With a 10% y-o-y increase in the annualized MRR rate in June and £5m of new contracts announced year to date, 7Digital Group PLC (LON:7DIG) seems on track to turn EBITDA positive in the second half of this year. This should provide a more visible forward valuation for the shares, which look attractive on less than half of peers’ FY17e P/E and EV/EBITDA multiples.
Trading update: New contract wins
Management expects H1 revenues to be broadly flat y-o-y, affected by the transition to a B2B licensing model and the fact last year’s comparison includes termination payments from the legacy Blackberry (TO:BB) contract. More relevant is the development of monthly recurring revenue (MRR), which is up 4% y-o-y and annualized MRR was up 10% in June, with high-margin licensing revenues up 17% y-o-y. Compared to the 72% increase in MRR reported last December, this does mark a slowdown in the pace of growth. However, as flagged at the AGM in April, new contract wins in Q1 were strong (contracts with a lifetime value of £3.9m); this has continued in Q2 with £1.1m of new business won and the sales pipeline is ‘healthy’, with three new contract wins announced in conjunction with the trading update.
H216 EBITDA break-even on track
The new business wins are expected to have a positive impact in the second half of this year, and with 50% of revenues dollar denominated, 7digital’s path towards break-even appears to be on track. News that Guvera, one of 7digital’s larger clients, has placed two of its Australian subsidiaries into administration should not affect the repayment of an £818k outstanding receivable. This debt was at the group level, is being repaid in installments over the next eight months and, provided Guvera remains a solvent, ongoing business (which was not with the Australian subsidiaries), should not be affected.
To read the entire report Please click on the pdf File Below