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blinkx CEO, Suranga Chandratillake discusses a transformational year

Shares in Blinkx Plc (LON:BLNX)  soared by 27% to 16.5p this morning on news that the world’s largest and most advanced video search engine managed to break consensus expectations in its full year results. Of note, the company glided into positive EBITDA territory during the second half of the year – a move that it said was “nothing short of transformational”.

Revenues at Blinkx increased by more than 140% to £33.7m with gross profit up by 123% to $21.9m. Second half EBITDA came in at $0.03m against an EBITDA of $5.85m in the first half. Meanwhile, video streams in the UK and US rose by 186% according to independent industry analyst comScore, while daily video searches in March 2010 rose by 169% to 22.6m on the same month last year. On the advertising front, Blinkx said repeat bookings had risen by 193%, led by companies including Microsoft, BMW and Stella Artois. The company also expanded its network of distribution partners to include the likes of and news network ITN.

At the heart of Blinkx’s video processing technology is a licence from Autonomy, the FTSE 350 enterprise software group that the company was spun out of back in 2007. In a sign that it is keen to roll out the technology even further, it today gave more details about the imminent US launch of its Cheep “transaction hijacking” product. The new system, which the company assured investors had required minimal investment so far, intends to reinvigorate the e-commerce market by making it easier for users to compare products and prices before they buy.

Ahead of today’s analyst presentation, Suranga Chandratillake, the chief executive of Blinkx, spoke to Stockopedia News about the progress the company had made during the last 12 months.

Q. You have beaten expectations with today’s results and made some significant developments this year, so what has been driving growth at Blinkx?

Almost three years ago we IPO’d the company and raised $50m and at the time we put forward a plan which would take us to profitability. Since then, we have met or exceeded every single one of our own targets as well as the targets that have been set for us by the market at large. That culminates with the results we are looking at today which are very strong; revenues have increased by 140%, which is remarkable given the macroeconomic environment. Most importantly for us is that during the second half the business entered EBITDA-positive territory, which had been a major goal for us. What that does is de-risk the business, particularly from an investment point of view, because we are now beyond the stage of building the foundations – we are now into a stage where increased revenues drop to the bottom line and increase profits.

When you look at what has been driving all of this, it is really just strong, organic fundamentals. We continue to see massive demand for the service across the globe – our traffic grew by nearly 200% during the year. In the UK, we were the second fastest growing website in video, after, which is obviously a very fast growing site, and all of that is driving more people into using our service and watching more videos. The other side of the equation, of course, is the pricing and the great thing there is that we’ve been able to maintain or slightly increase our average pricing, or CPM (cost per thousand), in the videos to $16.50 over the period. What that means is that for all those extra users that we are getting, we are monetising them effectively and efficiently as well.

We have also just launched, which is the mobile version of the site. Obviously, this is a very exciting new market; it is small today but we already see people trying to access our normal site from a mobile phone and from now on, on certain devices, you can see it on a special interface.

Q. When you look back over the last three years, has the market grown in the way you anticipated?

We are certainly ahead of expectations. I think the consensus expectations for the current year was around $30m of revenue and we were at least, if not more than 10% higher than that. So in that sense we have been pleasantly surprised by the continued strong growth of the market. But three years ago, yes, we were extremely confident. We looked at the reality of the fact that internet video was exploding and in particular, like everything else on the internet, that would lead to a massive fragmentation of content. As a user, there would be lots of things that you would want to watch but they would inevitably live in lots and lots of different places on lots of different sites. When you have that kind of problem, search is king. Search is the solution that allows users to actually find what it is they are trying to watch, and that was what we were able to do. Our technology is unique it uses speech recognition and visual analysis and it is protected by over 100 patents and it is unique in its ability to actually make sense of all of that content. We knew we had a very special solution to a very significant problem and really the question mark was execution and having the capital to do that execution. That’s been what the last three years has been all about – and it has been hard work, of course. But we are happy to have seen that potential come true.

Q. During that time advertisers have begun to accept the value of online advertising, and in particular video advertising. But there has also been a general downturn in the advertising market. So how has all that impacted on the Blinkx business?

