Monitise Bull Case – Post Moratorium by Theo Vallee
The ride in Monitise has been similar to that of a one winged plane. After finding Leon Cooperman’s CNBC Halftime Report pitch interesting, I provided a qualitative review on Monitise and its future prospects. At the time, shares were trading around $0.519 (£0.335) per share and I believed that the risk reward was favorable based on management’s guidance and comments from Cooperman that he bid Visa for their entire stake at $0.43/share, slightly below a historical level of support. This to me effectively put a floor in the name and was outlined as a level to cut the trade. I was 100% wrong. The shares blew through $0.43, trading down ~90% to $0.044 where they sit today. The Financial Times illustration shows the deterioration below.
My thesis had multiple holes. I put too much weight on management’s guidance (52% CAGR revenue growth through 2018 via 200mm users at £2.5 ARPU), even as each update showed deterioration in management’s ability to forecast future results (note sales & profit warnings below). While I discounted their guide by 33% in valuing the shares, it was clearly not enough given the company’s results. The revenue transition from upfront licensing to subscription played out much worse than expected, as positive historical benchmarks such as Adobe’s transition failed to manifest. In addition, the large players in the room such as Omega and equity raises from the likes of MasterCard, Visa Europe, Banco Santander, and Telefonica gave me more confidence in the thesis, but I failed to review the other side; an elephant’s liquidation in a relatively illiquid name leads to significant downward pressure. That said, I am reevaluating the name here because I liked it at $0.519 (£0.335), so I sure as hell like it now.
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Monitise is priced for bankruptcy. The shares currently trade at a 28% discount to the company’s net cash position (£88.2), which sends a signal to me that the market sees Monitise’s cash burn wiping out its equity. While this risk is not unfounded, I am putting a very small probability on this scenario as it would have to play out above and beyond these lines: no accretion in gross margins, no revenue growth (mgmt forecast), no reductions in OPEX, and similar levels of CAPEX. Even this would still leave the company with a cash position of £10-20mm, or 32% of equity, far below management’s minimal cash guide of £45mm.
While management’s guidance has been as credible as a Ponzi scheme, I am not giving them a 100% discount rate yet, as my read on Lee Cameron (incoming CEO) from his investor presentation is a good one. Cameron and his peers see positive EBITDA in FY16 through continuous reduction in OPEX – in-line with a company that has just brought to market (April 2015) a cloud based platform requiring significant R&D. This also coincides with management’s guidance of a significant CAPEX reduction, as the company moves beyond the investment phase and into maintenance of the platform, new functionality, and capacity expansion.
To reach breakeven EBITDA in FY16, Monitise would need to cut its OPEX by ~ 45% or see significant improvement in gross margins assuming minimal / no revenue growth. A 45% decrease in OPEX is a tall order to fill and healthy GM expansion in 2016 is less likely based on management’s guidance, leading me to believe break even EBITDA will be pushed out to FY17. That said, under the assumptions of 2% revenue growth, 3% improvement in GMs (52–>55%), 30% decrease in OPEX primarily through R&D reductions, and £23mm in CAPEX, Monitise will have a cash balance in excess of £52mm (83% of equity) at the end of FY16. In my mind, these are conservative estimates that illustrate ample amounts of liquidity at year end, which should mitigate concerns of a liquidity crisis.
In the past, Monitise has had a difficult time conveying its offering, which left many in the dark on the company’s value add. This was echoed by Lee Cameron on the investor conference call to which he responded that the proposition of Monitise is, “providing digital engagement and increasing the level and pace of innovation for organizations that are inherently slow to act because they have large systems. They have huge customer bases. They are highly regulated. They have to worry about security and scalability and regulation much more so than other organizations that are looking to come into the space and compete with them. Those disruptors sit across the top of these bank grade systems, and what we enable are banks to defend their position and their role with their users and that digital engagement in a very cost effective and efficient manner. That’s our cloud platform.” Well done Lee.
The rebuild and redesign of the company’s website exemplifies this clear proposition. “What we do” takes up 80-85% of Monitise.com both on mobile and online, with product offerings directly below. The company then provides digital downloadable fact sheets on its product offering, for example digital banking, shown below. This clear value proposition, in my mind, gives the company a direction, aligns the team, and provides a catalyst for user and client adoption. Is it quantifiable? Probably not, but it gives me additional confidence in my forecasted registered user assumptions detailed below.
Monitise’s core mobile banking product dominates the niche sub of mobile money through its current clients/partnerships and the resulting network effect. The company’s main competition comes from in-house development of the largest financial institutions that have the capital and resources to undertake such a project; however, Monitise’s new cloud platform can now be consumed on top of said financial institutions existing platforms. It should be noted that Banco Santander (92mm customers) is running on Monitise’s cloud platform, which confirms that the company provides a competitive offering that can augment or replace in-house development. The company has stated they are actively pursuing larger scale projects.
Of Monitise’s core banking clients that have been publicly announced (note this number is likely higher), there are roughly 366mm banking customers that the company could potentially offer its product to. This assumes no further business from its Movida joint venture in India (wound down in H215), JETCO services provided with the Bank of China, and RBS’s decision to develop their product in-house, which would add an incremental 160mm customers to the addressable market, detailed in the chart below. The information was taken from company filings, press releases, and presentations.
Monitise disclosed that it is no longer providing registered user (pmt details in app) numbers, as it believes the numbers are not indicative of its performance going forward. In the annual report, the company did say that registered users continue to grow at 500k per month, which would bring the FY15 registered user count to 36mm. With 36mm registered users, Monitise has roughly a 10% penetration rate of its banking clients. Taking into consideration Monitise’s non-banking clients, shown to the left, Monitise’s total addressable market spans over 900mm users (4% penetration), indicating ample room for further growth.
Previously, management indicated Monitise would reach 200mm registered users by 2018. That since has been pared back and is no longer in the guidance. While the number is not out of the company’s reach based on the addressable market, the rate of adoption is far too strong. Looking forward, I am assuming that Monitise’s banking addressable market grows ~5% per half year on new banking contracts and average registered user growth of 4.3% through FY18. I think both estimates are conservative, leading to a 13% penetration rate in FY18 and 61mm registered users.
Below I have illustrated historical and forecasted subscription and transaction (S&T) revenue per user. This is clearly the most important segment going forward given the shift from upfront licensing to subscription based sales. Forecasted S&T revenue is based on registered users and is multiplied by the forecasted ARPU of that segment. Product licenses and royalties remain flat at £4mm per half year, representing a smaller percentage of sales through FY18, in-line with management’s guidance. Development and integration revenue remains relatively flat over the same period, growing from £44.8 in FY15 to £56.4 in FY18.
Monitise’s is worth $0.112 per share based on 12x FY18 EBITDA of £15.5 discounted back at 15%. Adding back the trough cash position of £45mm, equates to $.143/share, or 225% above Friday’s closing price of $.044. The respective financials are provided below.
On a comp basis, Monitise is also trading at significant discount to its peers, shown below. Applying an average peer P/S and EV/S multiple yields a $.19 stock, or a 330% premium to Friday’s closing price.
I believe this gap will be closed over the ensuing year as the market’s insolvency fears are mitigated and the company begins to execute on its financial targets. I think this is very possible under Lee Cameron’s leadership, and given the numbers, it doesn’t look too far out of reach. In the short-term, I think shares can trade meaningfully higher, as Mr. Cameron’s 1mm share purchase on October 2nd provides a catalyst for confidence in the name.