Blinkx blog remains burdensome

Blinkx (BLNX) lost half its stock-market value after warning that its first-quarter cash profits would be $5m (£2.9m) below management’s expectations. The online video-advertising business – whose customers include Disney’s ABC and Condé Nast - blamed the slump on "industry-wide issues of efficiency and effectiveness", as well as the lingering impact of a “disparaging” blog post published by a Harvard professor in January.

Blinkx managed a 5 per cent increase in sales last quarter, but experienced “lower than forecast demand”, particularly in its desktop division. Blinkx chief Brian Mukherjee has tried to restore shareholder confidence by shelling out £85,000 for 250,000 shares. But that may not allay fears of slowing growth. Blinkx’s operating profits grew only 7 per cent to $17m in the year to March, after rising nearly 10-fold in the previous year.

The company has taken steps to diffuse the incendiary blog post. The accusations of Ben Edelman, an associate professor at Harvard Business School, centred on Blinkx's unusually high revenue per employee and its use of controversial ‘adware’ software to drive traffic to its websites. The company responded with a review of its operations and a detailed rebuttal. It also highlighted Mr Edelman's own admission that he prepared part of his article at the behest of an undisclosed client.

Citi Research says…

Buy. There is little to cheer investors in the latest update. Blinkx’s valuation is already very depressed and this is not helpful at all. The concern is that the industry-wide problems behind this profit warning, the blog post and mobile cannibalisation of legacy desktop revenues could weigh on the company for some time. We are cutting our forecasts aggressively for the third time this year. Lower revenue growth and gross margin attrition lead us to downgrade EPS by two-thirds for the next three years. We now expect pre-tax profits of $15.1m this year, giving EPS of 3¢. We also reduce our price target from 175p to 55p.

Numis Securities says…

Under review. We estimate that January's blog distrations knocked $3-5m off Blinkx's cash profits last year. We’re now reviewing our forecasts for the current year, but expect cash profits to be about 17 per cent lower than in 2013-14, at $33m. Blinkx said that following its rebuttal client spend had begun to return to normal. Whether or not that's the case, we expect it to invest organically and by acquisition – and to improve its video and mobile capability - to keep pace with the industry migration from desktop to mobile.