E 2016E 2017E. Revenue, MSEK Growth 53% 92% 129% 151% 42% EBITDA EBITDA margin neg neg neg 9% 12%

Transcription

1 E 2016E 2017E INITIATING ANALYSIS 8 June 2015 Summary CybAero (cba.st) Getting ready for take-off CybAero develops and sells small remotely piloted aircraft systems ( RPAS or UAV ) with vertical takeoff and landing capabilities for military, civil service and commercial buyers. List: Market Cap: Industry: CEO: Chairman: First North 351 MSEK Information Technology Mikael Hult Claes Drougge The firm operates in a market segment that is growing globally, and will further be accelerated once rules around the commercial use of drones are improved. CybAero s mid-term success is determined by the successful delivery of its first two major orders, and the progress in scaling up its sales, production and aftersales organization. Estimated fair value lies at SEK 21.9 per share. This is not adjusted for a potential future equity issue. Substantial revenue growth during the next years is already priced in this scenario, but we see a further upside if the firm executes on its current breakthrough orders, manages to grow both sales and its organization and the market unfolds as expected. OMXS 30 CybAero Jun 07-Sep 06-Dec 06-Mar 04-Jun Redeye Rating (0 10 points) Management Ownership Growth prospect Profitability Financial strength 6.0 points 5.0 points 6.5 points 0.0 points 0.0 points Key Financials E 2016E 2017E Revenue, MSEK Growth 53% 92% 129% 151% 42% EBITDA EBITDA margin neg neg neg 9% 12% EBIT EBIT margin neg neg neg 1% 6% Pre-tax earnings Net earnings Net margin neg neg neg 0% 6% Dividend/Share EPS adj. neg neg neg neg 1.23 P/E adj. neg neg neg neg 15.5 EV/S EV/EBITDA neg neg neg Share information Share price (SEK) 19.0 Number of shares (m) 18.5 Market Cap (MSEK) 351 Net debt (MSEK) 20 Free float (%) 100 Daily turnover ( 000) 71 Analysts: Alexander Sattelmaier alexander.sattelmaier@redeye.se Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report. Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, Stockholm. Tel E-post: info@redeye.se

2 Redeye Rating: Background and definitions CybAero The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation. Company Qualities The aim of Company Qualities is to provide a well-structured and clear profile of a company s qualities (or operating risk) its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company s qualities on a ten-point scale based on five valuation keys; 1 Management, 2 Ownership, 3 Growth Outlook, 4 Profitability and 5 Financial Strength. Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points. The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys. Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company s management are: 1 Execution, 2 Capital allocation, 3 Communication, 4 Experience, 5 Leadership and 6 Integrity. Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company s stability and the board s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 Ownership structure, 2 Owner commitment, 3 Institutional ownership, 4 Abuse of power, 5 Reputation, and 6 Financial sustainability. Growth Outlook Our Growth Outlook rating represents an assessment of a company s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Growth Outlook are: 1 Strategies and business model, 2 Sale potential, 3 Market growth, 4 Market position, and 5 Competitiveness. Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 Return on total assets (ROA), 2 Return on equity (ROE), 3 Net profit margin, 4 Free cash flow, and 5 Operating profit margin or EBIT. Financial Strength Our Financial Strength rating represents an assessment of a company s ability to pay in the short and long term. The core of a company s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company s financial strength is based on a number of key ratios and criteria: 1 Times-interest-coverage ratio, 2 Debt-to-equity ratio, 3 Quick ratio, 4 Current ratio, 5 Sales turnover, 6 Capital needs, 7 Cyclicality, and 8 Forthcoming binary events. 2

3 Table of Contents CybAero Table of Contents... 3 Glossary... 5 Investment Case in Summary... 6 Getting ready for take-off... 6 Major AVIC contract only the beginning of a journey... 6 Key catalysts... 7 Valuation... 8 Company profile... 9 Background... 9 Products and services Helicopters Peripheral components payload & operational systems Aftersales and additional services Business model and sales The role of strategic partnerships From helicopter platform to system & solution provider Customer segments and the move to serial sales & production Team Management Board of Directors Market opportunity Global RPAS market status & outlook Need for general RPA systems in key segments Areas and drivers for VTOL adoption Key competitors Product segments Direct competitors Positioning & differentiation Financial projections Understanding revenue recognition, orders and call-offs Current customer orders Chinese customs agency AVIC Swedish Navy Future prospects US Department of State (DoS) UAE Armed Forces Indian Navy Korean Navy Predicting aftersales

4 Resulting revenue forecasts Margins and key costs Mid-term: Scaling up sales and production Long-term: sustained growth seems possible for several years Valuation DCF Key value drivers and result Sensitivity analysis Bear case Bull case Earnings and multiples comparison Key risk factors Summary Redeye Rating Rating changes in the report

5 Glossary CybAero ASEAN AVIC bn CBA DCF DoS IR ISP k m MALLS MTOW R&D Recon RFI RFQ RFT RPAS SEK UAE UAV US USD VTOL YoY Association of Southeast Asian Nations Aviation Industry Corporation of China Billion Ticker for CybAero AB Discounted Cash Flow Department of State Infrared Swedish Inspectorate of Strategic Products Thousand Million Mobile automatic launch and landing station Maximum Takeoff Weight Research & Development Reconnaissance Request for information Request for quotation Request for tender Remotely Piloted Aircraft System, synonym to UAV Swedish Krona; 1 SEK ~ 0.15 USD (2014 average) United Arab Emirates Unmanned Aerial Vehicle, synonym to RPAS United States of America US Dollar Vertical Takeoff and Landing Year-on-year (compared to previous year) 5

