Daniel Stewart VYKE report - Sept 2007

03 September 2007

This document has been produced by Daniel Stewart & Co Research Department for purposes of information and cannot be construed as investment advice, or an offer to buy or sell any securities that may bementioned in the body of the document. The information contained herein is subject to change without notice. Daniel Stewart & Co its parents or affiliates may have positions and effect transactions in securities orcompanies mentioned and may also perform or seek to perform investment advisory services for those companies

Mobile WiFi VoIP We initiate coverage of Vyke with a Strong BUY rating, target price 430p/share. Vyke provides a range of VoIP-based low-cost call solutions, based on activation of the WiFi chipset embedded in a range of Nokia, Samsung and Motorola handsets. This connects the user to the nearest in-range WiFi “HotSpot” (or broader-reach “cloud”). Vyke demonstrates savings of between 50% and 95% compared to conventional mobile rates. From just 35k users of this and its other IP calling services in March 2006, Vyke’s subscriber base had grown to the 800k mark by mid-2007. We forecast over 5m Vyke subscribers by 2010. WiFi and the economics of the net In the fixed-line arena Skype has become a byword for low-cost VoIP telephony, whilst the VoIP solution has matured from the status of “hype” (BT Group 2005) to one of a range of net-based services built around the all-important SIP (Session Initiation Protocol) architecture of re-engineered networks. WiFi, and latterly WiMAX, offer a variety of Licensed and Unlicensed Mobile Access (UMA) wireless broadband solutions sharing a common feature; low cost. We estimate 180k WiFi HotSpots currently worldwide, a figure set to grow by a factor of 5x by 2010. Expect 120% EBITDA CAGR FY08-11E Vyke has a proven product and has installed capacity sufficient to treble its caller footprint, having recently refinanced (£2m CB 2013). As it admits, its access software is not proprietary, but it has a time-to-market advantage which we estimate at 2 years. Our target valuation places Vyke on a FY10 prospective PE of 26.5x, FY11E 15.0x

Share Price Price 75p Target Price 430p Upside/downside 4.7x

Source: Proquote

Market Data Stock code VYKE

Listing AIM

Sector Mobile Telecommunications Services

Market Cap (£m) 27.2

Enterprise Value (£m) 33.2

12-month high/low 105p/16p Next results 18 Sep 2007

Initiating coverage VYKE BUY

At a glance Key features - 2007E EPS (p) -7.5

2008E EPS (p) 0.2

Rating Initiation: BUY Price target (p) 430p

• Vyke’s user base continues to grow strongly, adding 1,500 users daily

• Recent (Aug 29th) agreement with Morange in Singapore adds another potential 500k subscribers and highlights the suitability of Vyke’s offering to other internet/mobile operators

Company Statistics Yr to 31 Dec £m 2006 2007E 2008E 2009E Shares in issue (m) 36.2 Turnover (£m) 9.96 24.23 59.52 102.21

Net debt Dec07E (£m) 2.9 EBITDA (£m) (1.76) (1.21) 1.42 4.67

Gearing (%) 87 DS&C PBT* (4.18) (2.73) 0.12 3.83

Interest cover (x) n/a Tax (%) n/a n/a 30 30

DS&C EPS (p)** (1.01) (7.53) 0.24 7.39 Company Description CFPS(p) (0.49) (0.40) 14.38 23.02

WiFi-based mobile and call-back service provider Ratios 2006 2007 2008E 2009E

PE (x) n/a 311 10.1 4.9 Website: http://www.vykecorporate.com EPS Growth (%YoY) n/a n/a n/a n/a

Analyst EV/EBITDA (x) n/a n/a 21.1 6.4 Mike Jeremy +44 207 776 6570 ° pre-exceptional items and goodwill **diluted, pre-exceptional items and goodwill

[email protected] Source: DS&C

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www.danielstewart.co.uk 03 September 2007

P&L £m 1206A 12/07E 12/08E 12/09E Sales 9.96 24.23 59.52 102.21 Gross profit 0.78 1.88 5.40 9.67 EBITDA* (1.76) (1.21) 1.42 4.67 EBIT (rptd) (3.95) (2.73) (0.18) 2.92 PBT (rptd) (4.19) (2.73) 0.12 3.83 PAT (rptd) (4.19) (2.73) 0.09 2.68 EPS (1.02) (7.53) 0.24 7.39 DS&C EPS (p)** (1.01) (7.53) 0.24 7.39 DPS 0.00 0.00 0.00 0.00 Cashflow 1206A 12/07E 12/08E 12/09E Op CF (1.48) 0.46 5.48 9.58 Net Op CF (1.48) 0.39 5.75 9.34 Net Op FCF (2.02) (0.15) 5.21 8.34 EqFCF (0.15) 0.35 5.21 8.34 CFPS (p) (0.49) (0.40) 14.38 23.02 Balance sheet 1206A 12/07E 12/08E 12/09E Cash 0.17 0.55 5.76 14.10 Current Assets 0.81 2.08 9.51 20.54 Fixed assets 11.08 10.10 9.04 8.29 Current Liabilities 4.07 6.58 12.87 20.47 Net assets 0.01 0.00 0.00 0.01 Net debt 1.82 1.94 (3.27) (11.61) Cap-ex 1206A 12/07E 12/08E 12/09E Depreciation 0.22 0.30 0.38 0.53 Amortisation 1.09 1.22 1.22 1.22 Net cap-ex (0.54) (0.54) (0.54) (1.00) Acquisitions/disposals 0.00 0.00 0.00 0.00 Growth (%) 1206A 12/07E 12/08E 12/09E Sales 76 143 146 72 Gross profit 89 140 187 79 EBITDA* n/a n/a n/a 228 EBIT (rptd) n/a n/a n/a n/a PBT (rptd) n/a n/a n/a n/a PAT (rptd) n/a n/a n/a n/a

