CY4GATE Initiation of coverage - Alessandro Cecchini +39 02 6204 859
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CY4GATE Initiation of coverage Alessandro Cecchini +39 02 6204 859 a.cecchini@equita.eu
CY4GATE | Initiation of coverage
Analyst:
BUY (prev. n.a.)
Alessandro Cecchini | a.cecchini@equita.eu|
+39 02 6204 856 Target: € 5.3 (prev. n.a.) | Risk: High
EQUITY RESEARCH A CYBER SENTINEL TO SECURE INVESTMENT RETURNS
Italy | Technology
If we think of the world of cyber software houses, US or Israeli companies
undoubtedly spring to mind. Italy has very few cyber software houses, none
STOCK DATA Ord of which has a military and law enforcement background...bar one: Cy4Gate
Price € 4.3 (CY4G). CY4 is a company that was established in 2015 with a portfolio of
Bloomberg code CY4 IM proprietary Cyber Intelligence, Cyber Security and Lawful Interception
Market Cap. (€ mn) 65 software solutions. The company went public to accelerate its growth path
Free Float 46% in highly appealing and rapidly expanding markets. We start the coverage on
Shares Out. (mn) 57.4 CY4G with a BUY rating and €5.3ps target price (2022 EV/EBITDA=c9.5x):
52-week range 3.9-4.9 CY4G is a unique company that offers sustained growth rates (2019-2023
Daily Volumes ('000) 18.9 Sales CAGR=+40%) backed up by its peculiar product portfolio and attractive
industry fundamentals.
MAIN METRICS 2020E 2021E 2022E
Revenues 10.0 14.5 23.5 ◼ CY4G: a pioneering company operating in the cyber world
Adjusted EBITDA 3.5 5.0 7.2 CY4G is a unique, pioneering company that was founded in 2015 thanks to
Net income 1.8 1.7 2.8 the idea of the company Elettronica SpA (which operates in the defence
Adj. EPS - € cents 10.1 11.4 17.9 electronics sector, is controlled by the Benigni family and counts Leonardo Spa
DPS ord - € cents 0.0 0.0 0.0
and Thales amongst its shareholders) and the software house Expert System
SpA to combine their entrepreneurial and financial resources and expertise
in order to create an entity that specialises in two rapidly expanding cyber
markets: Intelligence and Security.
MULTIPLES 2020E 2021E 2022E
Just five years later, CY4G:
P/E adj 43.0 x 38.1 x 24.2 x
• Boasts a complete and integrated portfolio of proprietary software
Adj. EV/EBITDA 15.5 x 11.5 x 7.7 x
solutions (#5) in both the Cyber Intelligence (D-Sint, Epeius, Hydra and
EV/Sales 5.4 x 4.0 x 2.4 x Gens.AI) and Cyber Security (RTA) markets and provides cyber services;
• Is a software house that is largely independent of its two founding
REMUNERATION 2020E 2021E 2022E companies with expertise in various segments (e.g. Big Data/Artificial
Div. Yield ord 0.0% 0.0% 0.0% Intelligence) and has a highly motivated and entrepreneurial management;
FCF yield -3.3% -5.1% 3.7% • Has a growing portfolio of high-standing clients, particularly in the
government sector (89% of 2019 sales) and corporate segment;
INDEBTEDNESS 2020E 2021E 2022E • Has a 38-strong workforce that is expected to grow in the coming years
NFP 10.8 7.5 9.9 (up to about 100 people over the medium-term);
Debt/EBITDA n.m. n.m. n.m. • Generated sales of around €7mn in 2019 (70% Italy/30% foreign markets)
Interests cov n.m. n.m. n.m. with positive margins (43.6% EBITDA margin) and a solid NFP (€-0.8mn).
◼ IPO main rationale: fresh resources to finance growth
The main purpose of the IPO was to raise funds (about €16mn) to finance organic
growth (e.g. salesforce expansion/product development/new branches) whilst
also enhancing visibility on the Group. The IPO enabled Expert System to monetise
its investment and use the proceeds to focus on its core business.
◼ BUY: unique company in the right markets
We are initiating coverage of CY4G with a BUY rating and €5.3ps target price
(implied 2022 EV/EBITDA=c9.5x and EV/Sales=c3x) because:
• We are confident of its sound growth opportunities (2019-2023 Sales and
PRICE ORD LAST 365 DAYS EBITDA CAGR=40%-30%) supported by attractive market fundamentals
(average 2018-2023 CAGR=c15%), the company’s unique product
portfolio (e.g proprietary solutions) and further market penetration (e.g
additional investment in marketing/distribution, international expansion,
growth in the under-penetrated corporate segment);
• CY4G is one of the few Italian stocks that can offer exposure to the mega
trends behind the Cyber security/intelligence world.
After the positive stock performance since the IPO (>+30%), s/t valuation is not
immediate (2020-21 EV/EBITDA=c15-11x vs NYSE Cyber Security Index=19-
17x) but coherent for such peculiar stock/business model with expected high
growth rates.
