Cyan: Investors Worried About Growing Losses, Customer Dependency

May.13.13 | About: Ciena Corporation (CIEN)

Cyan (CYNI) made its public debut on Thursday the 9th of May. Shares of the pioneer of carrier-grade networking solutions ended their first trading day with gains of 1.4% at $11.14 per share.

Investors are worried about growing net losses as the company relies heavily on its top client Windstream (NASDAQ:WIN).

The Public Offering

Cyan is a provider of carrier-grade networking solutions which transform disparate and legacy networks into open, high performance networks. Offering high-capacity, multi-layer switching and transport platforms, the company can virtualize legacy networks while increasing service delivery and scalability, while reducing costs.

Cyan sold 8 million shares for $11.00 a piece. All shares were sold by the company with no shares being offered by selling shareholders, thereby raising $88 million in gross proceeds. The public offering values the equity of the company at $495 million.

Despite the jump in Thursday's trading session, the offering has not been a great success. The offer price was set at the mid point of the preliminary $10-$12 price range set by the firm and its bankers. Following Thursday's action, shares trade only just above the midpoint of the preliminary offering range.

Some 18% of the total shares outstanding were offered in the public offering. At Friday's closing price of $11.11, the firm is valued around $500 million.

The major banks that brought the company public were Goldman Sachs, JPMorgan, Jefferies and Pacific Crest Securities.

Valuation

Increased adoption of new application and communication trends are resulting in rapidly growing bandwidth demand as traffic increases. Scalability issues are already felt by network operators and Cyan is trying to close the gap with its Blue Planet platform, which was released in December of last year. This network virtualization and management software simplifies development, deployment and orchestration of scalable communications and business applications over high performance networks.

For the year of 2012, Cyan generated annual revenues of $95.9 million, up 137% on the year. At the same time net losses widened just a touch from $15.9 million in 2011 to $16.6 million over the past year.

The company operates with $14.0 million in cash and equivalents and $12.6 million in debt. The company furthermore has a preferred stock warrant liability outstanding of $8.3 million. Adding the $88 million in gross proceeds, and the company could operate with a net cash position of around $75 million.

Cyan has not earmarked a specific purpose for the raised funds. The company aims to increase financial flexibility while improving brand awareness and creating a public market for its stock. The company might invest in new technologies with the funds raised, as well as make acquisitions.

Friday's valuation values Cyan around 5.2 times 2012's annual revenues.

Investment Thesis

As noted above, the public offering of Cyan has been a bit disappointing. Shares were offered at $11.00 per share, at the midpoint of the preliminary price range, and quickly fell to levels just above $10 on Thursday. Shares recovered during the remainder of Thursday's trading session, currently trading 1.1% above the midpoint of the trading range.

The company has been off to a solid start in 2013, as first quarter revenues came in at $26.3 million, up 85% on the year. At the same time net losses more than doubled from $3.9 million to $9.3 million in the meantime.

Possibly more worrisome than increasing losses, is the increasing reliance on its main customer Windstream, which accounted for 47% of total revenues in the first quarter. This dependency is extra painful given that Windstream might cut its capital expenditures budget for the remainder of 2013.

As such, the key priority for Cyan is to reduce its dependency on Windstream. In 2012, Cyan added 50 new customers on which the company expects to derive meaningful revenues this year, bringing the total customer base towards 130 clients. Competition is fierce, with large names like Ciena (NASDAQ:CIEN), Cisco Systems (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR), among others.

Obviously Cyan's dependency on Windstream is the main risk in this offering. Investors are not too pleased as well that net losses more than doubled in the first quarter of 2013, after full year losses in 2012 stabilized from 2011's levels. At these growth rates, Cyan could generate full year revenues of $125-$175 million for 2013, valuing the business around 3.3 times annual revenues, which is not that steep.

Possibly shares do offer appeal at these fair revenue multiples as the public offering has not been a great success. Signs of improvements in profitability, resulting in narrowing losses, or a reduced dependency on Windstream could send shares towards $15 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.