7DIG.L Regulatory News (7DIG)

24 March 2015

7digital Group plc

("7digital", "the Group" or "the Company")

Preliminary results for the year ended 31 December 2014

7digital Group (AIM: 7DIG), the digital music and radio services company, today announces its audited preliminary results for the year ended 31 December 2014.

Operational highlights

· Reverse acquisition completed and net proceeds of £5.7m raised to fund the combined entity

o Integration of merged business completed within two months

· 25 material contracts with annual value of £3.4m won in last 12 months including- Guvera- i.am+- Spanish Broadcasting System, Inc.- The Overflow- ROK Mobile

· Catalogue now contains over 32m licensed tracks with 2.6m in high quality audio formats

· High quality audio services launched for Technics and Onkyo

· Transition from low margin download business to high margin B2B streaming services raises Gross Margin to 52%

· Sale of part of Audioboom investment, raising proceeds of £3.5m against investment of £1.60m

o Significant holding of 11% retained

Financial highlights

· Adjusted LBITDA reduced by 21% to £3.1m (2013: £3.9m) ahead of expectations

· Turnover down 12% to £10.2m (2013: £11.5m) with transition away from low margin download stores

· Strategically important high margin monthly recurring revenues (MRR) up 14% to £4.4m (2013: £3.9m)

· Adjusted operating loss reduced by 15% to £3.8m (2013: £4.6m)

· Statutory loss decreased 42% to £2.6m (2013: £4.5m)

· Total comprehensive income of £0.3m (2013: loss of £4.5m)

· Reported earnings per share was a loss of 3.01 pence per share (2013: loss of 7.40 pence per share)

· Cash balance at the year-end £ 5.31m (2013: £1.29m)

Simon Cole, Chief Executive, said: 

"These results represent a year in which we successfully created a new company from the merger of UBC Media and 7digital; we have ended it in a position ahead of the predictions we had made during the merger. Our success and growing customer base is proof of the developing market for streamed music services and the coming together of the radio and music industries as technology and consumer habits change. As our business model has changed, our high margin monthly recurring revenues and profitability continue to grow, powered by the fast growth of our existing clients and new customers wins.

"As the opportunities continue to grow in all of our key market sectors, the Board is confident that 7digital is well positioned to take advantage of what will be a significant demand for new streamed music and radio services globally."

Enquiries:

Chief Executive Officer's review

These results represent a year in which we successfully created a new company from the merger of UBC Media and 7digital. The rationale for the transaction was the opportunity created by the developing market for streamed music services and the coming together of the radio and music industries as technology and consumer habits change.

Although these results do not contain a full year of the combined business, they show powerfully that our vision is being validated by both operational achievements and the financial performance of our company. Our high margin monthly recurring revenues and profitability are growing, powered, as today's announcements from Sainsbury's and Guvera demonstrate, both by the rapid development of the business from current customers and also from new customer wins.

Our marketplace is the 'connected' world. It is a market where demand for the services we provide is expanding and changing rapidly as the range of hardware that is connected grows and consumer habits change in both music and radio. In the US, streamed music listening has just overtaken CD sales, now accounting for 27% of music consumption; in the UK, 21% of adults use streaming on their mobile devices to listen to radio - a 45% year on year increase. At the same time, connectivity of home hi-fi systems, wearable devices, cars and a range of other consumer goods means that businesses are recognising the need for such connected devices to 'come with music'. In the established connected market - mobile - new services and business models are being launched which see sophisticated consumer offerings and music being bundled as a marketing incentive.

Some consumer demand is met by the established players in digital music - Apple, Google, Amazon and Spotify - but their growth and encouragement of the market shows others the power of streamed music as a business and an incentive, creating demand from businesses who do not want to simply point their customers to a third party service but see the opportunity to create new revenue models and sales incentives for themselves. Our 25 material contract wins in the last 12 months have first year revenues worth £3.4m, with 55% of that being in new monthly recurring revenues (MRRs) from a range of customers including mobile operators and handset manufacturers as well as home audio hardware companies and retailers.

We have managed a change from two businesses, one focussed on building download music stores and the other on the digital radio industry, to a single business, which is able to provide the music and radio services demanded by businesses who want to enter this connected market.

The changes in the makeup of our turnover and the increase in gross margin are dramatic. In December 2013, 71% of 7digital's revenues came from low margin content sales and in its business to business (B2B) area, 79% was from operating download music stores. Today, only 22% is from content, with 61% coming from setup fees and monthly recurring revenues from B2B customers; of these 58% are now, in December 2014, for streamed music, radio and hybrid services and only 42% from download stores.

