Over the last couple of months shares of Monitise PLC (OTCPK:MONIF) have traded firmly to the downside. The company, which has been touted as the purest play in mobile finance has been one of my top picks for some time now. If you're not yet familiar, Monitise is a mobile banking, payments and commerce Technology Company with a global reach. Many of the world's most powerful financial institutions, including 1/3 of the top 50 banks in North America, choose Monitise's proprietary platform solution to power their mobile banking divisions. When I first wrote about the company about 12 months ago shares traded around $0.51 on the over-the-counter market here in the U.S. After peaking around $1.38 earlier this year shares have tumbled drastically to just $0.75. While the drop has pinched my portfolio, I don't think my original thesis, as seen in my original article Monitise: A Pure Mobile Financial Service Play, has changed. In fact, I would suggest investors use the pullback as an opportunity to start a position in the company. In this article, I would like to update my readers on my thesis as well as look at some of the more recent announcements in more depth.
In late June, Monitise announced the acquisition of an obscure e-commerce promotion company called Markco Media Limited. Living in the U.S. I had never heard of the company, its assets, or its primary website MyVoucherCodes.co.uk. MyVoucherCodes is a "leading voucher, coupon and discount deals site that works with 80% of the UK's leading online retailers and counts Marks & Spencer, John Lewis, Debenhams, Thomson Holidays, Argos, Currys, Sky, B&Q, Tesco, Walmart, Target, Amazon, The Home Depot, and Carrefour among the merchant brands it works with."
The market may have looked at the acquisition as nothing more than shareholder dilution. From the surface, the acquisition looks confusing. Why would a mobile finance technology company buy a consumer deals website? It's all about the partnerships. The acquisition of Markco is strategic and interesting from a mobile commerce perspective. We already know Monitise has a nice suite of mobile purchase and payment software. Think of what its mobile payment software could do when integrated directly with merchants and the company's current clients. The acquisition opens the door to a large partner base and a large number of consumers.
The fruit of the purchase may not be seen tomorrow or the next day but I believe down the road the company will successfully leverage Markco's partner list and mobile voucher assets. Monitise now stands in a better position to connect and market to consumers, financial intermediaries, and retail business. For retailers how cool would it be to market to your customer directly to their phone with a deal directly from MyVoucherCodes. Then the retailer could even accept payment from the consumer via their mobile device. Monitise's 'Buy Anything' platform allows for location based offers and targeted marketing all with secure checkout. The acquisition of Markco included VouChaCha, a London based mobile location based voucher platform. For example, Target could send you a location based advertisement or coupon for Oreos when a consumer is in range of a particular Target location.
When the news story first popped up on my screen, I was as confused as the market. But after connecting the dots, the acquisition started to make sense. As far as the dilution goes…
"The initial consideration for the Acquisition is to be satisfied by the issue of 43,729,676 new ordinary shares of 1p each in the Company ("Ordinary Shares"), valued at £24.5 million, based on the closing share price of 56.0p on 25 June 2014, a further £2.5 million of consideration held back for two years, payable in Ordinary Shares, and an earn-out consideration of up to an additional £28 million payable in Ordinary Shares on the basis of retention and achievement of aggressive earn-out targets over two years."
In July, the company announced that it now had over 30 million users registered as customers on its bank, pay, and buy platform. The company went on to say that it expects to continue growing this number by 500,000 per month in the near future. These users have moved quite a bit of cash through the platform. Monitise reported an astounding $88 billion per annum running rate for moved/paid funds. This growth represents a 120% year over year increase for the company.
Monitise's Brad Petzer announced revenues of between £95 million to £97 million for the fiscal year to June 2014 on the Trading Update Call in July. This top line growth represents an increase of 31% to 33% over the previous year. However, the numbers did come in light in comparison to the company's previous guidance of 40% growth. Management blamed "sub-optimal terms" on its leasing-based contracts as the reason for the miss. Management elected to put off these deals as it makes the transition into the subscription model. We will talk more about this later. But all in all, it looks like the company is still managing to grow fine.
Revenue Model Adjustment
Traditionally the company has focused on establishing licensed-based contracts with its customers. Going forward Monitise will be focused on growing through subscription sales. Much of the recent decline in price per share has been a result of the appearance of slowing growth. In my opinion, fears of slowing growth may be overblown.
While growth may be slowing in the shorter term, the longer-term growth thesis is still intact. By moving into the subscription-based model it will be easier for the company to grow its client list. Lower barriers will be seen in the onboarding process due to the removal of the licensing model. Moreover, the subscription model should create nice recurring revenues for the company over time. Personally I like the transition into a subscription model with customers paying the company over time.
In the words of CEO Alastair Lukies, "Our pipeline as a company has never been stronger, and the incoming interest in our platform are, I can safely say, has never been anywhere near as strong as it is today." Monitise's lofty goal of 200 million users by 2018 is ambitious, but possible. As the company spreads its reach with its now more accessible platform I hope we will begin to see a snowballing effect.
Shares of Monitise will likely remain volatile in the upcoming weeks, but if you have been looking for an entry into the stock this may be a good opportunity. The swing to the downside is overdone in my opinion. My original thesis is intact and the story surrounding mobile payments is still strong. Let us not forget that the company has received backing from some very powerful folks in finance including Visa (NYSE:V) and MasterCard (NYSE:MA). As of the most recent reports Leon Cooperman's Omega Advisors still owns 11.4%, Visa EU owns 6%, and Visa owns 5.5%. As consumers become increasingly mobile in both the developed and developing worlds increasing demand will be seen for mobile financial service products. If you're looking for pure exposure to mobile finance technology Monitise is still a good bet.
Note: Monitise is a small-cap company. Please consider Monitise only for the speculative portion of a well-diversified portfolio.
Disclosure: The author is long MONIF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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