Focused on delivery

Cyan 14 November 2019 Update
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Cyan

Focused on delivery

Technology

Scale research report - Update

14 November 2019

Price

€20.7

Market cap

€203m

Share price graph

Share details

Code

CYR

Listing

Deutsche Börse Scale

Shares in issue

9.8m

Estimated net cash (€m) at 31 October 2019 (H119 net debt of €14m plus estimated net proceeds from capital raising of €23m)

8.6

Business description

Cyan supplies cybersecurity systems for mobile data networks. Following the recent acquisition of I-New, its two major products are: content management software sold as a white-label product to mobile network operators; and a traffic management solution for MVNOs that enables them to reduce network traffic and corresponding costs.

Bull

Rapid growth in high-margin revenue expected.

Good visibility in general with existing recurring revenue base and blue-chip customers.

Opportunities to sustain rapid growth through mobile banking initiatives.

Bear

Execution risk and capacity constraints.

FY19 guidance requires significant sequential growth in H2.

Additional revenues may be driven by one-off licence sales, offering less visibility.

Analyst

Dan Gardiner

+44 (0)20 3077 5700

Over the last 12 months Cyan has focused on integrating its I-New acquisition and preparing for its Orange roll-out. Sustaining this focus on delivery over the next few months will be crucial. The company is targeting revenues of €75m by FY21, a significant uplift from the current (€16m) run rate. Investor confidence will be boosted if Cyan can deliver the large sequential jump in revenues implied by FY19 guidance and complete technical integration with Orange on time.

H1 demonstrates integration and investment focus

Cyan reported revenues of €7.9m and EBITDA loss of €1m in H119. Stripping out other income, revenue of €7.0m was broadly flat sequentially but operating costs fell by over €4m. The integration of the I-New team, the closure of its Brno office, merger of Sopron operations and restructuring in Latin America all helped streamline overheads. At the same time, the company began investing to support the upcoming Orange launch, expanding headcount and opening a dedicated office in Paris. In August Cyan lowered its FY19 EBITDA guidance by €6m (from €20m to €14m) predominantly to accelerate R&D and invest in marketing.

H2 delivery key to confidence in FY21 target

This increased investment, backed by a €25m capital raise, enabled Cyan to lift its FY21 revenue target to €75m (previously ‘at least’ €60m). Implying a doubling of revenues from FY19 guidance and accompanied by a 50% EBITDA margin target, Cyan’s medium-term prospects still look very good. However, investors will need reassurance that it can deliver. In our view Orange will be key to this. Cyan expects to complete technical integration by year end and for Orange to add €25m in recurring revenues by FY21. To meet FY19 guidance Cyan has to deliver revenues of €27m in H2 (€19m more than H1). It recently secured a large (€5–10m) deal with ACN/Flash Mobile but needs further big ‘upfront’ software sales to meet guidance.

Valuation: Delivery should see upside

At c €21, Cyan’s share price has fallen 18% since the beginning of 2019. At current levels it implies an enterprise valuation of 10x FY20e consensus EBITDA, a multiple that falls to 6.7x by FY21e. If the company can demonstrate its growth trajectory is on track, in our view there should be upside to both consensus estimates and the share price. Applying a peer group average FY20e EV/EBITDA multiple (12x) suggests a value of €25 per share, 23% upside.

Consensus estimates and implied valuation multiples

Year
end

Revenue
(€m)

Adj EBITDA**
(€m)

Adj. EBIT** (€m)

Adj. EPS** (€m)

EV/revenue
(x)

EV/EBITDA
(x)

12/18***

8.8

3.4

0.4

NA

21.8

56.9

12/19e

31.1

12.1

8.8

0.8

6.2

16.0

12/20e

45.3

19.3

13.3

1.3

4.3

10.0

12/21e

63.1

28.8

20.3

2.1

3.1

6.7

Source: Cyan and Refinitiv. **Adjusted for exceptionals. ***Cyan previously reported pro forma revenue of €22.9m and (adjusted) EBITDA of €4.8m in FY18. Numbers restated following publication of IFRS statements.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Orange is the new Cyan

In December 2018, Cyan secured a long-term (six-year minimum) global contract to exclusively provide cybersecurity to Orange. The scale of this contract and its significance to Cyan is enormous. Orange’s 28 subsidiaries provide services to 264 million mobile, fixed line, consumer and business customers and Cyan’s cybersecurity services will be embedded into these networks. Based on its experience with T-Mobile Austria and assuming each customer pays €1.5 per year plus 6.4% penetration of the customer base, Cyan estimates the contract should generate annual recurring revenue of €25m by FY21, ie a third of its FY21 revenue target.

As we highlighted in our last note, The future is bright, the future is …, precisely how Cyan’s cybersecurity service is provided to Orange’s customer base will be driven by Orange on a market-by-market basis. It is expected that in some countries, consumers will need to opt-in but in others it could be included as a default option or even mandated. Offering the product as a default across large swathes of Orange’s customer base could result in penetration rates much higher than 6.4%, In this scenario, revenues could be significantly larger than €25m (see Exhibit 1).