September 14, 2020 1 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT #305
CY4GATE | September 14, 2020
MAIN FIGURES € mn 2017 2018 2019 2020E 2021E 2022E
Revenues 2.1 5.2 7.1 10.0 14.5 23.5
Growth 41% 147% 36% 42% 45% 62%
Adjusted EBITDA -0.2 -0.6 3.1 3.5 5.0 7.2
Growth nm nm nm 14% 43% 44%
Adj.EBIT -0.8 -1.0 2.4 2.2 2.3 3.7
Growth nm nm nm -8% 6% 60%
Profit before tax -0.9 -1.0 2.3 1.9 2.1 3.5
Growth nm nm nm -20% 15% 64%
Net income -0.9 -1.0 1.9 1.8 1.7 2.8
Growth nm nm nm -5% -2% 64%
Adj. net income -0.9 -1.0 1.7 1.5 1.7 2.7
Growth nm nm nm -9% 13% 58%
MARGIN 2017 2018 2019 2020E 2021E 2022E
Ebitda adj Margin -10.0% -10.7% 43.6% 35.0% 34.7% 30.7%
Ebit adj margin -38.6% -18.3% 33.7% 21.9% 16.1% 15.9%
Pbt margin -42.1% -19.9% 32.7% 18.5% 14.7% 14.9%
Ni rep margin -42.1% -18.5% 26.2% 17.5% 11.9% 12.0%
Ni adj margin -42.1% -18.5% 23.5% 15.1% 11.8% 11.4%
SHARE DATA 2017 2018 2019 2020E 2021E 2022E
EPS - € cents n.a n.a n.a 11.7 11.5 18.9
Growth - - - - -2% 64%
Adj. EPS - € cents n.a n.a n.a 10.1 11.4 17.9
Growth - - - - 13% 58%
DPS ord - € cents n.a n.a n.a 0.0 0.0 0.0
BVPS n.a n.a n.a 1.5 1.6 1.8
VARIOUS - € mn 2017 2018 2019 2020E 2021E 2022E
Capital employed 2.1 4.7 6.1 11.9 17.0 17.4
FCF -0.8 -3.6 0.5 -2.1 -3.3 2.4
Capex 0.1 0.3 1.6 4.6 6.8 1.8
Working capital 1.2 4.0 4.5 5.1 6.1 8.3
INDEBTNESS - €mn 2017 2018 2019 2020E 2021E 2022E
NFP -1.7 -1.3 -0.8 10.8 7.5 9.9
D/E 4.4 x 0.4 x 0.2 x n.m. n.m. n.m.
Debt/EBITDA n.m. n.m. 0.3 x n.m. n.m. n.m.
Interests cov n.m. n.m. n.m. n.m. n.m. n.m.
MARKET RATIOS 2017 2018 2019 2020E 2021E 2022E
P/E n.a n.a n.a 36.9 x 37.7 x 23.0 x
P/E adj n.a n.a n.a 43.0 x 38.1 x 24.2 x
PBV n.a n.a n.a 2.9 x 2.7 x 2.4 x
EV FIGURES 2017 2018 2019 2020E 2021E 2022E
EV/Sales n.a n.a n.a 5.4 x 4.0 x 2.4 x
Adj. EV/EBITDA n.a n.a n.a 15.5 x 11.5 x 7.7 x
Adj. EV/EBIT n.a n.a n.a 24.7 x 24.7 x 14.9 x
EV/CE n.a n.a n.a 4.6 x 3.4 x 3.2 x
REMUNERATION 2017 2018 2019 2020E 2021E 2022E
Div. Yield ord n.a n.a n.a 0.0% 0.0% 0.0%
FCF yield n.a n.a n.a -3.3% -5.1% 3.7%
ROCE nm nm 28.2% 13.3% 9.9% 15.4%
ROE nm nm 35.1% 7.7% 7.0% 10.4%
Source: EQUITA SIM elaborations on Company Data and EQUITA SIM estimates
2 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
CY4GATE | September 14, 2020
TABLE OF CONTENTS
INVESTMENT SUMMARY ......................................................................................... 4
SWOT AND RISK ANALYSIS .................................................................................... 14
ATTRACTIVE INDUSTRY FUNDAMENTALS ............................................................. 15
CY4GATE IN DEPTH ................................................................................................ 21
D-Sint: a sophisticated and modular product ................................................... 21
Epeius and Hydra: Lawful Interception 2.0 ....................................................... 23
Gens.AI: to gather info through avatars ........................................................... 27
RTA: to protect your infrastructure .................................................................. 28
Services: mainly training and educational services .......................................... 30
HISTORICAL NUMBERS: START-UP PROFILE. POSITIVE NUMBERS IN 2019 ........... 36
P&L analysis: positive profitability, personnel expenses account for a large
percentage of costs .......................................................................................... 36
BS/FCF analysis: limited assets. NWC “is” capital employed ............................ 38
ESTIMATES: EXPLOITING THE PRODUCT PORTFOLIO ............................................ 40
Top-line to grow significantly: 2019-2023 CAGR=40%! .................................... 40
EBIT to more than double in 2023 .................................................................... 42
Net Income to benefit from no financial charges and low taxes ...................... 43
FCF more skewed in the medium-term. Healthy financial structure................ 44
UPSIDE SCENARIO FROM NEW INITIATIVES .......................................................... 45
Increased contribution from partnership with SIO (Lawful Interception) ........ 45
Commercial partnership with an Italian Defence player .................................. 45
Sales from IGEA/HITS products (Cyber Intelligence for Covid-19).................... 45
MANAGEMENT TEAM ........................................................................................... 46
SHAREHOLDING STRUCTURE ................................................................................. 48
VALUATION ............................................................................................................ 49
PEERS COMPANY PROFILE ..................................................................................... 53
3 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
CY4GATE | September 14, 2020
INVESTMENT SUMMARY
CY4G: a pioneering company operating in the cyber world
When we think of software houses operating in the world of cyber security or cyber
intelligence, it is not Italian firms but rather US companies or one of the many Israeli
start-ups that automatically spring to mind.
Although this might be so, Italy also has something to offer in this area.
There are very few Italian companies operating in the sector and none of them can
claim to have a military/government background, bar one: Cy4gate (CY4G).
CY4G is a unique, pioneering company that was founded in 2015 thanks to the idea
of the company Elettronica SpA (operating in the defence electronics sector with
shareholders such as the Benigni family, Leonardo Spa and Thales) and the software
house Expert System SpA (semantic software developer listed on the AIM market) to
combine their entrepreneurial and financial resources and expertise in order to
create an entity that specialises in two rapidly expanding cyber markets: Intelligence
and Security.
We believe this was a shrewd move given the increasingly cyber/digitally-oriented
and competitive world we live in and some underlying certainties:
• The amount of information/data to be found online is growing exponentially due
to the increasing number of "digital" users (corporate entities/individuals) and the
advent of the so-called Internet of Things;
• Corporate strategic decision-making is becoming increasingly complex (e.g the
world is ever more global, competitive, uncertain..);
• Wars are more often "electronic" (e.g. disabling strategic facilities) as opposed to
"traditional" (e.g. use of conventional weapons);
• Corporate entities are more and more prone to cyber attacks as their IT
infrastructures are increasingly vital and their assets interconnected: the risk of
cyber-attacks was included in the 2020 Global Risk Matrix of the World Economic
Forum as the world's greatest technological threat (on a par with climate change
and catastrophic event risks).
