Cyan |
Growth potential remains
Technology |
Scale research report - Update
29 October 2020 |
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Cyan’s share price has halved year to date. COVID-19 and the Wirecard insolvency affected both H1 sales and its pipeline, leading to a resetting of consensus. Yet H1 sales still more than doubled y-o-y and underlying EBITDA rose to €6.7m (excluding the Wirecard write-down). The prospects for long-term growth remain healthy. At €11, Cyan is valued at 7.0x FY21e consensus EBITDA, a substantial discount to peers. With a new CEO due to arrive in January, it might be time for investors to revisit the story.
A challenging H1: COVID-19 and Wirecard insolvency
Cyan’s H1 was affected by both COVID-19 and the declared insolvency of Wirecard. COVID-19 delayed technical integration at Orange (its largest customer) and reduced its ability to sign other big deals. Wirecard was a strategic customer and its declared insolvency in June resulted in a €4.5m write-down of an unpaid receivable. Despite these headwinds, Cyan’s sales grew 141% y-o-y to €16.9m and underlying EBITDA (ie before the impact of the Wirecard write-down) rose from -€1.0m to €6.7m in H120. Much of this growth was driven by Cyan’s BSS/OSS business, where revenues nearly trebled (up from €5.4m in H119 to €15.9m).
Consensus now reset; growth potential remains
We highlighted risks to consensus estimates in our Risks to consensus but solid fundamentals note. With forecasts now implying sales of just €12.5m in H2, and growth in FY21 and FY22 of 36% and 28% respectively, these now look more achievable. There is little visibility on Cyan’s sales base overall, but the potential of the market it is addressing remains unchanged. The growing use of mobile phones for banking and commerce is leading to rising cybercrime and demand for security measures to counter the threat. Cyan sees the overall market growing from €1.4bn in 2018 to €5.7bn by 2023 (a 32% CAGR) with the smaller “on-net” segment (where Cyan is focussed) growing even faster. The roll-out of its Orange France contract is due to begin in H2 and the extension of its Virgin Mobile contract bodes well for BSS/OSS sales. However, much hinges on the pace of deployment at Orange – a second COVID-19 wave could see further delays here and impact sales elsewhere.
Valuation: Upside potential if it can deliver
At €11, Cyan’s share price has fallen c 50% since the beginning of 2020. At current levels, it implies an enterprise valuation of 9.6x FY20e consensus EBITDA, a multiple that falls to 7.0x in FY21e. Its nearest cybersecurity peers, which are neither growing as rapidly nor as profitable, trade at an average FY21e EV/EBITDA multiple of 11x. If this peer group average multiple was applied to Cyan it would suggest a valuation of €18 per share, 65% upside to the current share price.
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Consensus estimates and implied valuation multiples
Source: Refinitiv. Note: *Adjusted for exceptionals including the Wirecard write down. |
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.
A challenging H1: COVID-19 and Wirecard insolvency
Both COVID-19 and the declared insolvency of Wirecard affected Cyan’s H1. Orange is Cyan’s largest contract with potential to generate €25m in annual recurring revenues by FY21 (see The future is bright, the future is…). COVID-19 delayed technical integration at Orange and led to the cancellation of the Mobile World Congress (MWC), the industry’s flagship trade show, where the product was going to be launched. This cancellation not only delayed the launch of the Orange product (and revenues), but also affected Cyan’s ability to close existing deals and market the solution to potential new customers.
Wirecard was a strategic partner; it planned to integrate Cyan’s endpoint cybersecurity solution into its apps and Cyan’s sales to Wirecard were c €5m in H219. Wirecard’s declaration of insolvency in June resulted in a €4.5m write-down of an unpaid receivable for Cyan.
Despite all these headwinds, Cyan grew revenue 141% y-o-y to €16.9m. Much of this growth was driven by its BSS/OSS business, which provides traffic management, billing and other software to virtual mobile operators. Sales here, including own work capitalised, nearly trebled to €15.9m. A large part of the licence sale from the extension to its contract with Virgin Mobile Group, announced in July, was recognised in Q2. Cybersecurity sales rose by 62% from €2.1m to €3.4m in H120.
Reported EBITDA turned from negative €1m in H119 to positive €2.2m. Personnel costs of €5.5m were down from H219, but reported costs rose due to the one-off €4.5m Wirecard write-down. Underlying EBITDA (ie before the impact of the Wirecard write-down) was €6.7m. Operating free cash flow was -€4.4m and net debt was €1.0m.
