Monitise Share placing and acquisitions

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9 January 2013 In order to further its m-commerce ambitions, Monitise has raised £100m from its

largest placing to date, and has also made two all-share acquisitions in the space. This should enable Monitise to accelerate the integration of m-commerce technology into its Mobile Enterprise Platform and positions the company to support existing and potential financial institution customers with a complete range of mobile banking, payments and commerce solutions. Although the acquisitions and increased investment in growth will push EBITDA break-even further into FY14, this should accelerate the generation of high-margin m-commerce revenues.

Year end Revenue

(£m) PBT* (£m) EPS* (p) DPS (p) P/E (x) Yield (%) 06/11 15.3 (12.3) (1.8) 0.0 N/A N/A 06/12 36.1 (12.7) (2.3) 0.0 N/A N/A

06/13e 72.2 (24.6) (2.1) 0.0 N/A N/A

06/14e 116.8 (2.4) (0.3) 0.0 N/A N/A

*PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

£100m raised to further m-commerce strategy

Monitise has raised gross proceeds of £100m through two placings totalling 333.3m shares. The company intends to use the proceeds to accelerate its m-commerce strategy, with c 50% to be used to continue to invest in the technology and the remainder to support the growth of the business, including potential M&A.

60.4m shares issued for m-commerce acquisitions

As part of the drive to accelerate the m-commerce offering, Monitise has acquired the remainder of the Mobile Money Network (MMN) joint venture that it did not own, and will incorporate the technology into its Enterprise Platform. Monitise also acquired eMerit Solutions, a UK company offering mobile card acceptance services.

Changes to estimates

We increase FY14 revenues by 19% to reflect faster generation of m-commerce revenues. We factor in the running costs of the two acquisitions and increase operating expenses to reflect the increased investment in technology and to support the growth of the business. Reflecting the higher cost base, our EBITDA break-even forecast has shifted into H214. We reduce FY13 EBITDA from -£9.1m to -£20.1m and FY14 from £6.7m to £4.4m. We forecast net cash of £52.5m by the end of FY14.

Valuation: Reflects strategic value

Monitise trades on an EV/Sales multiple of 6.4x FY13e and 4.2x FY14e. In the absence of profitability metrics to support the valuation, share price appreciation will

Monitise

Share placing and acquisitions

More mobile money

Price

34.50p

Market cap

£532m

Shares in issue 1,541.4m

Free float 62.6%

Code MONI

Net cash at end FY12 £9.9m

Primary exchange AIM

Other exchanges N/A

Share price performance

% 1m 3m 12m

Abs 12.2 (11.5) 24.3

Rel (local) 9.3 (14.9) 13.5

52-week high/low 39.5p 25.5p

Business description

Monitise provides a mass-market technology platform that enables banks, card schemes and other financial providers to offer mobile banking and payment services.

Next events

Interim results 11 February 2013

Analysts

Katherine Thompson +44 (0)20 3077 5730 Dan Ridsdale +44 (0)20 3077 5729

Utech@edisoninvestmentresearch.co.uk UEdison profile pageU

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Monitise | 9 January 2013

Strengthening m-commerce offering

Monitise has raised gross proceeds of £100m to accelerate the development of its m-commerce strategy. In addition, the company has issued 60.4m shares (worth £18.1m at the 30p issuance price) to acquire c 50% of the Mobile Money Network (MMN) joint venture and to buy eMerit Solutions.

Details of firm and conditional placing

Monitise has placed 333.3m shares at 30p per share for total gross proceeds of £100m. The

114,116,135 shares issued in the Firm Placing (worth £34.2m) were admitted to AIM on 10 December. The 219,217,198 shares (worth £65.8m) from the Conditional Placing were approved by shareholders at the general meeting on 21 December, and were admitted to AIM on 27 December.

Use of proceeds

The company intends to use the proceeds to accelerate investment in its m-commerce strategy over the next three years. Roughly half of the proceeds are expected to be invested in technology, and the remainder will provide working capital to support the scaling up of the business.

In particular the company expects to:

 Accelerate productisation of the platform: developing more standardised solutions should enable

Monitise to roll out services to customers more quickly. Although this would result in lower implementation fees, it should lead to the company earning higher margin user-generated revenues faster.

 Enhance the Monitise Enterprise Platform (MEP) to include MEP Commerce (in addition to the

existing MEP Banking and MEP Payments functionality).

