CyanConnode Holdings plc (LON:CYAN) is the topic of conversation when Hardman and Co’s Technology Analyst Milan Radia caught up with DirectorsTalk for an exclusive interview.

Q1: We’ve spoken about CyanConnode before, but could you just remind us of the company’s primary products and solutions?

A1: As you mentioned, the company is one of the leading providers of what is known as narrowband RF mesh and what that means is that these technologies use quite low bandwidth radio frequencies to transmit data wirelessly and therefore consume very little bandwidth along the way and at quite low cost. The mesh approach means that there are multiple connections for every single device in a network so if one of the roots to a device suffers a problem and goes down, the device will remain connected and can still transmit information. You can imagine in regions where maintenance may be an issue or where cellular connections are poor, for example in rural regions around the world, RF technologies become particularly valuable. The company’s platform, which is called Omnimesh, actually offers RF mesh and cellular as well as other technologies such as power line and so on and that contributes to the very high performance metrics that the company’s installations tend to deliver.

One of the areas is where its technology has proven to be particularly relevant, where it’s actually become established now as a global leader is smart metering, and that’s where very reliable connections are required in order to both draw data from the meter about usage and so on, and that obviously directly feeds into the billing systems, but also to send commands to the meter. For example, there may be prepaid meters where payments are not being made, and it would be appropriate to disconnect the service under the terms of the contract with the end user.

What we’re seeing right now is the current financial performance of the company is very much being driven by very large scale programmes to roll out smart meters and that’s particularly the case in Asia and Africa. Just to show that listeners understand, the company doesn’t actually manufacture the meters in these instances themselves, that’s done by very large entities such as Schneider Electric and so on, but rather it provides the intelligent modules that go into the meters and the various software and infrastructure platforms that go around that.

So that’s their activities and remit.

Q2: So, are the financial and operational benefits of smart meters proven?

A2: The short answer is very much so. Actually, we now have the data across many, many markets to confirm that these are very, very valuable elements of the distribution infrastructure. The benefits come in the form of multiple different strands, operational technical, financial, and these are aspects that are very carefully tracked and measured by the utilities, as you might imagine.

In the emerging economies, the problems are more acute around some of these infrastructure aspects and it’s very typical for there to be gap between the power generation capacity of the country and the demand that there is from both the consumer enterprise elements of that economy. So, you end up with big shortfalls in energy supply and that’s often compounded by inefficiencies and losses in the distribution infrastructure, and that sits in between the power generation and the end user and that actually is a major concern for governments because ultimately it proves to be an impediment to economic growth. You see the various impacts in economies where electricity supply just shuts down, load shedding happens and so on, and that’s not sustainable longer term and so you can see that this is the major driver, the big roll-outs that are happening in some of the regions that we mentioned earlier.

The types of improvements that the company’s smart meter platform helps to deliver are typically in the range of 15% to 25% ultimately, that translates into at least tens of millions of dollars per annum for a typical distribution utility. In India, for example, just within the first 12 months of some of these smart meter deployments, the improvement in the loss ratios that the company’s platform is held to deliver have been in the order of 8%-10%, and that’s just in a very short period of time and there’ll be more improvement thereafter.

So yes, very much proven now.

Q3: Now, silicon shortages have disrupted many supply chains, how is the company fairing on that front?

A3: Well, the proof of the pudding is really in uninterrupted supply of their modules and the data confirms that they have managed to achieve this at a time in many other industry sectors are floundering, and they’ve done this through a number of different initiatives.

I think they are very good at manage their supplier relationships, there’s a lot of dialogue and a lot of discussion around what the growing requirements that they will, or that they are seeing, over time. They’ve expanded production lines with existing suppliers, they’ve added new suppliers and they’ve been ordering well in advance, now that does require obviously some working capital investment in inventory of components and so on.

We saw in the last six months that contributed to the cash position at the end of the period but this is overall, a very positive set of management decisions, in our view, that have allowed them to maintain that supply chain integrity during this period.

Q4: India is a major focus for the company, how is the region progressing?

A4: After a lengthy gestation period, I think it’s fair to say, activity levels in India with respect to smart meters tend to be surging at the moment and we discussed this in our most recent report that you mentioned earlier that there are some 37 million meters tendering at the moment, with an expectation on the contract awards for most of these tenders will be made prior to the end of this calendar year. We also expect actually in the meantime, more tenders to be added to that tally as more distribution utilities get to that contracting phase.

