/(cash) (7,213) (6,709) (12,604) (22,167) (9,876) (85,636) (135,371) 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) (135,371) (79,636) Source: Monitise, Edison Investment Research Monitise 26 March 2014 5
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