The huge potential in Monitise‘s (LSE: MONI) business has never really been in dispute. The eye-widening attraction of the firm’s revenue growth figures captured investors from far and wide.
In February, the firm said its total user count exceeds 82 million. However, even after achieving that result the opportunity for Monitise remains huge. The directors reckon 200 million users could be availing themselves of the firm’s services by the end of 2018, based on the market potential and partnerships in place.
Indeed, recent partnering announcements suggest the company continues its growth momentum. Yet it’s all ‘jam tomorrow’ as far as us investors are concerned until we see a crumb of positive cash flow or profit to back that rising revenue. We can’t deny the best longer-term trade on Monitise for some considerable time has been to sell (or short if you are brave enough!).
Can Monitise do it alone?
The potential may be huge for Monitise’s business, but will current shareholders benefit from the realisation of that potential, or will it take new ownership to squeeze out profit from the business model?
After reviewing its strategy, root and branch, under the shadow of mounting losses, the firm recently put itself up for sale. It hasn’t ruled out any other options that might help it turn a profit, either. A cynic, like me for example, might conclude that such actions stem from a certain amount of desperation.
Let’s ignore the upside potential for a moment and consider three reasons that we might avoid buying shares in Monitise:
1. Cash burn
What we want to see is gradually reducing losses at the least, or steadily rising profits moving in the same direction as escalating revenues. What we have with Monitise is the opposite. Losses are escalating with revenues, and cash is pouring out of the firms clutches at an alarming rate:
|
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) |
You don’t need me to tell you that this outcome isn’t good. Monitise has been in the vanguard of those developing mobile banking solutions for a decade. During that time, the firm enjoyed support from many major and critical financial institutions. Monitise seemed way ahead of its competition and seemed to dominate the market. Yet it can’t make the business model pay. That’s not the first time a primary mover in a new industry has struggled.
2. Serial investor dilution
With such cash losses from operations, Monitise needs to get funds from somewhere to keep going. That’s why the firm regularly raises money through fund-raising events that dilute existing shareholders’ interests. A look at the cash-flow record is revealing:
|
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.
The latest fund-raising event will keep Monitise going for a while. On 31 December, there was £129 million on the balance sheet, down from £146 million on 30 June, which gives some idea of the rate of cash-burn here. However, if the cash leak isn’t plugged soon, we’ll surely see another dilutive fund-raising event on the horizon. Loss-making situations like this tend to see each new share issue at a lower level than the previous, which often ensures a negative outcome for investors as the share price grinds down.
3. Changing business model
On the 17 February, the directors said they reckon Monitise will achieve profitability during 2016 if we ignore the costs of interest, tax, depreciation and amortisation. The firm will drive such positive EBITDA by focusing on cost initiatives and by shifting to a product-centric model.
That sounds upbeat, but once again, it’s all in the future — jam tomorrow. I want to see the whites in the eyes of diminishing losses and reducing cash outflows before I’ll believe it. Turning the statement on its head, we see that the old business model has failed to be profitable and we could speculate that the new one might also fail to be profitable. The directors had high hopes for the first model and now they are optimistic for the second — the outcome remains a coin toss from an investing perspective.