Pixology was a rare ray of sunlight in an otherwise gloomy market for small cap shares last week, bouncing back strongly on the publication of its 2004 figures and news of a first contract win for its embedded IRISS red-eye detection and prevention system. I have tipped the shares here before – at 144p last June – but I can honestly say there is no more exciting stock around right now. If you are not already in Pixology, pick up a few at the current 150p.

Pixology came to the market in December 2003, raising £7.5 million net. It has two strands to its business. One is the provision of end-to-end digital printing software, supported by a company-wide control and management system. This has been, or is being, taken by the likes of Jessops, Boots and Tesco in the UK, Duane Read and Costco in the US and the mini-lab maker, Noritsu. UK turnover jumped by 145 per cent last year to £2.5 million and is set to jump sharply again this year as the system is rolled out to 165 Tesco stores over the first half of the year.

In all, Pixology’s turnover jumped 79 per cent last year to £4.5 million. But most of its major retail clients were either still paying a one-off licence fee, just moving to a pay-per-usage basis or waiting to install the kiosks and related systems. The soft dollar also deflated revenues from the States, where Pixology still expects the greatest growth to emerge over the next few years.

The other side of its business is IRISS. The company has long supplied a number of digital camera makers but last year launched an automatic version of IRISS that is built into the camera on a chip. Last week the company announced it had won its first contract, though it did not name the camera maker. This is encouraging not just for the acceptance of the new technology but because pricing pressure in the software area was clearly hitting returns in the traditional IRISS business.

Pixology is still making substantial losses – and is not likely to move into profit in 2005. It lost £1.96 million last year and consumed a like amount of cash. That still left it with £6.8 million cash in the balance sheet at the year-end. But with substantial recurring revenues now starting to come through the cash burn should start to reduce.

The key point to note is that Pixology is part of a boom industry. The world is rapidly turning its back on film and adopting digital photography. Sales of digital cameras hit 70 million in 2004 and are forecast to grow to 90 million this year. The growth in printing from digital cameras is accelerating at an even faster pace and the proportion printed online or in shops rose from 24 per cent to 39 per cent last year. Pixology’s aim is to be the world’s leading private label providers of digital printing services.

All of that could be dwarfed by the impact of the camera-phone. Pixology now has a product called PhonePrint which allows photos taken on a camera-phone to be sent over the telephone network directly to a store to be printed. It has been on trial with Nokia and Boots over the past six months and although revenues will take time to build, it again places Pixology at the forefront of the emerging technology.

At the current 150p (down from a recent high of 191p), the business is capitalised at about £30 million. That is way too low. It can take up to a year for Pixology to tie up a new retailer and I confidently expect a series of new contract announcements to emerge over the coming year. The long-term potential in what is fast-expanding market is huge. One to put in your pension fund.

Pixology	AIM	0pm	p	p
Click here for interactive charting
Other company articles:
Pixology 'in talks'			25/10/2006
Pixology			14/09/2006
Pixology: talks off			28/07/2006
Pixology upbeat			07/07/2006
Pixology hauls in Boots			15/05/2006