Market Watch

Investors reassessing Cybird after nearly a year as a listed company are sure to be wondering this: Is Cybird a stock that can fly back towards its peak share price of JPY1.1 million (currently JPY525,000), or is it just another turkey waiting to get gobbled up by the ferociously competitive content market?

Cybird attracted investor attention as an unknown start-up that helped NTT DoCoMo (9437) conceptualize and develop the highly successful i-mode service. This background has made Cybird a more important player than its JPY16 billion market cap might suggest. Going forward, Cybird's strategy is much grander: to move beyond dependence on content and become a massive force in the mobile universe on which wireless carriers, handset makers, and mobile business seekers rely for a full-range of wireless application solutions. Cybird president Kazutomo Hori's goals are clear, but the path to mobile domination, just like the evolution of next generation communication, contains many uncertainties. In the meanwhile, management is looking forward to the rollout of domestic 3G mobile phone services and the opportunity to apply first-mover advantage to increase market share.

At present, Cybird depends largely on content revenues, with its 65 content sites and 3 million subscribers accounting for 88% of total revenues. Revenue remains highly geared towards NTT DoCoMo (56% of the total), although this reliance has been falling with the market penetration of J-Phone and KDDI handsets. Management freely admits that content will remain the main source of revenues for the next few quarters, but reducing Cybird to a simple content company would be a mistake. They expect recently introduced Sugu Mail to become the next growth driver. Launched in mid-November, Sugu Mail offers instant access to mobile home pages without the need to input lengthy URLs. The idea is to include Sugu Mail four-digit access codes in advertising and special event announcements. Initial responses from partners such as Dentsu have been positive. A tie-up with PIA, Japan's biggest ticket sales magazine, should provide a terrific launch pad for the service. 

Having posted two consecutive quarters of positive bottom-line results, Cybird has cleared the profit hurdle tripping up many of its upstart peers. Its financial house is in order, with JPY2 billion in balance sheet cash and no long-term debt. Forward-looking investors attempting to figure out fair value for Cybird will likely continue to focus on the most tangible aspect of the business -- wireless content provision. Given growing competition in this space (from the likes of such players as Index, Bandai Networks, Nihon Enterprise, and Tose), the current P/E multiple of approximately 25x FY3/02 estimated earnings is probably appropriate. After all, investors have grown wiser after eating losses during the dot-bomb era and now look at technology companies with much more skepticism.
To drive the share higher, Cybird will need to show that the intangible assets within the organization can truly drive future profit growth. The personal network that CEO Hori has built among wireless carriers, handset makers, and distribution partners is indeed a valuable asset. Important too is the groundwork being done now with Asian and European partners as these regions follow Japan on the road to richer mobile telephony. However, until new businesses actually begin to create future profit streams, they will remain highly discounted by a weary stock market.

Successful achievements in the above-mentioned Sugu Mail project and conclusive deals beyond the "exploratory" stage with overseas carriers could be the events that reawaken investors and trigger a jump in Cybird's share price. In the meantime, the fundamentals of the content business remain positive. The platform transition to 3G is now rapidly under way, and carriers need compelling content to convince users that a trade-in is worth the hassle. This should keep Cybird's business pipeline full while Hori continues converting Cybird's hidden assets into the tangible profit drivers that investors demand most.

By Ortwin Gierhake, Analyst, WestLB Panmure, Tokyo
and Zachary Liggett, Analyst, WestLB Panmure, Tokyo