Major shareholders (% of ord. share capital) Centennial Group 11.14AXA Framlington AM 7.70 Blackrock IM 6.20 CIM IM 5.39 Jeffries Intl 4.81 BØhn K 4.46 Berger J 4.35 Jensen B 3.95 F&C 2.76 Inovas 2.25 Noble FM 2.15 Sub total 55.27

Valuation 1206A 12/07E 12/08E 12/09E PE (x) n/a n/a 311.2 10.1 Yield (%) 0.0 0.0 0.0 0.0 EV/Sales (x) 2.9 1.2 0.5 0.3 EV/EBITDA 5.9 n/a 21.1 6.4 EV/EBIT (7.4) (10.7) (162.2) 10.0 FCF Yield (%) n/a n/a 19.2 30.7 Ratios 1206A 12/07E 12/08E 12/09E Gross margin (%) 7.9 7.8 9.1 9.5 EBITDA* margin (%) (17.7) (5.0) 2.4 4.6 EBIT margin (%) (39.6) (11.3) (0.3) 2.9 Tax rate (%) 0.0 0.0 30.0 30.0 Interest cover (x) (17.4) (43.7) 0.6 (3.2) ROCE (%) (49.7) (44.3) 7.9 56.5 ROE (%) (63.4) (70.8) 2.2 40.5 Cap-ex ratios 1206A 12/07E 12/08E 12/09E Depn/Sales (%) 2.23 1.25 0.65 0.52 Cap-ex/Sales (%) 5.42 2.23 0.91 0.98 Revenues % of total 1206A 12/07E 12/08E 12/09E

Calling Cards 77.1 34.8 14.3 8.3

IP accounts 22.9 65.6 85.7 91.7 Sum (%) 100 100 100 100 Key events Aug 18 2007 FY07 interims (provisional date) Jul 20 2007 AGM Jul 6 2007 Equity offering, 8.454m shares Jul 3 2007 Upgrade to Mobile IP Oct 5 2006 Acquisition of Genme Services Sdn Bhd, Malaysia Jan 3 2006 Distribution agreement via T@lecom/Opal UK Jun 27 2005 Acquisition of Maskina AS (Vyke AS)

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Opportunity, Strategy, Valuation, Triggers

Opportunity ~ Vyke has a mobile WiFi solution that enables WiFi hardware embedded in selected Nokia, Motorola and Samsung handsets (currently numbering some 25 types), that connects the user to IP-based telephony and all the costs savings associated with VoIP solutions. Typically the saving compared to a GSM-based mobile call is between 65% and 95%. The most compelling evidence of Vyke’s solution is its paying subscriber base; this stood at 35,673 in March 2006, and had risen to 762k by June 2007. In our view the spread of WiFi “HotSpots”, fuelled by the interests of both incumbents and new competitors, should propel Vyke’s user base to reach some 5.3m by 2010. Strategy ~ Vyke does not compete directly with mainstream mobile providers such as Vodafone; its proposition is not parasitic to GSM or 3G network capacity, as it utilises WiFi accessibility provided at a variety of levels, from the “Home Hub” (BT Group) household variety to the coffee shop “HotSpot” and the city-wide “Muni-Fi” model being selectively deployed across the US. It is also fuelled by handset makers’ commitment to dual-mode GSM-WiFi equipment, an established trend. Vyke’s “strategy” therefore concentrates on two areas; (i) user-friendliness, reliability and efficiency of access, and (ii) the provision of sufficient capacity, notably billing, to meet demand. Valuation ~ We value Vyke at 430p per share based on a DCF valuation the key parameters ;

• WACC: 10.7% (levered beta 1.50)

• Assumed terminal growth rate: 2.0%,

• Implied FY11E EV/EBITDA multiple: 10.8x

• Indicated EV: £153m

Triggers ~ WiFi is a “hot” topic. The deployment plans of US Muni-Fi projects, developments on campuses or at airports and the debate over the future role of wireless broadband access in the home (the “femtocell” denoting ultra-small base stations) provides a continual newsflow. Not least should be the reaction of “incumbent” mobiles to the Vyke “threat”. It was only two years ago that BT Group famously dismissed fixed-line VoIP provider Skype as “rhyming with hype”; improved IP provision and the acquisition of Skype by eBay for $2.6bn has served to change the tone; BT Group itself offers a guide to VoIP on its website. Recent newsflow includes;

• July 24th ~ Wireless Silicon Valley, a not-for-profit project by Silicon Valley Metro Connect (consortium of Cisco Systems, IBM, SeaKay and Azulstar), proposes to link 44 cities including Santa Cruz, SanFrancisco, Santa Clara, Palo Alto, Campbell, San Jose, Santa Clara, Mountain View, and Milpitas at a cost of up to $150m.

• August 29th ~ Vyke signed an agreement with Singapore-base mobile community and interoperability provider Morange to allow its 500k+ subscribers access to Vyke’s services. Morange is powered by (and owned by) Mozat, a University of Singapore mobile solutions developer which also provides platforms for China Mobile, China Unicom, SingTel and TIGO.

WiFi continues to spread worldwide

Vyke’s strategy is best viewed through the WiFi functionality provided as standard by handset makers such as Nokia

Target value: at 430p We see Vyke as clearly undervalued

Triggers; WiFi should remain a hot topic, and Vyke’s services are now attracting corporate attention

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Vyke, the company

Founded in 2004, Vyke specialises in VoIP services focusing on mobile applications, having acquired Maskina AS (now Vyke AS) in June 2005. Its flagship service is mobile WiFi-based voice and data provision, offering cost savings compared to standard GSM-based mobile services of up to 95%. In this respect the Vyke mobile model replicates the now well-known approach of Skype (acquired by eBay) initially in the fixed-line VoIP arena. Vyke offers six products, individually or packaged as a Single Account proposition;

• Vyke Mobile IP, WiFi-based mobile access to the IP backbone, based on Nokia technology and Vyke IP algorithms

• Vyke Pro, Vyke lite, unlimited text messaging and call-back international calling

• Vyke IP, a converter from conventional analogue lines to VoIP or “softphone” IP devices operating within SIP (Session Initiation protocol) and IAX2 parameters

• Vyke PC, PC-based VoIP software creating a “virtual phone” with IP telephony access

• Vyke Callback, accessed via website, SMS or ANI callback with preset dialup capability

• SMS via the web and calling cards

As of Dec 2006 23% of total revenues were located in the six-product WiFi mobile and other IP-based offerings, with 77% derived from calling cards; a year earlier this ratio stood at 3% vs 97% in legacy calling card operations.

