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CyanConnode seems incapable of converting orders into revenue and profit

By Gary Newman | Sunday 7 January 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Often when it comes to AIM companies investors get far too fixated on revenue and orderbooks, and forget that in reality it all comes down to the bottom line and the actual net profit that the company is either already making, or is likely to make.

The market is full of small outfits that have extremely impressive order pipelines, sometimes many multiples of their current market valuations, yet year after year these orders usually fail to generate the revenue which was expected, or in some cases the margin is so small that the cost of sales doesn’t leave enough to even cover the expense of running the company.

CyanConnode (CYAN) has been around on the AIM market for a long time, and at various points during that time investors have gotten excited about big things to come, but thus far they haven’t really materialised.

The company specialises in narrowband RF technology which connect devices to the Internet of Things (IOT) – basically a way for electronic devices to talk to each other, and this includes things such as street lights and smart metering of gas, electricity and water.

The problem for this company would seem to be that it is yet to find a way of generating a profit from its technology, despite having tried to for a number of years.

I fully accept that when it comes to technology businesses a lot of money is needed for research and development in the early years and they can often be money-pits during this time. But by now I would have expected to see signs of progress that suggest that the company is moving towards a situation where it is profitable.

It is a very crowded market – the company operates within Europe and India – and although contract news always includes impressive figures, they rarely seem to translate into any actual sizeable amounts of revenue.

For example, if we go back to April 2016 the company announced a £10 million purchase order from Micromodje in Iran, which was to be rolled out over the next two years, yet revenue plus the lack of mention of this order in more recent financial statements, would tend to suggest that it hasn’t gone to plan.

That leaves me wondering if we will see similar when it comes to actually realising revenue from the $29 million smart metering deal with NIK in the Ukraine, announced back in September, and for one million units to be delivered over the next three years – although to be fair it did state that revenue is weighted towards years two and three, so it could still prove to be as good as it appears to be on paper.

The same would seem to be true of the $10 million purchase order extension from Bangladesh, which was in addition to an order extension from $5 million to $9 million back in June.

So on the face of it all looks rosy and the money should be rolling in, but then came a trading update last week which painted a bleaker picture.

As usual the company banged on about its order book in excess of $100 million, plus an order pipeline of $320 million, along with strong expected growth.

But this was also accompanied by news that one of its larger companies had delayed its order, and as a result revenue for the whole of 2017 would be significantly below the £1.2 million forecast. That revenue forecast alone would seem to be very low for a company boasting all these orders and contracts over the past couple of years, but it sounds like the real figure will be a complete farce, when taken in this context.

The last financials showed that revenue for the six month period up until the end June 2017 was down around 45% on the same period in 2016, at just £573,000, although improved margins meant that gross profit improved by a similar percentage to circa £180,000.

But that paled into insignificance when compared to total operating costs of nearly £5 million for the period, with a fair chunk of that made up of R&D investment, and a net loss of £4.43 million (or nearly £740,000 per month).

The company raised £8.6 million at 28p back in September so won’t be running out of money any time soon, but it does burn through cash quickly and at the start of 2018 had net cash of £5.5 million – although a further £1.3 million is expected from tax credits and funds yet to be received from that placing.

You could easily argue that this is one of those companies where you only need a couple of the bigger orders to come to fruition as expected and things will completely change, but then again I have seen similar in the past with plenty of companies of this type which never really made it.

Personally, I am surprised that the share price hasn’t dropped more as a result of the revenue and profit warning, and I wouldn’t be tempted to touch shares in this one at anywhere near the current level of 19p to buy (£23.65 million market cap), until it can show an ability to convert a much larger chunk of its order pipeline into actual revenue, especially given its track record to date.


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