Mirada - Brightening Outlook

http://www.mirada.tv/

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With the stock market remaining firmly within a bullish phase, it is the case that many small cap growth prospects are being chased higher by the market. The result is that there really aren't that many of them left at rock-bottom prices. However, one company that seems to be well positioned is Mirada (LSE:MIRA). The company, which specialises in creating and managing audiovisual content, is currently trading at 10.88p/share. that is not far off an established bottom around 9p. The share price has struggled to make any share price progress over the past year, and that has been mainly down to cash concerns. Those have now been mostly cleared up following a £1m placing roughly a month ago. In addition, a change of business model is at the centre of their operational improvements. Following a trading update today, Mirada (which is one of those companies that has a lower case first letter) is capitalised at £7.23m by having 66.5m shares in issue.


Upon the trading update today, the shares peaked just short of 13p. Clearly there was a significant retracement from that level during the rest of trading. The result of the spike up is that the spread has widened. However, on a technical basis Mirada seems to tick most of the boxes in order to be bullish for a small cap.
- Volumes in the last ~8 months are comparatively much higher than the period preceding it
- The company has been in a period of consolidation for several months
- There is an established base at 9p plus psychological resistance at 10p has been overcome
- There is minimal resistance up ahead (between 10p and 20p)
- The 200 day MA is flattening out (decreased gradient) indicating a trend change. This is supported by the possibility of a golden cross on any material upward move
- There has been a sharp intra-day move higher

More importantly though, the fundamentals back the case for a move higher. I'll come to that later. Mirada's CEO, Jose Luiz Vazquez has a holding of just over 2m shares, which equates to over £225,000 in cash terms. That is a fairly large backing and is ultimately better than the CEO having no share interest. 2 non-executive directors also backed the company during a placing in February. There is significant institutional backing for the company as well. Admittedly a fair part of that is down to the redemption of convertible loans notes (loans that can be converted to shares). The backing is positive though, and that helped the company last month during another placing. During that placing, major shareholder Chase Nominees took up the entire offer of ~11.5m shares. Following the placing, Chase Nominees hold 28% of the company's share total. The result is that most of the shares aren't in 'public hands'. Given the nature of the other institutional investors, I expect liquidity would be injected into the market in the case of a share price rise.

Mirada itself was created when two companies; YooMedia and Fresh IT, merged. British company YooMedia was loss-making at the time and the move to merge with Spain's Fresh IT was in a bid to revamp the operations of the merged group. The merger was also considered necessary in order to save YooMedia. From then on, Mirada was formed - a company focused on interactive TV and that strategy has been pursued since. However, changes have occurred down the line. CEO of Fresh IT (Jose Luiz Vazquez) took the helm of Mirada and has been there since.

The company's focus is on 'Audiovisual interaction' and its core market is Latin America where the bulk of revenues are now generated. A smaller and declining proportion of revenues are generated from the original UK and Spanish markets. Being more specific, the company is principally involved with the creation of software that enables users to interact with digital content on TV, online and companion devices (such as iPhones). This is done through their products, which include Iris, Navi and xPlayer. Over the years Mirada has secured a number of customers. In fact, the client list includes subsidiaries of big names such as Disney and Sky. However, such is the nature of the business, that the revenues are generated from companies that are not household names. For example, some of those companies include Latin American (LatAm) telecommunications operators such as Mexican telecoms company Axtel. The company does have some smaller non-core operations which are a bit strange, such as cashless payment solutions for car parking in the UK. However, those operations are pretty irrelevant in the grand scheme of operations.

As an example, Mirada was chosen by Axtel to create a new TV based product for their subscribers. The brief included certain features and that "users [should be able to] to record several channels simultaneously as well as pause, resume or start them over linear content without needing a local hard disk." For this contract, Mirada used their Navi product. Navi is a navigation solution created in conjunction with Ericsson. It includes features such as PPV (Pay Per View) and VoD (Video on Demand) services. This was achieved with Axtel's customisation and Mirada also aided in Axtel TV's service maintenance. The project proved Mirada's product flexibility and quality and this contract actually followed on from many before it with other companies. Notably, a contract with GVT and CableCom were used as reference to show the success of Mirada's product. These contracts have given them the reputation they need to drive them forward and that should make it easier for the company to continue gaining lucrative contracts.

The reason for the LatAm focus is twofold. Firstly, the Latin American market for these products is far less mature than in Europe and North America. As you have probably recognised, these products are already widely available in the UK and the market is dominated by firms such as Virgin Media. That means that these markets are closed off. The second reason is that these markets are experiencing significant growth. Those who have followed the site will recall this as being the case from the Amino Technologies review. Amino is a set-top box producer who has started focusing on LatAm to pursue growth opportunities. Ironically, Amino forms part of Mirada's client base. Indeed, industry reports all point to continued strong growth in digital TV on the continent by the end of the decade. That strong growth has opened up opportunities for companies such as Mirada to capitalise upon.

