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Should You Buy After Blinkx Plc Sinks 11% On Trading Update?

Video search engine firm Blinkx (LSE: BLNX) today released a pre-close trading update ahead of its results for the year ended 31 March.

The shares are down over 11% at 27p, as I write, which seems a little strange, because management was able to confirm that the full-year results are “anticipated to be in line with market expectations”.

Specifically, Blinkx told us to expect revenues of at least $210m and adjusted EBITDA of at least $3m. EBITDA stands for earnings before interest, tax, depreciation and amortisation, while the “adjusted” element leaves out other expenses, including acquisition and exceptional costs. At the bottom line — statutory, or real earnings — the company will be posting a hefty loss.

Of course, market expectations today are much lower than a year ago, and a far cry from Blinkx’s performance in the year to March 2014 when revenue came in at $247m and adjusted EBITDA at $40m. The company even made a bottom-line profit of $12m.

Blinkx has been struggling to adapt to changing industry conditions, seeking to stabilise its desktop business and to “invest in mobile and programmatic capabilities — the key industry growth areas”. To this end the company made a couple of significant acquisitions during the course of the year: Lyfe Mobile (for an initial cash consideration of $2.6m) and AdKarma (for an initial cash consideration of $15m).

In today’s trading update, Blinkx told us it expects to have cash on the balance sheet of above $90m at the year end, and that the two acquisitions “accounted for the majority of cash usage during this financial year”.

On the face of it, the numbers don’t seem to quite stack up, because cash on the balance sheet at the last year end was $127m. Perhaps this seeming discrepancy is why the shares have tumbled today. Certainly, I can’t see much else in the trading update to account for the heavy fall.

I’ve suggested in the past that Blinkx has been somewhat disingenuous, or unclear in its communication, in explaining the company’s poor performance during the last year. Today’s announcement does little to assuage my scepticism. The market, too, seems to have doubts about management’s handling of the changing industry dynamics (seemingly re-active, rather than pro-active), and the viability and profitability of the business going forward. Certainly, City analysts see no — or very little — headway on profitability in the next year or two.

The one big thing Blinkx undoubtedly has in its favour is the cash pile of $90m. This gives the company considerable scope for further acquisitions. However, it remains to be seen whether management is able to invest shrewdly to help turn what is currently a cash-burning business into a cash-generating company.

As I’ve said before, I think Blinkx has it all to prove. Even though the shares are now nearly 90% below their all-time high, I reckon this is a stock that can only be watched in the absence of evidence that there’s a long-term sustainable business here. The best hope for shareholders in the near-term would seem to be the chance that some bigger company within the industry sees sufficient value in Blinkx to make a takeover offer — but I’ve no idea how likely that might be.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.