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Pegasus Spyware Maker NSO Group Throws Cash at New Ventures to Survive

Davide Scigliuzzo
Tue, December 21, 2021




(Bloomberg) -- Israeli spyware firm NSO Group burned through most of its cash this year in a desperate bid to move past the scandal surrounding its phone-hacking tool Pegasus, according to a person with knowledge of the matter and private financial documents seen by Bloomberg News.

NSO has been spending heavily to build up drone-monitoring technology and a big-data analytics platform that executives are pitching as key assets in discussions with two U.S.-based funds that have expressed interest in acquiring the company, according to the person, who asked not to be identified because the talks are private.

The strategy shows NSO fighting for a path to survival as it battles accusations that its Pegasus software has been used by government clients to spy on political dissidents, human-rights activists and journalists. With its loans trading at deeply distressed levels, the company has been exploring options including shutting down Pegasus and selling itself in an effort to tackle its $500 million debt load.

The NSO unit that controls Pegasus used up two-thirds of its $44 million of cash during the first nine months of 2021, ending the third quarter with just $16 million in its coffers, according to the financial documents provided to lenders. Part of that money was used to fund NSO’s new ventures, which sit in separate entities, the person said.

A representative for Herzliya-based NSO declined to comment.

Phone Surveillance

Last month, the Commerce Department placed the company on an export blacklist for engaging in activities that it said “are contrary to the national security or foreign policy interests of the United States.” Pegasus software can track a user’s mobile phone, and the product allegedly was supplied to governments that used it to spy on political enemies. Pegasus was also reported to have been used in recent months to hack the mobile phones of State Department employees.

NSO has disputed the allegations and said that it shuts down service when clients misuse it.

Two American funds have expressed interest in NSO’s Eclipse technology -- which can detect, commandeer and land drones -- and in its new big-data analytics platform, for which the company signed its first contract this quarter, the person said. Pegasus would either be shut down or brought under the same umbrella as the other businesses in a bet that U.S. ownership would improve its standing, according to the same person.

NSO’s dwindling cash has put it at increased risk of default and was one of the factors that led Moody’s Investors Service to downgrade its rating on the company last month. Traders have been quoting NSO’s debt at between 60 cents and 70 cents on the dollar in recent weeks, levels that suggest bets on a default.

On Dec. 17, Jefferies Financial Group Inc. notified lenders of NSO of its intention to resign from performing key administrative tasks on the company’s debt, a move that could precede a debt restructuring.

Tough Quarter

The third quarter appears to have been particularly tough for NSO, the financial documents obtained by Bloomberg show.

Revenue declined 4.4% from a year earlier, while the cost of sales rose three times as fast. An increase in research-and-development spending as well as general expenses more than offset lower sales and marketing costs, leading to a 24% drop in operating profit.

Looking at the first nine months of 2021, the picture looks healthier, with the company’s core operations holding up relatively well in the first half. From the beginning of the year through the end of September, NSO recorded revenue of $176 million, up 4.1% from the same period in 2020, while operating income fell by a smaller 7.2% to $45 million.

If annualized, the 2021 revenue numbers are not far below the approximately $250 million that NSO reported in 2018, according to the person. That was the year before private equity firm Novalpina Capital acquired a majority stake in the company following a buyout orchestrated with NSO’s management. Revenue in 2019 was slightly above $290 million before falling to a little over $225 million in 2020, the person said.

Since 2019, the company has shut down services to at least seven customers with contracts worth a combined $80 million to $100 million in annual revenue after deciding that it would no longer do business with them, the person said.

Cash Burn

NSO generated $9.7 million of cash through its operations in the first nine months of 2021, a 9.2% increase from the year before. After taking into account the effect of investments and financing activities, however, the company used $29 million of cash over the period, more than seven times the amount it spent in the comparable period of 2020.

NSO started 2020 with $50 million of cash and managed to keep that balance roughly stable through the worst of the pandemic by drawing its entire $30 million bank credit line, the financial documents show. Nearly half of those funds were used to pay a $15 million distribution to shareholders that was also used to finance new investments, the person said.