6 Investment Case in Summary CybAero Major AVIC contract gives CybAero a good base to grow upon Getting ready for take-off CybAero is at an interesting stage in its development. Winning the contract with AVIC was the firm s biggest, multi-year business so far and the final confirmation that CybAero is on to something big. Previously, this could already be seen by the profiles of its co-development partners, including Saab, Spanish major defense systems provider Indra Sistemas or Cassidian which was part of EADS at the time and now a subsidiary of Airbus. After years of developing their RPAS systems on its own and together with these partners, the contracts with AVIC and also the Chinese customs office are CybAero s basis for moving into the stage of serial sales and production. This is a key step in the firm s growth towards its visionary revenue goal of around 200 musd in some years. While this figure sounds rather high, the current market growth projections and the firm s positioning compared to the few competitors make it clear that there is significant growth potential in the firm. Major AVIC contract only the beginning of a journey As for now, the contract with AVIC with its guaranteed revenue potential of msek over the remaining 7 years gives the firm a perspective of financial stability for the first time, even if the timing of future call-offs from the contract is not plannable entirely. At the same time, this is only the beginning of the journey. Besides seeing several other military and civil service customers about to purchase RPAS systems in CybAero s class, the company currently faces several challenges ahead before it can capture the market. The firm faces several challenges ahead slow decision making in the market, ramping up its organization and closing the existing prospects Firstly, the market itself is a rather complex and slow animal. In the military and civil segments, the use of non-combat engaging VTOL systems is still at an early stage compared to the use of combat or reconnaissance drones with fixed wing architecture (similar to traditional airplanes). This is partly due to the fact that decision-making processes for defense buying are rather slow, partly since it is driven by strategic military and political decisions. In addition, the commercial use of RPAS is at an even earlier stage. While more and more firms are open to test the use of drones to validate different potential benefit cases, one key issue remaining to be solved is that of regulation. First countries like Japan or France have passed improved regulations, while others including the US and the big part of the EU are still lagging behind, creating uncertainty for potential commercial clients to what extent they will be able to use RPAS. Secondly, with market demand slowly catching on and the first major contracts flowing in, CybAero as a company is facing the challenge to step up its game. As with any growth company, CybAero will have to quickly 6

7 evolve key processes such as especially sales, production and aftersales in line with increased market potential. As this will both take time from existing staff and management as well as require additional hiring, a key challenge in to balance this growth and ramp up neither too slow nor too quickly. If the firm is too slow in making these changes, it might have to turn down potential sales opportunities or even get into quality issues with the products it ships. Growing too quickly will increase the cost base disproportionally and could lead to cash flow issues. At the same time, it seems that this balancing problem is less pronounced than in more fastmoving industries, due to the aforementioned slow decision making processes on the customer side. In addition, the management and especially CEO Mikael Hult have experience from growth companies, meaning they should be aware of the issue and capable to execute on it accordingly. One positive signal for this is the recent release of an updated and also rebranded product program. Now called APID ONE, CybAero is packaging its helicopters and peripheral systems in a modular way towards its key customer segments with three basic models. This is part of the firm s positioning as a solution provider, and aims at helping clients to more easily find and configure a system matching their needs. In addition to the contracts closed, the company seems to have several prospective clients in the pipeline, especially in the civil and military segments. Currently, demonstration flights and longer test projects with individual prospects seem to be a key part in the sales process. This as well as the recent launch of the new product program continue to require significant investments into R&D and related costs. As of now, it can be assumed that the outstanding receivable from the first major order (Chinese customs agency) will be settled in late Given that the firm plans to increase production and build both the demonstration systems for the Swedish navy as well as a bigger number of systems for delivery to AVIC, a minor financing round as well as a short-term loan are required to bridge a cash flow gap during 2015 and If the call-offs and deliveries by AVIC come in as expected during the next quarters, this should however not be a long-term issue. Any additional contracts won will then further accelerate the firm s journey to profitability. Finally, given the size of AVIC s contract and its importance in terms of both future orders, cash flow and prestige, this however also means it is a risk for CybAero s position and development if anything does not go according to plan. Key catalysts We see several events that could impact the share price of CybAero in the near- to mid-term future. These include the successful deliveries and incoming customer payment for the systems to the Chinese customs agency and the first 5 AVIC systems, the announcement of a second call-off order from AVIC or the signing of additional medium or major sized orders. A key 7

8 factor in the near-term is also the question of whether the firm chooses to finance its remaining capital needs partly or fully with a new equity issue. In the longer run, key drivers for the stock value will also be whether CybAero s target market grows as expected, when and to what extent the regulatory situation in the commercial segment will improve, and how well the firm can capture this opportunity (including which commercial customers will chose a product like CybAero s for their RPAS use cases, and how the firm has managed to build up its sales and production capacities until then). Valuation Given the situation and future dynamics described, we see a good potential and position for CybAero in the market. At the same time, our valuation indicates that a substantial growth of the firm is already priced in the stock for now. Our fair value base case at SEK 21.9 per share is only 15% from the current price of SEK 19 (June 5), and we have not adjusted for a potential equity issue to finance any capital need during the coming quarters. Given such a financing, we see a fair value share price of around SEK 20 per share. There is however still a significant upside possible in the mid-term - if the firm manages to deliver on the existing expectations and additionally closes and executes on a number of bigger contracts, especially in the size class of AVIC, in the coming 2-3 years. This is indicated by our bull case fair value of SEK 41.6, which is a 119% premium over the last stock price. Our fair value bear case gives an idea of the potential downside risk still inherent in the firm. It lies at SEK 8.3 with a 56% discount compared to the last stock price, and is the result of a reasonably negative scenario where the firm does not close any major contracts apart from the one with AVIC during the next years. 8

