Net Neutrality Friday

A couple of things happened this week that I want to write about.

First, LightReading was sold again. That online publication came about just as the dot.com bubble was about to burst. It has been around ever since. It was founded by a gentleman named Steve Saunders. He sold the publication in 2005, when telecom was at its lowest point. He bought back the site in 2014 and has sold it one more time! We shall see how things evolve. The publication started in a much more cheeky fashion and became a more business oriented publication over time. I recall the first time I was quoted there. I was at a conference called "Turning Copper into Gold" and I noted that the State PUCs were more concerned with the costs of telephony than in the deployment in broadband. The quote on the site sounded like I was attacking Grandmothers. I called the author, Phil Harvey. He and I became friends over our time working in Telecom.

The other event was Verizon buying Yahoo! for over $4B. That is added to the purchase of AOL earlier this year. I have done some due diligence in this space and thought I would add what I think is going on. There is a lot of money in the infrastructure of the Internet. Yahoo! has some excellent content (Sports for example). Yahoo! is the default Search Engine for iOS devices and has a significant mail engine. Many of these capabilities are great opportunities for advertising. If you haven't noticed the advertising in Gmail, then you probably just not looking.

These older companies have businesses with significant cash flow if managed correctly and are a lot cheaper than buying Microsoft or Google (the other primary search providers). If Verizon can get Yahoo! to be the default search engine on its phones, I think the purchase will pay for itself. All of that leads to greater advertising possibilities. Advertising has great margins and can be a significant revenue and profit gain. Verizon will have to optimize the businesses to make them useful in its future.

The positive thing for Verizon is that they have recognized that they can not make these businesses organically. The way Telcos work is just not conducive to the way that Internet companies work. Has Verizon chosen good properties to buy and exploit? I don't know if it will work out for them. But I think their head's are in the right place. The future is in content and applications not hardware. You can't turn a Telecom company into one of these new firms. But you can use the money that they make to buy into the right spaces. The question is how do you buy companies and how do you operate them to make them work in your future?


Jim Sackman
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Sonoma County: News and Notes

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.

If you want to make sure that you are not on the edge like Cyan, then you need to have an Annual Operating Plan for their Business. Unlike a larger Business Plan, an Annual Plan provides very specific ideas of what will make your business work over the next 12 months. If you are interested in such a plan and don't know where to start, contact me at jsackman@focalpointcoaching.com. A properly executed plan will more than pay for itself! If you want to understand the service better, then click HERE!

Jim Sackman Focal Point Business Coaching Change Your Business - Change Your Life! Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning

The End of Tellabs

Today's Blog is different than the other's I have posted. I am going to talk about the pending sale of Tellabs to a Private Equity Firm for $891M. Given that the revenue of Tellabs should be about that this year the sale is about 1x revenue. On top of that, Tellabs has over $500M in cash. That means that the sale is between 1/3 and 1/2 of current revenue. Not a great price.

Light Reading has full coverage of this and there was a bit of speculation about whether there might be a counter-bid. Tellabs has publicly said that it has talked to over 30 companies so it seems that there will be none.

My time at Tellabs was a mixed bag. I had a great experience while I was at AFC, but Tellabs was nowhere near as rewarding. There were some great people I met, but I thought many of the plans that were set forth made no sense and I said so.  That made me unpopular on a regular basis.

But I thought what I would post about, was how AFC ended up getting an offer from Tellabs. I don't recall the exact date, but it must have been in late Q1 or early Q2 of 2001. I know we had already found that Winstar was going bankrupt and that Tellabs was cancelling all their orders associated with Cablespan. AFC would be okay, but we had just lost about $80M in annual revenue from those two sources. John Schofield and I were in Keith Pratt's office. The telecom world was coming apart around us. Keith was refering to Telecom as a "Toxic Wasteland". People were very happy that we had hedged our Cisco position at $65 a share at that point. Earlier they had been blasting us for it.

The three of us sat around and pondered the future for most of the afternoon. We reached a consensus that our customers would consolidate and that would cause a consolidation in the Telecom Equipment market. We came to the conclusion that AFC was too small to play in a world dominated by major vendors. The conclusion was simple. We needed AFC to grow very quickly or sell it. From that point forward, that was our mission.

I created a list of 7 companies that were potential buyers of AFC. We excluded the Chinese and Japanese from our list. The Chinese would likely be a challenge politically and the Japanese seemed unlikely to purchase a firm of AFC's size. From there, we sent John on a road show to meet the 7 CEOs and see what the possibilities were. The answer was clear: "AFC is a very nice little firm, but we only care about Tier 1 revenue and you have very little of that." So, our strategy became clear. We had to convert AFC to a Tier 1 revenue firm.

We ran a strategic planning process later that year with the idea of getting the rest of the Executive Staff on board with that plan. In retrospective, this plan succeeded wildly. When Tellabs bought AFC in 2004, we had gone from 20% to 65% Tier 1 revenue. Later that percentage went even higher.

When the FiOS win and the Marconi Access purchase became public, things got hot on the M&A front. In the end, we had only 3 companies actually take any kind of look at AFC. Siemens dropped out early as they ran into the scandal that had many executives arrested. Cisco took a purchase to their Board, but I suspect that is when they decided that Scientific Atlanta would be a better deal for them. Tellabs made and offer and most of the rest of that story is very public.

We had anticipated that an AFC/Tellabs combination was too small and the company would have to either buy more or be bought. I understand the plan that Krish had in place was a sale to Ericsson. My understanding is that Mike Birck thought the price was too low. Too bad, the combination would have been right for Tellabs. And here it is now.

Jim Sackman - former CTO of Advanced Fibre Communications
Certified Business Coach
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