Will.i.am picks 7digital for smartwatch talks

Few investors had ever heard of 7digital (7DIG) until the little-known digital music and radio platform provider made this weekend's press. And the company has now confirmed it is in talks with Will.i.am about delivering the music service on a new smartwatch being launched by the musician, judge on BBC talent show The Voice, and tech entrepreneur. Now 7digital shares are as popular as their fashionable partner.

"The potential contract would further underpin the company's revenue expectations," said 7digital in a brief statement Monday, just as daily trading volumes for the shares hit a record high with half a day’s business still to go.

Clearly, this is big news for 7digital, which reversed into AIM-listed UBC Media Group in June. Will.i.am, also frontman for The Black Eyed Peas, is incredibly high profile and there's a good chance some of his success will rub off on the small British company.

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According to a report in the Telegraph, Will.i.am and 7digital have struck deals with major record labels giving each artist and music group treated equally under the contract. "This could give it the edge over other music services, which have experienced problems over the different rates offered to independent music producers and big labels," the paper said.

This certainly ties in with the view of finnCap late last month following 7digital's maiden half-year results. "Despite tweaks to forecasts, 7digital remains uniquely positioned to benefit from drastic music market change with £5.3 million of cash and an Audioboom holding now worth £13.5 million (59% of 7DIG's market cap)," said the house broker.

Audioboom is the AIM-quoted company listed by UBC in May. The rest of UBC was reversed into privately-owned 7digital alongside a net £5.7 million fundraising at 27p. And earlier this month, and after Audioboom shares had surged from 3.5p to 18p, 7digital sold another £3.5 million of them for a £1.9 million profit. It still has a 10.9% stake (11.45% with warrants) worth £11.7 million.

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This will certainly come in handy. 7digital generated just £5 million of revenue in the six months to June as sales of low-margin music downloads fell, and it lost almost £2.8 million. Crucially, however, high-margin monthly recurring revenues (MRR) jumped by 43% to £2.21 million, sending gross margin up by 600 basis points to 49%.

7digital isn't expected to make a profit until 2017, according to finnCap, but it certainly has the cash to get there, and a run of high-profile deals can only improve the attraction of this highly speculative investment.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.