Consequently, all those whose:
• Primary concern is to protect citizens from crimes/health emergencies (e.g. public
prosecutors, intelligence agencies, armed forces, law enforcement);
• Aim is to protect their assets (e.g government and private entities);
• Aim is to improve the effectiveness of their strategic decisions.
....must therefore keep pace with the times and adopt an increasing number of new
advanced solutions. It is here that CY4G plans to make its mark with its proprietary
products and services based on its multi-layered and consolidated expertise in
various areas that range from Big Data to AI algorithms (e.g. machine learning, data
mining, etc).
Need an in-depth report on "El Chapo's" successor in Mexico? Is your CEO asking for
detailed information on a client or a supplier that is based in an area with a high
crime rate? Do you need to equip your drone detection system with a solution able
to scout the new commercial models in the market?
CY4G has developed a sophisticated modular software called D-Sint.
An intelligence agency needs to tap and monitor all the data traffic of a suspected
criminal (text messages, photos, calls, etc.)? CY4G's Epeius software is the solution.
The police need a criminal's detailed digital profile (what do they use on their cell
phone)? CY4G's Hydra is the answer.
4 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
CY4GATE | September 14, 2020
Need an avatar to monitor the behaviour of potential terrorists on social networks?
CY4G has developed Gens.AI.
Need to secure a tank or industrial facility? CY4G can offer RTA (Real time Analytics),
which monitors data in real time and identifies potential problems and serious virus risks.
Just five years after it was set up, CY4G:
• Boasts a complete and integrated portfolio of proprietary software solutions (#5)
in both the cyber intelligence (D-Sint, Epeius, Hydra and Gens.AI) and cyber
security (RTA) segments. From these “standard” products, CY4G has already
developed derivative solutions (e.g IGEA/HITS);
• Provides advanced cyber services (e.g penetration tests, reverse engineering,
training sessions etc..);
• Is a software house that is independent of its two founding companies
(Elettronica and Expert System) with expertise in Big Data/Semantics/Machine
Learning/IoT/Artificial Intelligence;
• Has a growing portfolio of high-standing clients, particularly in the government
sector and corporate segment;
• Has a 38-strong workforce that is expected to grow in the coming years (about 100
people over the medium-term);
• Generated sales of around €7mn in 2019 with positive margins (43.6% EBITDA
margin) and a solid net financial position (NFP €-0.8mn).
CY4G: SALES BREAKDOWN (2019)
BY END MARKET BY GEOGRAPHY BY PRODUCT
Corporate
11%
Export Services
30% 32%
Government
89%
Licences
Italy 68%
70%
Source: Company data
CY4G: HISTORY (2014-2019)
Source: Company presentation
Thanks to the IPO, investors has become a real partner for Elettronica by supporting
the company’s medium-term development.
5 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
CY4GATE | September 14, 2020
We find that CY4G has the following appealing features:
◼ Attractive industry fundamentals: double digit growth rates with low
correlation to GDP
CY4G’s products could be included in three wide reference markets (AIRO, OSINT and
Global Lawful Interception) with a total estimated value of >$25bn on a global level
(2023E).
These markets are expected to generate attractive growth rates (2018-2023
CAGR=15% on average) driven by a number of factors, many of which have a low
correlation to the GDP trend (an important characteristic, especially in the current
situation).
Cyber Intelligence and Cyber Security products and services (excluding Lawful
Interception products) can be included in the following two markets:
• AIRO (Analytics, Intelligence, Response and Orchestration);
• OSINT (Open Source Intelligence).
AIRO MARKET (2017A-2023, $BN)
Source: IDC, 2019
OSINT MARKET (2018A-2023, $BN)
Source: Global OSINT market report
6 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
CY4GATE | September 14, 2020
Among the main drivers we highlight:
• Cyber-physical system attacks are expected to have an increasing financial impact
due to the continuous evolution of operational technology (OT), smart buildings,
smart cities, connected cars which expose organisations to risks, threats and
vulnerabilities;
• Complexities and compliance stemming from trade wars and political instability
will boost investments in cyber security;
• Organisations will experience an increasing need to add expertise to newer IT and
security personnel in order to protect their IT systems;
• The use of Open Source Intelligence platforms to combat criminal activity
(becoming increasingly sophisticated and often hidden on the web) and for
corporate strategic decision-making (corporate demand) will become more and
more common.
CY4G’s Lawful Interception products are included in a market with a value of around
$1bn on a global level (2019).
GLOBAL LAWFUL INTERCEPTION MARKET (2018A-2023E, $BN)
Source: Technavio
We see the following drivers for the Lawful Interception market (last point specifically
for the Italian market):
• Technology: messages are subject to end-to-end encryption (e.g. WhatsApp
messages) and wire taps and surveillance are no longer sufficient (as they were
around 4-5 years ago). As a result, demand is growing for so-called Trojans (e.g.
Epeius), which can be installed directly on cell phones without the need to involve
telecom operators;
• Socio-behavioural: more and more communication/criminal activity is taking place
on the deep-dark web/social networks;
• Legislation: as of 1st May 2020, the “Spazzacorrotti" (anti-corruption) law greatly
increases the number of criminal offences (e.g. crimes committed against public
authorities) that may be monitored using digital interception.
7 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
CY4GATE | September 14, 2020
◼ An integrated product portfolio to meet diversified needs
In our view, one of CY4G's most appealing features is what we consider to be a highly
unique product portfolio.
Indeed, CY4G is practically unrivalled in Italy in both Intelligence and Cyber Security,
and its competitors are lacking in terms of proprietary products: we estimate that
most operators in Italy are either re-sellers of foreign products or act as service
providers.