So, I think it’s fair to say that the immense revenue opportunity, this region is now set to become reality for all participants in the supply chain. It’s taken a while but that’s to be expected given the complexities around contracting for a programme that aims to deliver 250 million meter replacements over a 5/6 year time span.

Q5: Will the Indian programme achieve its targets in your opinion?

A5: In the end, these targets will be met even if the tail end extends beyond the current target period of the 5 years or so, and that comes back to the economic imperative to do so over the longer term around these inefficiencies and inadequacies in the power generation quota versus demand.

Much of the current impetus in India is actually being driven by government initiatives to potentially force the distribution utilities – DISCOMS as they’re commonly known – to engage more intensively with the programme. There are now financial incentives and penalties associated with the progress that they’re making, they’re being analysed and ranked in terms of the financial and technical losses that they’re actually incurring in the improvements that are being delivered so there is an element of naming and shaming on one level.

That means that the DISCOMS that don’t roll out will be visibly left behind, when in the past, they were simply within that broad range of industry performance and this is really a function of the substantial and pretty quick benefits that are occurring from smart meter rollouts and the tangible impact on those loss ratios that we’ve mentioned.

Another key element is the funding of these rollouts. It’s widely understood that cash strapped distribution utilities aren’t well positioned to fund the upfront payments for meter hardware, software licenses, platform investments, the implementations and so on that are required. That’s a pretty hefty cash burden, and so the OPEX model is being introduced at a relatively brisk pace and some of the entities such as IntelliSmart and ESL are very strong, which are bodies responsible for some of these procurement initiatives on behalf of utilities and so on. They’re very much in favour of this OPEX type arrangement.

What that means is that third party funding can be brought to bear on these arrangements, it may be infrastructure funds for example, that decide to invest, and they will allow the utilities to rent this metering infrastructure for the first 8-10 years say, and then the platform would be handed over to them under the terms of the commercial agreements.

The funders will of course make an attractive return in the meantime, but you can see it’s a win-win, you get accelerated deployments, you ease that financial burden for utilities and their financial performance obviously improves as the losses come down and the end users also benefit as that kind of efficiency grows over time.

So yes, I think the targets will be met and the early signs are now very, very encouraging, given this accelerating pace.

Q6: Now, in your recent report, you talk about the EPCs becoming involved as prime contractors, can you tell us more about that?

A6: EPC stands for Engineering Procurement Construction management, and these EPCs are essentially large-scale prime contractors with big balance sheets and with the resources, global footprint, skills to take on complex projects and deliver all of the major elements within a specified timeframe. You can see that this type of capability is very well suited to the complexities of the Indian smart meter programme, which has got a lot of moving parts, a lot of suppliers, execution challenges into rural areas and very densely populated urban areas.

So, with the renewed momentum, the OPEX funding arrangements we talked about, and far more understanding actually amongst the decisionmakers as to who can deliver and who can’t, the service level agreements are becoming very stringent and vendors such as CyanConnode that have a proven ability to deliver 99.5% success rates, well ahead of a lot of their peers, that there’s recognition of that. The EPCs, as a result of all of this, are far more interested in committing resources to the market.

This is a positive development for, again, the likely pace of progress from here as the EPCs will take roles alongside the meter manufacturers and suppliers which will have opportunities to supply the EPCs amongst other players in the market.

Q7: Now that there’s tangible momentum in the Indian rollout, how should we think about the scale of the opportunity for CyanConnode?

A7: This is the million dollar and possibly even the billion dollar question, as I suggested in the report.

The tenders that are ongoing today, so around 37 million meters, represent only 15% of the total plan rollout of 250 million meters. Of course, we don’t know the precise terms of the contract that’ll signed, and there will be some volume discounts that get applied along the way, but using historical implied revenue parameters, we estimate the market for the company, just for this current round of 37 million meters and assuming that they win 15%, which is, I don’t think a demanding percentage win rate, given their proven efficacy from existing deployments, we would expect the total revenue from this round alone to be well over $100 million.

