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RhythmOne – argues “returns to full-year underlying profitability”, but it’s again net cash burn…

By Steve Moore | Tuesday 16 May 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

RhythmOne (RTHM) has announced results for its year ended 31st March 2017, emphasising “Returns to Full-Year Underlying Profitability led by 28% Growth of ‘Core’ Revenues”. The Income Statement though shows a significant loss and the shares have responded more than 6% lower to 45.5p. Hmmm.

The “underlying profitability” relates to “adjusted EBITDA” - a positive $11.9 million swing to +$1.4 million reported in that regard on continuing operations revenue up to $149 million.

The statement adds “management believes adjusted EBITDA provides a better gauge of underlying profitability”, but I particularly note $5.7 million of property, plant, equipment & development expenditure – raising the question how is ignoring depreciation and amortisation “a better gauge of underlying profitability”?!?

Thus, despite the ‘profit’ emphasis, it was again net cash burn – with cash and equivalents falling to $75.2 million.

However, the company argues it now has “a product portfolio that is well aligned with industry growth trends… the fundamental re-structuring of our business that we set in motion over two years ago is now complete” and sees “a period of continued expansion, through both organic efforts and scale acquisitions, as opportunities to consolidate the industry proliferate… as a means to fortify its programmatic base, and augment its scale, financial performance and long-term competitiveness”.

Hmmm. This suggests much competition and, despite its emphasising a “fundamental re-structuring”, I remain wary of previous issues here. Admittedly, the shares have recovered smartly from sub 20p (to now capitalise the company at more than £225 million, $290 million) but I’d want some strong, and evidence of sustainable, cash generation before reconsidering my present stance of avoid.

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