9 Company profile CybAero Development of RPAS started 1992, major companies involved as cooperation partners over time Background Having its roots in R&D projects at Linköping Technical University starting 1992, a company called Scandicraft was founded in 1997 in order to start the commercialization of the autonomously flying and remotely piloted helicopter developed. After years of demonstration flights and dialogues with key potential customer groups, CybAero was founded in 2003 to continue what Scandicraft started. Shortly after, the United Arab Emirates (UAE) Armed Forces placed the first order of 6 helicopter systems. The customer already had a contract with main competitor Schiebel, but due to several reasons chose to find a second source supplier. Scandicraft APID Mk3 prototype and APID 55. Source: helis.com / Scandicraft AB, CybAero This contract however required continued, substantial R&D effort, resulting in a cooperation with Saab AB on certain technical solutions. An era of different partnership discussions, executions and cancellations followed, lasting until around During this time, CybAero has been in partnerships with Saab AB, Spanish Indra Sistemas, French-based Cassidian (part of Airbus) and US-based AeroVironment, in addition to numerous discussions or shorter collaborations with other relevant players. In the meantime, the firm also sold the rights to its APID 55 helicopter to Saab in 2005 and released its own new system APID 60 in This phase can be somewhat seen as an orientation and development phase, both in terms of R&D on the product as well as the market. It helped the firm to identify its future customer segments, understand their needs or even educate them about the potential with VTOL UAVs. In addition, especially the partnerships with established players in the defense sector helped the firm to get access to the market and gain credibility as a future systems provider. This is an important aspect when selling to buyers in the defense or civil services area, which is further exemplified by the military backgrounds of several members of the board. Over the time, CybAero also established subsidiaries in both the UAE and US to get closer contact to its prospective customers, but both locations have been closed again later. This 9

10 was due to a pausing of the previous contract in the case of the UAE, and the initiation of a partnership with AeroVironment in the case of the US marked the real start of commercialization and saw the firm grow significantly In 2014, CybAero took the next steps towards a broader commercialization of its products. Firstly, it closed two contracts with customers in China with the Chinese customs agency ordering 3 systems, and AVIC, a defense and civil services systems provider, signing a frame agreement over a minimum of 70 systems over a span of 8 years. Secondly, the launch of the new product program APID ONE initiated an effort to position the firm as a solution provider and is in line with the buildup of serial processes in marketing, sales and production. CybAero was listed on NASDAQ OMX First North in It is headquartered in Linköping, Sweden, which is branding itself as the Aviation Capital of Sweden 1. Today, CybAero has around 50 employees and collaborations with major international players especially in the defense and civil services supplier segments. CybAero s product offering consists of 3 components: helicopter, peripherals and aftersales & additional services Products and services CybAero s product offering consists of three main component groups: the helicopters itself, peripheral components like payload and operational systems, and finally aftersales services. Each group will be introduced in detail in the following sections. For an understanding of the customer benefits and challenges of the use of VTOL RPAS systems as well as the competitive advantages of CybAero s products, refer to the next chapter Market opportunity. Helicopters The key component in CybAero s systems is a remotely piloted helicopter, a so-called VTOL UAV or VTOL RPAS. The company s new product program APID ONE features 3 different helicopters, which are however based on the same technical platform. This platform is not a complete redesign, but a significant advancement from the previous helicopter model APID 60. While the chassis may have different paintjobs and slightly different cuts, all are the same size, which is comparable to (though 40 cm slimmer than) a Toyota Aygo. This means that a system consisting of a helicopter and the relevant peripheral components can be transported with a small-sized transporter or truck. The frame and chassis are made from carbon fiber, titanium and aluminum

11 Previous model APID 60 being shipped for a testing mission. Source: CybAero All versions feature a rotary ( wankel ) engine with 55 horsepower that can be supplied in two versions, running either on gasoline or jet fuel with otherwise identical specifications. The shared and specific technical features of the helicopters are summarized below. The key differences between the systems are their takeoff weights (MTOW) as well as the different peripheral systems that come with it or can be ordered additionally. An overview of these is provided in the next section. 11

