Shares in Minds + Machines(LSE: MMX) have been on a roller coaster ride over the past 12 months. After hitting a high of 12.75p during September of last year, the shares fell to 8.7p during January. But since the end of March, the shares have rallied, adding 12.7% to 10p. These gains have come off the back of a positive trading update from the firm in which management informed the market that 2016's positive trading had continued into 2017.
Minds provides internet domain names, which is a highly lucrative business. For the first half of 2016, the company reported a gross profit margin of 86% on billings of $8.1m, up 300% year-on-year. Margins have been significantly improved by management's decision to move to a lean pureplay registry business, able to operate incisively across three time-zones. Operating costs fell 27% year-on-year for the first half of 2016 and are expected to fall further in 2017. Management is targeting an operating cost base of $6m for 2017, down from an annualised $7.2m based on first half 2016 figures.
Set for further gains?
Looking at the figures, it would appear that shares in Minds are set for further gains throughout 2017. For the first half of 2016, the company actually reported a small pre-tax profit of $0.1m, and trading continued to gain traction during the second half.
Indeed, at the end of January, the company indicated that total billings of $15.8m were achieved for 2016, compared to $7.9m for 2015. The trading update also revealed that operating costs are now below management's targeted level of $6m. Initial figures put operating expenditures at $6.8m, including $1m of non-recurring restructuring costs. After stripping out this one-off cost, the operating expense run rate declined to $5.8m.
Moving in the right direction
Topline figures show Minds is moving in the right direction and a further analysis of the figures supports this conclusion.
At the end of 2016 the company had just over 800,000 domains under management, and renewal billings for the year increased by 116% to $3.8m, providing a valuable source of recurring revenue for the firm. Management is targeting sales of 1m of its .vip domain names by the end of this year, up by more than a quarter since the end of 2016.
It is clear that Minds is moving in the right direction and for 2017 the company should report a decent level of profitability. Its cash balance is also attractive.
Cash is king
At the end of the first half of 2016, the company reported cash and cash equivalents of $29.1m giving a solid cash balance if things don't go to plan. Management has been active in returning some of this to shareholders. At the end of September, returned £13m via a tender offer. Alongside the offer, the company announced a private subscription to issue China-based Goldstein capital with 42.3m shares for a consideration of £5.5m, overall a net benefit to investors.
The bottom line
So, could Minds double by the end of the year? As with all small caps, it's difficult to predict where it will be in the years ahead.
However, Minds looks as if it's on track to report a healthy profit this year. Assuming the company does not have any unforeseen issues, there's no reason why the shares cannot rise substantially from current levels in the months ahead.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.