Blinkx shares massacred on profits warning

Shares in Blinkx, the Aim-listed online video company and bulletin board favourite, are down 45% to 36p this morning after a profits warning, valuing the company at £144 million. The shares have traded as high as 230p towards the end of 2013. A shocker indeed!

The RNS this morning read:

“Historically, blinkx’s business has been back-end loaded toward the latter part of each quarter, with disproportionate growth toward the end of each calendar year.   During the last three months, which are seasonally the smallest quarter of the year, we saw lower than forecast demand – specifically within Desktop – with a corresponding shortfall in revenues and EBITDA.  The shortfall was exaggerated toward the end of the quarter.   We attribute this performance to industry-wide issues of efficiency and effectiveness, which, in our case was compounded by the lingering effects of the disparaging blog about the Company.   This resulted in a slower than expected return of demand, despite earlier signs of normalization.

As a consequence, while revenues grew c. 5% year-on-year, EBITDA will be c. $5M below management expectations for the Period, based on the Company’s internal models.”

Blinkx was spun out of Autonomy in 2007, with its former parent being bought for a controversial $10.2 billion by Hewlett Packard in October 2011. Subsequently $8.8 billon was written off due to alleged accounting irregularities by HP and founded Mike Lynch is now facing being sued for misrepresentation of its financial performance. Like Autonomy, Blinkx has been mired in controversy in recent months though of a different nature to its former parent.

Blinkx’s business model involving encouraging consumers to search for and share videos online and then make money placing advertising alongside relevant content .

In January 2014, Ben Edelman, an associate professor at Harvard Business School, wrote a blog post funded by investment companies that were shorting the shares that criticised this business model and accused it of artificially inflating traffic and clicks on its advertising.  The shares promptly crashed by over 50% on the report which the company strongly refuted.

The latest profits warning means that expectations for full year revenues are down 7% to $268 million and for EBITDA down 23% to $33 million. The worry for investors in Blinkx is how much the poor performance is due to the impact of Edelman’s blog post and how much is related to internet advertisers being more cautious how they deploy advertising given the problems of ad fraud.

Blinkx has been a former stock market darling promising significant revenue growth in a sexy sector back in 2013. Today this growth story has fallen apart and although the impact on profits highlighted by this morning’s RNS is relatively minimal, it’s all about confidence and at the moment confidence is shattered. The management team has a big job to convince investors they can get back into growth. There certainly seems plenty of major disappointment on the bulletin boards this morning as many private investors have been stopped out on the huge fall or are facing a significant paper loss. Some are advocating buying into the story at these levels, but caution is probably advised. Edelman’s investment bank friends must be feeling pretty pleased with themselves right now with the share price massacred since the end of 2013.

Contrarian Investor UK

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