Ann: Preliminary Final Report, page-56

(MBE)
Result in line, forecasts little changed
Recommendation
Buy (unchanged)
Price
$0.225
Target (12 months)
$0.32 (unchanged)
Analyst
Chris Savage 612 8224 2835
Authorisation
TS Lim 612 8224 2810
Expected Return
Capital growth 42.2%
Dividend yield 0.0%
Total expected return 42.2%
Company Data & Ratios
Enterprise value $72.3m
Market cap $84.5m
Issued capital 375.7m
Free float 89%
Avg. daily val. (52wk) $1.16m
12 month price range $0.05 - $0.35
GICS sector
Telecommunication Services
Price Performance
BELL POTTER SECURITIES LIMITED
ACN 25 006 390 7721
AFSL 243480



FY14 result in line with guidance and forecasts
The FY14 result of Mobile Embrace was close to in line with both the company
guidance and our forecasts. There was a small miss at the revenue line ($19.2m vs
BP $19.8m and $19.5m guidance) but this was made up in a better EBITDA margin
(15.4% vs BP 15.2%) so that the EBITDA was close to in line with our forecast ($3.0m
(note our calculation differs to that of the company) vs BP $3.0m). There was no final
dividend as expected and cash at bank at 30 June was $12.3m.
No FY15 guidance as expected
Mobile Embrace did not provide any specific guidance for FY15 as expected. The only
general guidance was the company is focused on growing profitability and monetizing
existing agreements (such as with SingTel and Swisscom). The only other guidance
provided was on the conference call when the company said it anticipates doubling its
Mobile Marketing revenue in FY15.
EPS forecasts close to unchanged
There is <1% change to our EPS forecasts in FY15 and FY16. We continue to
forecast strong EBITDA growth in FY15 and FY16 of c.95% and 48% respectively and
this translates into similar growth levels for both NPAT and EPS. We also introduce
our FY17 forecasts and in this period forecast continued strong EBITDA growth of
c.32%.
Investment view: Retain BUY, PT $0.32
We retain our BUY recommendation on Mobile Embrace. We have updated each
valuation we use in the determination of our price target for the earnings changes as
well as any market movements and have also rolled forward these valuations by one
year with the move into FY15. The net result, however, is no change in our price
target of $0.32 which is a 42% premium to the current share price of $0.225 and is
supportive of a BUY recommendation.
Absolute Price Earnings Forecast
Year end 30 June 2014 2015e 2016e 2017e
Total revenue (A$m) 19.2 28.9 37.4 44.9
EBITDA (A$m) 3.0 5.8 8.5 11.2
NPAT (A$m) 2.5 5.6 8.4 10.4
EPS (diluted) (cps) 0.7 1.4 2.1 2.6
EPS growth (%) >100% 97% 49% 24%
PER (x) 31.3 15.9 10.6 8.6
Price/CF (x) 24.2 16.8 10.6 8.2
EV/EBITDA (x) 24.5 12.0 7.5 5.3
Dividend (¢ps) 0.0 0.0 0.8 1.0
Yield (%) 0.0% 0.0% 3.3% 4.4%
ROE (%) 14.8% 24.1% 26.9% 27.5%
Franking (%) 0.0% 0.0% 0.0% 0.0%
SOURCE: IRESS
SOURCE: BELL POTTER SECURITIES ESTIMATES
$0.00
$0.10
$0.20
$0.30
$0.40
Aug 12 Feb 13 Aug 13 Feb 14 Aug 14
MBE S&P 300 Rebased
Page 2
Mobile Embrace (MBE) 5 August 2014
FY14 Result
A summary of the reported FY14 result is shown in Figure 1 below. Figure 1 - FY14 result summary
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
The key take-outs of the result were:
 Small revenue miss …: Revenue of $19.2m was 3% below our forecast of $19.8m and 1% below the guidance of $19.5m. The key driver of the miss was lower-than-anticipated revenue for Mobile Payments (see over the page) while revenue for Mobile Marketing was in line with both the guidance and our forecast.
