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Cyan 14 May 2021 Update
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Cyan

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Technology

Scale research report - Update

14 May 2021

Price

€7.7

Market cap

€76m

Share price graph

Share details

Code

CYR

Listing

Deutsche Börse Scale

Shares in issue

9.8m

Net debt (€m) at 31 Dec 2020 (incl. lease liabilities)

7.3

Business description

Cyan supplies cybersecurity for end customers of mobile/fixed network operators and insurers. The acquisition of I-New created a second BSS/OSS segment addressing MVNOs (Mobile Virtual Network Operators). This segment includes traffic management solutions that enable MVNOs to reduce network congestion and corresponding costs. Cyan’s products are sold as white label solutions.

Bull

Rapid growth in high-margin revenue expected.

Blue-chip customer base and healthy pipeline.

Opportunities to accelerate rapid growth through financial services/insurance partnerships.

Bear

Execution risk and capacity constraints.

COVID-19 may affect implementation and sales.

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

Analyst

Dan Gardiner

+44 (0)20 3077 5700

Cyan’s share price has fallen 37% in the last two weeks. FY20 results confirmed the impact of COVID-19 continued into Q4 and management has reset expectations for FY21 (‘flat sales’). A new CEO is focused on growing (recurring) cybersecurity sales, albeit from a lower base. At a share price of €7.7, Cyan trades at a discount to peers but, after a second year of cutting forecasts, it may take time for it to re-establish its growth trajectory and for investors to regain confidence in the story.

Challenges continued in H220

Stripping out the Wirecard impact (€4.8m in sales and EBITDA), FY20 sales fell 3% y-o-y and adjusted EBITDA margins fell from 44% to 20%. We estimate that 60% of FY20 sales were generated by a single licence sale to Virgin Mobile in H1. H2 sales were €4.4m and reported EBITDA loss was €7.3m. Cyan continued to implement deals and sign new contracts but the pandemic hampered progress.

Resetting expectations for FY21

Recognising it is unlikely to sign a contract as large as Virgin Mobile in FY20 and that COVID-19 is not fully under control in some markets, Cyan nonetheless expects FY21 sales to be flat year-on-year (c €21m). Headline consensus appears not to have fully caught up: the mean sales estimate for FY21 is €30m.

A new focus on recurring revenues

We continue to believe the longer-term growth opportunity Cyan is addressing is attractive. A new CEO is aiming to grow Cyan’s recurring cybersecurity revenues to over 70% of total sales in 2021. If delivered, this would imply rapid growth in this revenue stream and enhance visibility on profit growth in future years. Confidence in this growth appears to be fuelled by a healthy pipeline and deals already signed that management expects to become revenue generating shortly. In January Cyan announced it had secured access to additional capital to help it fund this growth.

Valuation: Upside potential if Cyan can deliver growth

At €7.7, Cyan’s share price implies an enterprise valuation of 9.1x headline consensus FY21e EBITDA, a 16% discount to its nearest cybersecurity peers. This discount widens to 50% in FY22. Consensus forecasts may have further to fall but most of this is likely to be factored into the share price already, in our view. Delivering recurring revenue growth over the next nine months could restore investor confidence in Cyan’s longer-term growth trajectory and see the shares re-rate significantly. Applying the peer group average FY22 EV/EBITDA multiple of 11.2x to current forecasts suggests a valuation of €11.2 per share, 44% upside.

Consensus estimates

Year
end

Revenue
(€m)

Adj. EBITDA*
(€m)

Adj. EBIT* (€m)

Adj. EPS* (€m)

EV/revenue
(x)

EV/EBITDA
(x)

12/19

26.8

11.7

5.5

0.5

3.1

7.1

12/20

21.3

4.2

(11.0)

(1.0)

3.9

19.7

12/21e

29.9

9.1

3.0

0.3

2.8

9.1

12/22e

41.0

16.1

9.7

0.8

2.0

5.2

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.

Challenges continued in H220

In our report Growth potential remains, we highlighted the longer-term potential of the business model in the face of the near-term challenges created by both the COVID-19 pandemic and the declared insolvency of Wirecard. These challenges blighted H1 financial performance and continued in H2. Cyan had expected ‘revenues and EBITDA for 2020 to be at least at the level of the previous year’ but even adjusting for the Wirecard impact (€4.8m hit to revenue and EBITDA), full year revenue was down 3% y-o-y and adjusted EBTIDA margins fell from 44% to 20%. Cyan reported total exceptional costs, including fx losses, the earn out on the I-New acquisition and the write down of the Wirecard receivable, of €9.3m in FY20; reported EBITDA was -€5.1m. After H1 revenues of €16.9m that had included a ‘very large’ (we estimate c €13m) BSS/OSS (Business/Operations Support Services) Virgin Mobile contract, Cyan generated revenues of just €4.4m in H2 at a reported EBITDA loss of €7.3m. In total, FY20 saw a free cash outflow (measured as cash from operating activities minus capex) of €9.7m. Net debt, including €6.2m of lease liabilities, stood at €7.3m at the end of FY20.