 Broaden the scale of the platform eg to include additional languages, country-specific functionality

and to add more partners.

 Invest in datacentre capacity: the company expects there will be a need to rent more datacentre

capacity as the number of customers using Monitise’s services grows and the volume of users per customer grows. The company does not intend to invest in in-house datacentres.

 Add new account managers.  Consider potential acquisitions.

Acquisition of MMN stake

Monitise has issued 55.7m shares (worth £16.7m at 30p per share) to acquire 56% of MMN, valuing the JV at £30m. Monitise now owns 100% of the voting rights of MMN. The company intends to incorporate the MMN Simply Tap functionality (see p3) into the MEP.

Acquisition of eMerit Solutions

Monitise acquired eMerit Solutions Limited for initial consideration of £1.4m (4.7m shares issued at a price of 30p) and an earn-out of up to £1m payable in shares (up to another 3.3m shares). eMerit supplies a service that enables merchants to accept debit and credit cards using a combination of a smartphone or tablet and a secure wireless pinpad.

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M-commerce market – active and growing fast

Mobile banking provides foundation for m-payments and m-commerce

Monitise’s service offering was first developed to provide mobile services such as alerts and account management to banks (see Mobile money enabler for explanation of the business model). Once banks’ customers have adopted mobile banking services, the move to using mobile payment services (ie bill payments, peer-to-peer payments, transfers), is a natural step. Monitise already supports mobile payments for customers including Visa Inc, Visa Europe, NatWest, HDFC Bank and Standard Chartered, and has increased its annualised payments/transfers run-rate from $1bn in Q411 to $25bn in Q412. The next step up from mobile payments is to add the ability to shop on the phone. M-commerce functionality includes shopping, rewards, NFC0F

1_{, and coupons/offers/vouchers. Monitise}

has trialled a variety of m-commerce technologies: the Movida JV offers HDFC Bank customers the ability to buy tickets and top-up pre-paid phones. Standard Chartered’s Breeze service offers users the ability to buy cinema and airline tickets. The MMN Simply Tap service provides an instant mobile checkout service without the need for retailers to install new NFC infrastructure. The trials have not only demonstrated that the functionality works, but have enabled Monitise to connect new retailers, operators, ticketing aggregators, payment processors and media agencies into the MEP.

M-commerce market attracts new entrants

From a revenue generation perspective, the big opportunity for all players is in the m-commerce space. Revenues can be generated in a variety of ways including:

 Percentage of the value of items purchased by the customer.  Percentage of the value of vouchers used by customer.  Click fees from mobile advertising.

 Percentage of the value of mobile top-ups.

The market opportunity for m-commerce has attracted large players such as Google and the mobile operators who are setting up their own mobile wallet services, and payment processors such as PayPal are also heavily involved in this space. The mobile wallet has now become the key battleground for gaining control of the customer, and financial institutions are becoming increasingly concerned that non-bank wallets will steal their customers.

The ability to channel traffic is one of the key factors that will attract retailers to m-commerce service providers. While Google is a household name and has a widespread global audience and customer base, potential wallet customers will need to have confidence in Google’s ability to keep their data secure. Google Wallet is currently only available in the US - it can be used online and in stores with the relevant NFC infrastructure, using specific Android smartphones and is only available on the Sprint, Metro PCS and US Cellular networks. The three other major US mobile operators, Verizon Wireless, AT&T Mobility and T-Mobile USA, are working together in the Isis joint venture to develop their own mobile wallet, which again requires NFC functionality, and is being trialled in Salt Lake City and Austin. It can only be used with American Express, Chase Freedom and Capital One credit cards, with MasterCard and Visa noticeably absent. The three largest UK mobile operators are also planning to launch a wallet platform together.

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customer base, whereas they have tended to use mobile banking as a way to reduce the cost of servicing customers. This installed base of mobile banking users is likely to be attractive to retailers, as customers already use the service on a regular basis and have already overcome security concerns to set up the service. By using Monitise’s technology and managed service, banks can connect into the MEP to offer as limited or as wide a service as required, with access to the other network participants. Monitise currently has a pipeline of more than 100 financial institutions looking to use its technology for mobile banking, payments and/or commerce.