 … but higher EBITDA margin …: The EBITDA margin of 15.4% (based on our calculation of EBITDA) was above our forecast of 15.2% and was driven by a better margin in Mobile Payments (see over the page) as well as lower-than-expected total expenses. The margin improvement was partially offset, however, by higher-than-expected cost of sales.
 … means EBITDA in line: EBITDA of $3.0m was close to in line with our forecast (2% below). Note the company reported EBITDA of $3.15m but this is before an impairment charge of $0.1m and also includes interest revenue. We include the impairment charge in our EBITDA calculation (i.e. put it in expenses) but do not include interest revenue (i.e. put it in net interest expense) so that our calculation of EBITDA is $2.96m.
 Small EPS miss: Diluted EPS of 0.72cps was 4% below our forecast of 0.75cps and was driven by lower NPAT ($2.5m vs BP $2.7m) due to higher D&A ($0.5m vs BP $0.4m) and a modest income tax expense (we forecast a modest tax benefit). These negative impacts were partially offset by a lower-than-expected weighted average number of fully diluted shares (346.5m vs BP 359.1m).
Result vs PCPYear end 30 JuneFY13FY14ChangeFY14eVarianceCommentSegment revenue (A$m)12.219.257%19.8-3%Revenue miss due to lower Mobile Payments revenueOther revenue0.00.0NM0.0NMTotal revenue (not incl. interest revenue)12.219.257%19.8-3%Revenue 1% below guidance of $19.5mCost of sales-2.3-5.4131%-4.037%Higher-than-anticipated cost of sales but …..Gross profit9.913.839%15.8-13%Gross margin80.9%71.7%80.0%Total expenses (excl. D&A and int. expense)-9.1-10.819%-12.8-16%…. lower-than-anticipated expensesTotal expenses as % of revenue-74.3%-56.3%-64.8%EBITDA0.83.0269%3.0-2%EBITDA close to in line with our forecastDepreciation0.00.0-17%0.024%Depreciation higher than forecastAmortisation-0.4-0.410%-0.45%Amortisation higher than forecastEBIT0.42.5584%2.6-3%Net interest expense0.00.1>1000%0.112%Pre-tax profit0.42.6596%2.6-3%Income tax expense0.1-0.1-238%0.1-208%Very modest tax expenseNPAT from continuing operationgs0.42.5494%2.7-8%NPAT miss driven by higher D&A and impairment chargeNet profit/(loss) from discontinued ops0.00.0NM0.0NMNPAT before non-controlling interest0.42.5527%2.7-8%Non-controlling interest0.00.0NM0.0NMNPAT after non-controlling interest0.42.5542%2.7-8%EBITDA margin6.6%15.4%15.2%Better-than-anticipated EBITDA marginEBIT margin3.0%12.9%12.9%EBIT margin in lineEffective tax rate13.9%-2.8%2.5%Weighted average fully diluted shares286.6m346.5m21%359.1m-4%Diluted EPS0.1c0.7c431%0.8c-4%Modest EPS missDPS0.0c0.0cNM0.0cNMNo dividend as expectedResult vs Forecast
Page 3
Mobile Embrace (MBE) 5 August 2014
Result Breakdown
A breakdown of the FY14 result by operating segments is shown in Figure 2 below. Figure 2 - FY14 result breakdown by operating segments
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
The key take-outs of the result breakdown are:
 Lower payments revenue: Mobile Payments revenue of $14.2m was 5% below our forecast of $14.9m and was also 2% below the guidance of $14.5m. No particular reason was given for the revenue miss though on the conference call there was mention of a dispute that had caused some lowering of reported revenue for the division.
 Marketing revenue in line: Mobile Marketing revenue of $5.0m was 2% ahead of our forecast of $4.9m and was in line with guidance. On the conference call the company said it had good visibility for marketing revenue in 1HFY15 and that, for the year, it expected revenue to double relative to FY14 (i.e. from $5m to $10m).
