7digtal has now reported its FY17 results, which show a strong uplift in revenues, reflecting the 24-7 acquisition, and a greatly reduced EBITDA loss. The publication of the results was delayed in order to conduct a thorough review by new auditors, resulting in a significant strengthening in reporting procedures and systems, and a restatement of historical figures. The rapidly shifting streaming market gives the group significant B2B opportunities, with music a key element of customer engagement for retailers, connected devices and mobile network operators.
FY17 revenues, up 50%, reflect the May 2017 acquisition of its largest competitor, 24-7, from MMS. Revenues from MediaMarktSaturn (MMS, now 7digital’s largest customer) underlie the 74% increase in high margin licence revenue. This resulting gross margin improvement has enabled the group to narrow its EBITDA loss significantly, ahead of our previous forecast. Over FY17, 7digital carried out a major project to integrate the three tech platforms (its own, Snowite and 24-7’s Juke), with FY17 capex of £4.7m. This will improve its ability to offer clients ‘Platform-as-aService’. Year-end net cash, bolstered by the December 2017 capital raise, was £7.0m. The previous CFO, Matt Honey, has resigned and David Holmwood (previously financial controller at Universal Music) has been serving as CFO on an interim basis. He and other candidates for the permanent role are currently being considered.
FY17 was a transformative year: the 24-7 acquisition added scale, enabling the group to move towards EBITDA profitability, and the December 2017 capital raise provided ample funds to see the group to cash flow (and operating profit) breakeven, targeted for H218e. The group has continued to add reference clients across a range of industry verticals, cementing its position as the leading B2B end-to-end music platform provider. With its ‘ducks in a row’, we expect FY18e and FY19e to show good progress. H118 sales are indicated at £9.3m, up 57% and management points to a strong pipeline and increasing momentum across the business.
On a FY19e P/E of 5.7x based on our revised forecasts, 7digital trades at a considerable discount to software peers (UK sector, excluding outliers, on 24x). With the platform, reference clients and balance sheet structure now more secure, and with a significant amount of operational leverage in the business, we expect the group to move to a growth rating.