12 Product program APID ONE: overview technical data Model Rescue Ranger Defence Design Typical buyers Civil service organizations Civil service or commercial organizations Typical use cases Reconnaissance (recon) or Surveillance and recon, surveillance during pipeline inspection, forest & accidents, catastrophes, wildlife inventory, traffic person searches or similar control Length Height Width Rotor diameter Motor Fuel Operation time Operation radius Military organizations Surveillance and recon, object protection, communications interference, maritime operations MTOW 200 kg 180 kg 220 kg Source: Redeye Research, CybAero 320 cm 130 cm 120 cm 330 cm Rotary ("wankel") engine, 55 horsepower Gasoline or Jet A1 fuel depending on customer choice Up to 6 hours 50 to 200 km depending on configuration The APID ONE helicopters are operated by customers in two modes: autonomous, where the full flight path from start to landing is preprogrammed and controlled using satellite navigation, and semiautonomous, where the system is automatically kept stable but an operator controls the helicopter manually through joystick, map and for example an attached camera. CybAero has developed the helicopter models primarily on its own, but at the same time tries to maximize the use of standard components and produces almost no parts itself. For components which cannot be sourced through suppliers standard catalogues, the majority is produced by subcontractors. This allows both for a leaner manufacturing process and inventory, with CybAero buying all key parts from suppliers and focusing only on the final assembly, configuration and testing. In addition, this also lowers complexity and cost in maintenance for both CybAero and its customers. Production and testing is done at the company s headquarters in Linköping, with an additional test center being put into operation during Q around 1km from the headquarters. 12

13 Peripherals include payload (cameras and other sensors) as well as operating equipment (ground stations, mobile landing systems) Peripheral components payload & operational systems CybAero The helicopter itself is ultimately only a means to an end for CybAero s customers the real value lies in its use combined with certain peripheral components. This can be divided into additional equipment which is mounted on the helicopter, referred to as payload, and such equipment that is needed to operate the overall systems. The first category contains sensors of different kinds, including cameras, sonar systems, distance measurement lasers or radio interference transmitters. These are produced by third party suppliers and CybAero works with its clients to integrate the different components into the overall system. In the new product program APID ONE, the three helicopter models described earlier feature different standard configurations where CybAero has selected and integrated certain components already. This can however be enhanced with a range of other optional peripheral components. In addition, CybAero will also work with its customers to fulfill any more specific needs apart from these predefined standard and optional configurations, in order to adapt the system to the individual buyers needs. The second category of peripherals, needed to operate the helicopter systems, includes a smaller mobile as well as a stationary ground station from where the operator controls the aircraft. Based on the desired use case, the customers can chose which of those to buy and to use. In addition to the choice of ground station, customers can also choose between a shortand a long-range communication link, which determines the operation radius of the system. Another key component in this is also a marine configuration, including a special system facilitating fully or semi-automatic starting and landing from moving objects such as vessels. The system consists of three components: one to guide the helicopter in the early stages of the approach into the right position several meters above the vessel; an additional system to manage an automatized landing itself, and then a device that secures the helicopter on the vessel s surface once it has landed. The first component, to guide the aircraft into a stable position some meters over the vessel, is a third party solution licensed from Astrium (now part of Airbus). It was developed with input from CybAero and on the side of CybAero integrated into their mobile landing system for the APID systems. The second component is rather complex and still under development by CybAero. Once finished, it will allow to fully automate the final meters until a landing on the vessel s surface. As for now, this still needs to be handled by an operator. The third component is a device that resembles an anchor and secures the helicopter on the vessel s landing area once it has landed. This component is already in use and standardized by military organizations globally. With these 3 components, the marine configuration 13

14 allows for secure takeoff and landing from vessels, and is a rather complex and therefore expensive component in an overall helicopter system solution. Aftersales and additional services In addition to the provision of the helicopter and peripheral systems, CybAero also provides certain services upon delivery. One key aspect in this is a series of configuration and testing flights. This not only ensures the proper functioning of the equipment, but is also part of the handover to the client, ensuring their requirements have been met as defined in the contract. Furthermore, this includes a phase of training of key staff on the customer side regarding the use of the system. Normally, these activities are part of the initial sales contract and pricing. Aftersales are likely to create stable recurring revenue streams up to 20% of initial sales price In the initial sales contracts, CybAero also includes a warranty which normally lasts around 1 year or 500 operating hours, the latter corresponding to around flights, depending on individual mission times. Warranty times have not been standardized yet and therefore vary from contract to contract. After this factory warranty, CybAero expects a relatively steady need for both maintenance services as well as replacements parts. Aircraft regulations in most countries require a very regular inspection and even replacement of key parts in the system, and a variety of components is also subject to wear and tear. As a result, CybAero expects the yearly revenue potential from aftersales operations to up to 20% of the initial system cost. The lifetime of a system is expected at around 10 to 15 years. Partnerships have played a key role in R&D as well as establishing contact with prospective customers Business model and sales The role of strategic partnerships As mentioned before, partnerships with a number of players mainly in the global defense supplier industry have been drivers for CybAero s development in the past. Saab for example was an early development partner for the APID 55 system, which was the basis for the APID 60 and the current APID ONE product range. MALLS, a system for automated takeoff and landing from moving objects such as ships, has been developed in cooperation with European Aircraft manufacturer Airbus. Such partnerships support CybAero s R&D process due to access to resources and the network of these established industry players, thereby also reducing cost compared to complete in-house development. Such collaborations spill however also over on the sales process. Having its products co-developed with such major firms provides a relatively small and young company like CybAero with credibility, an important aspect when it comes to selling to especially military and civil service organizations. On the other side, engaging in such partnerships also bears the risk of creating future competitors. This has been the case with Saab, who got the product and sales rights to CybAero s APID 55 helicopter in exchange for R&D 14

