Shares in Forbidden Technologies rose by as much as 60% following the news, which means that Forbidden will now benefit from access to Microsoft’s global sales force. This looks like a great deal for Forbidden.
What the deal means
Forbidden’s Forscene platform is a professional grade, cloud-based video production platform. It’s used to process video after shooting to prepare it for television or online use. Like all cloud software, the concept is that Forbidden provides software as a service (SaaS). Rather than owning and running expensive production software on their own servers, Forbidden’s customers are able to pay to use the Forscene platform online.
Forbidden says that this will be the first time that Microsoft has been able offer “a true cloud-based, feature-rich video post-production platform”.
How big is the opportunity?
Forbidden’s research indicates that the global market for professional video editing is worth $366m. Given that the firm’s sales have not yet managed to break through the £1m mark, this suggests that the opportunity available to Forbidden is quite large.
According to Jason Cowan, who is Forbidden’s Business Development Director, both customers and prospective customers “have been crying out for the ability to set up and run their own Azure – Forscene solution”. Mr Cowan believes the offering will particularly appeal to productions which need to be turned around quickly, such as sports and news content.
When will the cash start flowing?
This deal should definitely help to increase sales of Forscene. However, Forbidden chief executive Aziz Musa warned investors that the deal will take time to produce results. Mr Musa said that while “some income” was expected from this deal in 2016, “we anticipate its financial impact being most acutely seen from 2017”.
This suggests to me that it’s worth taking a closer look at Forbidden’s finances. Does the firm have the cash it will need to make it through another year or so?
Is there enough cash?
Forbidden’s 2015 results show that sales were £708,717 and the firm incurred an operating loss of £2.66m. The cash flow statement shows that £2.7m of cash flowed out the business last year.
Given that Forbidden’s cash balance was just £1.7m at the end of last year, I think there’s a risk that the firm could run out of cash at some point this year.
In my view, today’s gains provide Forbidden’s management with an ideal opportunity to raise some extra cash through a placing. I’d argue that this would be a prudent move, to ensure that the business can be certain of trading through into 2017 without a further shortfall.
As an investment, the outlook for Forbidden depends on whether the firm can deliver on its commercial goals. Last year’s management reshuffle was designed to improve sales performance. Today’s deal seems to be a good starting point and I’m inclined to give Forbidden the benefit of the doubt.
As a result, I’d rate Forbidden Technologies as a speculative buy.
However, when investing in lossmaking small-cap stocks, it pays to be cautious and maintain a diversified portfolio.
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Roland Head 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.