7digital - A journey from cash burn to cash generation?

I've mentioned a company called 7digital before. It's a company I hold shares in. Here's the company website to find out more about what they do:-

http://about.7digital.com/services

A quick look at the share price graph will indicate what a great performer it's been for me so far. Apologies for the sarcasm. It's been a company that has consistently pulled off great defeats from the very jaws of almost certain victory. So why am I still here? Well, it may have lost some short term battles (certainly in terms of share price performance), but I'm still hopeful they'll eventually win the war.

I like their business model and I believe that the services they provide and their vision for the near future could bear fruit.

In April 2017, 7digital acquired a company called 24-7 Entertainment which provided them with considerable scale, and left them as last man standing in Europe in their field. In fact they claim to be the world leader with their PaaS offering.

However, the acquisition has come at a cost in terms of consolidating it with 7digital's existing offering and cash burn has been high. Certainly far higher than I had anticipated. In December of last year (2017) they raised around £8.5m by way of a capital raising and open offer for working capital and consolidation costs. Just over six months later they've burnt through most of this, and have taken a further loan from two existing shareholders to see them through to cash flow positive and profitability.

Not great reading so far, and indeed a delay to publishing full year accounts for the year ending 2017 in the summer months did not help sentiment, although that turned out to be much ado about nothing in the end and results showed good progress.

Back to the question. Why am I still here?

I'm hoping that 7digital are now very close to the end of needing further financing. Indications have been that by the end of this month they should be close to completing the consolidation. Once consolidation is complete, they anticipate annual cost savings of £5m a year. With gross margins around the 70% mark, recurring revenues and huge cost savings, 7digital should easily move into profit and be cash flow positive in 2019 with revenues around £20m+. At a modest market cap. of  around £12.5m, and with high operational gearing then it's easy to envisage a massive uplift in the share price.

In my view, the next few weeks will be pivotal in establishing 7digital's long term credibility and I'd expect some investors to wait on the sidelines since it's been less than a smooth ride so far. However,  are good things just around the corner?

I hope so, and shall wait to hear of further developments. If 7digital does turn cash positive and profitable in 2019 without the need for much more funding and serious dilution then the shares will multi-bag without question. Of course, it is an IF at the moment.

As ever, the shares are illiquid and can move quickly either way. I'm not a tipping service, these are just my personal thoughts and not advice so DYOR thoroughly.

twitter: @michae1mouse