15 cooperation in 2005 and now sells the system as a UAV solution to military clients on its own. In that specific case, it is however noteworthy that the system does not seem to have been development further significantly, and is likely part of bigger solution package sales of Saab, which goes in line with a much higher price tag according CybAero s management. Apart from some existing and paused co-development partnerships, the most significant partnership remaining in place for CybAero today is that with AeroVironment. The US-based firm is the biggest provider of UAV solutions to the US military, having supplied about 85% of the US armed forces total UAV fleet by AeroVironment therefore has an essential contact base with this customer segment that could be a significant market for CybAero in the future. The firms have a sales partnership agreement regarding CybAero s helicopter systems, where the first major sales prospect is the US Department of State. They had written a tender for the sourcing of a significant number of UAV systems, either fixed wing or VTOL, but canceled the tender mid-2013 since none of the bidding suppliers seemed to fulfill the necessary requirements. A renewal of the tender is still expected in the future. CybAero s partnership with AeroVironment however covers more than that. The US firm will sell CybAero s systems as part of their offering towards military, civil services and private clients in the US and other NATO countries. In addition, AeroVironment has contributed to CybAero s funding during 2012 with two convertible loans of 10 msek each, which they converted during Similar as for R&D partnerships, such sales partnerships should be positive for CybAero if the partner has a good contact network with relevant client segments, as well as a better understanding of the sales processes in the individual country. On the downside, selling through partners obviously results in lower net revenues for CybAero, since the partners take a cut of around 10 to 15%. From helicopter platform to system & solution provider CybAero s first sales were mostly payments from cooperation partners for testing systems or services. The first contracts, for example with the Chinese customs agency, contained the sale of the helicopter itself with an individual configuration of peripheral components worked out in pre-sales discussions with the customer. With the introduction of the new product series APID ONE, CybAero aims to standardize its sales model by introducing the pre-configured systems described earlier, which may then be further adapted to customers needs. APID ONE product range as a base for broad commercialization The underlying business model is however still based on an initial purchase price for the helicopter, the chosen peripheral components, initial training as well as testing and delivery of the systems. The initial revenue for such a contract can lie between 8 and 25 msek (1 to 3 musd), strongly depending on the configuration chosen. Systems for military use and more complex components like an automated landing system or a stationary base station 15

16 are the most expensive components, apart from the helicopter itself. Additional pricing details are not known to avoid sharing too much with competitors and maintain some flexibility in pricing towards different customer segments. As described earlier, sales can be supported through partners and distributors in various steps of the process, depending on the type of customer as well as the geographic market. The use of partners and distributors in sales typically reduces net sales for CybAero by 10-15%. It is noteworthy that the exact business model and processes for the aftersales market are currently being designed. CybAero expects the aftersales revenue potential to lie at up to 20% of the initial systems sales price per year, which is relatively high but explained by the factors mentioned in the product description section. The final setup of the aftersales value chain, including the decision how much to handle via partners and distributors, will determine what proportion of this revenue potential the company will be able to capture. Given an expected lifetime of these UAV systems of around 10 to 15 years and the significant size of aftersales revenues, it will however be in the interest of CybAero to capture a reasonably big part, since this generates a stream of recurring revenues over time and ensures a continued close client relationship. Business model and role of suppliers & partners Process Suppliers CybAero Partners & distributors PRODUCTION Helicopter Parts Concept, design Configuration, systems integration, assembly Assembly Testing Base station & related Production Systems integration, testing Payload equipment Production Systems integration, testing SALES Awareness depends Pre-sales depends depends Tender / offer depends depends Delivery depends AFTERSALES tbc tbc tbc Source: Redeye Research, CybAero tbc = to be confirmed as processes will evolve over time 16

17 has 3 key customer segments, of which only two are truly addressable as of today Customer segments and the move to serial sales & production CybAero As seen from the product program earlier, CybAero s sales are directed towards three main customer segments: military, civil service and commercial organizations. Buyers in the category military organizations could be for example defense ministries as well as individual divisions like marine or army corps. Civil service buyers may include coastal guard, border patrols and their related mother organizations. The commercial segment are private sector customers. As of today, the commercial market for drones in general is at a very early stage. With increased popularity of miniature and even consumer-oriented drones in recent years, the discussion around regulation have gotten increased public attention. At the same time, regulatory limits or unclear rules regarding the use of unmanned aircraft in civil airspace are however still a key limiting factor for the growth of this market. Given this limitation, many commercial organizations have not started to analyze or even test the potential use cases of drones in their business yet. Only a few exceptions to this have surfaced in recent years, such as Amazon, Google or several bigger delivery services experimenting with drone-based package delivery, for example. Other cases more relevant for CybAero include test projects regarding the surveillance of longer stretches of gas pipelines or bigger wildlife areas, which are however limited to individual projects so far. Sales process towards military & civil service organizations Phase Create Pre-sales Tender / offer awareness discussions process & order Delivery Aftersales Duration Ongoing 6-24 months 6-12 months ~6 months Ongoing Key aspects Educate future buyers about use cases Create interest & awareness for CybAero Help client to formulate need and get budget Introduce CybAero system and key benefits Match customer requirements with offer Get export Deliver in time clearance from ISP direct or via partners Respond with Deliver according competitive pricing to specification and in time Receive order and downpayment Receive final payment Meet warranty obligations during relevant time period Key activities Represent CybAero on trade fairs Assess & monitor interest across potential buyers Demonstration flights Direct meetings discussing use cases and solutions Demonstration flights Reply to RFI Direct meetings to discuss offer and any questions Demonstration flights Reply to RFP/T or RFQ Production, factory & acceptance tests delivery, configuration & final test flights Provide training (direct or via partner) Source: Redeye Research, CybAero RFI = Request for information: a potential customer reaches out to a base of suppliers, requesting information to understand what they can offer RFP/T = Request for proposal or tender: a customer has preliminary decided to buy a system to fulfill a need, but leaves the final configuration of the solution up to the seller RFQ = Request for quotation: like an RFT, but the product is more standardized or the desired, specific configuration already known, so the focus is more on price. Execution of maintenance during warranty period Provision of replacement parts 17