Figure 1: WiFi offering located

Broadcast

3G

2.5G

2G

802.11 WiFi

Bluetooth

Satellite

MMDS

LMDS

Narrowband

Broadband

Fixed Local Area Wide Area

WiMAX

Source: Vyke, DSC

A conventional callback offering, and WiFi IP connectivity

Figure 1 shows the position of WiFi-based broadband connectivity

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VykeGroup structure

Maskina EHFR&D

100%-ownedIceland

Maskina CommunicationsTelecoms

100%-ownedUS

Vyke Asia Sdn Bh(Genme Services)

100%-ownedMalaysia

Tele Super NordicTelecoms

50%-ownedNorway

VykeGroup structure

Maskina EHFR&D

100%-ownedIceland

Maskina CommunicationsTelecoms

100%-ownedUS

Vyke Asia Sdn Bh(Genme Services)

100%-ownedMalaysia

Tele Super NordicTelecoms

50%-ownedNorway

Figure 2 shows Vyke’s revenue split by product type and geography.

Figure 2: Vyke Revenue Breakdown FY06, by Type and Geography, FY06

Calling Cards IP accounts

Asia Europe

Source: Vyke, DSC

Vyke Development path

• June 2005 Maskina formed through reverse takeover of Tower plc (Aim-listed Sep 2004), share-based transaction valued at £7.559m

• November 2005, membership of the Nokia Forum

• January 2006 distribution agreement with T@lecom, part of the UK Opal Group (owned by Carphone Warehouse)

• June 2006 acquisition of Maskina AS (renamed Vyke AS)

• 1Q06 36k VoIP accounts

• 4Q06 305k accounts

• 1Q 07 534k accounts

• 2Q 07 estimated 800k accounts

Figure 3: Group structure

Source: Vyke

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WiFi

The key feature of WiFi development for Vyke is that it has proceeded and should continue to grow independently of Vyke’s operations and efforts, i.e. Vyke is not required to build its transport network. In addition, mobile handset makers (Nokia, Samsung, Motorola) continue to enable GSM and 3G handsets with WiFi functionality; again this is not a development that companies such as Vyke are required to fund or subsidise. 802.11 WiFi, originating as Wireless Fidelity, operates principally at high frequencies (2.4GHz and 5.0GHz) over short range (45-90m) to provide a wireless local area network that enables connection to broadband and other networks. The actual term stems from activities of the self-appointed “Wi-Fi Alliance” industry group which now numbers over 400 members. It has recently come to denote a generic wireless interface for PCs, and spread to the provision of VoIP telephony and domestic links for media (DVD, TV, digital cameras etc.). WiFi networks use the IEEE 802.11 networking protocol, originating in 1997 and developed through various iterations, notably by Nokia. For example, version 802.11a transmits at 5GHz and up to 54 Mbs; 802.11b at 2.4GHz <11Mbs; 802.11g at 2.4 GHz, <54Mbs. HotSpots For device access a comparatively inexpensive base station is required; this is the now well-known “HotSpot” that has invaded the coffee shop or airport lounge and which, when grouped or concentrated becomes an overlapping “mesh” or “cloud”. Mesh WiFi embodies one of the original guiding principles of the world-wide-web; the ability to “self heal” in which packets find alternative routes within the mesh should one point (node) fail. WiFi product development is essentially an exercise in coordination (certification) to ensure interoperability. WiFi networks have spread at a variety of levels, from the home to the metropolitan area; “home hub” to “muni-Fi”. From “Home Hub” to “MuniFi” There is an estimated total of 180k WiFi HotSpots worldwide (2007E ABI research). WiFi is currently deployed in some 10,393 locations throughout Europe, notably in cafes, at airports and in the public arena; for example the UK has some 8,995 hotspots, Germany 915, and Sweden 397. In the US there are an estimated 35 hotspots, with the municipal network or “Muni-Fi” a feature. Municipal WiFI (Muni-Fi); (see www.muniwireless.com)

• July 24th ~ Wireless Silicon Valley, a not-for-profit project by Silicon Valley Metro Connect, a consortium of Cisco Systems, IBM, SeaKay and Azulstar, proposes to link 44 cities including Santa Cruz, SanFrancisco, Santa Clara, Palo Alto, Campbell, San Jose, Santa Clara, Mountain View, and Milpitas at a cost of up to $150m.

• July 26th ~ Phase One of Chandler, Arizona's citywide Wi-Fi network has gone live. Owned and operated by Kite Networks; Kite provides service to approximately 17,000 customers across 21 markets and 11 states. Kite Networks also operates and manages the first generation 2.5GHz licensed networks under the Sprint

WiFi originates in a protocol (802.11) and has become a certification or coordination process

Depends on a base station or hotspot which can be located at home, at the kerbside or across a municipal area forming a “mesh”

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trademark as well as a number of wireless mesh WiFi networks in Arizona, Texas and Colorado.

The WiFi Cloud

Concentrated deployment in London has created a “meshed network” or “cloud”, an example being the seamless access zone created within the City of London, by The Cloud, in association with Nokia, which uses 127 nodes to achieve 95% coverage across areas owned by the City of London Corporation. Antenna in a compact (1m) tubular format are easily incorporated into lamp posts and street signs.

