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In the fixed-line arena Skype has become a byword for low-cost VoIP telephony, whilst
the VoIP solution has matured from the status of “hype” (BT Group 2005) to one of a
Stock code VYKE
range of net-based services built around the all-important SIP (Session Initiation
Listing AIM Protocol) architecture of re-engineered networks. WiFi, and latterly WiMAX, offer a
Sector
Mobile Telecommunications variety of Licensed and Unlicensed Mobile Access (UMA) wireless broadband
Services
solutions sharing a common feature; low cost. We estimate 180k WiFi HotSpots
Market Cap (£m) 27.2 currently worldwide, a figure set to grow by a factor of 5x by 2010.
Enterprise Value (£m) 33.2
12-month high/low 105p/16p
Expect 120% EBITDA CAGR FY08-11E
Next results 18 Sep 2007
Vyke has a proven product and has installed capacity sufficient to treble its caller
footprint, having recently refinanced (£2m CB 2013). As it admits, its access software
is not proprietary, but it has a time-to-market advantage which we estimate at 2 years.
Our target valuation places Vyke on a FY10 prospective PE of 26.5x, FY11E 15.0x
This document has been produced by Daniel Stewart & Co Research Department for purposes of information and cannot be construed as investment advice, or an offer to buy or sell any securities that may be
mentioned in the body of the document. The information contained herein is subject to change without notice. Daniel Stewart & Co its parents or affiliates may have positions and effect transactions in securities or
companies mentioned and may also perform or seek to perform investment advisory services for those companies
www.danielstewart.co.uk 03 September 2007
P&L £m 1206A 12/07E 12/08E 12/09E Valuation 1206A 12/07E 12/08E 12/09E
Sales 9.96 24.23 59.52 102.21 PE (x) n/a n/a 311.2 10.1
Gross profit 0.78 1.88 5.40 9.67 Yield (%) 0.0 0.0 0.0 0.0
EBITDA* (1.76) (1.21) 1.42 4.67 EV/Sales (x) 2.9 1.2 0.5 0.3
EBIT (rptd) (3.95) (2.73) (0.18) 2.92 EV/EBITDA 5.9 n/a 21.1 6.4
PBT (rptd) (4.19) (2.73) 0.12 3.83 EV/EBIT (7.4) (10.7) (162.2) 10.0
PAT (rptd) (4.19) (2.73) 0.09 2.68 FCF Yield (%) n/a n/a 19.2 30.7
EPS (1.02) (7.53) 0.24 7.39
DS&C EPS (p)** (1.01) (7.53) 0.24 7.39
DPS 0.00 0.00 0.00 0.00
Cashflow 1206A 12/07E 12/08E 12/09E Ratios 1206A 12/07E 12/08E 12/09E
Op CF (1.48) 0.46 5.48 9.58 Gross margin (%) 7.9 7.8 9.1 9.5
Net Op CF (1.48) 0.39 5.75 9.34 EBITDA* margin (%) (17.7) (5.0) 2.4 4.6
Net Op FCF (2.02) (0.15) 5.21 8.34 EBIT margin (%) (39.6) (11.3) (0.3) 2.9
EqFCF (0.15) 0.35 5.21 8.34 Tax rate (%) 0.0 0.0 30.0 30.0
CFPS (p) (0.49) (0.40) 14.38 23.02 Interest cover (x) (17.4) (43.7) 0.6 (3.2)
ROCE (%) (49.7) (44.3) 7.9 56.5
Balance sheet 1206A 12/07E 12/08E 12/09E ROE (%) (63.4) (70.8) 2.2 40.5
Cash 0.17 0.55 5.76 14.10
Current Assets 0.81 2.08 9.51 20.54
Fixed assets 11.08 10.10 9.04 8.29
Current Liabilities 4.07 6.58 12.87 20.47
Net assets 0.01 0.00 0.00 0.01
Net debt 1.82 1.94 (3.27) (11.61)
Cap-ex 1206A 12/07E 12/08E 12/09E Cap-ex ratios 1206A 12/07E 12/08E 12/09E
Depreciation 0.22 0.30 0.38 0.53 Depn/Sales (%) 2.23 1.25 0.65 0.52
Amortisation 1.09 1.22 1.22 1.22 Cap-ex/Sales (%) 5.42 2.23 0.91 0.98
Net cap-ex (0.54) (0.54) (0.54) (1.00)
Acquisitions/disposals 0.00 0.00 0.00 0.00
Growth (%) 1206A 12/07E 12/08E 12/09E Revenues % of total 1206A 12/07E 12/08E 12/09E
Sales 76 143 146 72 Calling Cards 77.1 34.8 14.3 8.3
Gross profit 89 140 187 79
EBITDA* n/a n/a n/a 228 IP accounts 22.9 65.6 85.7 91.7
EBIT (rptd) n/a n/a n/a n/a
PBT (rptd) n/a n/a n/a n/a
PAT (rptd) n/a n/a n/a n/a
