Vyke’s VoIP victories

It’s been a terrific four weeks or so for Tommy Jensen and Hans-Arne L’orange, the executive chairman and chief executive respectively of innovative telecoms outfit Vyke Communications. In early January, Jensen signed a mobile distribution deal with Opal Telecom, a unit of Carphone Warehouse and one of the UK’s largest network operators.

This was swiftly followed up by news that Vyke had completed a £2 million fundraising (it previously raised £1.6 million in July 2006) and that the number of unique customers for its enhanced telecom services had grown substantially.

Vyke is a voice over internet protocol (VoIP) service provider, proffering an array of much lower cost communication services and products to individuals and corporations.
Vyke Mobile is a complementary add-on to a person’s existing mobile phone service. Once an individual signs up, a product is loaded onto his or her mobile phone that enables cheaper calls and SMS messaging – and dramatically reduced roaming charges when travelling beyond the UK.

Vyke PC enables end-users to call any phone number in the world over the internet cheaply, while Vyke Web can connect any two phone numbers in the world via an internet-based interface. There is also Vyke SMS, which radically reduces the price of text messages.

The mobile services require java-enabled mobile phones and a service provider that supports wireless internet access, which are, of course, becoming increasingly prevalent as the mobile world undergoes yet another evolutionary step.

According to Jensen, someone calling from a WiFi network abroad to a fixed-line phone in the UK would be charged a 2p connection charge and would then get free talk time. Connecting from a WiFi area to a UK mobile phone would be just 8.8p per minute. This is a vast reduction on the prices mobile phone customers are currently charged – and still well below the mooted cap on roaming charges the European Union may force on mobile telecom operators.

In addition to all of these innovative services, Vyke boasts traditional pre-paid phonecard services (used largely for international calls). At present this still represents the bulk of business, but 2007 is expected to be the year in which the VoIP services become the main driver.

In the fourth quarter, 304,071 unique customers were sold enhanced services, a leap of 88 per cent over the third quarter, which itself witnessed growth of 172 per cent over quarter two.

For all of 2006, group sales of £10 million are expected and an EBITDA loss of £2.4 million is likely to be posted.

But, with new distribution agreements in place, new institutional backers on board and customers clamouring for ways to reduce their mobile bills, 2007 is looking very exciting. This stock has plenty of speculative appeal.

Company: Vyke
Market: AIM
Share price: 1.5p
Market cap: £9.16m

The power of fuel cells
Companies that develop fuel cell technologies began to arrive on AIM only a couple of years ago, but already there are enough to constitute a ‘fuel cells’ sub-sector. That said, only a few produce revenues of any significance, while only one or two are forecast to record profits before the end of the decade.

One fuel cell developer that appears to have a good chance of long-term success is Massachusetts-based Protonex Technology Corporation. It develops fuel cell systems for both military and commercial applications. Close ties to the US Department of Defense have already helped Protonex generate revenues of $5.4 million (£2.74 million) since it was founded in October 2000, but this year looks to be the one in which it will start to develop its commercial market.

The company develops fuel cell systems based on hydrogen proton exchange membrane (PEM) technology. PEM fuel cells have been around for decades and, because of this, Protonex claims they have significant advantages over rival fuel cells. For example, all materials science issues associated with PEM fuel cells have been solved, while all the components and materials required for PEM devices are commercially available in volume.

An additional advantage held by PEM fuel cells is their compactness, making them ideal for vehicle-based use and other mobile applications as small as mobile phones. Protonex is targeting applications in the ten-watt to one kilowatt power range, which rules out using other kinds of fuel cell technologies. For example, solid oxide fuel cells are costly to make, operate at high temperatures and have low system reliability. Alkaline fuel cells require pure oxygen and hydrogen fuel, making them unsuitable for practical everyday applications, while direct methanol fuel cells have a number of drawbacks, such as short lifecycles.

The worldwide market for fuel cell-based portable power is expected to produce annual sales of $2 billion (£1.01 billion) by 2011 (source: Darnell Group). Protonex is already producing prototype soldier power packs for the US military, while it expects to launch a 250W methanol-fuelled PEM power pack into commercial markets this April. The company is seeking manufacturing partners to build the power pack into application-specific tasks, such as in power tools. ‘2007 will be the cross-over year for us,’ says CEO Scott Pearson, who told us he is excited about the power pack’s commercial potential.

Recently published results show that during the year to 30 September 2006, the business increased its revenues to $2.3 million (2005: $1.8 million), while the pre-tax loss increased to $5.2 million (2005: $2.2 million). This was expected as Protonex expanded its in-house capabilities to cover complete system design and doubled its employees. This level of spending is forecast to increase during the next couple of years as the company not only improves its product but also focuses on building partnerships and market share.

However, the $13.6 million it raised at its flotation last July means a large cash pile ($18.7 million at the end of September) will give it plenty of breathing space, particularly since house broker Canaccord Adams expects profits within three-to-four years.

Fuel cell developers are certainly not for the faint-hearted, but investors who feel they need exposure to the sector should take a look at Protonex. Canaccord has a short-term target price of 124p for the shares. Speculative buy.

Company: Protonex
Market: AIM
Share price: 95.5p
Market cap: £41 million

ADT’s nanotech revolution
Introduced with a £25 million market price tag, Advance Display Technologies (ADT) was the first PLUS float of 2007. The company plans to amass its fortune in the £54 billion ‘display’ market through the commercialisation of nanotechnology, a branch of science potentially as ‘disruptive’ to society as the steam engine.