Figure 4 illustrates the location of City-based WiFi hotspots

Figure 4: Location of HotSpots in the City of London

Source: The Cloud, Microsoft MapPoint

The Home Hub BT’s Home Hub is the core of its DSL-based broadband access strategy. As a wireless broadband router using 802.11b/g it connects up to five DECT handsets suitable for broadband VoIP calls and is pre-configured for ADSL2+ up to 24Mbit/s with an indoor range of < 50m indoors outdoor < 250m outdoors (although BT states “in ideal conditions”). * WiFi Alliance principal sponsors: Apple, Broadcom, Cisco Systems, Conextant, Dell Computing, Intel, Microsoft, Motorola, Nokia, Sony and TI. Other members include 2Wire, 3Com, 3e Technologies, Acer, AMD, Alcatel, ATT, Belken, BT Group, Deutsche Telekom, EarthLink, Ericsson, France Telecom, Fujitsu-Siemens, HP, Hitachi, IO Data, Juniper, Kenwood, LG, Logitec, McAfee, NEC, Nortel Networks, NTT, Netgear, Philips, Samsung, Symbian, Telia, Telenor and US Robotics.

The Cloud proposes seamless WiFi access across the Square Mile

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How Vyke mobile VoIP works

To enable Vyke’s VoIP service the user,

• Creates a PC web-based Vyke account with username and password

• Uses Vykes configuration instructions to activate WiFi on a suitable handset (see Figure 6 for a snapshot of current WiFi-enable models) for example Nokia E60, E61 and E70, by downloading Vyke Mobile IP, which adds an “Internet Tools” icon to the phone screen (see Figure 5, below)

The activated handset will automatically scan for HotSpots within range. These can be saved for future reference and the process saved as a screen shortcut, in addition to which internet connection may be set as the automatic preference and also set at Vyke VoIP rather than conventional cellular connection. Calls are initiated using the usual stored numbers but via a “internet call” option. And if the IP connection requires a security code used by selected sites Vyke IP will store for future reference. As Figure 5 shows, calls are displayed with the usual number plus a “@sip.vyke.com” suffix.

Figure 5: Vyke mobile VoIP setup process

Vyke internet account and password

Configure mobilehandset for

Vyke mobile VoIP

Establishes Internet Telephone

icon WiFi-enabledhandsets locates

HotSpots

Locator“discovering services”

Internet call displays number as

[email protected]

Vykemobile VoIP

setup processfrom account

to call

Source: https://www.vyke.com/merchantsite/howtomip.c#8

Figure 6 illustrates the currently-available (wide) range of WiFi-enabled mobile handsets, lead by Nokia and Samsung. Figure 7 provides two examples of WiFi-based call savings; Vyke’s compared to GSM services.

Attractiveness depends on a simple procedure with clear web-based instructions, and a proximal WiFi point of access

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NokiaN92NokiaE90

NokiaE61

NokiaE65

NokiaN93i

NokiaE70

NokiaE60

Nokia9300i

Nokia9500

NokiaE61i

Nokia6136

Nokia6086

MotorolaMPx

MotorolaA910

Samsung i600

Samsungi750

SamsungP200

Samsungi620

SamsungP520

SamsungP260

NokiaN80

NokiaN91

NokiaN93

NokiaN95

NokiaN92NokiaE90

NokiaE61

NokiaE65

NokiaN93i

NokiaE70

NokiaE60

Nokia9300i

Nokia9500

NokiaE61i

Nokia6136

Nokia6086

MotorolaMPx

MotorolaA910

Samsung i600

Samsungi750

SamsungP200

Samsungi620

SamsungP520

SamsungP260

NokiaN80

NokiaN91

NokiaN93

NokiaN95

Figure 6: A selection of WiFi-enabled wireless handsets

Source: https://www.vyke.com/merchantsite/howtomip.c#8

Figure 7: Vyke call savings, examples

Vyke Mobile IP cost comparison: from Russia to UK fixed-line

Vodafone mobile roaming 150 p per min Vyke IP mobile call free connection 2.15p Vyke PC IP call free connection 2.15p Vyke Mobile "Call @" on fixed-line call 3.32p per min Vyke Mobile on Vodafone roaming call 111p/min of which 100p Vodafone of which 10.76p Vyke charge

Vyke Mobile IP cost comparison: UK to Spain fixed line

Vodafone mobile roaming 12 p per min Vyke IP mobile call free connection 2.15p Vyke PC IP call free connection 2.15p Vyke Mobile "Call @" on fixed-line call 2.46p per min Vyke Mobile on Vodafone roaming call 10.76p/min Source: Vyke

WiFi-enabled handsets are widely-available

There are some 25 WiFi-enabled mobile handsets already available, amongst which the Nokia E65 is an optimum example for Vyke functionality

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Vyke ~ subscriber projections

Vyke added 703k IP user accounts in twelve months to June 2007. A user account is described as a subscriber paying between $7 and $32 per month (source Vyke) on a recurring basis. In FY07 we estimate that Vyke should add 858k accounts, taking the total from 304k to 1.36m. Currently, users are distributed equally between Europe and Asia; we expect Vyke’s IP WiFi mobile subscriber base to pass the 2m mark a year later. As Figures 8 and 9 indicate, we expect strong IP account growth;

• Dec 07E 1.36m

• Dec 08E 2.56m

• Dec 10E 5.26m

• Dec 12E 9.26m

Figure 8: Vyke IP accounts (m and $m) and breakdown by ARPU band 12/05-12/15E

0.002.004.006.008.00

10.0012.0014.00

Dec

-05

Dec

-06

Dec

07e

Dec

08e

Dec

09e

Dec

10e

Dec

11e

Dec

12e

Dec

13e

Dec

14e

Dec

15e

0

500

1,0001,500

2,000

2,500

3,000

IP accounts (m) IP revs $m

0.150.1

100.1150.1200.1250.1300.1350.1400.1450.1

2006 2007e 2008e 2009e 2010e 2011e 2012e

£m

$5 $15 $20 $25 $30

Source: Vyke DSC E. Note ARPU bands revenues converted into £m.