Our MRRs have therefore been transformed in the period to match the new marketplace for streamed services; however, they have also risen in absolute terms, up some 14%. This change of focus has also led to a rise in gross margin from 47% to 52% and a consequent fall in LBITDA by 21%.

In each of the sectors of growth we have identified; mobile and wearables, the connected home, radio, automotive and retail, we have seen growth and contract wins.

In mobile, the historical business of providing download stores has transformed into a dynamic sector with new streaming business models. Our customer ROK Mobile in North America is providing a 'comes with music' SIM card deal in partnership with major network operators and using a mix of radio-like streamed music services and curated playlists as a sales differentiator; we expect their service to expand into other territories in the near future. Guvera, on the other hand, operate a service embedded on all handsets and tablets from fast-growing Lenovo. With the announcement today of our contract to provide their UK and European services, we have moved from providing services to Guvera in three territories last year to 16 in 2015. In Canada, we have powered the launch of the first "micro subscription" mobile music service; "The Overflow" operates a full service of online and offline music for just $4.99 a month but with the content being specifically targeted to fans of Christian music.

Despite the many different business models operated by our customers, for 7digital, the model is always the same: set up fees for each new service followed by monthly fees with a fixed minimum and growth based on usage and territories covered. The growth of these and other services won in the last year has seen the streams served by our platform increase by nearly 400% in the period.

Apple's entry into the wearables sector has created much excitement and, as is always the case with new product launches from the major consumer music services, it has stimulated demand from others who want to take advantage of this new sector with different functions and business models. We were ready for this move, having released the first wearable app based on our platform in July last year. As a result of this, we were approached by i.am+, the company formed by international music industry icon will.i.am, to develop a service to support his "Puls" wearable device, due to launch this year

The music services on many of the mobile devices we are seeing emerge involve heavily curated playlists - designed to give consumers quick and easy access to the music they want without the need to search and programme their own playlists. This is a very 'radio like' experience, where consumers use trusted sources to provide the music they want but with added interactivity, allowing for example for a track to be skipped and another one added. We have now, through the integration of the radio industry skills that were within UBC Media, developed ways to combine human curation with the so-called 'algorithmic' or automated curation, which has been the hallmark of early digital music services. The recent move by Apple to hire leading BBC Radio One DJ Zane Lowe for its upcoming re-launch of the "iTunes radio" service, shows that this is the direction of travel for the industry.

As radio listening moves online and especially into mobile devices, we are now seeing, as we predicted, radio companies begin to develop their own streamed music services to complement their linear offerings in order to prevent a drain of listeners to services operated by the likes of Apple and Spotify. Our contract wins this year from Spanish Broadcasting in the US and Astro in the Far East demonstrate this and we expect this to be a significant growth area in the future.

We are well positioned here because of our existing business providing radio stations with the tools to stream successfully online. The Radioplayer platform, which we license internationally, is now used by some 750 radio stations in Europe to deliver mobile and web listening, with the Austrian broadcasters being the latest licensee, signed this week.

There is no doubting the transformation that connectivity has brought to mobile which is becoming a relatively mature market. However, that same level of transformation is now occurring in other potentially even bigger market sectors.

The connected home - sometimes linked to the "internet of things" - is opening new markets for us. Our recent business wins from Technics and Onkyo, adding to our existing business with Pure demonstrate that providing digital music directly to connected home speakers and music systems is the next major frontier in the advance of digital music. Here, quality of sound becomes more important and our investment in making the 7digtal platform ready to deliver music files in "Hi Res" was the reason we were selected by Panasonic (who own the Technics brand) and Onkyo to operate their new services. Today we have one of the largest catalogues of Hi Res music available - at 2.6m tracks. The current high quality services are all based around downloading tracks; however, we think that further developments in the hardware industry this year will see streaming services enter the home in higher quality. We were pleased to announce last month that we are working with Cambridge-based Meridian Audio to enable their "MQA" streaming technology - which can deliver studio-quality sound on a normal domestic connection - to be deployed first on the 7digital platform.

Only a short distance behind the connected home on the runway of emerging platforms for digital music is the connected car. We do not expect major revenues here in the immediate future. However, our announcement this year that we are working with Pioneer- the largest supplier of after-market audio solutions in automotive - on connected dashboard solutions, together with the announcement last week that Radioplayer will be part of the Apple in-dashboard solution, shows that, as in other areas, we are keeping abreast of a fast moving and growing marketplace.