Now, that’ll be spread over 7-10 years, but that’s only 15% of the total programme, if you think about that, and you’re basically multiplying by about 6-7 times to get to the overall programme value so we’re saying, $700 million plus comfortably would be the company’s revenue opportunity, just from winning 15% so less than 1 in 6 of the meter deployments that will be made, again, over 7-10 years.

One thing I would say is that a meaningful slice of that revenue be upfront to the company to cover the hardware element and there seems to be acknowledgement that that would be the appropriate contracting mechanism, whereas the software and services would be recognised on a deferred basis.

So, that’s interesting, isn’t it? You’ve got a revenue opportunity of many, many hundreds of millions of dollars and that should be viewed in the context of the current size of the company measured by market cap etc .

So, yes, it’s a very interesting question, and the pivotal question for anyone looking at this company.

CyanConnode Holdings plc (LON:CYAN) Executive Chairman John Cronin and Chief Financial Officer Heather Peacock caught up with DirectorsTalk for an exclusive interview to discuss record revenues, India’s £30 billion ‘Revamped Power Distribution Scheme’, share of the Indian smart meter market, opportunities in other countries and the key priorities over the coming year.

Q1: Heather, CyanConnode provided a trading update for the nine-month period, you must be very pleased with the record revenues and cash collection. Can you just explain for us what’s driven this tremendous result?

A1: We’ve been delighted to see this continued growth with revenues in the first nine months and the cash received from customers both being higher than for the whole of the previous financial year.

To achieve this, we’ve continued rolling out our existing backlog with volumes continuing to increase, including from our recent orders such as the one back in August 2021. Much of the backlog that was delivered during the period was against basis of credit and we’re starting to collect against milestones too, all of which has helped cash.

We’ve continued to have to mitigate against the continued component shortages and, in many cases, we have to order months in advance of the requirements due to the lead times. In certain cases, we’re having to source components from alternate suppliers and then the disadvantage of this is that we have to pay upfront rather than having 30 to 60 day payment terms.

Q2: Now the Indian government recently announced an approximate £30 billion ‘Revamped Power Distribution Scheme’. Can you tell us more about that and how the business will be able to take advantage of that opportunity now that you’ve established a leading position in the market?

A2: This is aimed at creation and strengthening of the transmission and distribution infrastructure, which we provided by an outlay of 15% against the total project cost of approximately £15 billion of installing the approximate 250 million smart meters that India’s installing at the moment.

The timeline for replacing these 250 million meters with smart meters has been split in to two phases. The first phase of that first 100 million customers will be metered with smart meters with the prepayment mode by December 2023. The second phase of the 150 million customers will be metered with smart meters with prepayment mode by March 2025.

Also, the Ministry of Power of the government of India has also floated a standard bidding document and a contract agreement that can be directly adopted by utilities, furling out the smart metering program so this just makes things so much easier in the bidding process, because it’s just a standard process that they have to go through. These steps have acted as a catalyst, as the scale of tenders have gone up from a few thousand to millions of units.

We believe that with our knowledge, skills and experience and our proven technology, which sees 99.5% and above SLAs, we believe that we’re in a really good position to capture a good portion of the market.

Q3: Just turning to you, John. Do you have any thoughts on the share of the Indian smart meter market that you might be able to capture and what that could be worth in module and additional services and software revenue?

A3: We’ve analysed scenarios, especially for the Indian market, to ascertain the potential value to our company and our shareholders from the roll-out, remember the roll-out is something like 250 million smart meters.

So, what we’ve done is two scenarios for India, base case assumptions look at about 7.5% market share of the 250 million that is planned to roll-out and if you take, what we’ve already rolled out, 1 million modules that’s ordered and contracted, there’s about 18 million modules to go starting in FY23. We deem this to be very conservative, this assumption, especially as the group today has deployed modules which we understand represent circa 10% of the roll-out in India so far.

Now, we have done an upside scenario, and that is we capture 15% of the Indian market share, that’s something like 37 million modules, which over an 8-year period will amount to a substantial amount of revenue and profits.

We believe this target is achievable when you consider that the company is a leader in RF mesh networks in India, and it has operated and expanded in India. Over the years, it has close ties for instance, with EESL IntelliSmart and as a management team which has experience in delivering large scale deployment projects.

