Mobile Embrace (ASX code: MBE) recently announced its FY14 full-year result with a net profit of $2.49 million, in line with my forecast of $2.5 million.
The result marks the fourth year of exceptional growth, with the company capitalising on the opportunity to monetise the large increase in mobile internet usage.
The transitioning market presents businesses of all types with the need to reach and transact with the growing volume of consumer traffic on mobile devices. Mobile Embrace assists in the process of providing consumers’ optimised products with contextual marketing and easy payment options.
Specifically, its payments solution allows consumers to pay for mobile products and services on their mobile devices via direct carrier telco billing. The marketing division allows agencies and brands to reach and engage with consumers on their mobile devices through the premium publisher network.
I initially recommended the stock as a Hold earlier this year on May 7, with the share price at $0.21. The price has moved slightly higher since, and is currently at $0.24. I am now ceasing coverage of the stock, due to the longer-term uncertainty of how the company will fit in with the fast-moving mobile payments and advertising sector.
It’s not that I can see anything drastically wrong with the company, but rather just considering the increasing competition in the sector as more and more companies try and capitalise on the huge industry growth. There are very low barriers to entry, and I need to see more visibility of the competitive advantage of Mobile Embrace’s intellectual property to continue recommending the stock.
One of the company’s most important drivers is its ability to set up direct carrier billing arrangements with telco companies in targeted regions. This allows consumers the ability to add the cost of products such as mobile apps to their post-paid monthly telco bill.
The risk of competition in the sector can be seen by recent news that Xiaomi Corp has become the largest smart phone vendor in China, outpacing global leader Samsung. Xiaomi Corp’s strategy has revolved around selling the smart phone at close to break-even to achieve scale in reaching consumers and then finding alternate services to monetising mobile usage.
As larger tech companies increase their spend to innovate new products it will increase the risk of Mobile Embrace’s technology becoming outdated. However, in the short term the company does look set to benefit from expansion in new regions providing the potential for continued high growth rates.
Direct Carrier Billing (DCB) with telcos
In Australia direct carrier billing (DCB) agreements are in place with Telstra, Optus and Vodafone.
Although there are multiple mobile payment options available, and many innovative new products likely to be launched, the DCB method is currently an efficient method of targeting customers. Juniper Research has completed a market study suggesting DCB offers a conversion rate that is five to six times higher than credit cards.
MBE has focused on the carrier billing, however it also partners with other options such as Paypal. Its IP enables it to offer payment methods that are most likely to suit customers. For example, if a customer is using wireless, and a SIM card is not identified, it has the capability to only offer Paypal as a payment option.
The company’s largest focus is on obtaining further DCB relationships in new markets. Although the telcos don’t have exclusive relationships, it is at least a six-month process to form a partnership. Therefore, the trend thus far has been that the telcos are very careful with whom they form an arrangement.
In the last six months, SingTel has been signed up for expansion initially into Singapore, with plans to expand into other Asian countries.
In December, an initial agreement with US-based Sprint was announced, the third-largest telco in the US. It has been identified that a connectivity partner is required, and given the complex structure of the US market there is potential for a longer-than-usual set-up time. If this successfully progresses, then the ability to target the US market obviously provides growth potential, many multiples above what is obtainable in Australia.
The establishment of new partnerships does cost money, and is not profitable for at least the first few months of operation. With limited funding, management does need to be careful in selecting the markets that provide the best opportunities.
Both divisions achieved strong growth with mobile payments revenue up 55.4% to $14.25 million, and mobile marketing/advertising revenue up 63% to $5.02 million.
The 57% revenue growth to $19.3 million produced a large increase in earnings before interest, tax, depreciation and amortisation (EBITDA), as can be seen in the table below.
The strong net cash position of $12.26 million was increased by $11.75 million from a capital raising earlier in the year. This capital raising was to enable continued overseas expansion, and specifically to set up new direct carrier billing arrangements.
There was no specific FY15 guidance, and I have only made minimal changes to my prior forecasts. My valuation remains at $0.25, however as explained due to the lack of longer term visibility on the company’s competitive position I am ceasing coverage.
To see Mobile Embrace's Forecasts and Financial Summary, click here.