18 It is therefore hard to really describe a sales process for the commercial customer segment. Based on past experience, it is however possible to draw a picture of the process for military and civil customers. An overview of the process is illustrated below: The sourcing of such equipment as RPAS systems is driven by both political and military decisions, often on a strategic level. This could include aspects such as which countries a buyer wants to source such systems from, but also from the side of Swedish authorities which countries and customer types a company like CybAero should be allowed to sell its products to. As a result, the sales process is not really too linear and standardized across different customers, and can range from something like 6 months if a buyer has already identified a specific need for a UAV system and written a detailed specification for it, up to several years if this is not the case or if the use case is very special and requires additional configuration and testing of the system. The firm s organization including sales and production processes is evolving with its commercial success At the same time, it needs to be noted that CybAero s sales process is also still evolving as part of the growth in the company s organization. Today, sales are structured around both customers, partners and customer segments. Regarding outgoing sales, CybAero is mostly active by participating at relevant global trade fairs (air shows, defense & security, other UAV related) and conducting demonstration flights for selected customer groups, for example in collaboration with its Chinese customer AVIC. Another important aspect in prospecting future customers especially in the defense and civil services segment is to keep an eye on the discussions around the sourcing of UAVs in different countries governments. The company however only has a small proportion of own direct sales efforts. Instead, many contacts are inbound, meaning they are initiated from the side of the customers or through one of CybAero s local agents and partners around the globe. Also CybAero s production and delivery capacities are just starting to be scaled up, as mentioned earlier in an attempt to grow the organization in line with winning new orders. With the new testing center put in service and an extension of the production floor in place, CybAero s production capacity will double to around 2 to 3 helicopters per month by August At the same time, the team has its schedules filled by the delivery of 3 units to the Chinese customs agency during Q2 and Q3 and 5 units to AVIC also in China during fall 2015, added by further test and demo flights in China, Sweden and elsewhere. More details on the production capacity, as well as current sales prospects and ongoing projects of the firm can be found in the financial forecasts chapter. Future sales to commercial customers are expected to be shorter and less complex in terms of tender and similar official processes, but as said it is hard to anticipate the exact duration and process as of today. It is however 18

19 likely that it takes several years for this customer segment to get a full understanding of and validate the different use cases of RPAS technology in their specific businesses, even after the regulatory questions have been solved. CybAero s management has seen some recent additions and seems now geared for scaling up the organization Team Management CybAero s leadership team consists of five roles CEO, CFO, COO (Chief Operating Officer), CPO (Chief Process Officer) and Head of HR. Mikael Hult is CEO of the firm since 2013, after serving 3 years as Chairman of the Board at CybAero. Even before that, from 2004 through 2010, he had already been in the CEO role. Before and during his time at CybAero, Mikael has worked in different roles with startup and growth companies. Most of the organizations he worked with had an engineering focus, including Instrutec, PS Presentation System and Surgvision AB but also business incubators and seed capital investment organizations such as Teknikbrostiftelsen, Innovationsbron and Mjärdevi Business Incubator. Anna-Lena Rahm joined CybAero as CFO in fall Before that, she was CFO at Innovativ Vision AB, a company providing technology to the wood industry, for more than 10 years, collecting experience with project accounting. Rolf Schytt joined the company in April 2014 as COO and deputy CEO. His previous roles include thirteen years as CEO and in other positions at different production-focused firms like STIGA, Expander, Animex and Motalaverken. Thomas Hall joined CybAero in June 2014 in the CPO role, like Anna- Lena Rahm coming from Innovativ Vision. Previous experience includes roles within process-, project- and quality management, software development, product improvement and technical sales. Malin Höög joined the company in January 2015 as Head of HR. Before CybAero she worked for IUC Öst in roles such as project- and administrative manager in professional development and training. She also has experience from leading positions within the IKEA Group and within HR from Stadium AB. Based on their industry experience and previous roles, we see positive on the mix of profiles in the management team. All five have been almost exclusively working with production-related companies, and in roles directly relevant to their position at CybAero today. Mikael Hult and deputy CEO Rolf Schytt also have experience from fast growing and/or bigger 19

