7Digital update

7Digital released their half-year results yesterday, and it was a bit of a mixed bag really. Here's what I had to say back in May though first of all:-

http://michae1mouse.blogspot.co.uk/2016/05/welliam.html

Let's start with the bad news.

Guvera, a client of 7Digital's is a company struggling for survival. Sadly 7Digital have had to write off a debt of £733,000 owed to the company by Guvera.

Adjusted reported losses have increased with a LBITDA of £2.8m (H1 2015: £1.3m).

Revenues have risen only slightly to £5.2m (H1 2015: £5.1m).

Slower revenue growth than expected in the first half overall will result in a larger loss this year than they had anticipated.

However, there is plenty to be optimistic about and it will be interesting to see how the rest of the year develops.

In my last report I mentioned that cash-burn has been high, encouragingly though they do appear to be bringing cash-burn under far greater control. However, I wouldn't totally rule out a cash raise in the near term, although I believe (if it happens) that it would (hopefully) be for a modest amount as they grow towards profitability.

Indeed it is encouraging to hear that they are still re-iterating their goal of reaching EBITDA positive in the last quarter of this year, and predict 2017 will be profitable as a whole for the company.

Of course shareholders have to hope that this is realistic and not just wishful thinking on management's part.

They have stated that the sales pipeline for the second half of the year is strong with a number of significant contracts in the final stages of negotiation.

Hopefully then the next few months will bring news of further contract wins to add to recent announcements including yesterday's contract win with GranPad.

Overall, I'm cautiously optimistic that as a medium to long term investment then the potential returns could be significant. However, whilst 7Digital remains loss making and cash burning then clearly risks remain.

It should be mentioned that the quality of the client base is improving significantly e.g. "The Company signed a contract with Cdiscount, the leading e-commerce retailer in France, which will see the launch of a new streamed music service next week. Cdiscount generated profits last year of €1.765bn on a turnover of €2.741bn and enjoys a 34.4% total share of e-commerce in France (source: GfK)."  Hopefully, with these types of contract it means that they should eventually create a firm foundation of reliable recurring revenues.

The share price dipped on release of the results and the company is currently valued at around £6.2m.

As mentioned in my previous report, there are risks involved with an investment here. However, if they do get somewhere close to break-even by December this year, and are profitable in 2017 then things could get very interesting indeed.