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Cyan Inc (NYSE:CYNI)

Q2 2013 Earnings Call

August 06, 2013 05:00 pm ET

Executives

Bonnie McBride - Vice President, Investor Relations

Mark Floyd - Chairman and CEO

Mike Hatfield - President, Director

Mike Zellner - Chief Financial Officer, Vice President

Analysts

Simona Jankowski - Goldman Sachs

Rod Hall - JPMorgan

George Notter - Jefferies & Company

Brent Bracelin - Pacific Crest Securities

Brian Freckmann - LS Capital

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cyan Q2 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

I would now like to turn the conference over to Bonnie McBride, Vice President of Investor Relations. Please go ahead.

Bonnie McBride

Thank you and thank you everyone for joining us today for Cyan’s Second Quarter 2013 Earnings Call. By now you should have received the copy of yesterday's earnings release. If you have not, please visit our website at cyaninc.com where you’ll find our press release as well as my contact information if you should need following this call.

Joining us today from management are Mark Floyd, our Chief Executive Officer, Mike Zellner, Cyan's Chief Financial Officer and Mike Hatfield, Company's President and Founder.

During the course of today's conference call, we will make forward-looking statements regarding a number of topics. These include forecast of future financial results and business performance, the market and prospective customers for the company's product, product plans and future capital expenditures, trends affecting gross margins, operating expenses and operating results for future periods and other matters.

Forward-looking statements include those and which use the terms belief, anticipate, expect and target. These statements are just predictions and actual results or events may differ materially. We refer you to the documents the company files from time-to-time with the SEC. These documents contain important factors that could cause company’s actual results to differ materially from those contained in our forward-looking statements.

Please also note that we will be discussing certain non-GAAP financial results. Our GAAP results and reconciliations of non-GAAP to the most comparable GAAP measures can be found in our earnings release and in the IR section of our website.

Before we begin, I would also like to let you that the information we are providing represents our views of the matters discussed as of today August 5, 2013, except to the extent that we have a legal duty to update, we do not expect to update our closure even if circumstances change.

I would now turn the call over to you, Mark.

Mark Floyd

Thank you, Bonnie and thank you to everyone participating today in Cyan's first earnings call as a public company, we appreciate having the opportunity to speak directly to all of you, share our perspective on the business and update you on how we are progressing in the market.

Hopefully, you will come away from today’s call with a clear sense of our growth strategy and investment we are making to create value over the long-term. This afternoon, we are pleased to report record revenue of $31.7 million for second quarter, reflecting a 37% increase over the second quarter 2012 and a 20% growth over the first quarter of this year.

While Windstream continue to be a very good customer of us, revenue from our other customers grew sequentially 43% and 95% year-over-year. We also achieved improvements in gross margin of 43.5% which is continuing the trend for the long-term financial objectives and importantly demonstrate the leverage of our financial model.

For those of you that are new to the Cyan's story, let me give you a brief overview of what we are doing and why it's important. Cyan's goal is to establish our position as a leading provider of open [carrier] grade networking solutions. This strategy addresses the fundamental shift that is now occurring and how end customers access and use data.

We all understand how the data center was virtualized and how these virtualized compute and cloud resources has created an on-demand world, but there is a problem. There is still one major component of our communications infrastructure that's monolithic and static and that's the network.

Cyan has taken a leadership role in network virtualization, so these networks can be dynamic and the software controlled is the cloud and data center resources to which they are connected. This approach is often called software defined networking or SDN. And it represents a huge opportunity for Cyan. So, why is SDN important? Today, service providers are under immense bandwidth pressure and their existing business models are becoming unsustainable. To obtain greater efficiencies from new and existing infrastructure and develop and quickly deploy value-added and revenue-generating services, service providers are starting to look at (inaudible) software from the hardware and moving towards network virtualization.

SDN is the key to this transition. SDN delivers the orchestration, virtualization and control of the service providers required to improve network scale and elasticity. This technology reduces operating costs and accelerates time-to-market for new services. SDN also enables providers to virtualize capacity and network functions in order to quickly and effectively tailor services for customers.

Finally, by shifting controlled software off to the hardware SDN significantly reduces the cost of hardware, which reduces the CapEx for network operators and significantly improves new business models. We are seeing operators across the globe start to embrace SDN with engagements to ranging from initial investigation and visibility testing to active deployment.

There is a second fundamental transformation occurring in networks today driven by the increasing deterministic traffic patterns within the core. Areas to design their networks to handle many to many connections flowing through the core are now seeing traffic patterns that for the most part flow between just a few large data centers and content hubs.

We are taking advantage of this trend by accelerating the offloading the traffic from core routers to more scalable and cost-effective packet optical platforms. Again the key is software and control are disaggregated from hardware in central hubs while routers do not go away with this approach this solution pushes router functions closer to the edge where many to many connectivity is required essentially reducing overall network cost and increasing the capacity performance services to customers.

Cyan is capitalizing on these enormous opportunities with two key product platforms. First which are Blue Planet testing platform, the first carrier grade SDN solution built specifically for network operators. Blue Planet enables an array of Cyan and third-party applications to manage and control underlying network infrastructure and importantly operates with a broad range of third-party network while most SDN innovations stay as occurred inside the data center Blue Planet is the first SDN system built for network operators weather it's service provider, government organization, data center operator or enterprise.

Blue Planet is designed specifically to address the pain-points network operators are facing by simplifying the deployment and orchestration and business applications over high performance networks. Because of this unique ability to manage third-party element, Blue Planet enables our customers to make far more efficient use of existing assets to cost-effectively expand capacity and significantly accelerate the delivery of premium revenue generating services to end-users. We don’t believe there's any comparable solutions available in the market today.

