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03 September 2007

Initiating coverage VYKE BUY

Share Price Mobile WiFi VoIP


Price 75p
Target Price 430p
We initiate coverage of Vyke with a Strong BUY rating, target price 430p/share.
Vyke provides a range of VoIP-based low-cost call solutions, based on
Upside/downside 4.7x activation of the WiFi chipset embedded in a range of Nokia, Samsung and
Motorola handsets. This connects the user to the nearest in-range WiFi
“HotSpot” (or broader-reach “cloud”). Vyke demonstrates savings of between
50% and 95% compared to conventional mobile rates. From just 35k users of
this and its other IP calling services in March 2006, Vyke’s subscriber base had
grown to the 800k mark by mid-2007. We forecast over 5m Vyke subscribers by
2010.

WiFi and the economics of the net


Source: Proquote

Market Data
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

At a glance Key features -


2007E EPS (p) -7.5 • Vyke’s user base continues to grow strongly, adding 1,500 users daily
2008E EPS (p) 0.2

th
Recent (Aug 29 ) agreement with Morange in Singapore adds another potential 500k
Rating Initiation: BUY
subscribers and highlights the suitability of Vyke’s offering to other internet/mobile
Price target (p) 430p operators

Company Statistics Yr to 31 Dec £m 2006 2007E 2008E 2009E


Shares in issue (m) 36.2 Turnover (£m) 9.96 24.23 59.52 102.21
Net debt Dec07E (£m) 2.9 EBITDA (£m) (1.76) (1.21) 1.42 4.67
Gearing (%) 87 DS&C PBT* (4.18) (2.73) 0.12 3.83
Interest cover (x) n/a Tax (%) n/a n/a 30 30
DS&C EPS (p)** (1.01) (7.53) 0.24 7.39
Company Description CFPS(p) (0.49) (0.40) 14.38 23.02
WiFi-based mobile and call-back
service provider Ratios 2006 2007 2008E 2009E
PE (x) n/a 311 10.1 4.9
Website: http://www.vykecorporate.com
EPS Growth (%YoY) n/a n/a n/a
n/a
Analyst EV/EBITDA (x) n/a n/a
21.1 6.4
Mike Jeremy
+44 207 776 6570 ° pre-exceptional items and goodwill **diluted, pre-exceptional items and goodwill

mike.jeremy@danielstewart.co.uk Source: DS&C

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

Major shareholders (% of ord. share capital) Key events


Centennial Group 11.14
AXA Framlington AM 7.70 Aug 18 2007 FY07 interims (provisional date)
Blackrock IM 6.20 Jul 20 2007 AGM
CIM IM 5.39 Jul 6 2007 Equity offering, 8.454m shares
Jeffries Intl 4.81 Jul 3 2007 Upgrade to Mobile IP
BØhn K 4.46 Oct 5 2006 Acquisition of Genme Services Sdn Bhd, Malaysia
Berger J 4.35 Jan 3 2006 Distribution agreement via T@lecom/Opal UK
Jensen B 3.95 Jun 27 2005 Acquisition of Maskina AS (Vyke AS)
F&C 2.76
Inovas 2.25
Noble FM 2.15
Sub total 55.27

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Opportunity, Strategy, Valuation, Triggers


WiFi continues to spread Opportunity ~ Vyke has a mobile WiFi solution that enables WiFi hardware embedded
worldwide in selected Nokia, Motorola and Samsung handsets (currently numbering some 25
types), that connects the user to IP-based telephony and all the costs savings
associated with VoIP solutions. Typically the saving compared to a GSM-based mobile
call is between 65% and 95%. The most compelling evidence of Vyke’s solution is its
paying subscriber base; this stood at 35,673 in March 2006, and had risen to 762k by
June 2007. In our view the spread of WiFi “HotSpots”, fuelled by the interests of both
incumbents and new competitors, should propel Vyke’s user base to reach some 5.3m
by 2010.

