Today is my weekly Sonoma County Update. I wanted to start the way I finished last week's local blog and that is to remind everyone of my Sales Success Intensity training at the Doubletree on 11/22. This is a 1 day training event for people that are either new to sales or need to re-energize their effort to be able to exceed quota. One group in particular might be a great fit, which is those that are not classical sales folks. Many of us are selling internally or externally all the time. It is really important to understand how Sales work, especially for those that are not classically trained. If you are interested, follow the link - https://www.eventbrite.com/event/8404400789
Before I get to the main topic, I wanted to note the great opening for the Graton Casino yesterday. I was in Petaluma yesterday morning and came back to Santa Rosa around 11:30AM. Traffic was bad through Petaluma and opened up when I got to the place where the expansion was in place for 101. When I got to the bottom of the North Side of the Cotati Grade traffic stopped. Traffic stayed stop and go until after Golf Course Drive. One thing to note was that the left lanes were more open.
Now to the main topic. Discussion of the Q3 results of Calix and Cyan. I know lots of people at both companies and have respect for their businesses. They are in different places as Cyan is a much younger company. Both announced lower guidance for Q4 and they got hit in stock price than had been expected. One thing that is interesting is to compare the calls from a tone, style and topics.
Cyan is building its reputation on a future based around Software Defined Networks (SDN) and Network Function Virtualization (NFV). From the call today, this is more of a "Thought Leadership" position than a revenue generating position today. By that, it means that Cyan is engaged at the forefront of a market but their ongoing business is traditional. Cyan is playing this as the long term growth engine and is talking about carriers going very fast into deployments. This is a bit of a dangerous play as it means that if there are delays then they will have to acknowledge that and investors may become skeptical. Any delays are outside of Cyan's control so they are at the whim of their customers.
I noted comments on SDN on the call. What Cyan said was that Colt was looking at using SDN as a provisioning tool. Well if that is true then this is both good and bad news. It means that SDN is being viewed (at least by Colt) as replacing their flow through provisioning to automate the process. That is good because it represents a capability that Carriers are familar with and understand. The downside is that SDN is being viewed externally as a way to create new services. It is not obvious that Colt is viewing it that way which may dampen the move or slow it down.
I want to say Cyan talked a lot about traction at Tier 1 customers. I want to throw a bit of caution on this as Cyan today is too small to directly take important business at Tier 1 customers. This quarter's results show why as the guidance for Q4 is based on slowdowns at large customer - Windstream. Tier 1 carriers are very hesitant about being a huge percentage of a business for a company. That would imply that a Tier 1 that is ready to buy Cyan may send Cyan on a World Wide Packets type selling plan (Ciena bought WWP before AT&T did a large deployment).
Calix is a different state and I am really familiar with it. They have a dominant market share in the Tier 3s and are in hand to hand combat with Adtran in the Tier 2s. If you look at their top line revenues, they have reached a relatively flat level over several years. Given that Calix is running about 20% of revenue in R&D, they are getting simple awful ROI on that investment. The fundamental problem is that they need new customers.
From what I have seen from the outside, Calix is focused on bringing their portfolio through Ericsson into the International market. They are going to be head to head with the Chinese in those markets. That will be a margin challenge for them and given their long term margin guidance does not seem to make sense. One easy way to do understand it is to look at DSL price points in Emerging Markets. In the US, Calix is starting to overbuild themselves. This is good business but does create an expanding company. There are limits to investment and the Tier 3s are very worried about changes to USF. So, what are they going to do to expand?
This is a very tough nut to crack from a company standpoint. There are limited ways in Access for them to expand. In the US, the Tier 1s are outside of Calix reach at the moment. The best way in short term is to buy the former AFC assets from Marlin. At least then they are an RBOC vendor, because Adtran already is an RBOC vendor. International runs head on into Huawei and ZTE. The only other path forward is to do things other than Access and they will need to buy their way into that kind of business.
One last thing that they talked about is expansion of FTTP deployments. Up until now, FTTP deployments have come through either large competitive challenges or government intervention. What Calix said under the hood is that FTTP is cheaper than high speed DSL in low densities. Okay they did not say it directly, but it is a truism. What that means is that I think folks are finding the limits of DSL.
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