 Strong payments result: Mobile Payments pre-tax profit of $4.9m was 11% ahead of our forecast of $4.4m and was driven by a much better-than-anticipated margin of 34.3% versus our forecast of 29.5%. The strong margin, therefore, more than made up for the lower-than-anticipated revenue and generated a result comfortably ahead of our forecast.
 Maiden profit for marketing: Mobile Marketing pre-tax profit of $0.1m was better than our forecast of a breakeven result. The modest profit represented the maiden full year profit of the division and was achieved despite a modest loss in 1HFY14. The revenue run-rate in 2HFY14 was $5.5m annualised (versus $4.5m annualised in 1HFY14) and so annual revenue of c.$5.0m appears to be the minimum required for a breakeven or better result.
 Flat D&A and unallocated expenses: D&A and unallocated expenses were both relatively flat in FY14 relative to FY13 but were both higher than we were forecasting. The higher-than-expected levels for both meant reported pre-tax profit was close to in line with our forecast of $2.3m despite the better-than-expected segment results for each division.
Result vs PCPYear end 30 JuneFY13FY14ChangeFY14eVarianceCommentRevenue (A$m)Mobile Payments9.114.255%14.9-5%Lower-than-anticipated payments revenue but …….Mobile Marketing3.15.063%4.92%…. higher-than-anticipated advertising revenueTotal segment revenue12.219.257%19.8-3%3% revenue miss relative to our forecastInterest revenue0.00.1237%0.14%Total revenue12.319.357%19.9-3%Pre-tax profitMobile Payments3.04.962%4.411%Better-than-anticipated payments resultMobile Marketing-0.20.1NM0.0NMBetter-than-anticipated marketing resultSegment pre-tax profit2.84.978%4.413%Beat at segment pre-tax profitD&A-0.6-0.6-10%-0.429%Higher D&A than forecastUnallocated corporate expenses-1.8-1.81%-1.338%Higher unallocated expenses than forecastPre-tax profit0.42.6596%2.6-3%Close to in line pre-tax profit resultMarginMobile Payments32.8%34.3%29.5%Good margin improvement in paymentsMobile Marketing-7.1%1.4%0.0%Positive margin in marketingTotal pre-tax profit22.7%25.7%22.2%Good margin improvement overallResult vs Forecast
Page 4
Mobile Embrace (MBE) 5 August 2014
Earnings and Valuation Changes
EPS Forecasts Close to Unchanged
There is negligible change (i.e. <1%) in our EPS forecasts for FY15 and FY16 post the
FY14 result. The key change we have made is to reduce our revenue forecasts by 1-2% in
each of FY15 and FY16 due to the lower-than-expected revenue result in FY14 but the
impact of this change on earnings has been largely offset by an increase in our forecast
margins.
The key point is we continue to forecast strong EBITDA growth in FY15 and FY16 of c.95%
and 48% respectively and this translates into similar growth levels for both NPAT and EPS.
A summary of the changes in our earnings forecasts is shown in Figure 3 below.
Figure 3 - Earnings revisions
SOURCE: BELL POTTER SECURITIES ESTIMATES
Price Target Unchanged at $0.32
We have updated each valuation we use in the determination of our price target for the
earnings changes as well as any market movements and have also rolled forward these
valuations by one year with the move into FY15. In the relative valuations of PE ratio and
EV/EBITDA we continue to apply the average multiple of the listed peers and do not apply
any premium or discount to the average.
The change in each valuation and the impact on the price target calculation is shown in
Figure 4 below.
Figure 4 - Calculation of price target
SOURCE: BELL POTTER SECURITIES ESTIMATES
The figure shows there has been an increase in the EV/EBITDA valuation, a decrease in
the PE ratio valuation and no change in the DCF valuation. The change in the relative
valuations is largely driven by the roll forward of these valuations rather than any change in
our earnings forecasts. The net result is no change in our price target of $0.32 which is a
42% premium to the current share price of $0.225.
