Cyan — The future is bright, the future is…

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Cyan — The future is bright, the future is…

The contract with Orange is another transformative deal that validates both Cyan’s cybersecurity technology and its white label model. Deployment across Orange’s 28 subsidiaries may not prove straightforward and the pace of end-user adoption is difficult to predict precisely at this point. Nevertheless, Cyan’s assumptions appear conservative and suggest the contract could generate additional annual revenues of €25m by FY21. Consensus forecasts group EBITDA to reach €37m by FY21.

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Cyan

The future is bright, the future is…

Technology

Scale research report - Update

1 July 2019

Price

€26

Market cap

€230m

Share price graph

Share details

Code

CYR

Listing

Deutsche Börse Scale

Shares in issue

8.8m

Net debt at 31 December 2018

€11m

Business description

Cyan supplies cybersecurity systems for mobile data networks. Following the recent acquisition of I-New, its two major products are: 1) content management software sold as a white-label product to mobile network operators; and 2) a traffic management solution for MVNOs that enables them to reduce network traffic and therefore corresponding costs.

Bull

Rapid growth in high-margin revenue expected.

Good visibility: recurring revenue base, blue chip customers, + €100m pipeline.

Opportunities to sustain rapid growth through mobile banking initiatives.

Bear

Execution risk and capacity constraints

FY19 forecasts imply a 57% margin that could attract competition.

Full FY18 financials on an IFRS basis not currently available in English

Analyst

Dan Gardiner

+44 (0)20 3077 5700

The contract with Orange is another transformative deal that validates both Cyan’s cybersecurity technology and its white label model. Deployment across Orange’s 28 subsidiaries may not prove straightforward and the pace of end-user adoption is difficult to predict precisely at this point. Nevertheless, Cyan’s assumptions appear conservative and suggest the contract could generate additional annual revenues of €25m by FY21. Consensus forecasts group EBITDA to reach €37m by FY21.

…Orange: Another transformational deal

In our previous note we highlighted how Cyan’s acquisition of I-New should accelerate its growth trajectory. The long-term (six-year minimum) contract to provide security for Orange’s 260m customers across its 28 subsidiaries is a similar step change, in our view. It validates both Cyan’s core technology and is further evidence that operators recognise the potential of cybersecurity to boost ARPU. Orange will begin domestic deployment in Q419. Assuming a 6.4% penetration across the customer base and a monthly ARPU of just €0.13, Cyan estimates the contract should generate revenues of €25m in FY21.

Financials: Revenue expected to double by FY21

Cyan delivered against FY18 guidance and confirmed it is on track to meet its FY19 guidance (revenues of €35m+ and EBITDA of €20m) in March. Factoring in the incremental revenues from Orange, it has guided to revenue of at least €60m by FY21, more than double the H218 run-rate (€26m) and implying a three-year CAGR of 38%. If we assume no margin uplift from FY19 levels (57%), this suggests FY21e EBITDA of €34m. The high margin, largely recurring nature of Cyan’s revenue base offers investors good visibility on this profit growth in our view. The main uncertainties are the speed of deployment across Orange’s subsidiaries and the pace at which its customers adopt the technology (see page 2 for details).

Valuation: Discount to peers despite growth

At €26, Cyan’s share price is essentially unchanged since the beginning of 2019. At current levels it implies 8.2x FY20e consensus EBITDA, a multiple that falls to 6.5x by FY21e. Ultimately, a DCF approach may be the best way to capture Cyan’s value, but even applying a peer group average FY20 EV/EBITDA multiple (12x) suggests a value of €38 per share, 45% potential upside.

Headline financials, estimates* and implied multiples

Year
end

Revenue
(€m)

EBITDA**
(€m)

EV/Revenue
(x)

EV/EBITDA
(x)

12/17

4.1

2.0

58.9

122.2

12/18***

22.9

9.4

10.4

25.4

12/19e

35.0

20.0

6.8

11.9

12/20e

49.0

29.0

4.9

8.2

12/21e

61.0

36.6

3.9

6.5

Source: Cyan. Note: *Refinitiv. **Adjusted for exceptionals. Cyan reported unadjusted pro forma EBITDA of €4.8m in FY18 reflecting IPO costs and provisions at I-New. ***Numbers reflect Cyan’s pro forma reporting following the I-New acquisition.