Sum (%) 100 100 100 100
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Vyke’s strategy is best viewed Strategy ~ Vyke does not compete directly with mainstream mobile providers such as
through the WiFi functionality Vodafone; its proposition is not parasitic to GSM or 3G network capacity, as it utilises
provided as standard by handset
WiFi accessibility provided at a variety of levels, from the “Home Hub” (BT Group)
household variety to the coffee shop “HotSpot” and the city-wide “Muni-Fi” model being
makers such as Nokia
selectively deployed across the US. It is also fuelled by handset makers’ commitment
to dual-mode GSM-WiFi equipment, an established trend. Vyke’s “strategy” therefore
concentrates on two areas; (i) user-friendliness, reliability and efficiency of access, and
(ii) the provision of sufficient capacity, notably billing, to meet demand.
Valuation ~
Target value: at 430p We value Vyke at 430p per share based on a DCF valuation the key parameters ;
We see Vyke as clearly • WACC: 10.7% (levered beta 1.50)
undervalued
• Assumed terminal growth rate: 2.0%,
• Implied FY11E EV/EBITDA multiple: 10.8x
• Indicated EV: £153m
Triggers; WiFi should remain a hot Triggers ~ WiFi is a “hot” topic. The deployment plans of US Muni-Fi projects,
topic, and Vyke’s services are now
developments on campuses or at airports and the debate over the future role of
wireless broadband access in the home (the “femtocell” denoting ultra-small base
attracting corporate attention
stations) provides a continual newsflow. Not least should be the reaction of
“incumbent” mobiles to the Vyke “threat”. It was only two years ago that BT Group
famously dismissed fixed-line VoIP provider Skype as “rhyming with hype”; improved IP
provision and the acquisition of Skype by eBay for $2.6bn has served to change the
tone; BT Group itself offers a guide to VoIP on its website. Recent newsflow includes;
• July 24th ~ Wireless Silicon Valley, a not-for-profit project by Silicon Valley Metro
Connect (consortium of Cisco Systems, IBM, SeaKay and Azulstar), proposes to
link 44 cities including Santa Cruz, SanFrancisco, Santa Clara, Palo Alto,
Campbell, San Jose, Santa Clara, Mountain View, and Milpitas at a cost of up to
$150m.
• August 29th ~ Vyke signed an agreement with Singapore-base mobile community
and interoperability provider Morange to allow its 500k+ subscribers access to
Vyke’s services. Morange is powered by (and owned by) Mozat, a University of
Singapore mobile solutions developer which also provides platforms for China
Mobile, China Unicom, SingTel and TIGO.
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Figure 1 shows the position of As of Dec 2006 23% of total revenues were located in the six-product WiFi mobile and
WiFi-based broadband other IP-based offerings, with 77% derived from calling cards; a year earlier this ratio
connectivity
stood at 3% vs 97% in legacy calling card operations.
LMDS Broadcast
MMDS
Satellite
WiMAX
Broadband
802.11 WiFi
3G
Narrowband
Bluetooth
2.5G
2G
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Vyke
Group structure
Source: Vyke
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WiFi
The key feature of WiFi development for Vyke is that it has proceeded and should
continue to grow independently of Vyke’s operations and efforts, i.e. Vyke is not
required to build its transport network. In addition, mobile handset makers (Nokia,
Samsung, Motorola) continue to enable GSM and 3G handsets with WiFi functionality;
again this is not a development that companies such as Vyke are required to fund or
subsidise.
