7digital’s recent trading update confirmed good progress. H117 revenues increased 13%, with a strong performance from high-margin licence and creative sales. Momentum in monthly recurring revenues and new contract wins, as well as the full impact of the 24-7 acquisition put the group on track for an even stronger second half and add to our confidence in the deliverability of targeted EBITDA profitability in 2018. Given the progress being made, the 3.0x FY18 EBITDA rating looks extremely attractive.
H1 revenues, which include a month of the 24-7 acquisition and some currency benefit, increased 13% to £5.93m. High-margin licence revenues increased by 25% (c £3.8m) and monthly recurring revenues (including Juke!) increased by 27%. Creative revenues, which are also fairly high margin, were also “particularly strong”.
Contracts with a lifetime value of c £5m were signed in H1, including with DTS (automotive), HDtracks (the world’s first full MQA streamed music service) and the relaunch of TriPlay’s eMusic service in the US. Since the period end, 7digital has also announced new contracts with Global Eagle Entertainment (inflight entertainment content to the airline industry), Deedo SAS for a new music streaming service across 27 markets in Africa and Asia and US group Fan Label. These contracts will start to contribute to revenues in H217 and along with the first full half contribution from the consolidation of 24-7 (which is expected to add £5m of revenues in H217 and £8m in FY18) should support a very strong second half performance in line with our forecasts and management’s expectations.
We look forward to more detail at the interims in September, but on the face of it, 7digital has had a good start to the year both financially and in terms of new client wins across a range of segments, which along with the successful integration of 24-7 underpin our forecast 61% growth in revenues this year. While work remains to be done to deliver forecasts, the growth in MRR is encouraging, reflecting in part the benefit of the acquisition, improving earnings visibility and adding to our confidence in the achievability of EBITDA profitability next year. Given the progress being made, the FY18 EV/EBITDA rating of 3.0x, a fraction of the peer set, is looking increasingly out of sync. As the group moves towards targeted EBITDA profitability in FY18 we expect to see a significant re-rating of the shares, which we believe are worth at least 14p. Please refer to our recent initiation report for more information.