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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Vyke, the company


A conventional callback offering, Founded in 2004, Vyke specialises in VoIP services focusing on mobile applications,
and WiFi IP connectivity having acquired Maskina AS (now Vyke AS) in June 2005. Its flagship service is
mobile WiFi-based voice and data provision, offering cost savings compared to
standard GSM-based mobile services of up to 95%. In this respect the Vyke mobile
model replicates the now well-known approach of Skype (acquired by eBay) initially in
the fixed-line VoIP arena.
Vyke offers six products, individually or packaged as a Single Account proposition;
• Vyke Mobile IP, WiFi-based mobile access to the IP backbone, based on Nokia
technology and Vyke IP algorithms
• Vyke Pro, Vyke lite, unlimited text messaging and call-back international calling
• Vyke IP, a converter from conventional analogue lines to VoIP or “softphone” IP
devices operating within SIP (Session Initiation protocol) and IAX2 parameters
• Vyke PC, PC-based VoIP software creating a “virtual phone” with IP telephony
access
• Vyke Callback, accessed via website, SMS or ANI callback with preset dialup
capability
• SMS via the web and calling cards

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.

Figure 1: WiFi offering located

LMDS Broadcast

MMDS

Satellite
WiMAX
Broadband
802.11 WiFi
3G
Narrowband
Bluetooth
2.5G
2G

Fixed Local Area Wide Area

Source: Vyke, DSC

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Figure 2 shows Vyke’s revenue split by product type and geography.

Figure 2: Vyke Revenue Breakdown FY06, by Type and Geography, FY06

Calling Cards IP accounts Asia Europe

Source: Vyke, DSC

Vyke Development path


• June 2005 Maskina formed through reverse takeover of Tower plc (Aim-listed Sep
2004), share-based transaction valued at £7.559m
• November 2005, membership of the Nokia Forum
• January 2006 distribution agreement with T@lecom, part of the UK Opal Group
(owned by Carphone Warehouse)
• June 2006 acquisition of Maskina AS (renamed Vyke AS)
• 1Q06 36k VoIP accounts
• 4Q06 305k accounts
• 1Q 07 534k accounts
• 2Q 07 estimated 800k accounts

Figure 3: Group structure

Vyke
Group structure

Maskina EHF Maskina Communications Vyke Asia Sdn Bh


R&D Telecoms (Genme Services)
100%-owned 100%-owned 100%-owned
Iceland US Malaysia

Tele Super Nordic


Telecoms
50%-owned
Norway

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”.

From “Home Hub” to “MuniFi”


There is an estimated total of 180k WiFi HotSpots worldwide (2007E ABI research).
WiFi is currently deployed in some 10,393 locations throughout Europe, notably in
cafes, at airports and in the public arena; for example the UK has some 8,995 hotspots,
Germany 915, and Sweden 397. In the US there are an estimated 35 hotspots, with
the municipal network or “Muni-Fi” a feature.
Municipal WiFI (Muni-Fi); (see www.muniwireless.com)
• July 24th ~ Wireless Silicon Valley, a not-for-profit project by Silicon Valley Metro
Connect, a 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.
• July 26th ~ Phase One of Chandler, Arizona's citywide Wi-Fi network has gone live.
Owned and operated by Kite Networks; Kite provides service to approximately
17,000 customers across 21 markets and 11 states. Kite Networks also operates
and manages the first generation 2.5GHz licensed networks under the Sprint

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trademark as well as a number of wireless mesh WiFi networks in Arizona, Texas


and Colorado.

The Cloud proposes seamless The WiFi Cloud


WiFi access across the Square
Mile Concentrated deployment in London has created a “meshed network” or “cloud”, an
example being the seamless access zone created within the City of London, by The
Cloud, in association with Nokia, which uses 127 nodes to achieve 95% coverage
across areas owned by the City of London Corporation. Antenna in a compact (1m)
tubular format are easily incorporated into lamp posts and street signs.

Figure 4 illustrates the location of City-based WiFi hotspots

Figure 4: Location of HotSpots in the City of London

Source: The Cloud, Microsoft MapPoint

The Home Hub


BT’s Home Hub is the core of its DSL-based broadband access strategy. As a wireless
broadband router using 802.11b/g it connects up to five DECT handsets suitable for
broadband VoIP calls and is pre-configured for ADSL2+ up to 24Mbit/s with an indoor
range of < 50m indoors outdoor < 250m outdoors (although BT states “in ideal
conditions”).

