Company overview - Mobile Embrace Limited is a mobile marketing and carrier billing m-commerce company. The Company's principal activities include mobile commerce. Its segments include Carrier Billing and Mobile Marketing. It offers its partners integrated customer acquisition, management and carrier billing through mobile devices. It enables reaching of, engagement and transactions with consumers on their mobile devices through its digital media trading desk and carrier billing platforms. The consumers engage with digital product and service offerings, and utilize carrier billing to pay for them on their mobile devices. It also enables the reaching of, engagement and transactions with consumers on their mobile devices through its mobile marketing platforms, permission databases, publishing network and mechanics. Its carrier billing products include video-on-demand, mobile security, fitness, games, education and sports. The Company operates in Australia, the United Kingdom, Singapore and New Zealand.


   MBE Details

Resolution of litigation with GBD Ventures: Mobile Embrace Limited (ASX: MBE) has settled its ongoing litigation with GBD Ventures Pty Limited in which GBD was suing MBE for $3.5 million for loss alleged to have been incurred by GBD under a digital video advertising inventory supply agreement with MBE. MBE has denied the claim and has cross-claimed against GBD and two of its shareholders. Under the terms of the settlement, judgment has been entered for MBE on the principal claim brought against it by GBD, and the cross-claim brought by MBE has been dismissed. Under the terms of the settlement, all parties are to be responsible for payment of their own costs. During 2015, Mobile Embrace was served with a Summons filed in the Supreme Court of NSW from GBD Ventures Pty Ltd (the Claim). The Claim alleged that Mobile Embrace owes GBD an amount in the order of $4 million in respect of a digital video advertising supply agreement involving the two companies. The Claim has subsequently been reduced by GBD to $3.5 million. In response to the Claim MBE has filed and served a defense and a cross claim against the Plaintiff and its two shareholders who were also representatives of GBD.

During H1FY17, the company reported $27.1 million revenue and $2.1 million of EBITDA in line with expectations. MBE continues to develop its core strategy of enabling the acquisition of high quality customers at scale on mobile devices through Performance Marketing and Direct Carrier Billing (DCB). Further to the Company’s announcement of 17 November 2016, MBE’s Performance Marketing operations continue to grow and are progressing soundly, while DCB operations have seen some impact because of external factors. Still, international DCB managed to deliver strong transaction and revenue growth as H1FY17 revenue was up >120% on H1FY16 ($4.24mn in H1FY17 vs $1.9mn in H1FY16).


H1FY17 results; (Source: Company Reports)

On track to achieve FY17 revenue guidance: MBE reaffirms its full year FY17 guidance of revenue of $52 million and EBITDA of between $5 and $6 million. Reduction of DCB marketing spend, whilst boosting the Company’s cash position, is estimated to impact FY17 revenue by $13M, and consolidation of the first screen business is estimated to impact FY17 revenue by $4M The Company is well funded with positive cashflows, a strong balance sheet and additional borrowing capacity under its current facility with CBA. Further, it continues to execute its strategy of enabling businesses to acquire quality customers at scale on any device, with revenue primarily being derived from the marketing or billing transactions that the Company delivers.

Performance Marketing to drive the operating margin growth: The Company has increased its focus on building marketing transaction volumes through the progressive development of its Performance Marketing business unit. Performance Marketing has become the Company’s dominant revenue and earnings driver with transactions increasing and delivering a higher EBITDA margin than the Carrier Billing division. The Performance Marketing business unit is growing well with average monthly marketing transactions of 1.9 million per month from July 2016 to March 2017, which was an increase of 46% on the FY2016 monthly average of 1.3 million per month. Moreover, several new proprietary brand and data assets have been successfully launched and there are more than 200 simultaneous client live campaigns with retention rates exceeding 90%. The expanding client base covers major industries including gas, electricity, telecommunications, finance, health, travel, insurance, education, entertainment and FMCG (fast moving consumer goods). Importantly, the industry outlook for Performance Marketing is encouraging, and generating traffic and leads is the top marketing challenge for 65% of all businesses, while converting leads to customers is the key marketing priority for 74% of all businesses.