CY4G – PRODUCT PORTFOLIO (2020)
Source: Company presentation
One-stop-shop of integrated solutions in the cyber-Intelligence world
CY4G's portfolio is unique, particularly in the key market of Intelligence, given that:
• Its portfolio is comprised entirely of proprietary products that combine its
expertise in various fields;
• Solutions can be integrated to offer a complete package: the competition might
currently have potentially more sophisticated solutions in one area, but CY4G's
rivals are unlikely to have a complete package of products that can be combined
with each other, especially its Italian rivals.
For example, if we take client X, which is targeting individual/situation Y: using
CY4G products, the client could choose to simply focus on passive interception (e.g.
Hydra) or to use active interception solutions (Epeius) or potentially obtain a
detailed analysis of data gathered from all systems to gain a "God's eye view" using
the sophisticated modular software D-Sint;
8 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
CY4GATE | September 14, 2020
CY4G: A TARGET CENTRIC APPROACH, CYBER INTELLIGENCE
Source: Company presentation
• Solutions are highly customisable and versatile: CY4G's IGEA (Integrated Guest
Easy Access) platform for management and planning of the post Covid-19 peak
phase is a clear example of the versatility of its solutions given that IGEA was
derived from D-Sint.
RTA: to protect your infrastructure (e.g pipelines, industrial sites, ships, tanks)
RTA (Real Time Analytics) is a cyber security software solution used to protect/monitor
IT/industrial infrastructure based on Big Data Analytics technology.
Noteworthy this sophisticated software is mostly devoted to protecting industrial
(e.g pipelines, industrial sites etc.) and military (e.g ship/tank/plane etc.)
infrastructures from cyber attacks (we can name this world as “Cyber resilience”).
These end-markets are “green field” (so far corporate/military departments have paid
little attention to protect this kind of infrastructures) leading to significant
opportunities for CY4G.
Both cyber intelligence and cyber security solutions
While its competitors are often focused on either Intelligence or Security, CY4G is
exposed to both and also offers the relevant products and services.
9 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ Government roots plus Elettronica as main shareholder: great strength!
Another aspect we like about CY4G is that the management team and main
shareholder have a background in government and the latter is a solid and important
company (4th place globally in military defence electronics with roughly 900
employees and >€200mn sales in 2019. NFP was roughly neutral).
Management team members come from the following backgrounds:
• Military (CEO Eugenio Santagata, Operations & Quality director Massimiliano
Romeo);
• Defence and Security (Chairman Domitilla Benigni, CEO Eugenio Santagata and
Marketing & Sales director Enrico Fazio).
As for Elettronica, it is private company set-up and controlled by the Benigni family
(35.3%) with a large portion of the capital held by two government companies
(Thales at 33.3% and Leonardo 31.3%).
Leonardo has not in its Italian product portfolio Electronic Warfare solutions and in
the Cyber Security world does not have the same product portfolio of CY4G.
ELETTRONICA: BUSINESS DESCRIPTION AND KEY FINANCIALS
Source: Company data
We believe that these features are a winning card from a business perspective,
particularly in Intelligence (as well as security) given that:
• Government clients (law enforcement, armed forces, public prosecutors, etc)
speak the same language as CY4G, which could benefit from having such
prestigious contacts;
• Clients and investors may be reassured by the fact that although CY4G is still a
small company with just a short history that generates turnover of just a few
million euros, it still has a heavyweight shareholder structure!
Furthermore, Elettronica is a real asset for CY4G (and CY4G is a real asset for
Elettronica as well) given that Elettronica’s Electronic Warfare solutions (e.g solutions
installed in military aircrafts or war vessels able to detect potential threats like enemy
radars) need more and more Cyber Security software like RTA/D-Sint.
10 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ IPO main rationale: resources to finance international growth and expansion
in the corporate sector
The primary focus of the IPO was to:
• Raise enough capital to finance organic growth;
• Improve visibility on the company (CY4G seen not simply as a "division" of
Elettronica but also as an "independent" company).
Of the roughly €16mn that the company raised, we estimate that:
• Around €7-9mn will be spent on the development of currently existing Lawful
Interception products (e.g. new functions, applications, features) to: 1) penetrate
the international market, which offers larger dimensions and significant
opportunities (international contracts can sometimes amount to tens of millions),
but will also bring competitors (e.g. Israeli) that sometimes offer more
sophisticated solutions (e.g. in terms of infection methods) and 2) furtherly widen
the current gap to competitors in Italy catching all the market opportunities;
• Around €3-4mn of the proceeds may be used for a 3-year plan to: 1) strengthen
the salesforce (we estimate 6 new salespeople between seniors/specialists) to
better penetrate mainly international/corporate channels, 2) increase marketing
investments and 3) forge commercial partnerships (indirect channel), which
always require initial investments (e.g. conventions, trials, etc).
We underline that: 1) CY4G generated €7mn in sales in 2019 despite a very small
sales force (4 salespeople including the CEO) and 2) CY4G will benefit from the
Elettronica’s International offices to sell its products (as it did in 2019 in a still
limited way given the recent set-up of its proprietary portfolio).
In addition to increasing capital, the IPO allowed Expert System, to monetise its
investment and reinvest the proceeds in expanding its core business.
We underline that Expert System's shareholder structure changed in 2019 with the
arrival of new shareholders (Claudio Costamagna, Diego Piacentini and Francesco Caio
through the holding Ergo Srl).
CY4G: IPO RATIONALE
Source: Company presentation
11 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
Additional considerations:
• We believe that Elettronica could also have provided the resources required to
finance growth (it launched a €4mn capital increase back in 2018 thus increasing
its stake from 75.5% to 82%) but that management pushed for an IPO in order to
improve visibility on the company (currently not very well known outside the
sector);
• We do not think Expert System's departure is a problem given that: 1) CY4G will
continue regardless to purchase the semantic intelligence module developed by
Expert (amongst the various modules, 7 in total, that are required for D-Sint), which
can if necessary also be replaced by products from other suppliers and 2) relations
between the two companies are excellent.
◼ Estimates: targeting significant business growth
CY4G is a young company considering that it only really began to sell its proprietary
products in 2019.