Key revenue assumptions ARPU “matrix” In addition to subscriber growth forecasts, our first key assumption underlying revenue development is assumed ARPU distribution. Our distribution matrix results in an average of $6.6 in 2010(E) and $9.5 by 2012(E). Figure 9: Projected revenues by ARPU band Revs $m 2006 2007e 2008e 2009e 2010e 2011e 2012e $5 0.8 6.8 28.1 52.0 79.0 113.7 139.4 $15 1.6 12.5 50.5 99.4 142.2 227.3 313.7 $20 1.1 8.4 24.5 37.9 94.8 151.5 209.1 $25 0.7 4.4 0.0 0.0 39.5 126.3 174.3 $30 0.0 0.0 0.0 0.0 0.0 0.0 104.6 Source: DSC

We assume that users become regular WiFi paying subscribers only after a 4-6 month lead time of intermittent use

An average ARPU calculated from a “matrix” of user types

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A six-month lapse

Second, we assume that subscribers who register in a given month will only generate regular calling revenues some six months later as regular WiFi users. Revenue development therefore trails an initially high rate of subscriber registration.

Lead time but not a “lock” on mobile WiFi

Third, our outlook is not predicated on Vyke having a proprietary “lock” on mobile WiFi access technology. As the company has noted its offering is innovative but translates only into a time-to-market lead which it estimates at a minimum of 18 months. In this respect the recent (August 29th) agreement with Mozat Pte, owner of the Morange (www.morage.com ) mobile “community”) in Singapore is an important indicator of Vyke’s ability to extend its market presence through partnership rather than organic growth. From origins in 2003 at the National University of Singapore, Mozat has become has developed mobile solutions for software providers, device manufacturers and also carriers including China Mobile, China Unicom, SingTel and TIGO. Singapore-based Morange is a mobile platform which provides an operator independent, mobile handset- based interface featuring services such as mobile based social networking, push email, cross platform instant messaging, remote desktop access and personal information management. Further, in mid-2007 Vyke announced an agreement with The Cloud Networks, giving Vyke users the ability to access mobile VoIP services across a network of 9,000+ hotspots and 16 large area, metropolitan networks, including such areas as the City of London, Canary Wharf, Manchester and Amsterdam.

Efficient billing and capacity

Central to this leadership is the ability to efficiently track users and bill revenues; Vyke has invested heavily in its billing system and analytical capacity. We expect this to scale; as its subscriber population grows we expect cap-ex to grow, currently calculated at 1.5%-2.0% of FY2011-12 revenues. Our forecasts incorporate total cap-ex of £18m by 2012. The competition ~ “Vodafone” Vyke’s most obvious competitor is the GSM-based mobile communications “community”, epitomised by Vodafone, the mobile operations of national incumbents, and the limited number of other licensed network operators (Orange etc.). In July 2007 Vyke acted to circumvent efforts by mobile operators to disable WiFi functionality in handsets operating on their networks. One key feature is the clear price differential between mobile voice tariffs (epitomised by roaming and call termination charges) and IP-based access. In the fixed-line area voice IP telephony has become part of a wider “triple-“ or “quad-play” media-based offering. As yet mobile data applications such as TV viewing have been slow to take off; in our view the potential impact of mobile IP (WiFi-based) voice competition is greater given that the “bundled” media package has as yet less appeal.

New registrations are assumed to take six months before becoming regular paying users

Time to market advantage but not a “lock” on mobile WiFi technology

Billing capacity demands should increase

Mobile WiFi is a direct challenge to licensed GSM networks, which should continue to attempt to “disable” WiFi functionality, even though handset makers provide this feature

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Financial outlook The key features of our Vyke earnings outlook are

• 75% CAGR revenue growth in the 2008-2011 phase

• EBITDA growth over the same period at 115%, assumed margin 4.5%

• EPS rising to 15.3p by 2010

Figure 10: P&L FY05-10E P&L £m 2005 2006 2007e 2008e 2009e 2010e Calling Cards 5.5 7.7 8.4 8.5 8.5 8.5 IP accounts 0.2 2.3 15.9 51.0 93.7 176.0 JV Tele Super Nordic 0.0 (0.2) (0.1) 0.0 0.0 0.0 Genme Sdn (Vyke Asia) 0.0 0.0 0.0 0.0 0.0 0.0 Internal 0.0 0.2 0.0 0.0 0.0 0.0 Total Revenue 5.7 10.0 24.2 59.5 102.2 184.5 Cost of Sales (5.3) (9.2) (22.3) (54.1) (92.5) (166.7) Gross profit 0.4 0.8 1.9 5.4 9.7 17.9 Mrg (%) 7.3% 7.9% 7.8% 9.1% 9.5% 9.7% Operating costs (2.2) (3.6) (4.6) (5.6) (6.8) (11.6) Mrg (%) -38.9% -36.4% -19.0% -9.4% -6.6% -6.3% EBITDA (DS&C) (1.3) (1.8) (1.2) 1.4 4.7 8.4 Mrg (%) -22.1% -17.7% -5.0% 2.4% 4.6% 4.6% Depreciation (0.2) (0.2) (0.3) (0.4) (0.5) (1.0) Amortisation (0.5) (1.1) (1.2) (1.2) (1.2) (1.2) EBIT (DS&C) (2.3) (3.9) (2.7) (0.2) 2.9 6.2 Mrg (%) -41.0% -39.5% -11.3% -0.3% 2.9% 3.4% Goodwill 0.0 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 EBITDA (rptd) (1.3) (1.8) (1.2) 1.4 4.7 8.4 Mrg (%) -22.1% -17.8% -5.0% 2.4% 4.6% 4.6% EBIT (rptd) (2.3) (4.0) (2.7) (0.2) 2.9 6.2 Mrg (%) -41.0% -39.6% -11.3% -0.3% 2.9% 3.4% Other 0.0 (0.0) 0.0 0.0 0.0 0.0 Net Interest 0.0 (0.2) (0.1) 0.3 0.9 1.7 PBT (rptd) (2.3) (4.2) (2.7) 0.1 3.8 7.9 PBT (DS&C) (2.3) (4.2) (2.7) 0.1 3.8 7.9 Provision for Income Taxes 0.0 0.0 0.0 (0.0) (1.1) (2.4) Tax rate (%) 0.0% 0.0% 0.0% -30.0% -30.0% -30.0% PAT (rptd) (2.3) (4.2) (2.7) 0.1 2.7 5.5 PAT (DS&C) (2.3) (4.2) (2.7) 0.1 2.7 5.5 Basic Wtd Av Dil Shares 238.3 412.4 36.2 36.2 36.2 36.2 EPS reported (1.0) (1.0) (7.5) 0.2 7.4 15.3 EPS (DS&C) (1.0) (1.0) (7.5) 0.2 7.4 15.3 Source: Vyke, DSC