The best proxy that we have operationally on how that is affecting us is probably the average CPM – the pricing that we can command for our ads. If you look at average CPM across the industry over the last 18 months most sites, including video sites, have seen a depression in pricing. In some cases, traditional banner advertising was down by around 40% by the end of 2008, so a pretty significant drop in value. We haven’t seen that. Our CPM was essentially static through the worst of the downturn and it has actually risen slightly this year as things have improved. We have been able to defy gravity in that sense and the reason for that is quite simply down to the way we do advertising. We put ads inside video content but the thing that is unique about our Blinkx Ad Hoc system is that it is contextually targeted. Basically it uses its understanding of what is going on in the video to match ads specifically to each individual video. The great thing about that is that if you show a relevant ad inside a relevant video then you are more likely to get a relevant viewer who is more likely to remember the ad or click on it. That means you get a better ROI from an advertiser perspective and even if the economy is in a tough state, if you can prove ROI you can maintain pricing. So that very targeted, ROI-driven form of advertising that we have been able to offer, which is unique to us in the video space, has meant that we have been able to ride through the macroeconomic push down on prices for most advertising.

As part of our demerger from Autonomy three years ago we secured a perpetual licence to their technology for consumer-facing applications – so, anything consumer-facing we can build. That core technology is at the heart of what we do in the video search side and also at the heart of our advertising side. The great thing about it is that is has given us a massive head start – the licence was valued at something like $50m at the time. But we have also had to build on top of that because, of course, Autonomy is an enterprise company and we have had to modify the technology and build further IP ourselves to make it work in the consumer space.

Q. Will that focus on technology development remain close to your heart?

Yes, and I think there are two aspects to that. There is absolutely always going to be more technology; we have certainly seen that over the last three years and it won’t stop. The introduction of the mobile site is a great example of the new technology that we are building. In addition, it is also about building the business on top of that technology. If you think about the way our business works, we have a large audience of users – tens of millions every month at this stage – who come to our site and use the search engine and then we also have hundreds of content partners that are matched to those users. That creates a great second-order effect in the market because if you are a new content company, Blinkx is a very attractive company to partner with because we have a very large audience that we can bring to your content straight away. That, in turn, makes it a really exciting service for the user because there is lots of content that they can actually watch. So you get this nice cyclical effect where either side of the equation supports the other. That was hard to trigger in the early days, of course, but now we are at this stage of growth the momentum increases.

Q. How has your market share evolved over time given the increasing interest from other players? And how do you fend off the threat of competition?

Online video is booming and there are lots of players inside that. Some of the business models that haven’t done so well include the video sharing business model outside of You Tube itself, which is a bit of an outlier given it is owned by Google. We have seen difficulties in that market. What has been a big success in the last 18 months are the video content sites produced by the professional media companies – here in the UK that would be the BBC iPlayer, the SKY and ITV and Channel 4 systems. Over in the US we have had, which is a venture between News Corp and NBC. Those sites have done extremely well because more people want to watch TV online. All of that is essentially a good thing for Blinkx because it creates more and more content which is available on the web to watch in an easy, free manner. But of course, all the content lives in these different sites and as a result you get a very messy, fragmented reality. If a user actually wants to watch a particular show and he or she isn’t quite sure where to actually go and watch it, that could lead them to Blinkx – and that helps us in the long term.

Q. Finally, how would you rate your experience on AIM this year and do you foresee the need to raise any more cash?

Overall, I think we are very happy with the way we have run things over the last three years. When we IPO’d we did it with our eyes wide open, knowing that markets can move irrespective of our own corporate performance. The key for us was that it is a long term game – we were raising cash at the IPO to execute on a plan, we set out that plan very clearly and we knew our job was to get our heads down and execute on it. The key thing that happened in the second half of the year, as well as hitting all those planned targets, is the EBITDA positivity. That has fundamentally de-risked our business from an investment point of view and I think that makes it a much more interesting prospect going forward. We have no plans and no need to do raise money in the future. Whether or not the door is open, it is not one we envisage walking through at this stage.

Thank you Suranga.