* 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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How Vyke mobile VoIP works


Attractiveness depends on a To enable Vyke’s VoIP service the user,
simple procedure with clear web- • Creates a PC web-based Vyke account with username and password
based instructions, and a proximal
WiFi point of access
• Uses Vykes configuration instructions to activate WiFi on a suitable handset (see
Figure 6 for a snapshot of current WiFi-enable models) for example Nokia E60,
E61 and E70, by downloading Vyke Mobile IP, which adds an “Internet Tools” icon
to the phone screen (see Figure 5, below)
The activated handset will automatically scan for HotSpots within range. These can be
saved for future reference and the process saved as a screen shortcut, in addition to
which internet connection may be set as the automatic preference and also set at Vyke
VoIP rather than conventional cellular connection. Calls are initiated using the usual
stored numbers but via a “internet call” option. And if the IP connection requires a
security code used by selected sites Vyke IP will store for future reference.
As Figure 5 shows, calls are displayed with the usual number plus a “@sip.vyke.com”
suffix.

Figure 5: Vyke mobile VoIP setup process

Vyke internet Vyke


account and password mobile VoIP
setup process
from account
Configure mobile to call
handset for
Vyke mobile VoIP

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

Figure 6 illustrates the currently-available (wide) range of WiFi-enabled mobile


handsets, lead by Nokia and Samsung. Figure 7 provides two examples of WiFi-based
call savings; Vyke’s compared to GSM services.

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WiFi-enabled handsets are widely- Figure 6: A selection of WiFi-enabled wireless handsets


available

NokiaE90
NokiaN92
NokiaN93 NokiaN93i Samsung i600

NokiaN91
Samsungi750
NokiaN80
Nokia9300i NokiaN95

SamsungP200
NokiaE61
NokiaE70

Samsung
Nokia9500
P260
NokiaE65 NokiaE61i

Nokia6086 Samsungi620

MotorolaMPx NokiaE60 SamsungP520

Nokia6136
MotorolaA910

Source: https://www.vyke.com/merchantsite/howtomip.c#8

There are some 25 WiFi-enabled Figure 7: Vyke call savings, examples


mobile handsets already available, Vyke Mobile IP cost comparison: from Russia to UK fixed-line
amongst which the Nokia E65 is
Vodafone mobile roaming 150 p per min
an optimum example for Vyke
Vyke IP mobile call free
functionality connection 2.15p
Vyke PC IP call free
connection 2.15p
Vyke Mobile "Call @" on fixed-line call 3.32p per min

Vyke Mobile on Vodafone roaming call 111p/min


of which 100p Vodafone
of which 10.76p Vyke charge

Vyke Mobile IP cost comparison: UK to Spain fixed line


Vodafone mobile roaming 12 p per min
Vyke IP mobile call free
connection 2.15p
Vyke PC IP call free
connection 2.15p
Vyke Mobile "Call @" on fixed-line call 2.46p per min

Vyke Mobile on Vodafone roaming call 10.76p/min


Source: Vyke

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Vyke ~ subscriber projections


We assume that users become Vyke added 703k IP user accounts in twelve months to June 2007. A user account is
regular WiFi paying subscribers described as a subscriber paying between $7 and $32 per month (source Vyke) on a
only after a 4-6 month lead time of
recurring basis. In FY07 we estimate that Vyke should add 858k accounts, taking the
total from 304k to 1.36m. Currently, users are distributed equally between Europe and
intermittent use
Asia; we expect Vyke’s IP WiFi mobile subscriber base to pass the 2m mark a year
later.

As Figures 8 and 9 indicate, we expect strong IP account growth;


• Dec 07E 1.36m
• Dec 08E 2.56m
• Dec 10E 5.26m
• Dec 12E 9.26m

Figure 8: Vyke IP accounts (m and $m) and breakdown by ARPU band 12/05-12/15E

14.00 3,000 450.1


12.00 2,500 400.1
10.00 350.1
2,000
8.00 300.1
1,500
£m

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.

Key revenue assumptions


ARPU “matrix”
An average ARPU calculated from In addition to subscriber growth forecasts, our first key assumption underlying revenue
a “matrix” of user types development is assumed ARPU distribution. Our distribution matrix results in an
average of $6.6 in 2010(E) and $9.5 by 2012(E).

