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Based in Petaluma, CA, Cyan (CYNI) scheduled an $88 million IPO with a market capitalization of $486 million at a price range mid-point of $15, for Thursday, May 9, 2013.

Nine other IPOs were scheduled for the week of May 6th. The full IPO calendar is here.

  • S-1 filed April 25, 2013
  • Manager Joint Managers: Goldman; JPMorgan
  • Co Managers: Jefferies; Pacific Crest Securities.

SUMMARY
CYNI pioneered innovative carrier-grade networking solutions that transform disparate and inefficient legacy networks into open high-performance networks.

Revenues are increasing at a fast clip: up 85% in the March 2013 quarter compared to March 2012. But one customer accounted for 47% of revenue, and that customer indicates they will be reducing their purchases.

At the same time CYNI's losses are increasing. If revenue growth decreases and losses increase it's not a pretty picture for CYNI. Gross profit is low for a high-tech business, at 41%.

2010

2011

2012

March qtr '11

March qtr '12

Revenues ($mm)

$24

$40

$96

$14

$26

% increase from prior period

72%

137%

85%

Gross Profit % of rev

29%

26%

25%

40%

41%

Loss

-$16

-$16

-$17

-$4

-$9

Loss % of revenue

-70%

-39%

-17%

-27%

-36%

However, CYNI's business is 'pay as you go' which is similar to a subscription business that's in favor with Wall Street.

CYNI introduced a major new product in December 2012, Blue Planet, that could help add customers and increase sales, but that hasn't happened yet.

VALUATION

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

annualizing March qtr

Cap (MM)

Sales

Earnings

BookValue

TangibleBV

CYAN

$490

4.71

-13.0

5.3

5.2

% offered in IPO: 18%

Glossary

CONCLUSION
CYNI may increase from its IPO price but the longer term future is somewhat cloudy, because the main customer is cutting back and because CYNI is facing new product introduction expenses.

Also, the sales cycle for a new customer deployment, from the time of prospect qualification to the completion of the first sale, may span multiple quarters. Therefore, it seems prudent to watch from the sidelines ... avoid.

BUSINESS
CYNI pioneered innovative carrier-grade networking solutions that transform disparate and inefficient legacy networks into open high-performance networks.

Solutions include high-capacity, multi-layer switching and transport platforms, as well as a carrier-grade software-defined networking platform and applications.

CYNI designed its Z-Series platforms to support the multiple concurrent technologies used in regional and metro networks, including both Ethernet-based services as well as optical services.

By deploying CYNI's solutions, network operators can transform legacy networks into open, multi-vendor, carrier-grade software-defined networks, or SDNs. CYNI's solutions not only reduce network operators' ongoing capital and operating expenses, but also enable their networks to more flexibly support rapidly changing service requirements and new business models

BLUE PLANET
In December 2012, CYNI introduced the Blue Planet platform, a carrier-grade software-defined networking solution purpose-built to address network operator requirements.

Blue Planet is the latest implementation of CYNI's network virtualization and management software that was first introduced in 2009 to work in combination with CYNI's high-capacity, multi-layer switching and transport platforms.

Customers may choose to deploy Blue Planet either on a standalone basis or integrated with CNYI's Z-Series platforms. CYNI solutions enable network operators to virtualize their networks, accelerate service delivery and increase scalability and performance, while reducing costs.

ACHIEVED MILESTONES
CYNI was founded in October 2006 to simplify network operations and to accelerate innovation through a centralized, open, multi-vendor, software orchestration model.

The first Z-Series platform was launched in September 2009. In April 2010, CYNI launched CyMS, one of the first multi-layer network management solutions.

In December 2012, CYNI launched Blue Planet. To date, sales of Z-Series platforms have accounted for substantially all of the revenue.

Standalone sales of Blue Planet have accounted for an immaterial amount of revenue to date and are expected to increase only modestly as a portion of revenue in the near term. However, CYNI expects that the portion of revenue derived from standalone sales of Blue Planet will increase over the longer term.