High profile services such as Square more merchant-focused

The m-commerce market has seen an explosion in alternative payment mechanisms, with high profile services from companies such as Square and iZettle. The eMerit acquisition brings a similar card-reader technology to the UK market. The original Square “dongle” is a card card-reader that enables merchants to accept card payments using their own smartphone or tablet, bypassing the need for card processing hardware. It also helps those who would struggle to get an acquiring bank relationship, as Square acts as the merchant of record aggregating transactions that it passes to its own acquiring bank. Square has since introduced an app called Square Wallet: the user registers one or more cards to the wallet, selects merchants that it would like to visit, and uploads a photo. The merchant is then able to identify a customer’s phone when it enters the premises via the phone’s GPS technology, and when the customer gives their name, their photo will appear on the merchant’s register. If the customer’s identity is confirmed, the transaction will be automatically charged to the card registered to the wallet, without the customer having to show their phone.

iZettle offers a similar card-reader service in Europe (originally in Sweden, and more recently in Norway, Denmark, Finland, Germany, Spain and the UK) although due to its inability to use chip-and-pin has had issues with Visa Europe regarding security.

We view the Square-type apps and services as expanding the number of merchants that can take card payments, enabling smaller merchants to take card payments on a more time efficient and less costly basis, and taking the merchant acquiring application process out of the loop. The main downside risk from this market development is to incumbent merchant acquirers who may lose business to Square’s or other service providers’ merchant acquirers.

The advantage of eMerit’s technology is that it is chip-and-pin based, so it is compliant with card companies’ security requirements. The eMerit technology gives banks another service that they can offer to their SME customers. While eMerit is currently only UK-focused, we believe the service could be expanded to other chip-and-pin-based countries.

Trading update

Monitise has also announced additional business updates.

Blackberry service launch imminent in Indonesia

Monitise Asia Pacific (the JV in which Monitise has a 50% stake) entered into a JV (called AGIT Monitise Indonesia) with Astra Graphia Information Technology in 2011 to develop services in the Indonesian market. AGIT Monitise Indonesia has signed an agreement with Research in Motion to develop the first mobile payments service for Blackberry Messenger (Blackberry is the most popular smartphone in Indonesia with 10m users). The service is due to launch early in 2013.

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Progress in North America

Monitise has signed an alliance with BMO Bank of Montreal to develop new Mobile Money services for BMO’s customers. BMO was originally a customer of Clairmail1F

2_{, and Monitise will build on the existing}

relationship to further develop smartphone applications, mobile web offerings and SMS services based on the Monitise Enterprise Platform, to provide added convenience for new and existing customers.

Monitise has also entered into an alliance with Intuit (a Nasdaq-listed accounting software provider with revenues of $4.15bn in FY12) to explore ways to deliver Intuit’s Mint service to financial institutions. Mint is a personal and small business financial management solution designed to help people manage all of their finances in one place.

Service launch in India

The Movida JV in India launched a pilot mobile payments service with HDFC Bank in February 2012. The service has now been made available to a wider selection of HDFC customers and Monitise expects to be able to announce new banking customers for the service in the coming months.

Potential move to full listing on LSE

In 2013, the company will consider moving its listing from AIM to a full LSE listing.

Changes to estimates

We have made changes to estimates for the placing, the acquisitions and the use of proceeds.

Changes to P&L

 Revenues: we make no changes to our FY13 revenue estimate. The MMN business is not

generating material revenues yet so the consolidation of the business will have no impact on revenues, and eMerit revenues are not yet at a material level. In FY14, we have increased our revenue forecast from £98.1m to £116.8m, through a combination of owning 100% of MMN, and through higher user-generated revenues from m-commerce. User-generated revenues start with a base level of subscription revenue for m-banking, augmented by revenues from m-payments (e.g. fixed transaction fee per peer-to-peer payment) and m-commerce. Monitise believes it could earn an incremental ARPU of at least $5 per annum from m-commerce.

 Operating expenses (excluding depreciation & amortisation): we increase FY13 expenses by £11m

to take into account an additional £4m for MMN (which previously was reported below the EBIT line), the running costs of eMerit and increased investment in headcount. In FY14, we increase costs by £17.3m, again taking into account MMN and eMerit and the increased investment in technology and scaling up the business.

 EBITDA: as a result of the higher operating expenses in both years, our EBITDA loss widens from

£9.1m to £20.1m in FY13. In FY14, we expect that break-even will be pushed out into H214, and EBITDA will reduce from £6.7m to £4.4m.

 Depreciation & amortisation: we forecast an increase in the level of capitalised development costs

of £8m in FY13 and £14.2m in FY14, resulting in higher amortisation in FY14 as the technology starts to drive increased revenues. We forecast a £3.8m increase in tangible fixed asset investment in FY14 to support the growth of the business.