Figure 9: Projected revenues by ARPU band


Revs $m 2006 2007e 2008e 2009e 2010e 2011e 2012e
$5 0.8 6.8 28.1 52.0 79.0 113.7 139.4
$15 1.6 12.5 50.5 99.4 142.2 227.3 313.7
$20 1.1 8.4 24.5 37.9 94.8 151.5 209.1
$25 0.7 4.4 0.0 0.0 39.5 126.3 174.3
$30 0.0 0.0 0.0 0.0 0.0 0.0 104.6
Source: DSC

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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.

Lead time but not a “lock” on mobile WiFi


Time to market advantage but not Third, our outlook is not predicated on Vyke having a proprietary “lock” on mobile WiFi
a “lock” on mobile WiFi technology access technology. As the company has noted its offering is innovative but translates
only into a time-to-market lead which it estimates at a minimum of 18 months. In this
respect the recent (August 29th) agreement with Mozat Pte, owner of the Morange
(www.morage.com ) mobile “community”) in Singapore is an important indicator of
Vyke’s ability to extend its market presence through partnership rather than organic
growth. From origins in 2003 at the National University of Singapore, Mozat has
become has developed mobile solutions for software providers, device manufacturers
and also carriers including China Mobile, China Unicom, SingTel and TIGO. Singapore-
based Morange is a mobile platform which provides an operator independent, mobile
handset- based interface featuring services such as mobile based social networking,
push email, cross platform instant messaging, remote desktop access and personal
information management.
Further, in mid-2007 Vyke announced an agreement with The Cloud Networks, giving
Vyke users the ability to access mobile VoIP services across a network of 9,000+
hotspots and 16 large area, metropolitan networks, including such areas as the City of
London, Canary Wharf, Manchester and Amsterdam.

Efficient billing and capacity


Billing capacity demands should Central to this leadership is the ability to efficiently track users and bill revenues; Vyke
increase has invested heavily in its billing system and analytical capacity. We expect this to
scale; as its subscriber population grows we expect cap-ex to grow, currently
calculated at 1.5%-2.0% of FY2011-12 revenues. Our forecasts incorporate total cap-
ex of £18m by 2012.

The competition ~ “Vodafone”

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

Figure 10: P&L FY05-10E


P&L £m 2005 2006 2007e 2008e 2009e 2010e
Calling Cards 5.5 7.7 8.4 8.5 8.5 8.5
IP accounts 0.2 2.3 15.9 51.0 93.7 176.0
JV Tele Super Nordic 0.0 (0.2) (0.1) 0.0 0.0 0.0
Genme Sdn (Vyke Asia) 0.0 0.0 0.0 0.0 0.0 0.0
Internal 0.0 0.2 0.0 0.0 0.0 0.0
Total Revenue 5.7 10.0 24.2 59.5 102.2 184.5
Cost of Sales (5.3) (9.2) (22.3) (54.1) (92.5) (166.7)
Gross profit 0.4 0.8 1.9 5.4 9.7 17.9
Mrg (%) 7.3% 7.9% 7.8% 9.1% 9.5% 9.7%

Operating costs (2.2) (3.6) (4.6) (5.6) (6.8) (11.6)