CUSTOMERS AND CUSTOMER CONCENTRATION
Customers range from service providers to high-performance data center and large, private network operators.

CYNI solutions have been deployed primarily across North America, as well as in Asia and Europe, by over 130 customers, including among the top ten customers by revenue in 2012: Great Plains Communications Inc., Intelleq Communications LLC, Lynx Network Group, Inc., TDS Telecommunications Corporation, US Carrier Telecom, LLC, US Signal Company, LLC, Vision Net, Inc., Windstream (WIN) and Zayo Group, LLC.

Historically, revenue has been derived primarily from customers located in the United States. For the years ended December 31, 2011, and 2012, and the three months ended March 31, 2013, the largest customer was Windstream, which accounted for approximately 37%, 45% and 47% of revenue, respectively.

No other customer represented greater than 10% of revenue in any of these periods.

Windstream has publicly indicated its intention to reduce its overall capital expenditures in 2013.

Accordingly, CYNI expects revenue derived from sales to Windstream to decline in future periods.

In addition, approximately 6.9%, 12.3%, 9.3% and 10.0% of revenue for the years ended December 31, 2010, 2011 and 2012, and the three months ended March 31, 2013, respectively, was attributable to Independent Operating Companies, or IOCs, and other telecommunications network providers that used government-supported loan programs or grants to fund purchases from CYNI.

Changes to or elimination of similar government programs have occurred in the past and are likely to occur in the future, especially given the current U.S. federal government fiscal issues.

To the extent that customers have received grants or loans under government stimulus programs, but no longer have access to such assistance, they may substantially reduce or curtail future purchases.

Revenue from customers located outside of the United States was 1%, 5% and 1% of revenue for the years ended December 31, 2011, and 2012, and the three months ended March 31, 2013, respectively.

PAY AS YOU AS YOU GO
Customers have historically purchased CYNI solutions using a pay-as-you-grow approach that begins with a targeted product purchase to address specific services or portions of their networks and expands over time to additional product purchases as they experience the benefits of solutions.

The sales cycle for a new customer deployment, from the time of prospect qualification to the completion of the first sale, may span multiple quarters.

SALES
During 2012, CYNI began to transition to a mixed sales channel approach, complementing its direct sales force with a channel distribution strategy, particularly in international markets. CYNI expects to generate a substantial portion of international sales through this network of channel partners in future periods.

INTELLECTUAL PROPERTY
To date CYNI has only three issued U.S. patents, and does not have any patents issued outside the United States.

COMPETITION
CYNI competes either directly or indirectly with large networking and optical companies, such as Alcatel-Lucent (ALU), Ciena Corporation (CIEN), Cisco Systems (CSCO), Fujitsu Limited, Huawei Technologies Co. Limited and Juniper Networks (JNPR) and specialized technology providers.

In addition, CYNI seeks to replace legacy network control tools and processes that network operators have either already purchased or internally developed, and potential customers may be reluctant to adopt a solution that replaces or changes existing systems and processes in which they have made significant investments.

In the future, in selling Blue Planet, CYNI may also compete with companies that are focused on providing virtualization software solutions for other end-markets as they may try to adapt their solutions to meet the needs of network operators or compete with networking companies that develop or acquire SDN solutions

5% STOCKHOLDERS PRE-IPO

Entities affiliated with Norwest Venture Partners, 30%

Entities affiliated with Azure Capital, 16.5%

Entities affiliated with Tenaya Capital, 9.1%

Entities affiliated with Focus Ventures(14)

Entities affiliated with Meritech Capital Partners, 6.7%

Michael L. Hatfield, 5.6%.

USE OF PROCEEDS
CYAN expects to net $78 million from its IPO.

Proceeds are allocated to working capital and general corporate purposes, including the expansion of the sales organization, overseas expansion, primarily through channel partners, and further development and expansion of solutions.

Disclaimer: This CYNI IPO report is based on a reading and analysis of CYNI's S-1A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Cyan