We expect numbers to greatly improve in the coming years, driven mainly by the
effective penetration of key markets (which themselves are expected to enjoy rapid
growth), partly thanks to the investment of the €15.8mn proceeds from the capital
increase (we estimate €8mn in capex for product development and €4-5mn to
strengthen the sales/marketing team).
Our estimates:
• Sales from €7.1mn in 2019 to €27.3mn in 2023;
• Adj. EBITDA from €3.1mn in 2019 to €8.8mn in 2023;
• Net profit from €1.9mn in 2019 to €4.1mn in 2023;
• NFP from €-0.8mn in 2019 to €14mn in 2023 (following €15.8mn capital increase).
In the shorter term (2020-22), prudently we do not expect positive operating leverage in
light of the salesforce expansion, international growth and company structuring after the
IPO.
We estimate that the most tangible effects of the IPO proceeds (in terms of EBITDA)
will be seen as of 2022.
We suggest focussing (at least in the short term) on analysing/monitoring the
evolution of the business in terms of turnover growth, number of clients, launch of
new applications, where we believe CY4G has ample room for growth!
Considering the new initiatives currently in place we have included in our report a
dedicated paragraph named “Upside scenario from new initiatives”.
Estimates included in this report incorporate minor adjustments to those showed in
our IPO research:
• Capital increase of €15.8mn instead of €15mn;
• €0.25mn of annual non-recurring items at the P&L level relating to the IPO costs
(included in D&A).
12 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ M&A optionality is not ruled out
Although we do not think that M&A is the most appealing part of the CY4G equity
story, we do believe that it could be a driver of further growth (possibly with
subsequent capital injections).
We believe that end point cyber protection and security orchestration are amongst
the most appealing sectors.
CY4G: POTENTIAL M&A PIPELINE
Source: Company presentation
Regarding passive M&A, although we do not believe there is a possibility that CY4G
could become a takeover target, partly considering that it is protected by Italy's
"Golden Power" legislation (covering assets that are considered strategic for Italy), on
the other hand, we cannot completely rule out the possibility that the current
shareholders/government companies may attempt to tighten their grip on the
company sometime in the medium-long term.
13 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
SWOT AND RISK ANALYSIS
Strengths:
• Wide range of proprietary products with cutting-edge technology backed by years
of experience in Cyber Intelligence and Security;
• CY4G has built and sold its proprietary software portfolio while most operators
in Italy are either re-sellers of foreign products or act as service providers;
• Exposure to growing reference sectors and bolstered by structural drivers;
• Strong shareholder structure: Elettronica Group is an important company owned
by the Benigni family and by two large Aerospace&Defence companies (Leonardo
and Thales);
• Growing portfolio of high-standing clients, particularly in the government sector
(89% of 2019 sales) and corporate segment;
• High-standing management team with strong credibility in the defence industry.
Opportunities:
• Gaining market share in the Italian public prosecution sector (Lawful Interception
products) where there is ample room to grow;
• Expanding sales outside Italy and in the corporate sector where the penetration
rate is basically negligible. Outside Italy, CY4G can leverage its relationship with
Elettronica;
• Expanding sales in the Cyber resilience sector (to secure both military and
corporate infrastructures) that is “green field” and suitable for RTA software;
• Enlarging the product range even though the current range is already sufficient;
• Increasing features and applications of the current product portfolio, which is an
important barrier to entry;
• M&A deals to reinforce know-how, positioning and to expand end-markets.
Weaknesses:
• Limited size of the company compared to some larger competitors;
• Limited track-record on historical profitability and potential volatility of future
earnings;
• Current high NWC to sales (65% of sales). Nevertheless, this ratio is expected to
be improved by the management over the next years;
• Low visibility on some contracts (a small portion) and clients relating to
Government activity;
• Poor liquidity expected given the limited free-float (in absolute terms).
Threats:
• Increase in the cost and complexity of finding the workforce necessary to keep
up with the company's technological advancement/development in a scenario in
which resources of this kind are becoming increasingly scarce;
• Potentially "disruptive" technological innovation by competitors.
Risks:
• Although it has a strong and cohesive management team, the company is
undoubtedly inextricably linked to the current management;
• Inability to expand abroad/in the corporate sector properly with a decent
profitability level;
• Need for additional financial resources to step-up R&D investments and/or to
attract talent following subdued financial results/negative FCF.
14 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
ATTRACTIVE INDUSTRY FUNDAMENTALS
As we have seen, CY4G operates in some Cyber Intelligence and Cyber Security
market niches.
These are enormous, fragmented sectors, that are constantly evolving.
For this reason, it is not easy to quantify or identify their worth.
That said, we think that CY4G’s products could be included in three wide reference
markets with a total estimated value of >$25bn on a global level (2023E).
◼ Global Lawful Interception market - Epeius, Hydra and Gens.AI
Global lawful interception market (digital only) – $0.9bn (2019)
According to Technavio, globally (excluding China, Russia and other countries) this
market was worth around $ 0.9bn in terms of turnover in 2019 and is the key market
for CY4G products Hydra, Epeius and Gens.AI (we estimate roughly 20% of CY4G sales
in 2019).
The market gives us an accurate picture of the key market for CY4G given that it does
not include electronic interception/wiretaps (e.g. bugs, microphones, sensors),
markets that CY4G does not cover given the low technological content and large
number of potential competitors.
It is a relatively small market (compared, for example, to Cyber Security) but the
future CAGR (2018-2023) is expected to be significant (+24.6%).
GLOBAL LAWFUL INTERCEPTION MARKET ($, BN)
Source: Company presentation
15 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
Italian Lawful Interception market (digital only) – €36mn (2017E)
Whereas this is the global market, the Italian market (probably the most relevant for
CY4G, at least in the short term) is estimated by management to be worth around €
36mn in 2017 (excluding wiretaps, electronic surveillance and sale of licences).
It is a relatively new market, with little correlation to GDP trends (for obvious reasons)
and is expected to grow exponentially in the coming years, partly thanks to the
following:
• Technology: communication is increasingly subject to end-to-end encryption (e.g.