While financial performance was disappointing, Cyan did make operational progress. It continued to implement its solutions, Orange France and Aon. A contract with SMARTEL was signed in H2. In December 2020 Cyan announced a partnership with Secure64, a provider of DNS (Domain Name System) security with customers including T-Mobile US and Reliance. Secure64 launched its OneGuard solution incorporating Cyan’s technology in March 2021.

Resetting expectations for FY21

Cyan’s outlook for FY21 continues to reference the risks posed by COVID-19, which is not fully under control in some of the markets in which it operates. Nevertheless, it describes itself as ‘cautiously optimistic’ and, recognising it is unlikely to sign a contract as large as the one it reached with Virgin Mobile, expects FY21 revenue to be at the level of FY20 (€21m).

While the share price has reacted to this guidance (down 37% since the FY20 report was released at the end of April), consensus appears not to have fully adjusted. Headline (mean) sales consensus for FY21 is €29.9m, well above the c €21.3m implied by the ‘sales in line with FY20’ guidance and suggesting further downward revisions are possible. Given the reaction of the share price, we believe much of these further near-term downgrades should now be factored in.

A new focus on recurring revenues

One of the main areas of focus for Cyan’s new CEO, Frank von Seth, is increasing recurring revenues. The additional disclosure over the last year (quarterly and segmental breakdowns) highlight the lack of visibility in the revenue base (Exhibit 1). The company aims to generate over 70% of FY21 revenues from recurring sales, implying significant growth in its cybersecurity revenue during the year. If delivered, this would imply rapid growth in this revenue stream and enhance visibility on profit growth in future years.

Exhibit 1: Historic sales have been lumpy and the focus in FY21 will be on recurring cybersecurity revenues*

Exhibit 2: FY22 EV/EBITDA multiples for selected cybersecurity peers

Source: Cyan, Edison Investment Research. Note: *Cyan reports total earnings quarterly, which includes other income and inventory adjustment but correlates with sales. Splits between Q3 and Q4 in FY19 have been estimated from reported revenue numbers and the estimated impact of Wirecard has been removed.

Source: Refintiv



Exhibit 1: Historic sales have been lumpy and the focus in FY21 will be on recurring cybersecurity revenues*

Source: Cyan, Edison Investment Research. Note: *Cyan reports total earnings quarterly, which includes other income and inventory adjustment but correlates with sales. Splits between Q3 and Q4 in FY19 have been estimated from reported revenue numbers and the estimated impact of Wirecard has been removed.

Exhibit 2: FY22 EV/EBITDA multiples for selected cybersecurity peers

Source: Refintiv



Confidence in this growth appears to be fuelled by a healthy pipeline of new prospects and deals already signed that management expects to become revenue generating shortly. Since the start of the year, Cyan has announced an extension of its partnership with Grameenphone in Bangladesh, which is likely to lead to a doubling of the covered customer base by the end of FY21. It also announced a deal with Seguros Equinoccial, a leading insurance company in Ecuador. Management continues to see this sector as a big opportunity to accelerate growth for the group. It also signed a deal with MTEL and a contract for cyber security solutions with Claro Chile, a subsidiary of the América Móvil Group with 6.4 million customers. The pipeline at the end of Q1 had 10 customers in final stages of contract negotiation. Its solutions at Orange France (Cyberfiltre) became commercially available in April and are now being actively sold by Orange. Mobifone Safekids and its additional fixed line solution at Magenta Austria also became available recently. Its solution at Orange Slovakia (amongst others) are expected to roll out in FY21. In January the company announced it had secured the terms for a €8.4m convertible bond to ensure it has sufficient capital to pursue its growth opportunities.

Valuation

At €7.7, Cyan’s share price implies an enterprise valuation of 9.1x headline consensus FY21e EBITDA, a 16% discount to its nearest cybersecurity peers (Exhibit 2). This multiple falls to 5.2x in FY22e implying a discount of 50%. Consensus forecasts may have further to fall (suggesting the discount is not as large as it currently appears) but much of these further near-term downgrades should now be factored into the share price.

Analysts expect Cyan’s nearest cybersecurity peers to grow revenues (on average) 11% y-o-y in 2022 and report a 36% EBITDA margin. Cyan’s headline consensus may need to fall but we believe it is capable of delivering this level of growth and profitability. Delivering recurring revenue growth over the next nine months could restore investor confidence in its longer-term growth trajectory and see the shares re-rate significantly. Applying the peer group average FY22 EV/EBITDA multiple of 11.2x to current forecasts suggests a valuation of €11.2 per share, which is 44% upside.

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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.

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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.

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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 2021 Edison Investment Research Limited (Edison).

Australia

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

General disclaimer and copyright

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 2021 Edison Investment Research Limited (Edison).

Australia

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

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.

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

1185 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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