This is a last reminder that on May 12th I am presenting at a Workshop for Small Business Week with the Santa Rosa Chamber of Commerce. My topic is “The Way to Wealth Formula” and I am paired with Cynthia Riggs who is presenting “The Fastest, Easiest Way to Write Your Business Plan”. There are other friend of mine presenting as well! George Merrick of Interface Financial Group is leading a panel Discussion on Alternative ways of funding a business. John McHugh of Winning Workforce is presenting “6 Things You Must Know to Hire and Keep Talent-Do you Know Them?” on Thursday May 15th. Follow this LINK to the main page describing all the Workshops!
This week brings us to the results of the Cyan Conference Call that was held yesterday. The results were very troubling but better than projected on the Q4 conference call. The company had revenue of $19M and Operating Expenses of $25M. This led to a loss of 33 cents a share (non-GAAP) and more troubling a cash burn of around $15M in the quarter. This cash burn was noted to be higher than expected and higher than anticipated going forward. The net of that is that the company has about 12 months or so of cash.
The first question we need to ask is “Can Cyan grow out of this?” If we return to Q3 of last year (the best quarter in the history of the company financially), we see that Gross Margin (GM) Dollars were about $15M. Stated on the conference call, the Operating Expenses (OPEX) were about $25M and this looks to be the plan going forward. If we take 40% GM (as a nice round number around the current gross margin), the company would need to generate around $62M in revenue or $25M more than it has ever made in the past and about triple its Q2 guidance. There is good news however in that the newer products should have a much higher gross margin. This is due to a shift to a much higher content in software of the total solution. So, I will do a projection that says revenue recovers to $30M a quarter for the old business (40% GM) I get $12M in GM dollars. That leaves us $13M in margin of the new business. Let me call that Business 80% GM as a guess. That would mean a Total New Business Revenue of $16.25M and a Total Revenue of $46.25M. That is larger than Cyan has ever produced but not so much larger that it is irrational.
Now you can quibble easily with my 80% number. I use that because if Revenue increases, Sales Commissions will likely increase as will other expenses. Since I am declaring Operating Expense flat in my exercise, then really I am saying the incremental margin of the business is 80%.
There were other issues on the call that were discussed. Where I want to head to next is Windstream. Unlike what the analysts you listen to on the call have done, I have actually listened to what Windstream has to say. Windstream doesn’t talk about Cyan directly but you can find plenty of information about them and where they are headed on-line. It is clear that Windstream had a bubble of spending that existed and Cyan may have benefited from that. To what degree, it is not possible to determine from the outside. But it is also clear, that Windstream’s total Capital Expenses (CAPEX) are not going to go up. An analyst that projects Windstream revenue at Cyan to go back to previous levels is certainly making a mistake given available information. HERE is an older video of Windstream’s CFO talking about CAPEX and there are plenty more videos available. The good news is that margins from upgrades at Windstream should be at higher margin than the initial revenue. So, in balance I think this is neutral to my analysis above.
I want to go next to Trials and Proof of Concept (POC) Networks at Tier 1 carriers. This is an important thing for Cyan to participate in. I don’t believe that a large carrier will buy directly from Cyan in its current form. It would put the Carrier Network at extreme risk to buy major elements from a company this small. As one can see from what has happened at Windstream, the changes in buying behavior can put a small company at risk. What is good about these trials is that it should create interest from strategic buyers. SDN and NFV are initiatives at all the major systems vendors. Cyan seems to have products that are either ahead of others or have unique capabilities that carriers find of interest. A large player might find it simpler to buy such technology from Cyan (through M&A) than developing such on there own.
This leads me to the path forward. There are really 2 plans. Plan 1 is to rescope the company to the size of the revenue that is immediately available. This would be require a huge layoff. Where you would want to get to is an OPEX of around $15M a quarter, or about 60% of where it is today. Plan 2 is to engage strategic buyers immediately. This plan would be status quo running forward and press on all the POC engagements. Carriers have been known to ask small companies to engage strategic buyers in the past (see World Wide Packets). The longer this process takes the more high stakes the game becomes. It looks to me that the company has gone for Plan 2 as there was no talk of immediate layoffs.
I know lots of folks at Cyan and wish them the best of luck. They have quite the tightrope to walk.
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