Traditional retailers continue to realise the importance of having a digital music service and our existing business with HMV in the UK and Canada is augmented today with the announcement that 7digital is to power the Sainsbury's digital music service.

Whilst the business has been growing fast, operationally, the merger of staff and premises was accomplished quickly in the background. Within two months from the completion of the merger deal, all 115 London-based staff had been moved into our Wilson Street HQ, exiting UBC's previous lease in Marylebone. Our content and technology teams are now integrated so as well as producing some of the highest quality radio programming - like Radcliffe and Maconie on 6Music and Pick of The Pops on Radio 2 - our content teams are curating music services and producing video and audio content for the websites we are creating for our customers. The Technics launch of their Hi Res music service was accompanied by artist profile videos and curated content produced by us from within our existing companies.

As the opportunities continue to grow in all of our key market sectors, the Board is confident that 7digital is well positioned to take advantage of what will be a significant demand for new streamed music and radio services globally.

Chief Financial Officer's Review

This review covers the consolidated results of 7digital Group plc (formerly UBC Media Group plc), which went through a reverse acquisition with 7digital Group, Inc. on 10 June 2014. The statement of Comprehensive Income consists of 12 months of the 7digital Group, Inc. consolidated accounts from 1 January, and the 6 months and 20 days of the UBC Media Group from 10 June 2014. The comparative figures are for 7digital Group, Inc. only.

Revenue

Our high-margin business-to-business ("B2B") revenues have continued to enjoy strong growth, rising by 7% overall, and in the strategically important monthly recurring revenues ("MRR") we have seen a year-on-year increase of 14% from £3.86m to £4.41m. This growth has been offset by a fall in the Content revenue, which is driven by the fall in the sale of MP3 downloads, as streaming services continue to cannibalise downloads services within the digital music industry. The Production businesses acquired as part of the transaction were consolidated for the period following the transaction on 10 June, and provided £1.28m of revenue.

In the year to 31st December 2014, 7digital has seen a small drop of 2% in gross profit, decreasing from £5.45m to £5.33m, but has also seen gross margin rise from 47% to 52%. This increase in gross margin was despite a 12% drop in revenue to £10.1m (2013: £11.6m). This is due to a change in the mix of revenues of the business.

Underlying administrative expenses have decreased by 12% to £8.44m (2013: £9.63m). The Group has achieved operational synergies from the merger and continues to maintain tight cost control.

Adjusted Results

Adjusted LBITDA (which excludes return on investments, taxation, depreciation of tangible assets, amortisation of intangible assets, share based payments and exceptional items) showed an improvement of 21%, narrowing to a loss of £3.11m (2013: loss of £3.94m). The adjusted operating profit also improved, by 15%, narrowing to £3.78m (2013: £4.46m).

Adjusting Items

7digital incurred exceptional costs of £388,000 during the year. The majority of these relate to material one-off costs in relation to the reverse acquisition that occurred during the year. There were no exceptional items in the year to 31st December 2013. Furthermore, the Group set up a new share option scheme during the period, which resulted in a charge of £340,000 (2013: £nil).

Investment Gains

The Group has two distinct gains in relation to our stake in Audioboom Group plc:

Firstly, on 1 October 2014 the Group sold 29,029,307 Audioboom shares for cash proceeds of £3.52m. The stake sold was valued at £1.60 million at the time of completion of the reverse acquisition; hence, the sale resulted in a £1.89 million profit for the Group. This profit has been recognised in the Consolidated Income Statement, as it is a realised gain in the period.

Secondly, the Group has a gain on the fair value of the investment. Following the divestment, 7digital holds 58,000,000 Audioboom shares, and 8,765,404 warrants that are exercisable at 1.5p. On the date of acquisition of these shares, which was the date of the reverse acquisition, the fair value of this portion of the investment was £3.62m. On 31 December 2014, the fair value of this stake was £6.63m, resulting in a fair value gain of £3.00m. This gain is recognised in the Consolidated Statement of Comprehensive Income.

Statutory Results

The Group made a loss for the period of £2.63m (2013: £4.54m), a narrowing of 43% from the previous year. The Group had Total Comprehensive Income for the period of £345,000, which compared to a loss of £4.54m in the previous year.

Loss per share

Reported earnings per share was a loss of 3.01 pence per share (2013: loss of 7.40 pence).

