Micro Cap Rising Stars – MobileActive and ComTel

This story features COSMO METALS LIMITED. For more info SHARE ANALYSIS: CMO

By Greg Peel

Microequities is an Australian financial adviser specialising in in-depth research of listed “micro caps” – those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their wares. FNArena was invited to attend, and over a period of time will provide conference highlights. This is the third instalment

I walked past the new Apple building in Sydney the other day and was impressed by its all-glass facade, its spartan but hi-tech showroom, and the milling throng of young things marvelling at the products. Unfortunately however, the Beatles weren’t playing on the roof.

Australia is now in a countdown to the debut of the iPhone – the latest offering to the world from Steve Jobs of iPod fame. The iPhone has been available in the US for about a year, but only in 2G form. Those Yanks are a bit backward, you see. So we’ve had to wait a while for a 3G version to be produced which is compatible with the latest Australian telco networks. For those wondering just what an iPhone actually is, consider it as a mobile phone that “does everything” – from the internet to television, videos, photos, games and so forth. Oh and you can apparently make calls on it too. Perhaps the most endearing feature of the iPhone is it has no buttons, just a touch-screen. No more trying to hit a single button with a fingernail, and no more squinting at a postage stamp display.

Why am I going on about iPhones? Because just like the iPod, Apple’s latest gizmo is set to revolutionise the world. A couple of years ago we were all talking about the internet – as accessed on the home computer or notebook – as taking over from the traditional media of newspapers, television and radio. However the introduction of the iPhone, and the mounting copy-cats, has surprised even industry observers. For suddenly the world is very rapidly moving away from actual computers and onto mobile phones. And why not? We now carry them around as ubiquitously as a wallet. If you are in “new media” and you’re not involved in mobile phone delivery, you’ve missed the boat.

There are now more mobile phones in Australia than there are people. The rapid evolution of this device has been startling. When I worked for a well-known investment bank back in the early nineties, my trading desk had one mobile phone between us to be allocated to the person who might be most likely to need contacting over lunch. It was a house-brick. These days restaurants are moving towards banning mobile phones in the dining room.

In arguably the most gizmo-loving nation on earth – Japan – 60% of internet access is now achieved via a mobile phone. Since the introduction of the iPhone in the US, internet content consumption has increased tenfold. Unfortunately for those who use public transport, and for people like me who’d just like something that would only make phone calls and texts, the new offerings are complete communication and entertainment packages in one little box.

Warning: Trite industry jargon ahead.

MobileActive ((MBA)) is Australia’s leading independent mobile entertainment, content and services company. The company was founded in 2003 to provide those highly irritating ring tones you hear constantly advertised, and while ring tone mania is still alive and well the evolution of MobileActive has a lot to do with mobile content consistently moving “off deck”.

Well I did warn you.

What this means is that previously the carriers of the world, such as Telstra, provided their own offerings in mobile content as part of their own contract packages. This would be stuff available on the “deck” of the phone. However, telcos have got enough going on without having to worry about creating entire content packages on their decks and keeping them up to speed with today’s tech-hungry youth. Hence carrier decks are now in decline, or at least flat in growth.

This has led to the rise of the outsourced deck which, to use another form of jargon, has led to companies like MobileActive breaking down the “walled garden” of carrier content services. Another competitive player in the market is Jamster, which is 50% owned by News Ltd. MobileActive provides business-to-consumer services in the form of marketing and distribution (games, video, music) and inbound licensing and aggregation, and business-to-business services in the form of infrastructure partnering and outbound licensing in in-house development.

The internet itself has revolutionised advertising. Consider that free-to-air television networks, for example, still rely on accumulating ratings numbers (which have always been argued to be extremely unreliable) and then pouring over the data, breaking them down into demographics of sex, age and economic capacity. This data is then used to entice advertisers, who hope that a particular show remains popular enough to justify an enormous ad-spend. Television viewers are notoriously fickle, and program managers are forever madly chopping and changing shows to keep up their ratings numbers.

On the internet, it’s a different game. Specific sites and services are readily demographically apparent, allowing advertisers to confidently reach target markets, and the growing industry is one where sites and content are specifically created as thinly-veiled advertising vehicles. As MobileActive’s CEO Chris Thorpe describes it, “niche web destinations with relevant content”, allowing “low cost acquisition of specific consumers”. And to actually use English, it’s very much a case of “give them what they want now”.

