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Has The Growth Story At Monitise plc Halted?

As we might expect, Monitise (LSE: MONI) has a compelling story. Why else would the share price surge from 5p in 2009 to around 80p at the beginning of 2014? With the firm’s revenue exploding up by around 1500% over the period, today’s 29p must be the mother of all buying opportunities, right?

A great vision, but is it a business?

Not so fast with that buying finger! The company’s vision to facilitate the use of mobile phones for banking and paying for things must have seemed like a great idea 11 years ago. How could it fail? Every Tom, Dick and Henrietta carries a phone, the shift to using it for other essential tasks surrounding personal finance must have seemed like a given then, and it still does now. 

So, Monitise sallied forth to build the world’s first mobile banking, payments and commerce ecosystem. Today, the firm provides services to more than 350 financial institutions and other leading brands globally, it has about 30 million users and enjoys strategic partnerships with the likes of Visa Inc., Visa Europe, RBS Group, Telefónica Digital and FIS, all with the aim of delivering mobile money services. Monitise reckons it now processes around 4bn mobile transactions annually to the value of about $90bn.

However, a marathon is rarely won by the fastest off the blocks and into the first five miles. Commerce is littered with examples of early movers failing to win the race in the end and, I’m sorry to say, it’s starting to look like Monitise could fall by the wayside, too.

It just doesn’t pay

Whichever way we look at Monitise’s financial record alarm bells start to ring. The firm can’t seem to make money. In fact, losses are actually escalating along with revenues. The black hole that creates in the middle is frightening. Monitise is throwing money down the pan like the end of the toilet roll caught in a non-stop flush — it’s spinning out of control:

Year to June

2010

2011

2012

2013

2014

Operating profit (£m)

(17)

(15)

(11)

(46)

(59)

Net cash from operations (£m)

(14)

(12)

(12)

(24)

(36)

Being the first mover in the industry is definitely not paying off so far and, worse, fault lines in the firm’s competitive advantage are starting to show, which threatens to undermine Monitise’s already wobbly business model.

In a recent announcement, Visa declares that it intends to develop in-house mobile solutions, which could signal the start of a trend. It seems to make more sense for financial service providers to bolt on mobile management capabilities for their customers, rather than to try to profit from the service — Monitise tried that, it didn’t work (so far).

Perhaps mobile banking and payment services will end up as just another commodity-style offering that’s easily reproducible — who needs Monitise any more, we might ask. That seems to be a question on many peoples’ lips. Take the firm’s finance director, for example. He owns around 17,857 shares, worth about £5,178 at today’s share price. He knows the accounts all right. Then there’s the chief executive with his holding worth a more convincing £222,501 but, overall, the director share-holding count seems modest.

The danger for investors

No firm keeps trundling on without cash in-flow and Monitise is no exception. That’s why the firm regularly raises money through fund-raising events that dilute existing shareholders’ interests. A peek at the cash-flow record tells the story:

Year to June

2010

2011

2012

2013

2014

Net cash from financing activities (£m)

18

31

25

108

122

Every time more shares join the register thanks to fundraising, the upside potential dilutes for existing holders.

Money recently raised will keep the firm going for a while. On 30 June, there was £146 million in the bank, but the last trading year saw £36 million cash flow out from operations thanks to losses. If that leak isn’t plugged soon, we’ll be tick-tocking inexorably towards yet another fund-raising gut-punch for shareholders. In loss-making situations like this, each time the company whip-rounds investors, the event occurs at a lower share price than the last, making such firms something of an anti-investment for shareholders.

Something material needs to change soon, in my opinion. One hope is that a larger financial firm will put Monitise and its shareholders out of their misery by pitching a takeover offer. That, though, is just wishful thinking at the moment, just like profits.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.