"Open doors" that needed a far bigger push

In November 2013 I wrote a small article about a company called Synety that I had made a modest investment in:-

http://michae1mouse.blogspot.co.uk/2013/11/synety-very-promising-speculative-stock.html

As I mentioned in the article, this was a highly speculative investment which didn't meet my usual investment criteria, but a number of factors encouraged me to follow the Directors lead and buy shares in the company. At first my speculation appeared justified by their rapid progress from a low base, and the share price shot up accordingly:-

http://michae1mouse.blogspot.co.uk/2014/03/ubc-media-trakm8-and-synety.html

However, the story hasn't quite panned out as management and investors hoped. Clearly, "pushing at open doors" has resulted in a few slamming back in their faces. In short, an overly optimistic management team, high cash burn, and subsequently a deeply discounted fund raise (around 90p) scuppered the expectations of early investors and decimated the share price from it's highs of around £3+ in February 2014. Management have since recognised the importance of trying to reach cash flow breakeven as soon as possible by adopting a change of strategy.

This morning Synety released their interim results where investors can assess their current progress. The results broadly paint a positive picture of their prospects in achieving their revised aims. The positives are that the user base is up 104% compared to the same point last year and 28% since the year-end, revenue is up 130% vs the same period last year, operating expenses are tracking in line with the Board's expectations and annualised monthly cash absorbed by operations is decreasing. Simon Cleaver, the Executive Chairman asserts that, "The Company has cash and cash equivalents of just over £3m at the end of this reporting period, which the Board believes will, on the current trajectory, be sufficient to reach cash break-even."  Since the year end annualised recurring revenue has improved from around £3m to £3.9m.

Cleaver also states that, "Whilst the Group's change in strategy did have an impact on new orders received in April and May whilst staff were retrained and internal systems amended, I'm pleased to report that the Group has witnessed a strong recovery, with June and July being the strongest months to date for new sales. The Group's sales teams on both side of the Atlantic are now building strong pipelines, which is encouraging for the remainder of the year."

In my view the group still has it's work cut out to achieve cash break-even and an operating profit. That said, they are clearly getting there quite rapidly which means that even in the eventuality that they do need to raise more cash in the future then the scale of the cash raise should be minimal, and with a supportive shareholder hopefully not at a deeply discounted price. It's also worth remembering that whilst there haven't been any Directors purchases in recent months, they do have significant "skin in the game".

In early trading this morning the share price rose 9%. I'd guess that early investors who have been disappointed by the rate of growth have sold into this strength and the share price has since fallen back to 91p.

On balance, I would suggest that the price is about right for all the known information, but if they can manage cash break-even by the year end and continue with their growth trajectory then there is plenty of upside potential from here. Gross margins of 77% and recurring revenues streams will provide significant operational gearing if they can hit their targets.

I continue to hold.