Cash and cash flow

At 31 December 2014, the Group had a cash balance of £5.31m (2013: £1.29m), and overall cash inflow of £4.02m. This included a cash outflow of £6.30m from operating activities (2013: £4.19m), and £3.37m earned on investing activities (2013: £863,000 spent). The Group had a net cash inflow of £6.95m from financing activities (2013: £1.00m)

Dividend

During the year, 7digital did not pay an interim or final 2013 dividend (2013: no interim or final 2012 dividend). The Board of Directors is not proposing a final dividend in the current year.

Consolidated Statement of Comprehensive Income

Year ended 31 December 2014

Consolidated Statement of Financial Position

31 December 2014

Consolidated Cash Flow Statement

Year ended 31 December 2014

Consolidated Statement Changes in Equity

Year ended 31 December 2014

Notes to the financial statements

Year ended 31 December 2014

1 Accounting policies

On 10 June 2014, 7digital Group plc (formerly UBC Media Group plc) completed the acquisition of 7digital Group, Inc. The directors determined that the transaction was a reverse acquisition as per IFRS 3 Business Combinations. Therefore, the results contained herein treat 7digital Group, Inc. as the acquiring company. Therefore the restated historical comparatives are the comparatives of the consolidated 7digital Group rather than that of 7digital Group plc (formerly UBC Media Group plc). 7digital Group, Inc. had a 31 December year-end. 7digital Group plc (formerly UBC Media Group plc) had a 31 March year-end, and as part of the transaction, it changed its year-end to 31 December. Therefore, the current year results contain 12 months of 7digital Group, Inc., and the post-acquisition (7 months) results of 7digital Group plc (formerly UBC Media Group plc). 

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2014, but is derived from those accounts. Statutory accounts for 31 March 2013 have been delivered to the Registrar of Companies and those for 2014 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company will publish full financial statements that comply with IFRSs in August 2014. 

Going concern

The financial statements at 31 December 2014 show that the Group generated an operating loss for the period of £4.50 million (2013: £4.46 million), with cash used in operating activities of £6.30 million (2013: £4.19 million) and a net increase in cash and cash equivalents of £4.02 million in the year (2013: decrease of £4.05 million). The Group balance sheet also showed cash reserves at 31 December 2014 of £5.31 million (2013: £1.29 million).

During the year UBC Media Group plc completed the reverse acquisition of 7digital Group Inc., and the Group was renamed 7digital Group plc. As part of this process, the listed company completed a subscription on 10 June 2014 that raised a total of £6.95 million to fund the combined business and to support the growth strategy. The directors note that the business is at a stage of development that requires investment. This new funding means that the business has a strong balance sheet and funding position going forward.

The Board has concluded that no matters have come to its attention that suggest that the Group will not be able to maintain its current terms of trade with customers and suppliers. The Group's forecasts for the combined Group, including due consideration of the continued operating losses of the Group, and projections, taking account of reasonably possible changes in trading performance, indicate that the Group has sufficient cash available to continue in operational existence throughout the forecast period and beyond. The Board has considered various alternative operating strategies should these be necessary and are satisfied that revised operating strategies could be adopted if and when necessary. Consequently, the Board believes that the Group is well placed to manage its business risks, and longer term strategic objectives, successfully. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

2. Principal risks and uncertainties

The Group is currently loss making and is reliant on continuing to win new B2B licensing business in order to drive it to profitability. There is a risk that management will be unable to secure new contracts or that the anticipated demand for the Group's services will not materialise. However, the directors believe that the Group is well placed to continue to grow the business in order to reach profitability in the medium term. 

The market in which the Group operates is fragmented and competitive and new players may enter the market. Furthermore, the Group is a B2B provider of services to customers that may be in competition with companies that are seen as industry leaders. It is possible that developments by either the direct competition, or the competitors to customers, will render the Group's current and proposed products and services obsolete.

The market in which the Group operates has seen a number of significant changes, such as the shift from physical sales, through to downloads, and then onto streaming. The Group's competitors, or the competitors of the Group's customers, may announce or develop new products, services or enhancements that better meet the needs of customers or the end consumers. Further, new competitors, or alliances among competitors, could emerge. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Group's business, financial condition and results of operations.

The directors believe that the overall market for the Group's products and services will continue to grow, as the broadcast radio industry and the recorded music industry continue to converge. There can, however, be no assurance that growth in the market for its products and services will occur, or occur at the rate envisaged by the Group.