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Balance Sheet We expect strong cash generation, with Vyke close to positive cashflow (Net OpFCF basis) this year (see Cashflow, below). The company recently refinanced debt through the issue (27 June 2007) of £2.0m in convertible bonds (due 2013 at 130.33%), redeeming an existing £1.5m Global Bond (2011). Figure 11: Vyke, Balance Sheet FY05-10E Balance Sheet £m 2005 2006 2007 2008e 2009e 2010e Cash & Equivalents 0.35 0.17 0.55 5.76 14.10 28.32 Investments 0.00 0.00 0.00 0.00 0.00 0.00 Inventory 0.00 0.00 0.00 0.00 0.00 0.00 Accounts Receivable 0.53 0.64 1.53 3.75 6.44 11.63 Accrued/Other 0.00 0.00 0.00 0.00 0.00 0.00 Total Current Assets 0.88 0.81 2.08 9.51 20.54 39.95 Goodwill 11.33 12.17 12.17 12.17 12.17 12.17 Amort. Goodwill (0.54) (1.62) (2.84) (4.06) (5.28) (6.49) Goodwill net 10.79 10.55 9.33 8.11 6.89 5.68 Fixed Assets gross 0.69 0.79 1.33 1.87 2.87 5.87 Depreciation (0.19) (0.26) (0.57) (0.95) (1.48) (2.47) Net Fixed assets 0.50 0.53 0.77 0.92 1.39 3.40 Deferred tax, other 0.00 0.00 0.00 0.00 0.00 0.00 Fixed assets 11.30 11.08 10.10 9.04 8.29 9.09 Total Assets 12.18 11.89 12.93 19.31 29.59 49.79 Accounts Payable 0.05 1.76 4.31 10.60 18.20 32.86 Short-term debt 1.00 1.42 1.42 1.42 1.42 1.42 Tax& Provisions 0.00 0.17 0.17 0.17 0.17 0.17 Accruals and Deferred Income 0.45 0.68 0.68 0.68 0.68 0.68 Other 0.27 0.03 0.00 0.00 0.00 0.00 Total Current Liabilities 1.76 4.07 6.58 12.87 20.47 35.13 Long-term debt 0.01 0.57 2.00 2.00 2.00 2.00 Accruals,Other 0.49 0.49 0.49 0.49 0.49 0.49 Long-term Liabilities 0.49 0.65 2.49 2.49 2.49 2.49 Share Capital 4.07 4.43 4.43 4.43 4.43 4.43 Share Premium 7.69 7.69 7.69 7.69 7.69 7.69 Adjustments, other 0.00 0.00 0.00 0.00 0.00 0.00 Retained earnings (1.79) (5.53) (8.26) (8.18) (5.50) 0.05 Total Equity 9.97 6.58 3.85 3.94 6.62 12.17 Sum Liabilities & Shareholders Equity 12.22 11.30 12.93 19.31 29.59 49.79 Source: Vyke, DSC

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Cashflow outlook

We expect Vyke to generate positive cashflow in FY08, with the following outlook;

• 2.4x cashflow Op CF CAGR FY07-10E

• Investment of up to £8m in switching and billing systems upgrades in FY07-12E

• We estimate capacity to treble this level of investment without the need to leverage

Figure 12: Vyke projected cashflow FY05-10E Cashflow £m 2005 2006 2007e 2008e 2009e 2010e CAGR

FY07-10E Op DS&C (2.3) (3.9) (2.7) (0.2) 2.9 6.2 D&A (0.7) (1.3) (1.5) (1.6) (1.8) (2.2) Working capital 0.1 1.2 1.7 4.1 4.9 9.5 Provisions Other 0.0 (0.1) 0.0 0.0 0.0 0.0 Op CF (1.5) (1.5) 0.5 5.5 9.6 17.9 239% Net interest 0.0 (0.0) (0.1) 0.3 0.9 1.7 Taxation 0.0 0.0 0.0 (0.0) (1.1) (2.4) Net OpCF (1.4) (1.5) 0.4 5.7 9.3 17.2 252% Purch. Fixed Invest. 0.0 0.0 0.0 0.0 0.0 0.0 Capital Expenditure (0.0) (0.5) (0.5) (0.5) (1.0) (3.0) Net OpFCF (1.5) (2.0) (0.1) 5.2 8.3 14.2 Exceptional Items (1.1) 0.0 0.0 0.0 0.0 0.0 Share Based Payment 0.0 0.0 0.0 0.0 0.0 0.0 Disposal Fixed Assets (net) 0.0 0.0 0.0 0.0 0.0 0.0 Cash before dividends, financing (2.6) (2.0) (0.1) 5.2 8.3 14.2 Dividends Paid 0.0 0.0 0.0 0.0 0.0 0.0 Issue of Shares (net) 2.2 0.0 0.0 0.0 0.0 0.0 Loans, Net 0.0 1.9 0.0 0.0 0.0 0.0 Increase/Decrease in Borrowings (0.0) (0.1) 0.5 0.0 0.0 0.0 Receipts/Payment - Investment 0.0 0.0 0.0 0.0 0.0 0.0 Lease Capital 0.0 (0.0) 0.0 0.0 0.0 0.0 Purchase of Own Shares 0.0 0.0 0.0 0.0 0.0 0.0 Eq FCF (0.4) (0.2) 0.4 5.2 8.3 14.2 242% Source: Vyke, DSC

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Valuation We value Vyke as a startup operation based on a five-year (FY07-12E) DCF under the following assumptions (summarised in Figure 13). The range of scenarios is wide, but the overall conclusion is that given subscriber growth potential a suitable valuation range should be well above Vyke’s current traded price.

