CYBERSURF CORPORATION (CY $1.20, CDNX)
Recommendation: SPECULATIVE BUY
12 to 18-Month Target: $2.40
Mark Pavan (416) 864-3559; mpavan@yorkton.com
Revenue and Subscriber Forecasts Significantly Reduced; Belief in Subscriber Value Maintained
EVENT: We are reinstating our Speculative Buy recommendation on Cybersurf, which had been under review. We are also
issuing new revenue forecasts . Our new target is $2.40 versus $3.00 previously.
COMMENT: We are reducing our revenue forecasts related to Cybersurf from $3.9 million and $18.4 million for F2000 and
F2001 to $1.9 million and $6.2 million, respectively. We are also releasing a F2002 revenue forecast of $13.5 million. Our
forecasts do not include any potential revenue from Cybersurf’s Latin American partnership software licensing venture. We
have chosen to not forecast any revenue from this partnership until its economic value can be validated externally. We have
taken its potential into account as part of our rationale related to reinstating our Speculative Buy recommendation. We have
also taken into account the company’s cash position of approximately $24.7 million or $0.78 per share at March 31 that may
be used for acquisitions and product development. The company could forseeably burn through approximately $2.0 million in
cash for each of the next two quarters. We do not believe that Cybersurf is a potential hostile takeover candidate due to
management share control and existing employment contracts.
Cybersurf’s Free ISP/direct marketing business has suffered from the slow pace of Canadian advertising dollars migrating to the Web.
We believe that Canada is behind the U.S. in terms of advertisers adopting the Web as an advertising medium, the net result being
that Cybersurf has failed to live up to our expectations of subscriber growth, geographic expansion, corporate development and co-branding
thus far. We still believe, however, that the company will address each of these issues in the near term.
In spite of a May press release announcing geographic expansion, Cybersurf has not launched its service across 16 new cities.
The delay is attributed to longer-than-expected line negotiations with local exchange carriers. We expect that subscriber growth
will accelerate on launching service as promised in 16 new cities. We expect this launch to occur within three months. We
believe that Cybersurf’s lack of national presence has severely hampered its growth and partnership opportunities, as national
advertisers are reluctant to use a non-national service. We also believe that the company’s salesforce, which has historically been
sourced from the traditional advertising channel, is likely not adequately trained or ideally suited to sell Web advertising.
On the corporate development and revenue partnership fronts, Cybersurf has not made a major partnership announcement since
HMV Canada in March 2000. Cybersurf management has indicated that it is in late stage discussions with high-profile potential
partners and that its absence of announced partnerships relates to efforts to secure the best possible economic deal for the
company. We recognize the inherent difficulty in negotiating favourable licensing agreements and that large organizations may
not be as nimble as hoped when transacting with an upstart company with limited operating history. However, we do not believe
that licensing will become any easier in the near future, with U.S. free ISP NetZero (NZRO NASDAQ) entering the Canadian
market in the fall. The upside in this recent announcement is that we believe it validates the Canadian space as a potentially
profitable arena, one where Cybersurf has an opportunity to be a leading industry participant. The added exposure of NetZero
may also help some advertisers come on board, although several large U.S. ISPs/marketers are already operating in Canada.
Our valuation is derived on a per subscriber basis. Based on our assumption that approximately 65% of Cybersurf’s 390,000
subscribers are live (i.e., logged on at least once in the last month), the company is trading at $150 per subscriber. Publicly
traded ISPs in the U.S. are currently trading in the range of US$100 to US$5,800 per subscriber. We are forecasting that one
year from now, the company will have approximately 500,000 active subscribers and that this will represent 33% of the Free
ISP market in Canada. Using $150 per subscriber, we arrive at a target of $2.40 per share.
Previous Day’s Volume 29,900
12-Month High-Low $4.65 - $1.40
Shares Outstanding 31.4 million
Market Capitalization $38 million
Float 17.8 million
Float Value $21 million
Index Member NA
CONCLUSION: To maintain investor confidence in the Free ISP model, Cybersurf will have to act relatively quickly and add
new cities and new partners to its existing operations. To maintain our confidence, the company must execute on the
following items within a two to five-month time frame:
• launch of service in 16 additional cities;
• demonstrate subscriber growth in each new city;
• launch French language site;
• enhance subscriber and activity disclosure and improve financial disclosure;
• one to three co-branding partnerships with significant Canadian corporate partners;
• additional sales staff added to roster;
• new content and user experience partnerships with leading online and brick and mortar firms; and
• proof of concept of sale of software via Mesoamerica channel.
We have a Speculative Buy recommendation on Cybersurf and a $2.40 target based on its existing cash position and its current
stock price level. We highlight that this investment is only appropriate for investors with a very high risk tolerance.
Cybersurf Selected Summary
June 30 Year-end
1999 2000E 2001E 2002E
Revenue (mm) $3.9 $1.9 $6.2 $13.5
Price/Revenue 17x 6x 3x
EPS (0.01) (0.33) (0.41) (0.37) |