Year end 30 June FY14 FY15e FY16e
Old New Change Old New Change Old New Change
Total revenue (A$m) 19.8 19.2 -3.1% 29.3 28.9 -1.6% 37.8 37.4 -0.9%
EBITDA 3.0 3.0 -1.8% 5.7 5.8 1.0% 8.3 8.5 2.7%
NPAT 2.7 2.5 -7.7% 5.6 5.6 -0.5% 8.4 8.4 -0.7%
Diluted EPS 0.8c 0.7c -4.3% 1.4c 1.4c -0.6% 2.1c 2.1c -0.5%
DPS 0.0c 0.0c NM 0.0c 0.0c NM 0.8c 0.8c 0.0%
Old (as at 26-Mar-14) New (as at 5-Aug-14)
Valuation % Price Valuation % Price
per share weighting target per share weighting target
Methodology
PE ratio $0.37 25% $0.09 $0.35 25% $0.09
EV/EBITDA $0.22 25% $0.06 $0.25 25% $0.06
DCF $0.33 50% $0.17 $0.33 50% $0.17
Total $0.32 $0.32
Page 5
Mobile Embrace (MBE) 5 August 2014
Mobile Embrace
Company Description
Mobile Embrace is a provider of integrated mobile and digital communications products and services to residential and business customers in Australia and internationally. The company has two key products/services:
 Mobile Payments: An integrated end-to-end service that acquires customers through mobile ad networks, develops mobile products and services and provides a payment platform via a mobile phone or tablet; and
 Mobile Marketing: Tailored mobile and advertising solutions designed to meet the specific communications and marketing objectives of agencies, brands and publishers.
Investment Thesis
We retain our BUY rating on Mobile Embrace. Our investment thesis is based on:
 $0.32 price target: Our 12 month price target for Mobile Embrace is $0.32. The price target is generated from a blend of three valuation methodologies we apply to the company: PE ratio, EV/EBITDA and DCF. The price target is a 42% premium to the current share price of $0.225 and the total expected return is the same.
 Exposure to the shift to mobile: Mobile Embrace provides exposure to the shift to mobile and, in particular, mobile internet usage. Nielsen forecasts that mobile internet usage will overtake desktop internet usage in 2014 and Mobile Embrace, through its Mobile Payments and Mobile Marketing business units, provides key exposure to this shift and the corresponding increase in transactions occurring on mobile devices.
 Relatively unique service offerings: Mobile Embrace has two key services: mobile products/services for purchase by consumers on their mobile devices and tailored mobile and advertising solutions. Both service offerings are relatively unique in the market as they are both integrated, end-to-end offerings and each also uses proprietary sales channels developed by the company to effectively reach consumers.
Risks
Key downside risk to our estimates and valuation include (but are not limited to):
 New technologies: Mobile Embrace is, amongst other things, a technology company that relies on its own technology as well as technical innovations to be successful and provide a value-add, competitive offering to customers. A risk is that new technologies will emerge that will supplant or supersede the services or products of Mobile Embrace.
 Increased competition: Mobile Embrace currently has a relatively unique integrated offering in its Mobile Payments business unit and also has one of the largest premium mobile advertising networks in Australia in its Mobile Marketing business unit. The risk, however, is that a new entrant or entrants enters the mobile payments market with a similar offering and/or a new or existing competitor in the mobile marketing market develops a new and successful marketing approach.
 Lumpiness in mobile advertising spend: Mobile advertising spend tends to be lumpy by nature given a large portion of the spend is on campaigns which tend to have specific start and end dates. We have allowed for some of this lumpiness in mobile advertising spend in our forecasts but the risk is that the lumpiness, or percentage of campaign revenue, is greater than what we have allowed for.
Page 6
Mobile Embrace (MBE) 5 August 2014
Mobile Embrace as at 5 August 2014 Recommendation Buy Price $0.225 Target (12 months) $0.32 Table 1 - Financial summary
SOURCE: BELL POTTER SECURITIES