We're just back at the desk after a couple of days away to see Mediasurface, which we wrote on positively last week (you can download our note here), getting hammered on the back of a profit warning this morning. The shares are down over 50% as we write. We met the company for the first time last week and liked the story - clear market positioning with what looks like a strong product range, we thought. However, the profit warning suggests that the company has had a very tough H2. The statement suggests that revenues would be no lower than £11.3m for the year compared to a £14.0m consensus estimate. Moreover, the revenue miss means that the company will generate an EBITDA loss of £1.3m compared to a market estimate of a £1.3m profit. If our maths is right, this means that, after a £1.1m H2 contribution from Immediacy, the underlying business generated revenues of just £4.1m in H2, down from £6.1m in H1.
The company gives two reasons for the poor performance in H2. First is the impact of the release of Microsoft Office Sharepoint Server (MOSS) 2007. Given its collaborative functionality, some customers have clearly thought that it could do the job of Mediasurface's Morello product. Mediasurface is at pains to point out that it has not lost any deals to Microsoft and talks positively about opportunities going forward following the introduction of its MOSS connector. The second issue is a significant fall off in demand from the financial services sector following the recent credit crunch. The company sees no sign of demand returning. The net result of these two issues is that £2.25m of licence sales slipped.
Our View
This kind of warning is always a possibility for a software business that depends on licence fees dropping at the end of each period. However, we were surprised at the extent of this warning. With an average contract value for Morello of around £120k, the missed revenue accounts for nearly 20 average orders. Even if these were large orders (some Morello orders are over £0.5m), investors may ask whether the company could have talked to the market sooner about this issue.
Despite the difficulties in current trading, we believe that the company has strong products that play well to the current trends in enterprise web usage. However, with debt on the balance sheet, the company generating losses and investors in the Immediacy placing nursing a 65% loss on their investment, this technology may best be exploited as part of a larger group.
