Thanx to Coleman over on S.H. for this:
CYBERSURF CORPORATION (CY $0.42, CDNX)
Recommendation: HOLD
12 to 18-Month Target: $0.55
Mark Pavan (416) 864-3559; mpavan@yorkton.com
Farhan Syed, CFA (416) 864-3689; fsyed@yorkton.com
Year-end Results Announced; Recommendation and Target Lowered
EVENT: Cybersurf announced its year-ended June 30 results late last week. The company generated $2.5 million in revenue
compared to $3.9 million in the prior year. By inference we calculate that Cybersurf generated $0.7 million in revenue in Q4
2000 compared with $0.8 million in Q4 1+99. Of the total annual revenue, $0.8 million was derived from 3web related
activity. At June 30, the company held approximately $22.8 million in cash. Today the company has approximately 450,000
registered 3web subscribers, up from 380,000 at the end of June.
Cybersurf also announced that its board of directors has approved a corporate reorganization that separates its free ISP
business, 3web, into a separately incorporated entity from Cybersurf’s software development activities. Furthermore the Board
approved the adoption of a shareholder rights plan, subject to regulatory and shareholder approval.
COMMENT: In July of this year we indicated that to maintain investor confidence in its existing business model, Cybersurf
would have to act relatively quickly to add new cities and new partners to 3web operations. Among the items we expected were:
• launch of service in 16 additional cities;
• demonstrate subscriber growth in each new city;
• launch French language site;
• new content and user experience partnerships with leading online and brick and mortar firms;
• one to three co-branding partnerships with significant Canadian corporate partners;
• additional sales staff added to roster;
• enhance subscriber and activity disclosure and improve financial disclosure; and
• proof of concept of sale of software via Mesoamerica channel.
Cybersurf has achieved many of the above the goals with the exception of enhanced disclosure and success through the
Mesoamerica channel, both of which may come in the future. Unfortunately, although subscriber growth has been
demonstrated, it has occurred slower than forecast.
The environment within which Cybersurf operates has not improved dramatically as Internet-based advertising continues to
experience slower-than-anticipated growth. Arguably similar phenomena is occurring south of the border where a number of
free ISPs have become insolvent. We note that Cybersurf is fully funded such that it can afford to wait for the expected ramp in
Internet advertising. Leading free ISP NetZero (NZRO, NASDAQ) reported sequential revenue shrinkage in its last reported
quarter, while Juno Online (JWEB, NASDAQ) reported a decrease in monthly per subscriber revenue in its last reported
quarter. Since we do not believe this economic and operating environment will change in the medium term, we are reducing
our Cybersurf recommendation from Speculative Buy to Hold.
CONCLUSION: Our valuation of Cybersurf continues to be based on active subscribers, whereby we assume that
approximately half of Cybersurf’s registered subscribers are active. We are lowering our forecast active subscribers from
500,000 to 350,000 for next year based on the pace of growth to-date. We are also lowering our subscriber value from $75 to
$50 per subscriber based on U.S. comparable firm valuations, and discounted for poor visibility into Cybersurf’s operations.
The net result is to lower our target from $1.20 to $0.55. We note that this valuation does not attribute any value to
Cybersurf’s software development business because of the uncertainty surrounding those activities. Thus, we have a Hold
recommendation and a $0.55 target on Cybersurf. |