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 EPS: Reflecting the higher share count and revised net income estimates, our normalised EPS

forecast for FY13 decreases from -1.56p to -2.12p and for FY14 from 0.0p to -0.29p.

Changes to balance sheet and cash flow

 We factor in gross proceeds from the two placings of £100m and estimate that the costs of the

placing were c £6m.

 We forecast a net cash position of £75.6m by the end of FY13 and £52.5m by the end of FY14.  Until completion of the balance sheets are known, we include the acquisition prices in goodwill.

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Exhibit 1: Financial summary

£'000s 2009 2010 2011 2012 2013e 2014e

Year end 30 June IFRS IFRS IFRS IFRS IFRS IFRS

PROFIT & LOSS

Revenue 2,658 6,019 15,277 36,087 72,155 116,750

Cost of Sales (1,167) (2,213) (5,878) (12,132) (23,731) (32,189)

Gross Profit 1,491 3,806 9,399 23,955 48,424 84,561

EBITDA (11,767) (13,168) (11,888) (10,412) (20,063) 4,374 Operating Profit (before GW and except) (11,977) (14,053) (12,558) (13,101) (25,076) (2,939) Amortisation of acquired intangibles 0 (235) (281) (532) (5,000) (5,000)

Exceptionals 0 956 0 5,100 (6,000) 0

Share based payments (1,754) (3,776) (1,740) (2,707) (3,500) (3,500) Operating Profit (13,731) (17,108) (14,579) (11,240) (39,576) (11,439)

Net Interest 604 65 288 412 500 500

Profit Before Tax (norm) (11,373) (13,988) (12,270) (12,689) (24,576) (2,439) Profit Before Tax (FRS 3) (13,127) (17,043) (14,291) (10,828) (39,076) (10,939)

Tax 0 273 2,738 527 0 0

Profit After Tax (norm) (11,373) (13,715) (9,532) (12,162) (24,576) (2,439) Profit After Tax (FRS 3) (13,127) (16,770) (11,553) (10,301) (39,076) (10,939) 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) (28,576) (4,439) Net income (FRS 3) (13,127) (16,770) (14,478) (16,335) (43,076) (12,939) Average Number of Shares

Outstanding (m) 329 453 686 776 1,349 1,553

EPS - normalised (p) (3.5) (3.0) (1.8) (2.3) (2.1) (0.3) EPS - FRS 3 (p) (4.0) (3.7) (2.1) (2.1) (3.2) (0.8)

Dividend per share (p) 0 0 0 0 0 0

Gross Margin (%) 56.1 63.2 61.5 66.4 67.1 72.4

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 (2.5)

BALANCE SHEET Fixed Assets 992 3,986 11,739 170,635 198,743 216,431 Intangible Assets 659 2,725 6,636 160,921 187,842 200,842 Tangible Assets 333 874 2,827 5,621 6,809 11,496 Investments 0 387 2,276 4,093 4,093 4,093 Current Assets 15,798 16,549 29,341 34,474 103,606 88,480 Stocks 0 0 0 0 0 0 Debtors 1,227 3,945 7,174 14,908 28,000 36,000 Other 4,426 0 0 0 0 0 Cash 10,145 12,604 22,167 19,566 75,606 52,480 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) 0 0 0 0 0

Other long term liabilities 0 (1,098) (551) (10,849) (10,849) (10,849) Net Assets 9,334 14,219 32,787 152,997 253,927 244,489 CASH FLOW

Operating Cash Flow (11,396) (14,071) (12,597) (11,605) (27,155) 8,374

Net Interest 604 70 173 375 500 500

Tax 0 207 724 0 0 0

Capex (307) (1,104) (6,815) (10,802) (20,000) (30,000)

Acquisitions/disposals 0 71 (500) (8,634) 0 0

Financing (including demerger adjustments)

11,548 17,915 31,477 25,296 116,385 0

Dividends 0 0 0 0 0 0

Net Cash Flow 449 3,088 12,462 (5,370) 69,730 (21,126)

Opening net debt/(cash) (7,213) (6,709) (12,604) (22,167) (9,876) (75,606)

HP finance leases initiated 0 0 0 0 0 0

Other (953) 3,364 (2,899) (6,921) (4,000) (2,000)

Closing net debt/(cash) (6,709) (13,161) (22,167) (9,876) (75,606) (52,480)

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