Revenue breakdown by transaction by transaction; (Source: Company Reports)

Restructure of Carrier Billing division:  Given the external factors that have led MBE to put the marketing of its international Carrier Billing operations on hold, as well as the continuing reduction in spend for the Australian operations (as announced 7 February 2017), the business unit has been restructured with costs reduced to ensure optimum margin returns are delivered, and activities can be scaled up once return on investment metrics can deliver acceptable financial returns. The Carrier Billing business unit is co-operatively working with its carrier and connectivity partners to further develop user billing and customer service processes. A carrier group partner has recently deployed MBE’s proprietary customer service platform to improve its carrier billing customer communication. The factors that have impacted the Carrier Billing business do not impact the Performance Marketing business.


International direct carrier billing revenue growth; (Source: Company Reports)

Increases shareholding in Clipp:  MBE has increased its shareholding in Clipp, a leading mobile payment and loyalty smartphone application (App). Clipp’s advanced payment platform allows consumers to use their mobile phone to purchase drinks and food directly from the App as it is integrated into the hospitality venues point of sale (POS) system. In 2015, it acquired a 31% shareholding in Clipp from existing Clipp shareholders through the issue of a combination of MBE shares and options. MBE has now acquired a further 66% of Clipp for $550,000 in cash, taking MBE’s stake in Clipp to 97%. MBE’s increased shareholding, to 97%, now allows the Company to exercise control over Clipp and set the strategic direction to develop the business and take it to the next level. This control provides the Company with a stronger platform to realize optimum value from its investment moving forward. Clipp generated $4.3 million in gross revenue for the half year to 31 December 2016. In the 12 months from January 2016 to January 2017 downloads of the Clipp App grew circa 70% to 218,000 and registered users grew circa 53% to 104,000. Clipp is currently integrated with most of the POS systems in Australia with further integrations being pursued.


Internet access and smart phone ownership estimations; (Source: Company Reports)

Leveraging the growing market opportunity: MBE will benefit from the global uptake of mobile and is accordingly positioning themselves in a strategic manner.  The mobile sector is very strong with the mobile marketing and carrier billing sectors growing. There is a heavy growth in the consumer engagement and the way through they transact through their mobiles are growing at the rapid pace. Moreover, the projected internet access in 2016 from mobile is 2 billion consisting of 44% of the world’s population compared to 1.2 billion of desktop users. The mobile usage is high as it is estimated that people check phone 85 times the day and there are 5 hours per day usage of mobile internet and apps. Additionally, the apps download is expected to grow from 180 billion in 2015 to 284 billion in 2020. Given these strong prospects, MBE has invested for the expansion of the operational infrastructure from the July 2015 to August 2016, while the company has established four international territories for direct carrier billing and new International territories for mobile marketing. The carrier billing is in ten countries and has a capacity to expand into ten more countries for which new territories are pending.


International Revenue growth (Source: Company Reports)
 
Robust revenue growth for fiscal year of 2016: During FY16, Mobile Embrace Ltd (ASX: MBE) has reported 83% yoy growth in the revenue to $60.6 million, and 86% yoy growth in EBITDA to $9.5 million against the prior corresponding period (pcp) ahead of the company’s guidance. As a result, the group’s NPAT grew 63% to $4.9 million as compared to FY 15, while the earnings per share has grown 57% to 1.26 cents. Moreover, MBE has posted a five-year compounded revenue growth rate of 40%, while the EBITDA has grown at the CAGR of 100%. MBE earnings per share has grown at the CAGR of 325% from the past five years. During the year, the Company continued to focus on strengthening its balance sheet to ensure the financial flexibility to capitalize on growth opportunities as they arise. Further, it has been partly achieved by delivering strong pre-tax operating cash flow of $7.6 million, which reflects the solid cash generating capabilities of the businesses.


FY16 Financial summary; (Source: Company Reports)

Stock Performance: The stock fell over 38% in the last six months, while it is down 72.8% in the past one year (as on 25th July 2017) impacted by the soft guidance for fiscal year of 2017. Further, compliance to the recent changes in Australian telco carrier billing impacted marketing channel partners and thus the group’s ability to win new clients. However, the group still has a significant market opportunity in several underpenetrated regions while international operations are on track. We give a “Buy” recommendation on the stock at the current price of $0.088


MBE Daily chart; (Source: Thomson Reuters)
 

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