802.11
WiFi originates in a protocol WiFi, originating as Wireless Fidelity, operates principally at high frequencies (2.4GHz
(802.11) and has become a and 5.0GHz) over short range (45-90m) to provide a wireless local area network that
certification or coordination
enables connection to broadband and other networks. The actual term stems from
activities of the self-appointed “Wi-Fi Alliance” industry group which now numbers over
process
400 members. It has recently come to denote a generic wireless interface for PCs, and
spread to the provision of VoIP telephony and domestic links for media (DVD, TV,
digital cameras etc.). WiFi networks use the IEEE 802.11 networking protocol,
originating in 1997 and developed through various iterations, notably by Nokia. For
example, version 802.11a transmits at 5GHz and up to 54 Mbs; 802.11b at 2.4GHz
<11Mbs; 802.11g at 2.4 GHz, <54Mbs.
HotSpots
Depends on a base station or For device access a comparatively inexpensive base station is required; this is the now
hotspot which can be located at well-known “HotSpot” that has invaded the coffee shop or airport lounge and which,
home, at the kerbside or across a
when grouped or concentrated becomes an overlapping “mesh” or “cloud”. Mesh WiFi
embodies one of the original guiding principles of the world-wide-web; the ability to “self
municipal area forming a “mesh”
heal” in which packets find alternative routes within the mesh should one point (node)
fail. WiFi product development is essentially an exercise in coordination (certification)
to ensure interoperability. WiFi networks have spread at a variety of levels, from the
home to the metropolitan area; “home hub” to “muni-Fi”.
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* WiFi Alliance principal sponsors: Apple, Broadcom, Cisco Systems, Conextant, Dell
Computing, Intel, Microsoft, Motorola, Nokia, Sony and TI. Other members include
2Wire, 3Com, 3e Technologies, Acer, AMD, Alcatel, ATT, Belken, BT Group, Deutsche
Telekom, EarthLink, Ericsson, France Telecom, Fujitsu-Siemens, HP, Hitachi, IO Data,
Juniper, Kenwood, LG, Logitec, McAfee, NEC, Nortel Networks, NTT, Netgear, Philips,
Samsung, Symbian, Telia, Telenor and US Robotics.
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Establishes
Internet Telephone
icon WiFi-enabled
handsets locates
HotSpots
Locator
“discovering services”
Internet call displays
number as
44207776550@sip.vyke.com
Source: https://www.vyke.com/merchantsite/howtomip.c#8
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NokiaE90
NokiaN92
NokiaN93 NokiaN93i Samsung i600
NokiaN91
Samsungi750
NokiaN80
Nokia9300i NokiaN95
SamsungP200
NokiaE61
NokiaE70
Samsung
Nokia9500
P260
NokiaE65 NokiaE61i
Nokia6086 Samsungi620
Nokia6136
MotorolaA910
Source: https://www.vyke.com/merchantsite/howtomip.c#8
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Figure 8: Vyke IP accounts (m and $m) and breakdown by ARPU band 12/05-12/15E
6.00 250.1
1,000 200.1
4.00
2.00 500 150.1
0.00 0 100.1
50.1
Dec-05
Dec-06
Dec 07e
Dec 08e
Dec 09e
Dec 10e
Dec 11e
Dec 12e
Dec 13e
Dec 14e
Dec15e
0.1
2006 2007e 2008e 2009e 2010e 2011e 2012e
IP accounts (m) IP revs $m $5 $15 $20 $25 $30
Source: Vyke DSC E. Note ARPU bands revenues converted into £m.
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A six-month lapse
New registrations are assumed to Second, we assume that subscribers who register in a given month will only generate
take six months before becoming regular calling revenues some six months later as regular WiFi users. Revenue
regular paying users
development therefore trails an initially high rate of subscriber registration.