Mrg (%) -38.9% -36.4% -19.0% -9.4% -6.6% -6.3%
EBITDA (DS&C) (1.3) (1.8) (1.2) 1.4 4.7 8.4
Mrg (%) -22.1% -17.7% -5.0% 2.4% 4.6% 4.6%
Depreciation (0.2) (0.2) (0.3) (0.4) (0.5) (1.0)
Amortisation (0.5) (1.1) (1.2) (1.2) (1.2) (1.2)
EBIT (DS&C) (2.3) (3.9) (2.7) (0.2) 2.9 6.2
Mrg (%) -41.0% -39.5% -11.3% -0.3% 2.9% 3.4%
Goodwill 0.0 0.0 0.0 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0
EBITDA (rptd) (1.3) (1.8) (1.2) 1.4 4.7 8.4
Mrg (%) -22.1% -17.8% -5.0% 2.4% 4.6% 4.6%
EBIT (rptd) (2.3) (4.0) (2.7) (0.2) 2.9 6.2
Mrg (%) -41.0% -39.6% -11.3% -0.3% 2.9% 3.4%
Other 0.0 (0.0) 0.0 0.0 0.0 0.0
Net Interest 0.0 (0.2) (0.1) 0.3 0.9 1.7
PBT (rptd) (2.3) (4.2) (2.7) 0.1 3.8 7.9
PBT (DS&C) (2.3) (4.2) (2.7) 0.1 3.8 7.9
Provision for Income Taxes 0.0 0.0 0.0 (0.0) (1.1) (2.4)
Tax rate (%) 0.0% 0.0% 0.0% -30.0% -30.0% -30.0%
PAT (rptd) (2.3) (4.2) (2.7) 0.1 2.7 5.5
PAT (DS&C) (2.3) (4.2) (2.7) 0.1 2.7 5.5
Basic Wtd Av Dil Shares 238.3 412.4 36.2 36.2 36.2 36.2
EPS reported (1.0) (1.0) (7.5) 0.2 7.4 15.3
EPS (DS&C) (1.0) (1.0) (7.5) 0.2 7.4 15.3
Source: Vyke, DSC

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www.danielstewart.co.uk 03 September 2007

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).

Figure 11: Vyke, Balance Sheet FY05-10E


Balance Sheet £m 2005 2006 2007 2008e 2009e 2010e
Cash & Equivalents 0.35 0.17 0.55 5.76 14.10 28.32
Investments 0.00 0.00 0.00 0.00 0.00 0.00
Inventory 0.00 0.00 0.00 0.00 0.00 0.00
Accounts Receivable 0.53 0.64 1.53 3.75 6.44 11.63
Accrued/Other 0.00 0.00 0.00 0.00 0.00 0.00
Total Current Assets 0.88 0.81 2.08 9.51 20.54 39.95
Goodwill 11.33 12.17 12.17 12.17 12.17 12.17
Amort. Goodwill (0.54) (1.62) (2.84) (4.06) (5.28) (6.49)
Goodwill net 10.79 10.55 9.33 8.11 6.89 5.68
Fixed Assets gross 0.69 0.79 1.33 1.87 2.87 5.87
Depreciation (0.19) (0.26) (0.57) (0.95) (1.48) (2.47)
Net Fixed assets 0.50 0.53 0.77 0.92 1.39 3.40
Deferred tax, other 0.00 0.00 0.00 0.00 0.00 0.00
Fixed assets 11.30 11.08 10.10 9.04 8.29 9.09
Total Assets 12.18 11.89 12.93 19.31 29.59 49.79
Accounts Payable 0.05 1.76 4.31 10.60 18.20 32.86
Short-term debt 1.00 1.42 1.42 1.42 1.42 1.42
Tax& Provisions 0.00 0.17 0.17 0.17 0.17 0.17
Accruals and Deferred Income 0.45 0.68 0.68 0.68 0.68 0.68
Other 0.27 0.03 0.00 0.00 0.00 0.00
Total Current Liabilities 1.76 4.07 6.58 12.87 20.47 35.13
Long-term debt 0.01 0.57 2.00 2.00 2.00 2.00
Accruals,Other 0.49 0.49 0.49 0.49 0.49 0.49
Long-term Liabilities 0.49 0.65 2.49 2.49 2.49 2.49
Share Capital 4.07 4.43 4.43 4.43 4.43 4.43
Share Premium 7.69 7.69 7.69 7.69 7.69 7.69
Adjustments, other 0.00 0.00 0.00 0.00 0.00 0.00
Retained earnings (1.79) (5.53) (8.26) (8.18) (5.50) 0.05
Total Equity 9.97 6.58 3.85 3.94 6.62 12.17
Sum Liabilities & Shareholders Equity 12.22 11.30 12.93 19.31 29.59 49.79
Source: Vyke, DSC

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www.danielstewart.co.uk 03 September 2007

