This week I will be reviewing Cyan Optics Q3 results with some notes from their call. I do these reviews because I know that Quarterly Calls are the one opportunity for a company to transmit broadly to their investors. The challenge with these calls is that they have a structure and a language that is not apparent to folks outside of the investment community. On top of that, these calls are Sales calls. The product that is being sold is the stock of the company. This means that there is a tone to the conversation and the things said that are intended to a single end. With all of that said, let's move on to the results. In comparison to past quarters, this quarter was not as bad. Revenue was up quarter over quarter (this means that Q3 had more revenue than Q2). The company was not profitable once again and it used over $10M of cash in the quarter. There was a bright note with the inclusion of some Cisco and Juniper products within Blue Planet.
The question that I really want to address here is the future. On the call, it was announced that a 12-15% cut in expenses was planned. I know in fact that the cutting has already started. I would expect that about 10% of the firm will be laid off as part of this program. This is not enough of a cut to bring things to profitability anytime soon. In fact the company was asked about a date for being Cash Flow Positive. The answer that I would say was what I call NPNF - No Plan, No Forecast. I assume they actually have such a plan but are uncomfortable announcing what the date would be.
The second announcement was a money raise. No amount was stated nor was the mechanism. The thing is that the choices are a challenge. Debt is a problem. No bank is going to loan them money in the current state of the business. A bond issue is in the same boat. It is possible that a Preferred Stock investment might be possible by High Net Worth Individuals or by a Venture Capital Style fund. I don't think this is likely. This means an equity investment is probably the path forward. For the same reason that a bank won't loan Cyan money, a PE firm or a Hedge fund will not go for a minority investment. Neither will another equipment company. A carrier might have to do so (Windstream), but they will be very hesitant to do so. No Tier 1 will want to hear that a company that wants to sell to them needs an investment from them, so that is out. That leaves a secondary offering, but that will be ugly for the existing investors.
All of that brings me back to what I think should happen. Cyan needs to be sold and sooner rather than later. The longer this goes on the less Cyan is going to be worth. I am sure the management team and board want to get a Tier 1 win to raise that price. But it is a game of chicken with the cash. If a Tier 1 does select them, then they will get offers - potentially prodded by the carrier (I am winking at World Wide Packets here).
I want to be clear that none of this reflects on Cyan's technology or people. They might have the greatest products in the world, but the SDN market is not mature. I know they have some really good folks as I know and have worked with many of them. Luck and timing are a large part of success and Cyan may not have it.
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