Synchronica's (LON:SYNC,TSE:SYN) third quarter results highlighted a roadmap to profitability, says research house Equity Development.
Because of the various one off costs and the partial contribution from the Nokia businesses, the results did not show an accurate picture of the mobile messaging firm's performance, said Equity Development analyst Philip Carse in a note.
The company's blue chip customers and distributors include Nokia, Huawei, NSN, mobile operators, and device manufacturers, he pointed out.
On November 24, the company said that its larger recurring revenues, along with a cost control programme, would move it closer to a "cash positive" position.
Synchronica said it produced a 900-per cent improvement in revenue to US$7 million for Q3 2011, although the firm also saw its overall costs increase as a result of its Nokia OBM acquisition earlier this year.
Operating losses on the EBITDA level were US$3.5 million compared to US$2.2 million in the comparative period.
Equity Development has done some calculations. "We have estimated a pro forma quarter, which shows that in the absence of any cost reductions, quarterly EBITDA losses would be of the order of $1.9 mln rather than the $3.5 mln reported for Q3. Subtracting the $3m of operating costs per quarter that the company has recently secured leads to quarterly EBITDA of $1.1mln and a small operating profit of $0.25mln and, assuming reasonably working capital management, positive cash flow," said analyst Carse.
The analyst goes on: "Synchronica shares have fallen heavily after recent events, to an all-time low of 5 pence. On paper, they should be worth considerably more given the move to profitability plus the undoubted strategic value of Synchronica’s customer base and technology.
"Support for much higher valuations should start to come through in early 2012, as the company becomes profitable off the back of the recently implemented cost reductions."