Q4: Now, you’ve clearly got a management team that has a wealth of experience in large scale deployment projects and global partners. What other countries and opportunities are you looking to deploy smart technology to?

A4: The company first has made significant progress in 2021, putting in place, as you mentioned, key management personnel and building important relationships with key stakeholders in the Indian power and infrastructure sector.

The groundwork laid in 2021 should underpin a year of excellent developments growth for the group in 2022 and while the shares perform one in 2021, the scale of the opportunity in our focussed markets suggests significant more upside in the shares in our view.

You mentioned which countries, well apart from India, there’s Thailand, there’s several countries then within Africa, there’s the Middle East, Indonesia, and we’re also ensuring rollout of the not-spots in the UK via the SMETS2 DCC project so there’s a lot going on.

Q5: So, in summary, what are the key priorities over the coming year?

A5: So, the priorities are to focus on winning opportunities, they’re already out there in the market, such as 35 million units being tendered right now in India alone so that’s a fairly large number.

To help achieve this, we have formed a vertical global sales and business development structure that is headed up by Anil Dauliani as the President.

Another priority is to ensure supply chain management is secured through looking at alternative component suppliers, as we know there’s been a worldwide shortage.

Now, the cash management is also a key focus for us, and today we have something like £1.5 million in the bank, with debtors equating to some £5.5 million in India alone, much will become due in the coming months.

All of this puts CyanConnode in a very strong position to win more business.

CyanConnode Holdings Plc (LON:CYAN) Executive Chairman John Cronin and Chief Financial Officer Heather Peacock caught up with DirectorsTalk for an exclusive interview to discuss their interim results for the six months ended 30^th September 2021.

Q1: Can you provide an overview of CyanConnode for those listeners who are not familiar with your business?

A1: The company is a world leader in Narrowband Radio Frequency (RF) Smart Mesh Networks, which are used for machine to machine (M2M) communication.  As well as being self-forming and self-healing, our RF Smart Mesh Networks are designed for rapid deployment, whilst giving exceptional performance and competitive total cost of ownership.

In June 2018, the company launched its award-winning Omnimesh Advanced Metering Infrastructure (AMI) platform, which has already gained considerable commercial traction, especially in India which is a key market for the Company.

Q2: Can you provide a brief business overview and the key financial highlights from your interim results for the six months to 30 September 2021?

A2: There has been a further significant increase in the volume of modules we shipped to customers and a corresponding increase in revenue and cash collection. Key highlights include:

• Increase in revenue of 172% to £4.1m from £1.5m in H1 FY21
• Significant increase in gross profit of 112% to £831k from £477k in H1 2019
• Reduction in operating loss by 26% from H1 FY21
• Increase in cash received from customers by 138% to £3.8m from £1.6m in H1 FY21
• Cash and cash equivalents of £1.7m compared to £1m in H1 FY21
• Further order wins and the continued rollout of projects in India, Thailand and Europe

We are making great progress in all areas of our business and look forward with optimism for the next period.

Q3: Can you outline what else investors should be taking note of?

A3: In addition to the financial highlights just mentioned, investors should also be taking note of our strong operational performance:  

• Omnimesh modules shipped to customers up 3.4 times to 315k (H1 FY 2021: 92k)
• Order for 152,000 Omnimesh modules for a new end customer in Northern India
• Order for 100,000 Omnimesh modules for a new end customer in Africa
• Follow-on order from MEA (Metropolitan Electricity Authority) Smart Grid Project in Thailand
• Key MOU (Memorandum of Understanding) signed with Intellismart (IntelliSmart Infrastructure Private Limited)
• Heavily oversubscribed Placing completed at a premium to the then share price, raising £3.15 million before expenses
• Selected as EESL (Energy Efficiency Services Limited) Technology Partner for the Middle East and Africa
• Global Strategic Alliance signed with SEW (Smart Energy Water)
• Further strengthening of the Indian Management Team
• Awarded the London Stock Exchange Green Economy Mark
• Won the Frost and Sullivan Global Smart Metering Technology Innovation Leadership Award

Q4: Can you talk us through some of your business models?

A4: We’ve got three business models in total.