There has been one key change at Mirada has transformed the company financially and operationally over the past year or so. The change has been in the business model and how the revenues they gain are derived. Originally revenues were derived from product development/deployment and annual service fees. Consequently these revenue streams tended to have a low gross margin that was eaten up by development costs. Therefore the company took the strategic move to adopt a new business model. The new model retains the revenues from the development and deployment but it has another strand in that the success of the product is linked directly to the revenues of Mirada. That is achieved by Mirada receiving a share of the 'licence fee revenue'. The licence revenue is a share of that received by the client from subscribers to the service. That is excellent for the company as they are therefore getting monthly revenues filtering through for no extra cost. The result is that there is starting to be an improvement in the financials again. Preliminary effects of this are reflected in the 2013 FY results as shown below:


Over the period shown, revenues are lower compared to 2012, but that is partly down to the realignment of the business. Revenues were up 11% to £4.84m for 2013, but the important point is that the licence fee revenues will only really start to show through this year as further subscription revenues from GVT, Axtel and others contribute. Over this period, the shortfall has actually been compensated for by a substantial increase in gross profit from 65% to 96%. That has been driven by the shift to the digital TV revenues which are not cost intensive to run. That has led to an increased gross profit to £4.63m for 2013. EBITDA has followed this up and that was positive for the first time in 2013. Operating profit was also positive at £0.24m although pre-tax profits were -£0.24m. Regardless, the pre-tax losses are decreasing rapidly, which shows that the revised business model is starting to have positive impacts.

Other notable points from the 2013 results (FY to March 2013) included:
- Revenues from LatAm rose by over 100% from £1.50m to £3.16m
- Digital TV revenues rose by 22% and now represent 85% of total revenues
- 137% increase in licence fee revenue from £0.60m to £1.42m
- "We believe that as we secure new contracts based on this new model our licence fees will continue to increase resulting in the continued long term improvement in the performance of the Group."

As with all small companies, cash is an issue, although that has been significantly lessened over recent months. At year-end, cash on the balance sheet totalled £92k, current borrowings totalled £697k, non-current borrowings totalled £2.77m and net payables totalled £1.43m. Those figures are not exactly tempting. However, the payables payments can be deferred appropriately (as they have been) and the cash flows from operations can directly be used to help repay the loans. Importantly (by definition) the non-current borrowings won't fall due within a year.

Looking closer, a bank is supportive of up to £0.3m and actually the net liabilities are down year-on-year from £3.16m to £2.18m, which is an improvement. Post-results a convertible loan was partly redeemed for £315k at a 10p strike price. That left £660k as being owed under the loan. Furthermore, in October there was a £1m placing with Chase Nominees (as I alluded to earlier) at 8.75p which was not a large discount in terms of share price. At the end of the day, Mirada is trading at the current share price because of its previous financial uncertainties. I reckon that it should be able to manoeuvre itself free without much concern considering the improving financial performance. It's feasible, that if the share price rallies from the current price, there could be a placing, but I cannot see them undertaking another in such short order.

Interim results for the group are scheduled for release in late November to early December. I expect that these results will show a continued improvement for the group and a move into pre-tax profits for the six month period. As I pointed out earlier, Mirada also released a trading statement today. Importantly the company outlined further details of an ongoing trial with a major operator. In the full year results it was noted that a trial was being undertaken with a view of it being completed in Q1 2014. Investors were also told it would be a paid trial. Financials for that trial were clarified further today and the numbers are pleasing. The trial itself is set to generate revenues of circa £0.9m with the majority of that set to be recognised in the second half of the year. Importantly the company noted that if the trial was successful the 3 year licence fee revenues would far exceed the current annual turnover.  The outlook was also very encouraging.

"The rapid growth we have experienced in the Latin American market, with four major launches of new digital television services incorporating mirada's technology being made in the last 24 months, has led to a high level of recognition of mirada's products in the region. This has led to further substantial opportunities arising, and we expect to be able to make announcements on the progress of these opportunities in the coming months."

With reference to how value can be extracted here, the CEO offered up two scenarios in an interview; continued financial improvement or if the company is acquired by a larger competitor. Either of these methods is likely to lead to a higher share price in the medium to long-term in my opinion.  Of course, the primary focus should be on the performance of the group itself. That is progressing well, and it is also progressing quickly. The current shareholder base seems supportive of the company, which is important, and operationally they seemed to have turned a corner. Given the financial position of the company, it remains a medium-high risk investment opportunity. However, the technical outlook is very encouraging and the fundamental picture is brightening. I have therefore put a Buy opinion on Mirada at 10.88p targeting at least 50% upside.

UPDATE (21/03/14) - I have moved Mirada from Buy to No Rating at 10.75p following a sharp rise in the share price over recent weeks (without major news). I have therefore locked in a 72% profit ,which exceeded my initial target. The fundamental outlook looks good should the contract be won, as expected, but investors must remember to discount that the contract may not be won to the extent expected, so a discount does have to be priced in beforehand. There is the possibility that any large further rises will be used to strengthen the balance sheet further, but ultimately, the move to No Rating, is to protect the gains

3 comments:

  1. Good work! No idea how you find these companies!

    ReplyDelete
  2. I enjoy getting these emails in my inbox in the mornings.

    Keep up the good work
    CraigJ

    ReplyDelete
  3. Picked up a small parcel this morning

    ReplyDelete