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.

The Orange deal: Details

In December 2018, Cyan announced it had secured a long-term (six-year minimum) global contract to be the exclusive provider of cybersecurity to Orange’s 260m mobile, fixed line, consumer and business customers. Its ‘OnNet’ software platform will be embedded into Orange’s networks across its 28 subsidiaries starting with France in Q419, before moving to its other European assets and African subsidiaries in H120. This network-level implementation and white-label approach (or B2B2C as Cyan describes it) makes it easier for consumers looking for cybersecurity and generates ‘value-added’ revenue for operators. Cyan will be paid a share of the incremental revenue generated as Orange customers adopt the service.

Precisely how Cyan’s cybersecurity service will be provided to Orange’s customer base is difficult to say at this point. It is expected that in some markets consumers will predominantly need to opt-in but in other markets it could also be included as a default option or even mandated. Orange is likely to market the feature differently according to the type of customer and the tariff they are on.

Exhibit 1: ‘Go to market’ options for OnNet with Orange

Source: Cyan, June 2019 investor presentation

How the service is sold to customers will affect both the likely adoption rate and Cyan’s revenue share percentage. Cyan points to its experience in Austria as evidence of the likely take up: T-Mobile Austria currently charges €2–3 per month for cybersecurity and, with very little marketing, adoption reached 25% in just 2½ years. Cyan is currently working with Orange to develop a marketing campaign in its domestic market. It conservatively assumes adoption could reach 17m customers by FY21 (6.4% after an average of 18 months). Applying a revenue assumption of €0.13 per customer per month, Cyan estimates the contract should generate revenue of €25m in FY21. Assuming an adoption rate of 10%, this would increase to €39m. Like Cyan’s other revenue streams, any incremental revenue generated is likely to be recurring and high (80%+) margin.

Execution will also be critical to delivery. Cyan has already integrated OnNet into large mobile networks of course, including the Polish and Austrian subsidiaries of T-Mobile, but a roll-out of this scale, across 28 subsidiaries, different customer types and multiple tariff plans, is a different order of complexity. Given the size of the contract, Cyan is focusing a substantial proportion of its resources to delivering it seamlessly and has stated that its internal IT capacity will now be fully utilised until the end of FY19. The company is increasing headcount to expand capacity and believes it has sufficient resources to deliver at least one additional large contract from its pipeline given the lag between conversion of prospects and implementation. However, it has refocused its sales activities towards more profitable contracts.

Outlook for H219 and beyond

Over the next six months the pace of roll-out and the marketing strategy at Orange should become clearer. In addition, Cyan believes it has two to three large contracts close to signing and, although the timing and size of any further wins is not clear and cannot be guaranteed, they would clearly improve prospects further. Cyan has described current interest in its emerging insurance and banking product as particularly encouraging.

Even without additional deals Cyan expects to substantially outperform its nearest cybersecurity peer group. Its FY19e guidance implies organic revenue growth of 53% and EBITDA margins rising to 57% (vs forecast for cybersecurity software peers of 20% and 30%, respectively) and FY21 guidance implies a revenue CAGR of 38%.

Cyan is also improving the accessibility of its financial information as it prepares to move to the Frankfurt Stock Exchange in FY20. Our analysis here is based on the limited financial information the company publishes in English. In July 2019, Cyan will publish its first set of IFRS accounts and will move to quarterly IFRS reporting from Q319. This should substantially increase the breadth of institutions able to look at and invest in the company.

At €26, Cyan’s share price implies 8.2x FY20e consensus EBITDA, a 30% discount to its nearest cybersecurity peers despite significantly better growth prospects. Given its growth trajectory a DCF model may be the best way to capture Cyan’s value but even applying a peer group average multiple (12x) suggests a valuation of €38, 45% upside to the current price.

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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.

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 Edison analyst 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 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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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.

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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.

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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