The one to date that we’ve been using is a Capex Model and this means that capital expenditure is paid to us on milestones of Supply, Installation and Commissioning. In most projects, the installation is done in the first two years of the project and then there’s another eight to ten years support and maintenance then going forward with our software that’s all being deployed.

There’s another model called a Hybrid where some customers will pay a small amount of hardware upfront and then pay per meter per month over six or seven years.

The really exciting model that we’re just working on right now is the Opex Model, per meter per year over ten years and this Opex model is whereby we will set up a Special Purpose Vehicle, an SPV it’s known, with an infrastructure fund putting their money into the SPV and we sell into the SPV. They in turn can then lease the equipment to the DISCOMs and it makes it more affordable for them then to deploy their meters and it gives them the scalability they’re looking for, millions of devices rather than what we’ve been doing today with hundreds of thousands of devices in a contract.

Q5: What progress has been made in the Indian smart metering market during the last six months?

A5: As we have consistently stated, India represents a substantial opportunity for us, and we continue to hold a leading position in the market. India continues to be a significant adopter of smart metering technology, which we are a leading provider of in the country.

In May 2021, we announced the signing of a MOU with Intellismart, a joint venture company formed by EESL and NIIF. Intellismart is a Meter Asset Provider which deploys smart meters by funding CAPEX, which it then recovers through an OPEX model.  Intellismart is focusing on expediting the deployment of 250 million smart meters across India and it can operate at scale by leveraging the expertise and capital of EESL and NIIF.  Under the MOU, CYAN and Intellismart will work on existing EESL and Intellismart projects as well as new ones, in India and international markets. 

In June 2021, CyanConnode India appointed Rajiv Kumar as Managing Director and Chief Executive Officer. Rajiv is a dynamic professional with twenty-five years’ experience in digital energy for transmission and distribution utilities. He joined the business from Intellismart where he managed one of the largest smart meter deployment programs in India in his role as Chief Operating Officer, a role he held since Intellismart was set up in 2019.

In August 2021, the Company announced a new order for 152,000 Omnimesh modules from a new end customer in Northern India. The order includes Services, Omnimesh Head-End Software, Perpetual Licence and an Annual Maintenance Contract. Under the contract we will supply its new Omnimesh Cellular Modules as well as Omnimesh RF Modules. Deployment of this contract has commenced with 40,000 modules being shipped during the period.

Q6: Can you update on the progress made in other territories during the last six months?

A6: In April 2021, the company was pleased to announce it had been selected by EESL Energy Solutions LLC, Dubai, (EESL), as technology partner for projects in the Middle East and Africa for smart metering and smart lighting projects.

In May 2021, a Global Strategic Alliance Agreement was signed with SEW (Smart Energy Water). Headquartered in California, SEW is a global energy and water cloud platform provider serving over three hundred utilities worldwide.

In August 2021, a follow-on order was received from JST (The JST Group), for 31,000 Omnimesh modules and associated gateways, this order is in addition to the 33,000 Omnimesh Modules and 206,735 Omnimesh perpetual software licences purchased in 2019 and 2020. Deployment of this order will follow the successful ‘Go-Live’ phase of the MEA Smart Grid Project, which is expected in Q4 of 2021.

Also in August 2021, a contract for a smart metering deployment in Africa was received. Under the contract, we will supply 100,000 Omnimesh Modules together with Advanced Metering Infrastructure, Services, Omnimesh Head-End Software, Perpetual License and an Annual Maintenance Contract.

Q7: Looking to the next six months, what should investors be looking out for?

A7: Following the announcement of the ~£30 billion “Revamped Power Distribution Scheme” aimed at creation and strengthening of the transmission and distribution infrastructure the Ministry of Power, Government of India has issued a standard bidding document and a contract agreement that can be directly adopted by utilities for rolling out the smart metering programme.

These steps have acted as a catalyst in spurring the smart metering movement in the country as the size of tenders has gone up from thousands to millions of units. There are tenders for 11 million meters that are currently being floated or will be floated shortly. Given the Government’s ambition these numbers are only going to increase exponentially in near future. The Board of CyanConnode, with its experience of understanding the Indian market, believes the Company is well placed to cater to the current and upcoming requirements.

In addition, as markets around the world mature, the company believes that as well as its opportunities in India, it is well placed to capture further orders to build on other projects such as its project in Thailand and the African order announced recently.