I will be at the FocalPoint Annual Conference next week, so my postings might be a bit dicey. We have a packed agenda and I will probably post in the evenings if at all. I don't leave until Tuesday PM, so we shall see.
I want to remind everyone that I am having a Lunch and Learn at the SR Veterans Building tomorrow @ Noon. Click HERE for tickets. Also, I am going to be sponsoring a webinar in conjunction Michael Mills of Business Design Corporation on March 13th @ 10AM. I will be posting links for this later. If you want more information on this, just let me know.
On to Cyan. I have been there. It is hard. I was de facto running the Account Team at Winstar when they went bankrupt. There went $65M in revenue (at 60% Margin!) in one fell swoop. It was hard to deal with because on top of that Tellabs stopped buying Cablespan parts from us at any volume. I feel for my friends at Cyan.
I listened to the call and read a couple of notes on the call this morning. I thought people handled them with kid gloves. Analysts asked 3 basic questions: Is Windstream Revenue coming back? Do we have any significant SDN revenue soon? What about costs? I will deal with each one of these in turn.
Windstream Revenue - There is this notion of a "pause" at Windstream. According to Winstream's information, they lowered CAPEX in Q3. So, I think there is a possibility that the bulk of the buildout of the existing projects completed. If you listen to a video on the Windstream website, there was a period of enhanced CAPEX spending that is ending. I have no direct information, but the possibility of Windstream returning to its mid-2013 levels of buying seem low.
SDN Revenue - Proof of Concept. Those are the 3 words repeated often by Cyan executives. Those are cool, but potentially a long way from significant Revenue. For those not in this business, brand new technologies need to get a trial to see how they might fit. From there, someone needs to figure out how to apply it to a network so that a technology might provide gain for a Carrier. From the POC somebody needs to champion a business case. One challenge for SDN is that they are trying to change some traditional product and service categorization. That is hard inside Tier 1s in particular.
OPEX - Right now it is WAY too high. OPEX is approximately the same as revenue. The business runs on 40% Gross Margins and let's give them a break and call it 45% in the long term to cover an uptick due to more software. OPEX in a 45% GM company can't rationally exceed 40% of Revenue. To put this in context to cover the approximately $20M/Quarter OPEX Cyan needs to expand to $50M/Quarter in Revenue. Q1 Revenue will be about 1/3rd of that. For all those that have not been an Executive, about 70% of costs are directly related to headcount. You can cut travel and small items. To make a large dent in OPEX, the only way is to rightsize an organization.
So what does that mean? It means that Cyan is in one heck of a mess. Right now they have around 4 Quarters worth of Cash. It might take a lot longer than 4 Quarters for them to get meaningful revenue from the SDN side of the business. The only way to do that is to cut OPEX rather dramatically. They made a small hint that this might be coming on the call, but nothing definitive was said.
I have to say the only assured path forward that I see is to market the firm immediately, before things get too dire. The POCs would have value to larger players wanting to be at the forefront of the SDN wave. The challenge will be is that one would not expect to see a huge premium given the Balance Sheet. It is a tough place to be in as they might not get a valuation that they would like.
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