Here's why this battered small-cap's share price keeps falling

The performance of marketing company System 1(LSE: SYS1) -- formerly known as Brainjuicer -- over the last year is further evidence that those venturing into the small and micro-cap universe need to go in with their eyes wide open with regard to the risks involved.

Priced at 970p a pop almost exactly one year ago, the same shares now change hands for just 267p after dipping another 11% in early trading. That's almost 75% wiped off the company's value in just 12 months.

But as buying when everyone is selling can sometimes be very lucrative, is now the time for value aficionados to consider begin taking a closer look?

Profits plummet

System 1 saw revenue sink 18% (17% in constant currency) to just under £27m in the year to the end of March. If you think that's bad, consider that pre-tax profit slumped 68% to just £1.99m compared to the £6.28m the year before. To describe that sort of financial performance "disappointing" -- as the company did earlier today -- is something of an understatement.

The reason for such a dramatic fall was known in advance, of course, with CEO John Kearon confirming that System 1 had been "slow to appreciate the speed and scale of change" in its market. Having ascertained that the marketing budget cuts implemented by its clients were "significant and probably permanent", Mr Kearon went on to state that 2018/19 would be "a period of transition" for the firm as it attempts to push its "more competitive and scalable offer" in the tough environment.

Considering the push towards low-cost automated solutions is likely to "continue unabated" and the fact that rivals are now adopting the firm's previously unique approach (using behavioural science to inform marketing strategies) with greater frequency, that certainly won't be easy.

Despite the limited revenue visibility, it's not all doom and gloom. The balance sheet still looks decent with £5.78m left in cash at the end of the reporting period and no debt. The final dividend of 6.4p per share was also maintained, although the possibility of a cut in the future can't be ignored.

Having been positive on the company in the past, I admit to being disheartened by the speed of System 1's decline. While I cansee value at this price, it's clear that the road to recovery will be long and painful. Only patient investors need apply.

Better prospects?

For those who regard System 1 as too risky, small-cap software-as-a-service provider Dot Digital(LSE: DOTD) could be a decent alternative.

Despite some impressive interim numbers in February -- including a 25% jump in group revenue (to £18.8m) and 8% rise in EBITDA (to £5.7m) in the six months to the end of September -- the Croydon-based company's stock has fallen back in recent months, perhaps influenced by the Facebook/Cambridge Analytica scandal. I see this as an opportunity.

Right now, analysts are predicting a 30% rise in earnings per share for the 2018/19 financial year, leaving the stock trading at 19 times earnings. For a business that boasts partnerships with goliaths such as Microsoft and strong international growth ambitions, that looks pretty reasonable to me. Returns on sales and capital employed -- a couple of the hallmarks of quality companies -- are consistently high and a lack of debt (and cash balance of £10.5m) should appeal to investors who like their holdings to be in rude financial health.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended dotDigital Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.