Whatsapp messages) and wiretaps/network surveillance are no longer sufficient
(as they were 4-5 years ago). Demand is rising for trojans and other surveillance
software that can be installed directly on cell phones (e.g. Epeius) without the need
to involve telecom operators;
• Socio-behavioural: an increasing amount of communication/criminal activity takes
place on the deep-dark web / social networks;
• Legislation: as of 1st May 2020, the "Spazzacorrotti" law greatly increases the
number of criminal offences (e.g. against public authorities) that may be monitored
using digital surveillance.
ITALIAN LAWFUL INTERCEPTION MARKET (DIGITAL)
Source: Company presentation (1) management estimates take into consideration only the digital interception market
16 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ OSINT – D-Sint and derivative products
The OSINT market (Open source Intelligence) includes all the products that
collect/process and analyse public information in order to take a decision.
Global OSINT market report expects this market to grow with a 2018-2013
CAGR=16.8%.
The use of Open Source Intelligence platforms to combat criminal activity (becoming
increasingly sophisticated and often hidden on the web) and for corporate strategic
decision-making (corporate demand) will become more and more common.
OSINT MARKET ($, BN)
Source: Company presentation
17 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ AIRO – RTA, services and D-Sint
The consulting firm IDC terms a market that includes three large segments "AIRO":
Analytics and Intelligence, Response and Orchestration.
CY4G software solutions that can be included in these markets are: D-Sint, RTA and
all services (total turnover at roughly 80% of sales in 2019).
THE AIRO MARKET ($, BN)
Source: Company presentation based on IDC Estimates
It is worth noting that most of the activities of the large consulting/system integration
firms (e.g. Capgemini/Deloitte) that produce Cybersecurity manuals and of cyber
companies that offer services such as penetration tests/vulnerability assessments are
to be found in the "Response" segment.
These markets are estimated to be worth a total of roughly $10.5bn on a global level
(2019) with an expected growth rate of 11.5% (2018-2023) driven by factors not
strictly correlated to the economic cycle:
• Cyber-physical system attacks are expected to have an increasing financial impact
due to the continuous evolution of operational technology (OT), smart buildings,
smart cities, connected cars, which expose organisations to risks, threats and
vulnerabilities;
• Complexities and compliance stemming from trade wars and political instability
will boost investments in cyber security;
• Organisations will experience an increasing need to add expertise to newer IT and
security personnel in order to protect their IT systems.
18 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
AIRO MARKET (2017-2023, $BN)
Source: IDC, 2019
◼ How is big the addressable market for CY4G?
Having said that, if we look specifically at CY4G and its economic / commercial and
product opportunities, management estimates very precisely that the addressable
market (2023E) for CY4G could value approximately 2% of the total Lawful
Interception digital market + AIRO + OSINT ($ 0.6bn vs $ 25.7bn).
Products and geographies that are relatively inaccessible for commercial and
regulatory reasons (e.g. USA, China, Russia, Israel and other markets) have been
excluded.
CY4G: ADDRESSABLE MARKET (2023, $MN/BN)
Note: addressable market estimated excluding USA, China, Russia, Israel and other not accessible market
Source: Company presentation
19 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
A large percentage of the opportunities are concentrated in Italy (around 30%) but
the biggest market opportunities lie outside Italy (around 70%, i.e. Middle-East /
Africa / Asia) and this is also one of the main reasons for the IPO (fresh resources to
finance growth on these markets).
In terms of end-markets by client type, we highlight the following:
• Unsurprisingly, the market that is most easily accessible in the field of cyber
intelligence is government agencies (e.g. public prosecutors, police, intelligence,
etc.) but the corporate world is also an appealing target market thanks to the
strategic value of D-Sint (top managers are increasingly in need of critical/rapid/
easy-to-read data) and of the derivative product IGEA (companies/businesses need
to have systems in place to monitor points of entry in the post Covid-19 peak
world);
• Cyber security includes a huge (51% of the total), as yet mainly unexplored
market i.e. military (ship/tank/plane security through RTA/services) as well as
significant opportunities in the corporate world (42% of the total), where CY4G
aims to focus mainly on plant security (e.g. pipelines, industrial sites).
20 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
CY4GATE IN DEPTH
CY4G operates in the cyber intelligence/lawful interception and cyber security
markets. CY4G solutions in these segments are as follows:
• Proprietary, customisable software products (68% of 2019 sales) that can be used
in combination with each other (Cyber intelligence/Lawful interception: D-SINT,
Hydra, Epeius and Gens.AI, and in Cyber security: RTA);
• Services (32% of 2019 sales), i.e., anything other than the sale of proprietary products
and/or services dedicated strictly to the application of the products. At present, the
majority of services involve on-the-job training (CY4G Academy) and services such as
Penetration Tests, Vulnerability Assessments, Reverse Engineering, etc. CY4G mainly
sells man-hours but sometimes also infrastructure (e.g. digital laboratory).
◼ D-Sint: a sophisticated and modular product
"Who is El Chapo's successor in Mexico?", "Where are all my employees at the
moment?", "What's going on in Nigeria?", "Are potentially dangerous criminal cells
being created in South-east Asia?", "Where do the people who have officially contract
ed Covid-19 live?
D-Sint can answer all these questions quickly, efficiently and correctly!
D-Sint (which we estimate accounted for around 30% of CY4G 2019 sales) is a
technologically advanced software and offers:
• A high level of sophistication (using a number of AI algorithms) and allows for rapid
and accurate object recognition (i.e. recognition without digital noise). The fact that
management has been working on the product since 2010-2011 proves just how
complex D-Sint is;
• Versatility given that it can be used by government agencies and private firms for
various purposes (e.g. identifying criminals, analysing markets, travel management,
post Covid-19 peak management);
• Varied customisation options (customising the product can take weeks/months)
and modularity (D-Sint is a modular software solution with
text/image/video/audio modules);
• High price (compared to other products) with a licence that we estimate may be
worth roughly € 0.5-1mn;
• Unique features on the European/Italian market.