20 companies, which will likely be critical when it comes to growing CybAero, its organization and processes over the next time. Board of Directors Apart from CEO Mikael Hult, the company s board contains 6 other members as of May The detailed profiles can be read in the firm s annual report and on its website. What is important to see is that all members have been in the board during several years, including the latest member who joined the board in April 2015, but had been working as a consultant for CybAero since The firm s board features a strong mix of relevant backgrounds, but with a special focus on military and related organizations The board members have a mix of relevant backgrounds, with several underlying themes. Firstly, Mats Westin, Göran Larsbrink and Jan Ahlgren have worked in relevant positions with the Swedish military and related public organizations or military suppliers. This is an important addition given the importance of the military and civil services segments, and can help CybAero to better understand and access this customer base. Secondly, the other four board members have extensive practical and academic experience with growth companies. A good example for this is the latest new board member Mats Jacobson, who works as a consultant specialized in fast growing companies. He was previously CEO for Scalado, a software company that doubled its turnover 7 years in a row before being sold to Nokia. Given the challenges ahead of the firm in the coming years to scale up their organization and processes around product management, production and sales for example, this is a further critical skill set to have on board. The board of directors therefore features a good combination of the relevant skill sets. While none of the major shareholders are represented in the board, this team has the right background to help the firm develop during the upcoming exciting quarters and maybe years. That said, depending on the future development of both ownership in the firm as well as market traction around the commercial segment, the composition of the board might evolve over time as well. One weakness we see is the lack of one or several active majority shareholders, who would also have a board seat. Biggest shareholders as of Person / entity % capital Country Avanza Pension 9.2% SE Boston State Street Bank & Trust Com. 5.6% USA Aerovironment Inc 3.9% USA Lars Svensson 3.0% SE Swedbank Robur Fonder 2.7% SE Amer Al-Khalili 2.5% SE Goldman Sachs International LTD 2.4% UK Nordnet Pensionsförsäkring 2.3% SE Mikael Hult 2.1% SE Henrik Lewander 1.4% SE Source: Holdings.se, Redeye Research 20

21 Management and board ownership in the firms is rather uneven, but some key persons own significant stakes in the firm. We see it as positive that both the CEO as well as three of the board members have personally significant stakes in the firm. At the same time, looking at the fixed remuneration, it is surprising to see that both CEO and Chairman are paid via invoice. This is not the most transparent approach, but it has historically evolved and there is no indication for extremely inappropriate fixed remunerations. Management & board stock ownership as of Name Role % capital ksek % options Mikael Hult CEO 2.27% 8, % Anna-Lena Rahm CFO 0.02% % Rolf Schytt COO 0.01% % Thomas Hall CPO 0.00% % Sum management 2.30% 0.57% Claes Drougge Chairman 0.13% % Mats Westin Board member 0.23% % Göran Larsbrink Board member 0.12% % Jan Ahlgren Board member 0.03% % Anna Öhrwall-Rönnbäck Board member 0.00% % Mats Jacobson Board member 0.00% % Sum board excl. Mikael Hult 0.52% 0.49% Source: Redeye Research, CybAero, Holdings.se Market opportunity Global RPAS market status & outlook The concept of unmanned aircraft has been around for over two decades, and is therefore not new as such. But it is only in recent years that the former R&D projects and prototypes have evolved into systems that can be used at scale. So-called UAVs or RPAS are available in more and more variations, sizes and configurations. They can be fixed-wing (like traditional airplanes) or rotary systems (like helicopters), capable of horizontal and/or vertical take-off and landing, weighing a couple of grams up to over a ton and controlled through apps, small joystick controllers, bigger ground stations or even completely autonomously flying based on a route predefined on a map. Just as diverse as these configurations are also the use cases and payloads which can be thought of. This explains the fact that there is an increasing number of different customer segments who have already adopted RPAS, while many other areas and use cases have not been realized so far. 21

22 s three target customer segments military, civil service and commercial - can clearly benefit from RPAS Need for general RPA systems in key segments CybAero Compared to manned aircraft, RPA systems have the key advantage of not being dependent on one or several humans having to operate the system onboard. While this most obviously reduces the risk of human casualties in case of crashes and similar situations, it also allows the systems to be constructed to a much smaller size. This in turn reduces the unit and operating cost including fuel, transportation and maintenance. In addition, new use cases are opened, with the units for example being easier to camouflage, having a potentially longer mission time and range and being able operate them in harsher conditions compared to aircraft with humans on board. More general benefits and use cases of RPAS are discussed individually for the key customer segments below. Military: The most significant customer segment for UAVs so far have been military customers. Driven by well-known buyers such as the United States armed forces, who have attracted a lot of media attention for their drone wars during the last years, military organizations around the world have increased their use of RPAS. But apart from their use in combat missions with weaponry as payload, many systems are also used in other use cases. Most frequently, this includes reconnaissance missions to analyze wide territories in an efficient way, or using UAVs for the surveillance and to ensure security of areas, buildings or for example convoys of land and marine vessels. But also other, more specialized missions can be conducted efficiently by UAVs, such as using them as extenders or interferers for communication networks. For these use cases, a wide range of payloads such as cameras, communication equipment and different sensors are mounted to the RPAS. Civil service: Following the adoption in the military sector and seeing the relevant use cases there, different groups within civil services also started to see the potential benefits of using UAVs in their operations. Some groups, such as coast guard or border protection units as well as rescue services, had previous experience of using especially helicopter systems in their work. At the same time, many others such as firefighters might have used UAVs to a lesser extent and now see additional potential use cases possible compared to the use of full-sized and manned systems. The first areas for which RPAS are tested and used in this customer segment include routine surveillance of bigger sea or coastal areas as well as reconnaissance missions during accidents, catastrophes or person searches. This customer segment does not yet have the same routine in buying and using RPAS as the military segment, so more interest from them is expected in the future. Commercial: This is the customer group which as of today has the smallest adoption ratio and at the same time a possibly huge usage potential for UAVs. Several subgroups in this segment have started to experiment especially with micro & gadget as well as small-sized UAVs for an increasing number of use cases during recent years. These include film 22