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

Figure 12: Vyke projected cashflow FY05-10E


Cashflow £m 2005 2006 2007e 2008e 2009e 2010e CAGR
FY07-10E
Op DS&C (2.3) (3.9) (2.7) (0.2) 2.9 6.2
D&A (0.7) (1.3) (1.5) (1.6) (1.8) (2.2)
Working capital 0.1 1.2 1.7 4.1 4.9 9.5
Provisions Other 0.0 (0.1) 0.0 0.0 0.0 0.0
Op CF (1.5) (1.5) 0.5 5.5 9.6 17.9 239%
Net interest 0.0 (0.0) (0.1) 0.3 0.9 1.7
Taxation 0.0 0.0 0.0 (0.0) (1.1) (2.4)
Net OpCF (1.4) (1.5) 0.4 5.7 9.3 17.2 252%
Purch. Fixed Invest. 0.0 0.0 0.0 0.0 0.0 0.0
Capital Expenditure (0.0) (0.5) (0.5) (0.5) (1.0) (3.0)
Net OpFCF (1.5) (2.0) (0.1) 5.2 8.3 14.2
Exceptional Items (1.1) 0.0 0.0 0.0 0.0 0.0
Share Based Payment 0.0 0.0 0.0 0.0 0.0 0.0
Disposal Fixed Assets (net) 0.0 0.0 0.0 0.0 0.0 0.0
Cash before dividends, financing (2.6) (2.0) (0.1) 5.2 8.3 14.2
Dividends Paid 0.0 0.0 0.0 0.0 0.0 0.0
Issue of Shares (net) 2.2 0.0 0.0 0.0 0.0 0.0
Loans, Net 0.0 1.9 0.0 0.0 0.0 0.0
Increase/Decrease in Borrowings (0.0) (0.1) 0.5 0.0 0.0 0.0
Receipts/Payment - Investment 0.0 0.0 0.0 0.0 0.0 0.0
Lease Capital 0.0 (0.0) 0.0 0.0 0.0 0.0
Purchase of Own Shares 0.0 0.0 0.0 0.0 0.0 0.0
Eq FCF (0.4) (0.2) 0.4 5.2 8.3 14.2 242%
Source: Vyke, DSC

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www.danielstewart.co.uk 03 September 2007

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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www.danielstewart.co.uk 03 September 2007

Appendix I: Vyke management profiles


Tommy Jensen ~ Executive Chairman (51), has 20 years’ international experience in
senior management roles in the information technology and telecommunications
sectors. Past roles include; co-founder, the Maskina Group; Scandinavian and Benelux
Group MD, Caldwell Group; director Esselte AS; chief executive Esselte Video AS;
chief executive Filmnet (Digital Canal); senior vice president Egmont; chief executive
and founder of One2Com Group (Scandinavian telecommunications).

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

Kim Berknov ~ Non-executive director (44), managing director of Evergreen Capital


Partners Limited, a private equity service firm focusing on financing, restructuring and
growing businesses in Northern Europe. Previously Kim has held positions as
executive vice-president of Aldata Solution, and managing director of Digital Mountain
AG, TransConnect Corporate Finance GmbH and GE Capital IT Solutions. He was
previously a management consultant with McKinsey & Company and held international
sales and marketing positions at NCR Corporation. He holds an MBA from IMD in
Lausanne and a BA from Copenhagen School of Economics and Business
Administration.

Terje Aske-Henrikesen ~ Non-executive director (51), president of EMS Ship Supply


AS a manufacturer and supplier of marine equipment, technology and logistical
services. From 1998 to 2005 he was executive vice president and president of Nera
Satellite Communications and prior to that was general manager of Elopak ASA. Other
directorships have included BNSC Beijing, NSSL Limited, World Wide Mobile
Communications AS, Synnove Finden ASA, Crosscomar SL, Stromme Singapore and
Stromme- Madsen Rotterdam. He holds degrees in Mechanical Engineering and
Business Economics.