General description and how it works:
D-Sint ("Data & Signal Intelligence") software is a sophisticated data analysis system that
can:
• Gather (from various sources);
• Process;
• Correlate
a large amount of both:
• Structured (e.g. alphabetical-numerical symbols/tabular) and
• Unstructured (e.g. text, videos/images/audio, etc.)
data on a specific target (e.g. individual, object, or company) for the purpose of
transforming a large amount of mixed data into a usable analysis/report for so-called
"decision-makers" (e.g. special forces).
Where does it get this information? D-Sint (once the
research input has been entered) uses data gathered
from sources within the organisation (e.g. closed
source databases), open sources (e.g. web/social
networks), deep/dark web sources and reports and
emails.
21 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
How does it process the data? D-Sint uses artificial intelligence technology such as
machine learning and semantic intelligence as well as data mining to:
• "Understand" the content of text, videos, audio files etc.
• Organises it according to concept, subject, location and size, and then correlates it.
Then what? Once data has been correlated and analysed, D-Sint:
• Extracts the content most relevant to the input using a series of AI algorithms
(image tagging, data mining, cognitive computing, machine learning, etc...) and
complies it into easy-to-read graphs/documents/reports;
• It can offer suggestions on how an analyst could improve an analysis.
How is it sold? Either under a software licence (typically chosen by government agency
clients) or through a software-as-a-service model (whereby the client pays for use and
not ownership of the software).
CY4G: D-SINT
Source: Company presentation
22 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
IGEA: to manage the post Covid-19 peak world
D-Sint's versatility was confirmed by the launch of IGEA (Integrated guest Easy
Access).
The current health crisis requires measures and solutions to both contain the spread
of Covid-19 and also to manage our "return to normality", e.g., to manage crowd
safety responsibly and effectively.
The IGEA solution is an integrated system that is able to manage this problem by using
a number of sensors, algorithms and instruments that are able to balance access
restrictions.
The solution:
• Identifies each individual anonymously (using mobile phones via Bluetooth);
• Measures their body temperature (using a thermocamera);
• Calculates the level of risk (using an AI algorithm) that may then: 1) permit access;
2) require specific actions; 3) deny access and require the person to undergo
further testing ("Pulse Oximeter Integrated Workstation") and 4) deny access and
require the person to take a rapid swab test.
The IGEA system also includes a simple "collaborative" access mode whereby
individuals use a phone app (HITS) that calculates their risk profile automatically and
issues a "gate pass" that can be shown directly at entry points.
The app (named HITS – Human Interaction Tracking System) and the design of the
HW/SW infrastructure are proprietary.
CY4G has sold its first solution (IGEA with its app HITS) to Elettronica.
◼ Epeius and Hydra: Lawful Interception 2.0
As we mentioned in an earlier section describing the markets, the world of Lawful
Interception is evolving on the back of technological advancements and legal
changes.
In the segment digital Lawful Interception, CY4G sells two proprietary solutions that
can be integrated and have an extremely intuitive interface: Hydra (passive Lawful
Interception) and Epeius (active Lawful Interception).
Hydra and Epeius are software platforms used to collect data from personal
electronic devices such as smartphones, tablets and personal computers.
Legal background: only available to law enforcement and intelligence agencies
Before describing the products, we should first underline some of the legal aspects:
• Use of these products is strictly limited to national and international Law
Enforcement and Intelligence Agencies;
• In Italy, the products may be used exclusively for the prevention and/or
investigation of certain crimes following the issue of an interception warrant by
a judge (valid for a specific amount of time), in accordance with Italian law;
• The products may be sold internationally but only with government authorisation
since this involves the export of sensitive technology on a par with military
equipment. For example, CY4G can sell its solutions to France but not Myanmar;
• CY4G software solutions are comprised by two "components":1) data collection
software and 2) servers "controlled" exclusively by the judiciary where the
collected data is stored (CY4G does not have access to any data).
Moreover, CY4G provides training, technical assistance and technical support to
public prosecutors in order to maximise the potential of the software.
23 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
Hydra: digital profiling
Hydra is a software solution used for passive interception i.e. analysis of metadata
rather than content (which is encrypted), thus allowing it to create a digital profile of
the target without analysing the specific content.
It is a "simpler" product than Epeius, but no less important.
CY4G does not install anything on a client's device, but rather it "listens" to network
data (so-called unencrypted traffic).
Therefore, it can answer the following questions on digital behaviour: "How many
times a day does my target access the internet? "Which websites does my target visit
and when? Which apps have been installed and how often are they used?
But does not answer the following questions: "What did my target buy on Amazon?",
"What did my target write on day X to person Y on WhatsApp?"
For a public prosecutor it may be very interesting to learn that a target is always out of
the house between 9:00 and 10:00 in the morning or that the target visits certain
websites.
Once data has been collected, it is not presented in "raw" form but rather it is
"enriched" and presented using intuitive dashboards/clusters (e.g. number of online
shopping sites visited per day, number of information sites, etc).
When and how was it created? Hydra was developed starting from 2015 and derives
from RTA software.
How is it sold? Hydra is sold on a "per use" basis with an estimated price of around €50
per day for a single warrant, or otherwise under licence.
CY4G: HYDRA
Source: Company presentation
24 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
CY4G: HYDRA
Source: Company presentation
Epeius: do you remember the legend of the Trojan horse?
The product was named after its original creator: It was Epeius who built the mythical
Trojan horse!
Epeius is an active interception product, i.e. data is collected directly from the target's
device.
Active interception goes one step further than passive interception by collecting the
content of the target's digital traffic in addition to metadata.
Therefore, it collects both private/personal data as well as unencrypted traffic: it
allows the user to read chat conversations, record telephone calls (including VOIP),
watch shared videos/see shared images, etc.
Two aspects need to be considered with these types of products:
• Product type: does it work on Android and/or Apple devices? Does it capture all
means of communication precisely and quickly? Is the layout easy to read?;
• Installation method: this is often what separates one product from another.
For example, based on our analysis, Epeius can be installed via "temporary" apps
that the target unwittingly installs on their device (downloaded from a site their
digital profile created by Hydra shows they may be interested in) or a malfunction.
More sophisticated methods include the simple access to a single web page.
When and how was it created? Epeius was developed starting from 2015 based on
Trojans used for military purposes.