The Group relies on a number of key customers. The business plan produced by management assumes new and continuing revenue strands by key customers. If existing contracts were to be terminated or new revenue strands failed to materialise, this could affect the projected growth of the Group. Furthermore, 7digital's production businesses are dependent on the BBC as a key client and as such are vulnerable to the retendering process and BBC budget cuts. Failure by the BBC, as well as other key clients, to fulfil or renew existing contracts, sign up to new revenue streams, or become insolvent themselves, could have a material adverse effect on the financial condition of the Group.

The Group has a number of key suppliers of music content. The Group believe that these content rights that it has built up over a number of years are key to the success of the its business, and are also a significant barrier to entry to new competition within the market. There is no certainty that the rights holders will not limit or change the way or the price at which the Group is able to use the music content.

The Group depends on qualified and experienced employees, especially in relation to development staff, to enable it to generate and retain business. Should the Group be unable to attract new employees or retain existing employees this could have a material adverse effect on its ability to grow or maintain its business. Retention of the key executives of the Group is recognised as a risk and is managed by the incentive and remuneration arrangements.

3. Business and geographical segments

Business segments

For management purposes, the Group is organised into three continuing operating divisions - Content, Licensing and Production. The principal activity of the Content division is the sales of digital music direct to consumers. The principal activity of Licensing is the creation of software solutions for managing and delivering digital content. The principal activity of Production is the production of audio and video programming for broadcasters. These divisions comprise the Group's operating segments for the purposes of reporting to the Group's chief operating decision maker, the Chief Executive Officer.

In the year ended 31 December 2014, revenues of £1,345,000 (2013: £1,161,000) are included within the Licensing segment from to the Group's largest customer. There were no other customers that formed greater than 10% of external revenues within the years ended 31 December 2014 and 2013.

Geographical information

The Group's revenue from external customers and information about its segments by geographical location is detailed below:

 4. Exceptional items

On 10 June 2014 7digital Group plc (formerly UBC Media Group plc) acquired 7digital Group, Inc. This was accounted for as a reverse acquisition. As part of this transaction the Group incurred a variety of legal and professional fees which have been classified as exceptional items due to their one-off nature and magnitude. As part of the accounting for the accquisition the fair value of the assets acquired and the consideration paid were measured, as this resulted in an excess credit being recognised, this was not capitalised, but taken to the income statement as an exceptional item.

5. Acquisition

On 10 June 2014, UBC Media Group plc acquired 7digital Group Inc, and subsequently changed its name to 7digital Group plc. On a legal basis the transaction was an acquisition by 7digital Group plc (formerly UBC Media Group plc) of 7digital Group Inc. However, from an accounting and AIM Rules basis, the transaction constituted a reverse acquistion.

The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below:

The transaction was deemed to have been satisfied by share swap of 20,445,094 ordinary shares at a value of £0.27 per share, with the consideration reduced by £56,327 which was related to share options issued post transaction to 7digital employees in respect of pre-acquisition performance. The difference between the total consideration and the fair value of the assets purchased was a credit which was taken to the income statement and has been classified as an exceptional item.

6. Earnings per share

Basic earnings per share is calculated by dividing the loss attributable to shareholders by the weighted average number of ordinary shares in issue during the year. IAS 33 requires presentation of diluted EPS when a company could be called upon to issue shares that would decrease earnings per share, or increase the loss per share. For a loss-making company with outstanding share options, net loss per share would be decreased by the exercise of options. Therefore the antidilutative potential ordinary shares are disregarded in the calculation of diluted EPS. The 2013 calcuation of EPS has been restated. Reconciliation of the profit and weighted average number of shares used in the calculation are set out below:

Other Shareholder Information

Preliminary Announcement

· Copies of this document are available from the Company's registered office at 69 Wilson Street, London, EC2A 2BB

· The preliminary results will be available on the 7digital Group plc website from 25 March 2015: http://about.7digital.com/financial-information

Annual General Meeting

· The Company's Annual General Meeting will be held at 4:00pm on Friday 24 April 2015 at the offices of the Company at 69 Wilson Street, London, EC2A 2BB

· The notice of the AGM will be available from 25 March 2015 on the Company's website: http://about.7digital.com/financial-information

· Hard copy documents will be posted to shareholders on 31 March 2015 and will also be available from our registered office 69 Wilson Street, London, EC2A 2BB, from that date.

2014 Annual Reports and Accounts

· Copies of the 2014 Annual Reports and Accounts will be available from 25 March 2015 on the Company's website: http://about.7digital.com/financial-information

· Hard copy documents will be posted to shareholders on 31 March 2015 and will also be available from our registered office 69 Wilson Street, London, EC2A 2BB, from that date.