23 production, agriculture, wildlife protection, inspection of pipelines and power networks as well as shipping packages. Their tests of various types of RPAS for different use cases have often gone along with significant media coverage, which also holds for frequent coverage about numerous new manufacturers of especially micro & gadget sized drones. The commercial segment is still at a very early stage both regulation and unexplored use cases for RPAS are holding back growth for now A key aspect in these public discussions is often regulation, which is still a critical limiting factor for a more widespread testing and adoption of RPAS in the commercial market segment. This is a rather complex issue, comprising discussions around privacy in areas surveilled by UAVs, insurance coverage and responsibility in case of accidents as well as more technical challenges with integrating UAVs into existing civil airspace operations infrastructure. Several countries including Japan and France have allowed the commercial use of UAVs in certain use cases and weight classes, often requiring the operators to be certified. As a result, these countries have seen a significant increase in the interest from commercial players in the years after the regulation was implemented. Other countries, including the US, have not been as progressive and therefore faced criticism from companies like Amazon and others, who moved their test operations for UAVs to other countries as a result. Also the European Union is rather slow to define and implement a broader set of rules regarding the commercial use of drones. They however communicated in a specific RPAS roadmap that they want to start integrating such systems into the commercial airspace from 2016 onwards. Specific challenges for CybAero in the context of regulation are both the size class and operating radius of their systems. One discussion point in EU regulation is for example whether the European or rather the national airspace security bodies are responsible for aircraft with an MTOW over 150 kg, which includes CybAero s. In addition, the rules for systems that are operated outside the direct line of sight of the operator are more complex and strict compared to those for smaller systems such as consumer drones that are often operated only within the direct sight of the pilot. At the same time, it should be noted that regulation is not the only challenge, since the different customer groups also need time to constantly identify and test new use cases for RPAS before they adopt them on a broader scale. As a result of the aforementioned benefits and potential use cases of RPAS, experts see a bright future in this market. Teal Group, a leading research provider specialized in the aerospace and defense industry, forecasts a doubling of the global market for RPAS between 2014 and This comprises an increase from around 6.5 bnusd to almost 13 bnusd, or an average growth rate of around 7% per year. Most notably, they expect the commercial market for RPAS to grow from almost nothing in 2013 to more than 3 bnusd, compared to an expected absolute growth of the defense segment of around 4 bnusd. 23

24 Source: Teal Group, BI Intelligence, Michael Toscano, 2014 The Aerospace Industries Association estimated in its 2013 report on UAVs that only around 14% of a total of UAV types produced in 2012 were procured for civil use. At the same time, they also confirm the significant potential in the commercial segment for the future. This is further confirmed by a 2014 report from the European Commission, which reported a rapid increase in the number of licensed (commercial) UAV operators in France after the passing of regulation easing the use of UAVs below 25 kg MTOW in civil airspace. Areas and drivers for VTOL adoption VTOL RPAS are one product type in the overall market, who are currently much less sold and used compared to aircraft which start and land traditionally (horizontally), and which are normally fixed wing. It needs to be noted that this classification is not perfectly correct, since also some fixed wing aircraft, both manned and unmanned, have VTOL capabilities, for example by rotating their engines. The majority of VTOL aircraft are however rotary wing based, similar to traditional helicopters. There are no specific numbers or forecasts available about how high the share of VTOL RPAS is compared to the overall number of systems developed or sold today. Most market analyses are focused more around weight and size classes, military versus commercial use as well as geographic markets rather than type of product or specific use cases by the end users. Market analysts Teal Group estimate that the market demand for marine UAV applications will grow significantly during the five years or so, from around 50 musd up to over 500 musd globally. 24

25 Source: Teal Group, CybAero, 2011 Given the fact that VTOL RPAS are the best and almost only feasible alternative for marine use, the majority of this growth is expected to be in the VTOL product segment. As with the overall UAV market, there are therefore high expectations regarding a significant market growth in the coming years. The big question is then which type of product and supplier will be most successful in capturing this market growth. This will be discussed in more detail in the next section. VTOL systems feature several unique benefits compared to traditional systems with horizontal takeoff and landing Apart from the numbers, it is however clear that VTOL systems have a number of unique characteristics which make them more suitable and attractive for various customer groups. One key advantage is that such systems can be stationary in the air or fly slowly. Fixed wing aircraft even those with VTOL capabilities cannot do this to the same extent due to their technical construction, since they will lose uplift if they fly too slowly. In addition, VTOL systems can land on much smaller and unstable surfaces, such as moving vehicles or ships. Miniature versions of VTOL UAV can even be launched from and landed on a person s hand. These unique benefits make VTOL systems attractive for use cases such as marine operations as well as surveillance and security tasks of specific areas and objects which might be stationary. One key customer group for VTOL systems are therefore again military organizations. Specifically, such systems will likely be used for reconnaissance and surveillance missions from ships, surveying for example coastal areas or the area around a convoy of ships for other military ships, submarines or pirate activity. Such security missions around convoys are also a relevant use case on land, as well as the surveying of areas around key strategic landmarks and military camps for example. 25