How is it sold? Like Hydra, Epeius is often sold on a "per use" basis at a price that we
estimate at roughly € 150 euro per day (average duration of use may be around 40 days).
Other sales methods: under licence.
25 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
CY4G: EPEIUS
Source: Company presentation
CYFG: EPEIUS
Source: Company presentation
26 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ Gens.AI: to gather info through avatars
Gens. AI is CY4G's latest product in the segment of Virtual Humint.
Whereas
• D-Sint allows the user to gather data online;
• Hydra/Epeius can monitor digital data on target devices subject to legal permission;
……Gens. AI takes it one step further: by creating and actively managing virtual Avatars
("virtual identities") that cannot be traced back to CY4G or the software user,
information can be obtained by interacting with online users (subject to legal
authorisation).
Gens. AI creates fake online users with a history, life, precise location which access
social networks in order to monito r and prevent crimes such as drug trafficking, child
pornography, terrorism and related offences.
For example, it proves very useful for identifying paedophiles who use the internet to
search for potential victims (the avatar in this case might be a pretty 17-year-old girl).
Avatars are created, trained and actively managed (for example, interrupting or
changing automated activity) by an authorised human CY4G operator.
When and how was it created? Gens.AI was developed in 2018 and is based on AI
algorithms. Sales were limited at the end of 2019.
How is it sold? The product is sold under licence.
CY4G: GENS.AI
Source: Company presentation
CY4G: GENS.AI
Source: Company presentation
27 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ RTA: to protect your infrastructure
RTA (Real Time Analytics) is a cyber security software solution used to protect/monitor
IT/industrial infrastructure based on Big Data Analytics technology.
In the segment of cyber security, the product is included in the markets of SIEM
(security information and Event Management) and NTA (Network Traffic Analyzer).
Put simply, the process is as follows:
• Collection and analysis of event flows (standard and non-standard data such as
emails, telephone traffic, sensor traffic) from multiple sources (e.g. PCs, mobile
phones, industrial sites);
• Real-time contextualisation of monitored activities;
• Indexing of all contextualised data in a "time-machine";
• Automatic identification of risky situations / anomalies and consequent
classification (various levels of risk) and categorisation;
• Suggested solutions for each problem.
RTA is not an antivirus software in the sense that it stops the intrusion, but it tells the
client if they have a problem or not and provides potential solutions.
Two examples:
Example 1
In the corporate segment, RTA allows analysts to identify whether any warnings,
anomalies, attacks on the IT infrastructure have taken place.
Once any potential anomalies have been identified, the system flags if they have
already occurred in the past (thanks to the Time-machine) and suggests any potential
solutions.
One example of a red flag might be if an employee's company computer were accessed
from Brazil and then from Europe immediately afterwards.
Example 2
In the military sector, it is becoming increasingly important to be able to monitor all
military infrastructure (e.g. drones, planes, tanks) in real-time and RTA can help in this
respect.
Regarding applications sold by Elettronica, the company sells Electronic Warfare
systems that are composed of hardware and software components. RTA helps to
ensure that these solutions are secure.
When and how was it created? RTA started to be developed in 2017 and marketed as
of 2019.
How is it sold? Either under a software licence (typically preferred by government
agency clients) or software-as-a-service (where the client pays for use and not
ownership of the software).
We estimate that licences may be worth around € 0.2/0.3mn.
28 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
CY4G: RTA
Source: Company presentation
CY4G: RTA
Source: Company presentation
29 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ Services: mainly training and educational services
Within the services category ("Cy4Sec"), CY4G includes all turnover that is not
considered the sale of proprietary products and / or services dedicated strictly to
product implementation.
At present, the majority of this category is accounted for by on-the-job training (CY4G
Academy), which is essentially a transfer of know-how (e.g. CY4G teaches military
personnel to defend themselves from Cyber-attacks), and some services such as
Penetration Tests, Vulnerability Assessments, Reverse Engineering, ISoc (virtual
environment) rental, cyber security policy manuals etc ...
As for services, CY4G mainly sells man hours in addition to any infrastructure /
software (e.g. digital laboratory in Digilab) that may be required.
When it comes to orders for multi-year "services" (such as a contract included in the
FY19 backlog worth € 6mn), this entails providing a complete package of man hours
(e.g. on-the-job training), software and hardware to ensure that the client improves
their Cyber Security expertise (e.g. crypto analysis, malware analysis, penetration
testing etc.).
The following tables show some of CY4G's key services:
CY4G: ISOC CSIRT
Source: Company presentation
CY4G: CY4GATE ACADEMY
Source: Company presentation
30 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
CY4G: DIGILAB
Source: Company presentation
CY4G: SECURITY ASSESSMENT SERVICES
Source: Company presentation
CY4G: CYBER RESILIENCE FOR MILITARY SYSTEMS
Source: Company presentation
31 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORTCY4GATE | September 14, 2020
◼ How are CY4G’s solutions sold?
CY4G's proprietary products are sold in three different ways:
• Sale of (perpetual) licences including a semi-recurring component in the form of
updates (we estimate about 20% of the value of a licence in year T + 2).
On average: 1) licences are sold in 3 instalments (first the basic software followed
by additional functions) which are spaced around 2 months apart (1: we estimate
60% of the value of the licence; 2 = we estimate 20% and 3 = the remaining 20%)
and 2) government clients / intelligence agencies prefer this sales format;
• SaaS (software as a service): the client does not actually own the product but
purchases the right to use it for a certain amount of time, typically one year.
Corporate clients tend to prefer this option given that the outlay is much smaller;
• Per use basis: typically used for the sale of Lawful Interception products
(Hydra/Epeius) to public prosecutors (number of days' use multiplied by the price
per day).
Services are sold by billing the total number of man hours (if any) plus the sale of any
hardware.
◼ How much of CY4G’s business is recurring?
CY4G is a very new company and as such we do not have much historical information
at our disposal.
That said, in qualitative terms, "recurring sales" could be comprised by:
• Licence updates (we estimate 20% of the value of the licence at T +2);
• Sales on a per use basis of Lawful Interception services to public prosecutors
(negligible at FY19).
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