• 10.7% WACC (1.5x unlevered beta assumed)

• Terminal growth rate 2.0%

• Present value of cashflow component comprises 25% of total valuation, terminal value 75% of total

• Indicative EV/EBITDA (E)

• FY08 108x • FY09 33x • FY10 18x • FY11 10.8x • FY12 7.1x

• Resulting valuation:

• Base case, cap-ex FY07-12E £8m: 430p/share • If total cap-ex FY06-12 is increased to £30m: 325p/share

. Figure 13: Vyke DCF valuation

DCF £m 2007e 2008e 2009e 2010e 2011e 2012e

NetOpFC (0.1) 5.2 8.3 14.2 21.1 29.3 Risk Free Rate 5.51%

Eq risk premium 3.51% Beta unlevered 1.50

Target LR Debt / Equity Value 25% Target LR Debt / Enterprise Value 20.0%

Cost of Debt Debt Premium 2.0%

Pre-tax cost of debt 7.5% Corporate tax rate 30.0%

Beta - Levered 1.71 Cost of levered equity 11.5%

WACC 10.7% PV CF 38 (0.0) 4.1 5.7 8.1 9.8 10.5

Terminal growth rate 2.0% Perpetuity 115

Sum 153

Net debt 2.9 Equity 156 Shares 36.2

Per share 430 p Source: Vyke, DSC

Five-year DCF valuation indicates equity value of 430p per share

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Appendix I: Vyke management profiles

Tommy Jensen ~ Executive Chairman (51), has 20 years’ international experience in senior management roles in the information technology and telecommunications sectors. Past roles include; co-founder, the Maskina Group; Scandinavian and Benelux Group MD, Caldwell Group; director Esselte AS; chief executive Esselte Video AS; chief executive Filmnet (Digital Canal); senior vice president Egmont; chief executive and founder of One2Com Group (Scandinavian telecommunications). Kjetil Bøhn ~ CEO (36) co-founder Maskina AS, CEO Vyke AS from 2004; joined the Board of Vyke Communication plc 20 June 2007. Founder, CEO of Viva Technologies AS, a Norwegian-based mobile service company with operations worldwide, sold to Mobile Media Holding ASA in 2005. Educated at the Norwegian Business School (Bergen) he has held several board positions in both Norwegian and international companies, within the mobile services and mobile VoIP industries. Malcolm Bacchus ~ Finance Director and Company Secretary (53) joined the board 20 June 2007 (having provided financial management services to the Group since September 2005). Set up Baccma Consulting in 1994, providing accountancy, consultancy and interim management services to corporate clients, and was finance director of a number of AIM listed, OFEX and private companies. He is a chartered accountant and a member of the Council of the Institute of Chartered Accountants in England and Wales Kim Berknov ~ Non-executive director (44), managing director of Evergreen Capital Partners Limited, a private equity service firm focusing on financing, restructuring and growing businesses in Northern Europe. Previously Kim has held positions as executive vice-president of Aldata Solution, and managing director of Digital Mountain AG, TransConnect Corporate Finance GmbH and GE Capital IT Solutions. He was previously a management consultant with McKinsey & Company and held international sales and marketing positions at NCR Corporation. He holds an MBA from IMD in Lausanne and a BA from Copenhagen School of Economics and Business Administration. Terje Aske-Henrikesen ~ Non-executive director (51), president of EMS Ship Supply AS a manufacturer and supplier of marine equipment, technology and logistical services. From 1998 to 2005 he was executive vice president and president of Nera Satellite Communications and prior to that was general manager of Elopak ASA. Other directorships have included BNSC Beijing, NSSL Limited, World Wide Mobile Communications AS, Synnove Finden ASA, Crosscomar SL, Stromme Singapore and Stromme- Madsen Rotterdam. He holds degrees in Mechanical Engineering and Business Economics. Peter Holmgren ~ Non-executive director (28), a director of Pinemont Securities Limited, a private equity advisor specialising in the Nordic market and based in London. He is also a director of Cura Capitalis AB, a Swedish privately owned investment company and Seniorstøtten AS, a Norwegian private care company. Peter previously worked as an Equity Derivatives trader for IFX Group Limited. He holds a MA in Economics and Finance from Heriot-Watt University, Edinburgh, Scotland.

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Appendix II: Glossary of selected terms

802.11 ~ wireless standards grouping developed by the IEEE composed operating at different radio frequencies, e.g. 802.11b (2.4GHz) common to microwave ovens, cordless phones, medical and scientific equipment, and Bluetooth devices Bandwidth ~ communications network transmission capacity dependent on transmission speed, number of users and the type of device used to connect PCs to a network. Standard 802.11b provides a bandwidth of 11 Mbps; 802.11a and 802.11g provide bandwidth of 54 Mbps. Bits (bps) and Bytes (Bps) per second ~ bits per second (bps) sometimes confused with bytes per second (Bps); ‘bits’ is a measure of transmission speed, ‘bytes’ is a measure of storage capability. 8 bits make a byte; a wireless network operating at a bandwidth of 11 megabits per second (11 Mbps or 11 Mbits/sec), is sending data at 1.375 megabytes per second (1.375 MBps). Broadband ~ comparatively fast internet connection. Services such as ISDN, cable modem, DSL and satellite are all considered broadband as compared to dial-up Internet access. There is no official speed definition of broadband but services of 100Kbps and above are commonly thought of as broadband. XDSL ~ family of Digital Subscriber Line protocols for high-speed data, voice and video transmission over ordinary twisted-pair copper telephone wires. HotSpot ~ WiFi service point; often located in public spaces (coffee shops, airport lounges, stations, convention centres, hotels) and within corporations or on campuses. HotSpots are known as CoolSpots. Hz ~ frequency, equivalent to unit of cycles per second (megahertz (MHz) one million hertz; gigahertz (GHz) one billion hertz). AM broadcast radio frequency band is 535-1605 kHz, the FM broadcast radio frequency band is 88-108 MHz, and wireless 802.11b LANs operate at 2.4 GHz. IEEE Institute of Electrical and Electronics Engineers, New York, www.ieee.org. A membership organisation that includes engineers, scientists and students in electronics and allied fields. It has more than 300,000 members and is involved with setting standards for computers and communications. IP address A 32-bit number that identifies each sender or receiver of information sent across the Internet. An IP address has two parts: an identifier of a particular network on the Internet and an identifier of the particular device (which can be a server or a workstation) within that network. PHY The lowest layer within the OSI Network Model. It deals primarily with transmission of the raw bit stream over the physical transport medium. In the case of wireless LANs, the transport medium is free space. The PHY defines parameters such as data rates, modulation method, signalling parameters, transmitter/receiver synchronisation, etc. Within an actual radio implementation, the PHY corresponds to the radio front end and baseband signal processing sections. Source: The Cloud