Mobile WiFi is a direct challenge Vyke’s most obvious competitor is the GSM-based mobile communications
to licensed GSM networks, which “community”, epitomised by Vodafone, the mobile operations of national incumbents,
should continue to attempt to and the limited number of other licensed network operators (Orange etc.). In July 2007
“disable” WiFi functionality, even Vyke acted to circumvent efforts by mobile operators to disable WiFi functionality in
though handset makers provide handsets operating on their networks. One key feature is the clear price differential
between mobile voice tariffs (epitomised by roaming and call termination charges) and
this feature
IP-based access. In the fixed-line area voice IP telephony has become part of a wider
“triple-“ or “quad-play” media-based offering. As yet mobile data applications such as
TV viewing have been slow to take off; in our view the potential impact of mobile IP
(WiFi-based) voice competition is greater given that the “bundled” media package has
as yet less appeal.
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Financial outlook
The key features of our Vyke earnings outlook are
• 75% CAGR revenue growth in the 2008-2011 phase
• EBITDA growth over the same period at 115%, assumed margin 4.5%
• EPS rising to 15.3p by 2010
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Balance Sheet
We expect strong cash generation, with Vyke close to positive cashflow (Net OpFCF
basis) this year (see Cashflow, below).
The company recently refinanced debt through the issue (27 June 2007) of £2.0m in
convertible bonds (due 2013 at 130.33%), redeeming an existing £1.5m Global Bond
(2011).
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Cashflow outlook
We expect Vyke to generate positive cashflow in FY08, with the following outlook;
• 2.4x cashflow Op CF CAGR FY07-10E
• Investment of up to £8m in switching and billing systems upgrades in FY07-12E
• We estimate capacity to treble this level of investment without the need to leverage
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Valuation
Five-year DCF valuation We value Vyke as a startup operation based on a five-year (FY07-12E) DCF under the
indicates equity value of following assumptions (summarised in Figure 13). The range of scenarios is wide, but
430p per share
the overall conclusion is that given subscriber growth potential a suitable valuation
range should be well above Vyke’s current traded price.
• 10.7% WACC (1.5x unlevered beta assumed)
• Terminal growth rate 2.0%
• Present value of cashflow component comprises 25% of total valuation, terminal
value 75% of total
• Indicative EV/EBITDA (E)
• FY08 108x
• FY09 33x
• FY10 18x
• FY11 10.8x
• FY12 7.1x
• Resulting valuation:
• Base case, cap-ex FY07-12E £8m: 430p/share
• If total cap-ex FY06-12 is increased to £30m: 325p/share
.
Figure 13: Vyke DCF valuation
DCF £m 2007e 2008e 2009e 2010e 2011e 2012e
NetOpFC (0.1) 5.2 8.3 14.2 21.1 29.3
Risk Free Rate 5.51%
Eq risk premium 3.51%
Beta unlevered 1.50
Target LR Debt / Equity Value 25%
Target LR Debt / Enterprise Value 20.0%
Cost of Debt
Debt Premium 2.0%
Pre-tax cost of debt 7.5%
Corporate tax rate 30.0%
Beta - Levered 1.71
Cost of levered equity 11.5%
WACC 10.7%
PV CF 38 (0.0) 4.1 5.7 8.1 9.8 10.5
Terminal growth rate 2.0%
Perpetuity 115
Sum 153
Net debt 2.9
Equity 156
Shares 36.2
Per share 430 p
Source: Vyke, DSC
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Kjetil Bøhn ~ CEO (36) co-founder Maskina AS, CEO Vyke AS from 2004; joined the
Board of Vyke Communication plc 20 June 2007. Founder, CEO of Viva Technologies
AS, a Norwegian-based mobile service company with operations worldwide, sold to
Mobile Media Holding ASA in 2005. Educated at the Norwegian Business School
(Bergen) he has held several board positions in both Norwegian and international
companies, within the mobile services and mobile VoIP industries.
Malcolm Bacchus ~ Finance Director and Company Secretary (53) joined the board
20 June 2007 (having provided financial management services to the Group since
September 2005). Set up Baccma Consulting in 1994, providing accountancy,
consultancy and interim management services to corporate clients, and was finance
director of a number of AIM listed, OFEX and private companies. He is a chartered
accountant and a member of the Council of the Institute of Chartered Accountants in
England and Wales
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