The internet has also now long taken over from the old concept of local community activities. Instead of gathering at the local hall once a week to play the same crowd at chess, you can go on-line and be whipped by some kid from Belarus. Instead of trying to follow around your favourite band to venues that don’t exist anymore, join the on-line fan club, hear the latest tunes, chat with like-minded aficionados, and buy the T-shirt. Your into surfing? Get the latest weather details, event dates, hot photos and merchandise here. Your a fan of Desperate Housewives? Watch on the train, complete with embedded product-placement.

It has truly become a small world after all, with the advent of booming social network sites like MySpace and Facebook. MobileActive is able to exploit “social shopping”, which Thorpe describes as the “new shelf space”, by creating mobile-accessible incentives, benefits and clubs as well as managed events, subscription premiums and recommendations. From the advertisers point of view, MobileActive can manage the “digital asset” by monitoring hits, sub-genres and emerging trends, specific “content clustering”, and through “sophisticated acquisition, partnering and creation”.

As MobileActive has been a pioneering player in this new virtual game, it can point to several barriers of entry to discourage pretenders. These include the complexity and scale of the company’s infrastructure, relationships (more than 50 global partners), product quality and depth, marketing expertise and reach, and five years of “brand equity” development.

MobileActive is currently a 4c stock suggesting a market cap near $7m. Guidance for the end of FY08 includes Australian EBITDA of $1.5m (up 35%) on year-on-year revenue up 23%. Group net revenue should be $11.9m. The company holds $1.7m in cash and is debt free.

The mobile medium has already grown rapidly, but with the advent of iPhones and similar products Thorpe believes it is now set to explode.

Equally excited is David Sweet, CEO of ComTel ((CMO)). ComTel is a mobile video network operator.

See previous warning.

In short, ComTel sells advertising. But it is not simply an advertising agent, as the company has created its own specific mobile service. At last count the company boasted a database of over 500,000 advertising recipients. This is a concept I personally have begun to (slowly) become familiar with, as FNArena looks to fund its growth through offering advertising to our own database, and through accessing other databases to advertise FNArena. This is the new, on-line world.

We are all now familiar with the concept of “Fly-Buys” – the ability to accumulate reward points in the form of air tickets by being a frequent flyer, or being a frequent shopper at a particular store or using a particular credit card. This concept has since expanded, allowing, for example, shoppers at a supermarket to enjoy a discount at that supermarket’s petrol station, or shoppers anywhere receiving accumulated “points” towards discounts or other incentives. By offering such rewards, retailers are investing in the ability to keep shoppers coming back.

ComTel takes these concepts onto the mobile phone. As Sweet explains it, “consumers want value and rewards that reduce the cash costs of meals, groceries, holidays, entertainment, fuel, clothing, mobile phone rates, whatever”. And on the flipside, “advertisers want to target niche audiences who quickly respond to messages via the most receptive media – mobile and email”. Both, notes Sweet, have become worldwide phenomena.

What ComTel thus exploits are “permission-based marketing databases”. ComTel’s technology captures and segments consumers willing to receive advertising offers of personal value, and be rewarded for it. Once again this shifts the world away from the typical forms of intrusive advertising we’ve all come to hate, such as billboards that impair vision of an oncoming bus at the bus stop, or ear-splittingly loud, endless and repetitive ad-breaks during Underbelly. ComTel’s model works only by advertising to those who want to be advertised to. Perhaps you have stuck your hand up as liking Big Macs. Well look – your mobile phone has just received an email offering you a dollar off a Big Mac at the outlet just around the corner from you! (Your mobile can be traced). And no doubt you’ll probably purchase fries and a Coke as well.

Thus through ComTel’s mobile services Just Prepaid (budget pre-paid mobile), Amichi (18-29 years pre-paid) and RewardMobile (over 35s post-paid), customers can register and opt into a permission-based marketing database such as ComTel’s smspup, CommuniTel, WhatDoYouThink.com.au, SinglesWhoClick.com.au, BigGiveAway.com.au, and iDonate. Advertisers then pay ComTel database hosting and campaign management fees.

And, supposedly, everybody’s happy.

To grow the business, ComTel foresees an expansion of the above service providers and the above “portal brands”. It will also expand through “white-labelling” its technology. In November 2007, ComTel acquired Empowered Communications, an expert in tailoring on-line community networks.

ComTel shares trade at around 8c for a market cap of $10m. The company has grown its revenue from $2.6m in FY06 to an expected $35m in FY08. EBITDA has grown from negative $1.1m to positive $8m. The company has $3.5m of current debt and $15m of non-current debt. As the company has been investing and growing it has yet to make a profit.

It’s rather hard now to foresee what the next step in communications innovation might be, although it would probably involve some sort of surgical implant.

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