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Appendix III: Risk factors

Vyke has a clear first-mover advantage in its WiFi/mobile IP proposition, but as a start-up operation it faces a number of risks. We itemise these as follows;

• Technology risk

• Exposure to operational failure of WiFi algorithms or a challenge to of IP rights

• Redundancy of WiFi-enabled handsets due to development of 3G, 4G or other (e.g. WiMAX) developments

• Transaction and billing capacity limitations

• Switching capacity limitations

• Proven health concerns of the deployment of WiFi base stations

• Litigation risk

• As Vyke gains profile some reaction from GSM/3G-based operators such as Vodafone might be expected

• Ongoing litigation; suspended. Vyke reports that Southwestern Bell and other Bells had an action against Maskina Communications Inc US for “alleged participation in a wrongful scheme to avoid certain access charges “. The case was dismissed Aug 23rd 2005, but referred to the FCC. At this stage no further action is registered.

• Litigation completed. Vyke (Maskina Communications) paid Live Oak Telecom LLC $575k. Details are provided in Vyke’s FY06 Notes to Accounts 2:18.

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20


Disclosure checklist

COMPANY CODE DISCLOSURE Vyke VYKE 3

Vodafone VOD 3

Carphone Warehouse CPW 3

1. Within the past twelve months Daniel Stewart & Co plc and/or its affiliates has managed or co-managed a public offering for

this Company, for which it received fees or the promise of fees 2. Daniel Stewart & Co plc and/or its affiliates act as corporate broker or nominated advisor to this Company 3. Daniel Stewart & Co plc and/or its affiliates regularly hold/may hold in future trading positions (which may include options)

in this Company 4. Daniel Stewart & Co plc and/or its affiliates holds more than 5% of the securities of this Company 5. The Company holds more than 5% of the securities of Daniel Stewart & Co plc and/or its affiliates 6. Daniel Stewart & Co plc and/or its affiliates may currently be providing, expects to provide within the next three months or

may have provided within the previous twelve months, investment banking services to this Company, which have given rise to payment or the promise of payment

7. The author and/or an individual responsible for production of this report has direct ownership of stock in this Company 8. The author and/or an individual responsible for production of this report received or purchased shares in the issuer prior to

a public offering of shares The Daniel Stewart recommendation structure is based on relative upside/downside to target price. The target price is set on a rolling 12 month view. Upside or downside of 10% or more is categorised as Buy or Sell respectively, and less than 10% a Hold. Although reasonable care has been taken by Daniel Stewart & Co plc to ensure the facts stated and opinions given and projections made in this document are fair and accurate, Daniel Stewart & Co plc has not independently verified all the information given in this document. Readers of this document are advised that this document may not be considered as objective or impartial. Where Daniel Stewart & Co plc acts as Broker and/or Nominated Advisor to a Company, research on that Company may not be considered as objective or impartial. Any comments contained in this document are intended only for those private investors and business customers of Daniel Stewart & Company Plc to whom it has been distributed. This document is not intended for the use of private customers as defined by theFSA. In the event that any such person should come into possession of this document, it is recommended that they should seek independent advice from a suitably qualified professional advisor before taking any decisions in relation to the investments detailed herein. The investments mentioned in this document may not be suitable for all recipients or be appropriate for their personal circumstances. The information in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgement as of this date and are subject to change without warning. The views expressed in this report accurately reflect the personal views of the author as at the date of the report. The author did not receive compensation or other payments in connection with the specific recommendations or views expressed herein. This document is not intended as an offer or solicitation to buy or sell securities. Daniel Stewart & Company, its officers and employees may have positions in the securities mentioned herein. Past performance is not necessarily indicative of future performance and the value of investments may fall as well as rise and the income from them may fluctuate and is not guaranteed. Clients may not recover the amount invested. Some securities carry a higher degree of risk than others. The levels and basis of taxation can change. When we comment on AIM or OFEX shares you should be aware that because the rules for these markets are less demanding than those of the Official List of the London Stock Exchange the risks are higher. There is a higher risk of losing the money you have invested. Furthermore, the marketability of these shares is often restricted, you may have difficulty in selling your shares and there is often a big difference between the buying and selling price so that if you have to sell them immediately after purchase you may get back much less than you paid for them. If you are in any doubt, you should consult your investment advisor. Daniel Stewart & Co plc may actually or may seek to do business with companies covered in its research reports. Investors should be aware and take into consideration that the firm may have a conflict of interest that could affect the objectivity, independence and impartiality of this report. The firm’s policy on managing actual or potential conflicts of interest and other relevant disclosures may be found in our Research Note Policy statement on our website www.danielstewart.co.uk. The contents of this document have been prepared by, are the sole responsibility of and have been issued by Daniel Stewart & Company Plc for the purpose of section 21 of the Financial Services and Markets Act 2000. Authorised and Regulated by the Financial Services Authority.

Documents

Daniel Stewart VYKE report - Sept 2007