Nanotechnology provides the ability to exercise control over materials and processes at the level of individual molecules and atoms, which form the basic building blocks of matter. ADT, created by a Nasdaq-listed parent, is currently developing nine ‘nano-enabled’ display and printable electronics technologies. Chief executive Magnus Gittins plans to commercialise these within a short timeframe.

He says the ADT model is lower risk than most, since the company spots technology at leading universities and then funds the development in return for the exclusive commercialisation rights. Partnerships forged with seats of learning such as Bristol and Cambridge enable the company to operate on a lean cost base, since it is able to leverage university infrastructure and people. Risk is mitigated by the relatively small size of each investment in each technology, spreading risk across a number of high-return possibilities.

‘We have nine technologies in the portfolio, two of them from Bristol University and the remainder from the University of Cambridge,’ explains Gittins, ‘and we are looking to commercialise the first technology this year, with the balance over the next 12-36 months.’

Gittins boasts plenty of experience within the display and printable electronics industry, and is messianic in his belief that nanotechnology incorporation will ‘improve the price-to-performance ratio and quality of the display industry’. Opportunities to develop new, high-growth markets using nanotechnology only add to the appeal.

‘We are looking for first revenues as soon as 2008, because we have technologies that have been in development since 2004, and we expect to make a profit in 2009,’ adds Gittins. ‘Though we are not a nanotechnology company per se – we are more about displays – that initial over-exuberance in nanotechnology is now coming through.’

Company: Advance Display Technologies
Market: PLUS
Share price: 50p
Market cap: £25 million

Vanco’s disruptive appeal
‘I’m a serial entrepreneur who loves market discontinuity,’ enthuses Allen Timpany, chief executive and driving force behind Vanco, a pioneer of the virtual network operator model of network sourcing.

Vanco designs and manages communications networks for some true global heavyweights – Avis, Ford, British Airways – on long-term contracts, and Timpany has his sights firmly set on bumper growth in a £15.4 billion potential market.

Being ‘virtual’, Vanco owns no telecoms infrastructure and is independent of carriers and equipment-makers alike. It treats infrastructure as a commodity, trades with 650 carriers globally, and is able to get the best prices for customers while delivering the highest service levels. Solutions are also delivered with an array of partners such as IBM, and hundreds of carriers and other communications players, including Swisscom and Verizon, use Vanco to extend their footprint.

Anything but blue sky, Vanco boasts 18 years of uninterrupted top-line growth at an average 40 per cent per annum. Furthermore, contracts are typically three to five years in length, and from these deals it consistently makes gross returns of 35 per cent. Contracted orders approaching £350 million give very high earnings visibility.

‘We have a stunning business model,’ boasts Timpany, ‘we have an inverse relationship to technology risk. Our gross margin is consistent regardless of which technology wins out. And globalisation means we are in the right place at the right time. Cash generation is terrific, as we get paid quarterly in advance, and we have huge potential revenues from existing clients.’

Forecasts in the market for the year to January indicate a rise in revenues from £145 million to £180 million and a near 22 per cent pre-tax profits push to £17 million. Earnings growth of 20 per cent to 18p looks on the cards. For 2008, analysts are looking for an even more aggressive 65 per cent profits surge to £28 million and 57 per cent earnings growth to 28.3p. Those metrics place the shares, lowered following a mischievous broker’s missive, on a forward multiple of 27, falling to 17.4 for 2008. Offering profitable growth aplenty – the PEG ratio for 2008 is a budget-looking 0.3 – and with acquisitions likely to sweeten the investment story, we like the look of the shares.

Company: Vanco
Market: Official list
Share price: 492.5p
Market cap: £303.56 million

WIN sets out its virtual stall
If you haven’t heard of the hugely popular online virtual world ‘Second Life’ you will soon. It is an internet phenomenon with an online community that has grown so fast that several real-world businesses – including IBM and ABN AMRO – have already set up shop in the virtual space. If that’s not enough to whet your appetite, its worth noting that the US Congress is completing a study of whether income in the virtual economy should be taxed and the Swedish Government has even sanctioned plans to be the first country to open an embassy in Second Life.

To tap into this communication hotbed, AIM-listed WIN intends to combine mobile phone text messages with its own avatar technology in a service that mirrors, or maybe complements or replaces, community sites like Second Life. Much is already in place for WIN, which already makes avatars (graphical representations of real-life or made-up characters) for its mobile network operator customers and, as anyone with teen or pre-teen children knows, there’s a massive chunk of the population who seemingly use mobile text messages for their only means of contact.

WIN chief executive Graham Rivers, who took over in September last year, thinks this ‘has tremendous potential’ for the company. WIN’s team of technicians are already working on incorporating the avatars into technology for the mobile space.

Outside of the above, WIN’s day-to-day operations are about delivering content for the mobile network operators – Vodafone, O2 and T-Mobile are clients. A recent update informed that the business, which grew profits 93 per cent in its last full year but was hit by the loss of various contracts from O2 last June, continues to perform well and full-year results in March will be stronger than expected after a challenging year. House broker Arden has upgraded its numbers to £1.9 million of pre-tax profit and 14p of earnings, placing WIN on a prospective p/e of 15.3, a discount to rival 2ergo.

Company: WIN
Market: AIM
Share price: 215p
Market cap: £20.5 million