Peter Holmgren ~ Non-executive director (28), a director of Pinemont Securities


Limited, a private equity advisor specialising in the Nordic market and based in London.
He is also a director of Cura Capitalis AB, a Swedish privately owned investment
company and Seniorstøtten AS, a Norwegian private care company. Peter previously
worked as an Equity Derivatives trader for IFX Group Limited. He holds a MA in
Economics and Finance from Heriot-Watt University, Edinburgh, Scotland.
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www.danielstewart.co.uk 03 September 2007

Appendix II: Glossary of selected terms

802.11 ~ wireless standards grouping developed by the IEEE composed operating at


different radio frequencies, e.g. 802.11b (2.4GHz) common to microwave ovens,
cordless phones, medical and scientific equipment, and Bluetooth devices
Bandwidth ~ communications network transmission capacity dependent on
transmission speed, number of users and the type of device used to connect PCs to a
network. Standard 802.11b provides a bandwidth of 11 Mbps; 802.11a and 802.11g
provide bandwidth of 54 Mbps.
Bits (bps) and Bytes (Bps) per second ~ bits per second (bps) sometimes confused
with bytes per second (Bps); ‘bits’ is a measure of transmission speed, ‘bytes’ is a
measure of storage capability. 8 bits make a byte; a wireless network operating at a
bandwidth of 11 megabits per second (11 Mbps or 11 Mbits/sec), is sending data at
1.375 megabytes per second (1.375 MBps).
Broadband ~ comparatively fast internet connection. Services such as ISDN, cable
modem, DSL and satellite are all considered broadband as compared to dial-up
Internet access. There is no official speed definition of broadband but services of
100Kbps and above are commonly thought of as broadband.
XDSL ~ family of Digital Subscriber Line protocols for high-speed data, voice and video
transmission over ordinary twisted-pair copper telephone wires.
HotSpot ~ WiFi service point; often located in public spaces (coffee shops, airport
lounges, stations, convention centres, hotels) and within corporations or on campuses.
HotSpots are known as CoolSpots.
Hz ~ frequency, equivalent to unit of cycles per second (megahertz (MHz) one million
hertz; gigahertz (GHz) one billion hertz). AM broadcast radio frequency band is 535-
1605 kHz, the FM broadcast radio frequency band is 88-108 MHz, and wireless
802.11b LANs operate at 2.4 GHz.
IEEE Institute of Electrical and Electronics Engineers, New York, www.ieee.org. A
membership organisation that includes engineers, scientists and students in electronics
and allied fields. It has more than 300,000 members and is involved with setting
standards for computers and communications.
IP address A 32-bit number that identifies each sender or receiver of information sent
across the Internet. An IP address has two parts: an identifier of a particular network on
the Internet and an identifier of the particular device (which can be a server or a
workstation) within that network.
PHY The lowest layer within the OSI Network Model. It deals primarily with
transmission of the raw bit stream over the physical transport medium. In the case of
wireless LANs, the transport medium is free space. The PHY defines parameters such
as data rates, modulation method, signalling parameters, transmitter/receiver
synchronisation, etc. Within an actual radio implementation, the PHY corresponds to
the radio front end and baseband signal processing sections.
Source: The Cloud

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www.danielstewart.co.uk 03 September 2007

Appendix III: Risk factors


Vyke has a clear first-mover advantage in its WiFi/mobile IP proposition, but as a start-
up operation it faces a number of risks. We itemise these as follows;
• Technology risk
• Exposure to operational failure of WiFi algorithms or a challenge to of IP
rights
• Redundancy of WiFi-enabled handsets due to development of 3G, 4G or
other (e.g. WiMAX) developments
• Transaction and billing capacity limitations
• Switching capacity limitations
• Proven health concerns of the deployment of WiFi base stations
• Litigation risk
• As Vyke gains profile some reaction from GSM/3G-based operators such as
Vodafone might be expected
• Ongoing litigation; suspended. Vyke reports that Southwestern Bell and
other Bells had an action against Maskina Communications Inc US for
“alleged participation in a wrongful scheme to avoid certain access charges “.
The case was dismissed Aug 23rd 2005, but referred to the FCC. At this
stage no further action is registered.
• Litigation completed. Vyke (Maskina Communications) paid Live Oak
Telecom LLC $575k. Details are provided in Vyke’s FY06 Notes to
Accounts 2:18.

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www.danielstewart.co.uk 03 September 2007

Disclosure checklist

COMPANY CODE DISCLOSURE


Vyke VYKE 3
Vodafone VOD 3
Carphone Warehouse CPW 3

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