Expectations for H2 and beyond
Cyan has not updated its guidance for FY20 since April, when it stated that it expects ‘revenues and EBITDA for 2020 to be at least at the level of the previous year’. While it still sees substantial growth in FY21 it no longer expects to reach sales of €75m. Cyan has pushed back achieving this milestone by six to 12 months (ie sales will reach €75m in FY22 – see Exhibit 1) due to the impact of COVID-19 on both contract negotiations and technical integration of its products.
Consensus appears more cautious in general. FY20 sales are expected to reach €29m, above the €26m minimum implied by guidance and suggesting revenues of just €12.5m in H2. For FY22e, consensus sees sales of €51m, €11m below consensus in April and 31% below guidance. The latest downward revisions to estimates appear not to have affected profit expectations (see Exhibit 2). Consensus anticipates that tight control of opex, combined with growth in high-margin software sales, will enable Cyan to deliver a doubling of EBITDA by FY22 (an implied margin of 44%).
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Exhibit 1: Cyan originally guided to sales of €75m in FY21. It now expects this to be reached by FY22 |
Exhibit 2: Consensus EBITDA forecasts have remained stable since May |
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Source: Cyan, Refintiv |
Source: Cyan, Refintiv |
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Exhibit 1: Cyan originally guided to sales of €75m in FY21. It now expects this to be reached by FY22 |
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Source: Cyan, Refintiv |
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Exhibit 2: Consensus EBITDA forecasts have remained stable since May |
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Source: Cyan, Refintiv |
Delivery milestones and pipeline
Through growth in its cybersecurity products, Cyan is targeting the development of a high margin, recurring revenue model. However the nature of its current business, which is dominated by large, high-margin BSS/OSS licence sales, offers limited visibility on the timing of revenue in general. COVID-19 is compounding this issue. Cyan’s pipeline (as measured by the number of customers) is still growing, particularly for its Cybersecurity solutions to mobile network operators, but it is difficult to predict when this pipeline will be converted.
Probably the best gauge to near-term prospects is the timing of delivery milestones for major projects. The product launch at Orange in France, its most significant subsidiary, is Cyan’s priority. It expects to launch its cybersecurity and child protection products in the B2B segment in H220. Roll-out of the products in the B2C segment is expected in FY21. Cyan has also begun technical implementation at Orange Slovakia across all customer groups and expects to roll out its solution across the whole customer portfolio during H220. The joint project with Aon has been completed technically and Aon is expected to begin intensively promoting its CySec product including Cyan’s solution across Europe before the end of 2020. The company believes this could provide a very significant boost to its cybersecurity revenues.
In September, the current CEO, Peter Arnoth, announced that he will step down at the end of 2020 to be replaced by Frank von Seth. Frank von Seth was most recently chief commercial officer for Austria and Switzerland for Aon and his background is expected to help accelerate the deployment of Cyan’s product at Aon.
Mobile cybersecurity threats likely to rise sharply
While the near-term outlook is cloudy, the longer-term growth opportunity Cyan is addressing remains attractive. The telecoms sector is unlikely to be deeply scarred by COVID-19 in our view and changing working patterns (the shift to homeworking) may ultimately lead to rising cybersecurity threats. The fundamental demand driver, the rising proportion of mobile phone users opting to shop, bank or use mobile payment systems, remains intact (see Exhibit 3). Cyan sees an addressable market of 2.6 billion customers willing to pay, either indirectly via their subscription or directly, to prevent mobile cyber threats, yet very few are doing so currently. Citing third-party analysis, Cyan believes its addressable market will quadruple from €1.4bn in 2018 to €5.7bn by 2023 (a 32% CAGR).
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Exhibit 3: The rising use of applications that require cybersecurity on mobile phones |
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Source: Cyan citing GSMA and GlobalData as sources |
Valuation
At €11, Cyan’s share price implies an enterprise valuation of 9.6x consensus FY20e EBITDA, a 26% discount to its nearest cybersecurity peers. This multiple falls to 7.0x in FY21e and just 4.7x in FY22. Now that forecasts have been revised, risks to numbers have fallen, albeit there is limited visibility in general. Given the share price has halved year to date, if Cyan can meet lowered consensus forecasts there could be upside to both its rating and the share price. Its nearest cybersecurity peers, which are neither growing as rapidly nor as profitable, trade at an average FY21e EV/EBITDA multiple of 11x. If this peer group average multiple was applied to Cyan it would suggest a valuation of €18 per share, 65% upside.
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