The pace of the roll out is also not yet clear. Cyan expects to complete final technical integration in France in Q419 (ie in the next two months) before deploying it across Orange’s other European assets and African subsidiaries. It is still on track to deliver this but how quickly Orange will be able to roll out the service across all its subsidiaries, tariff plans and customer bases within each market remains to be seen. In countries where Cyan is not a default option, the pace of customer adoption is also uncertain.

Exhibit 1: Annual revenue impact from Orange contract with different pricing and penetration assumptions

Exhibit 2: The additional business Cyan needs to generate to reach its FY21 target

Source: Cyan, Edison Investment Research

Source: Cyan, Edison Investment Research. Note: FY21 target €75m comprises FY19 guidance + Orange + New Business FY20/21. H119 = run rate

Exhibit 1: Annual revenue impact from Orange contract with different pricing and penetration assumptions

Source: Cyan, Edison Investment Research

Exhibit 2: The additional business Cyan needs to generate to reach its FY21 target

Source: Cyan, Edison Investment Research. Note: FY21 target €75m comprises FY19 guidance + Orange + New Business FY20/21. H119 = run rate

Cyan has considerable experience integrating its security products at mobile providers but a deployment of this scale poses challenges. In June it highlighted how it is focusing a substantial proportion of its internal resources to ensuring seamless delivery and in August it announced that it is increasing headcount to expand capacity across the group. In our view, there are both downside and upside risks to Cyan’s revenues from Orange. Completing technical integration and recognising the first revenues in the next two months, followed by a smooth commercial launch in early FY20, will reassure investors that Cyan is on track to deliver at least €25m in extra revenues in FY21.

H2 delivery key to confidence in FY21 target

Assuming Cyan generates incremental revenues from Orange of €25m in FY21, it still needs to boost its H119 annualised run rate (c €16m) by €34m to reach its FY21 target (see Exhibit 2). Its FY21 EBITDA margin target of 50%+ also implies a 65%+ margin on incremental sales. The market appears sceptical at this point. Consensus FY21e EBITDA of €29m is 23% below guidance and the current valuation implies a relatively modest FY20e EV/EBITDA multiple of 10x.

The company has plenty of growth opportunities outside Orange. In July it signed a potentially significant deal with Telecom Argentina to provide network security and optimisation to up to 20 million customers and a strategic partnership with Wirecard in the financial services sector (on top of its deal with Aon last year). At the end of Q3 it disclosed five additional large contracts close to signing and announced a large deal in November to provide security to up to 60m ACN/Flash Mobile customers. The company indicated that the ACN/Flash Mobile deal could generate licence revenues in FY19 of €5–10m, but no financial terms were provided on the other wins and there is no guarantee the remaining Q3 pipeline will be converted to orders. However, the recent investment in headcount should remove resource constraints and help accelerate the rate of customer acquisition and implementation.

In our view, financial performance in H2 will be a big opportunity to reassure investors the company is on track to meet its FY21 target. FY19 revenue guidance of €35m implies €27m in H2, c €19m above the H1 run rate. If achieved, the company would be well on the way to reaching its FY21 target. However, the mix of incremental sales will be as important as the amount, in our view. To date Cyan’s revenues have been largely subscription based, a model that offers good visibility on revenue recurring in future years. The company expects most incremental revenues in H2 will be ‘one-off’ licence sales similar to the ACN/Flash Mobile deal. Such deals can generate large upfront payments but typically offer less long-term visibility because they are not recurring. Revenue recognition from Orange in H219 will be welcome but will not count against the €34m it needs to find from other customers.

Aside from the size and mix of any revenue uplift in H219, profitability and cashflow generation will also be important. Reaching FY19 EBITDA guidance of €14m requires a 50%+ margin on incremental sales and its FY21 EBITDA margin target of 50%+ requires a 65%+ incremental margin. The company will need to demonstrate that, despite increasing operating costs to drive long-term growth, profits from sequential growth are reaching the bottom line.

Valuation

At c €21, Cyan’s share price implies enterprise valuation multiple of 10x FY20e consensus EBITDA, a 20% discount to its nearest cybersecurity peers. This multiple falls to 6.7x by FY21e and is just 5.2x its FY21 EBITDA target of €37.5m. This note has discussed forecast risks – both positive (Orange) and negative (H219). Nevertheless, as we highlighted in The future is bright, the future is… and The transformation continues, Cyan does have a significant growth opportunity and, if it can hit its targets, there should be upside to consensus and the share price. Applying a peer group average multiple (12x) to FY20 consensus estimates generates a valuation of €25 per share (23% upside). Applying the same multiple (12x) to Cyan’s FY21e EBITDA target suggests a €47 per share valuation.

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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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