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blinkx -- Son Of Autonomy

The online video search start-up has turned profitable—sort of.

What investor doesn’t wish they’d been able to back UK search giant Autonomy (LSE: AU) when it was a mere algorithm in founder and CEO Mike Lynch’s eye? For a decade Autonomy has looked expensive, yet it’s kept on growing revenues and profits. You’d now need to be a billionaire four times over to buy the company!

Some optimistic onlookers think AIM-listed blinkx (LSE: BLNX) is the next best/big thing. blinkx was spun-off from Autonomy via an IPO in 2007, and its core technology relies on an exclusive license from its parent, which is also its largest shareholder.

There’s also the whiff of growth that all ‘blue sky’ tech stocks need to excite investors. With online video consumption rising 37% in the UK in the past 12 months alone, blinkx has that in spades.

“What about spectacular profit growth?” I hear some pedants cry.

Ah yes—let’s get to that.

Searching for a profit

Since the day it was listed at 45p through its brief rally higher and then down to its nadir at barely 11p in late 2008, profits have been elusive at blinkx.

Instead it’s been burning cash.

At the end of 2008, blinkx (which reports in dollars) still had $32 million left of the $50 million it raised via its IPO. Yet according to today’s full-year results to March 2010, this cash hoard has since dwindled to just $14.6 million, with the company spending $10.6 million in the past financial year alone.

If any reader over 30 is experiencing heart palpitations that I’m about to calculate the burn rate—the dreaded DotCom-era measure of a company’s death spiral—relax, I too am under doctor’s orders to avoid spurious precision when evaluating a potentially doomed company’s life expectancy.

Suffice to say, if blinkx is spending $10 million a year and it has only $14 million left in the bank, then something has to give.

And happily, it has.

After the usually loss-making first half, blinkx says it turned profitable in the second half of the past financial year. Admittedly that’s on the controversial EBITDA measure—and at just $30,000 the income is not going to keep anyone in iPads and Aeron chairs for long.

Yet the move is significant, especially with CEO Suranga Chandratillake sounding confident it’s only the start, saying:

“Having reached profitability on an EBITDA basis and after making infrastructure investments early in the year, the business is now positioned to capitalise on this market momentum and drive increased profitability from growing revenue.”

Full-year gross profit rose 123% to $21.9 million in the year, on revenues up 140% to $33.7 million. That’s a gross margin of over 65%, and suggests ongoing revenue growth should work wonders for blinkx’ bottom line.

The real action as I say was in the second half, which accounted for $20.6 million of the full-year revenues—a 57% increase on the first half. This led to a gross profit of $13.4 million, and most importantly reduced the cash burn (sorry—I lied!) through operating activities from $8.1 million in the first six months to just $2.5 million in the second.

To say investors liked the sound of this is putting it mildly—blinkx shares rose more than 40% on the results on Wednesday morning, compared with a wider market down that had fallen nearly 3% at its worst point.

Adding up the eyeballs

So much for the numbers, what about the business?

An Internet company’s revenue model is always a bit of a moveable feast, but blinkx has hitherto made money through advertising, both directly from its own video website (which broke into the top 10 video websites this year, on traffic growing at over 200% in the UK) and also through licensing its video search technology and sharing revenues with partners.

The company has expanded an arrangement with in the past year, for example, and also launched a broadband TV offering with the Brazilian media giant ELO.

blinkx is also keen to highlight the potential of the fast-growing smartphone sector. To explore this market, it’s working with a company called Mobica to produce a mobile video news and entertainment service.

Finally, there’s mention in the results of a long-awaited service, dubbed Cheep, which the company says has now been successfully trialed. Described by blinkx as a ‘transaction hijacking product’, Cheep works out what you’re about to buy online and suggests how you can buy it for less. On the face of it, a very attractive proposition indeed, though the proof will be in the pudding.

What price for the potential?

Assuming blinkx’s second half wasn’t a blip—and considering the strong underlying growth in traffic and advertisers, it shouldn’t be—then in 12 months’ time we could have a profitable year of trading to try to evaluate the company on.

And now? Citigroup analyst Thomas Singlehurst has slapped a price target of 55p on the shares, on the back of recent revenue growth over 100%. He’s assuming the same for 2011, but warns it could “surpass expectations”. What’s interesting about this guidance is that Citigroup correctly predicted blinkx would breakeven in 2010 way back in 2007!

With the share price settling back to 18p, the company is valued at £55 million. That’s just the right size for someone looking for a new growth star, which could well include the likes of Microsoft, which it’s rumoured has looked at blinkx in the past, let alone Google.

More cautious investors may wait to ensure the past six months weren’t an aberration—and that rivals don’t emerge before blinkx has established its dominance. It’s a long way to a billion dollars, after all.