Based on customer acceptance and feedback, we believe that Blue Planet can become the de facto standard in how network operators virtualize orchestrate and manage their networks. Blue Planet was designed to be open on both, the northbound and southbound side of the platform. Networks are complex and now two are alike, so open is to provide Cyan and our customers with ability to support the third-party southbound devices and northbound applications required by our customers.

Perhaps as important Blue Planet and its open design helps us evolve and enhance our customer relationships through deep levels of interaction as we explorer application development, IT integration and OSS typically not addressed by monolithic equipment companies. Blue Planet has been well received. To-date, we have over 85 customers that implemented this innovative technology. Blue Planet revenue was generally beginning recognized ratably, so our software is not yet a meaningful portion of our revenue as we build this recurring revenue stream its contribution will begin to accelerate.

Our second key solution to address the market transformation is our Z-Series platform. The industry's first purpose-built family of packet optical transport systems. In addition to supporting optical and Ethernet applications for customers, these products are pivotal in enabling service providers to transition from legacy routers for packet optical systems thereby reducing cost of their networks while enhancing performance and scalability.

Further benefiting operators is the 100G coherent optical technology impaired with the Z77 packet optical system, this technology provide the core of fiber transport terrorists capacity. We believe Cyan's 100G optical technology is the highest density solution available today providing us with a significant competitive advantage.

Finally is our XC-2800 is specifically generated interest for router bypass application. Taken together, we believe our software and hardware solutions enable network operators to successfully evolve and transform their networks become more scalable and elastic also remaining competitive and profitable.

Before I continue, I am going to turn the call over to Mike Hatfield to talk about a major milestone achieved during the second quarter related to our solutions.

Mike Hatfield

Thank you, Mark. We are confident to talk over the [next phase] networking. For us software defined networking and network function virtualization are two key software focused industry initiatives. While other companies are simply messaging in this direction, we've been actively proving our software driven capability. Our recent example is the multi-vendor demonstration we conducted at the SDN gathering Interop Tokyo. The context for the demo is that carriers often deliver enterprise services over fixed point to point bandwidth, or through best effort Internet access, but as new technologies become more common it is now increasingly used for mission-critical applications to create new (Inaudible) that provide more flexible connectivity and virtual [machines].

Our software innovation directed at this need allows carriers to offer new premium services and generating revenue. At Interop Tokyo, we proved that a multivendor SDN network build viable today. Our showcase demonstrated how operators can offer their enterprise customers the ability to dynamically expand our data center virtual machine in concert with flexible network resources via either APIs or web portal.

The scope spans from the enterprise across the service provider network into our data center. We also introduced the Blue Orbit Ecosystem; a group of wide minded company eager to deliver interoperable SDN [solution] focus on interoperability multi-vendor environment accelerate the viability of SDN in new networks. Family members of Blue Orbit include Accedian, Arista, Boundary, Canonical, ourselves, Embrane and Overture. We received a tremendous response from network operator ready to begin try this capability and also for potential Blue Orbit partners ready to join us in this effort.

With that, I will turn it back over to Mark.

Mark Floyd

Thanks, Michael. During the quarter, we continue to broaden our footprint both, with existing carrier accounts as well as with new carrier customers. Notably, during the quarter, we actively engaged with multiple new Tier-1 carriers. Although we are excited about these new opportunities, sales cycles are likely to be long in converting these Tier-1s to customers will take some. We also made inroads with data center operators, content providers and large enterprise. During the quarter, we saw initial revenue from one of the largest Internet franchises in the world.

On the international front, Cyan's global expansion continued in the second quarter. We had a personnel in Dubai serving the Middle East and Africa and personnel to cover Southern Europe. In EMEA, we also enhanced our existing resource to new additions to strategic markets where we already had presence, including Germany and the Netherlands.

In APAC, we established a presence in Malaysia to cover Southeast Asia and we augment our existing presence in Australia, where we added new regional management. Finally, we expanded our Latin American sales team well. Cyan now has direct sales presence in 13 countries outside North America. To support this [effort], we added eight new channel partners in Q2. These partners effectively expand Cyan's reach into previously untapped geographies.

Overall, we are very encouraged by the number and quality of engagement for Cyan international. These customers tend to be national incumbents and they are typically larger than our historical U.S. customer base, therefore the opportunities often involve longer and more complicated sales cycles. While later than anticipated, we expect to see early returns from our international investments starting in Q4 of this year. Finally, we added Joe Cumello to our team as Chief Marketing Officer. Joe has significant experience of network equipment providers and network operators.

At this time, I'd like to turn the call over to Mike Zellner, Cyan's Chief Financial Officer to walk you through our potential products. Mike?

Mike Zellner

Thank you, Mark. Good afternoon, everyone. I'll begin by reviewing detailed financial results for the second quarter of 2013 and follow-up with guidance for the third quarter.

As a reminder, [noted] the financial results and guidance and I will be reviewing our non-GAAP results GAAP and non-GAAP results as well non-GAAP to GAAP reconciliation are included in today's press release as well as in the investor relation section of our website.

As Mark noted, revenue for the quarter was $31.7 million, an increase of approximately 37% over the $23.1 million reported for the second quarter last year and up $5.4 million or 20%, sequentially. Windstream comprise 37% second quarter revenues which showed lower concentration than 47% last quarter.

We expect Windstream to continue to be a significant customer for us going forward. Gross margin for the quarter increased to a record 43.5%, up from 41.6% in the first quarter and 41.7% for the period last year. The increase in gross margin was driven primarily by product mix coupled with productions and costs. We expect gross margins to fluctuate modestly from quarter-to-quarter based largely on the timing, size and number of new customer deployments.

Looking to Q3, we currently anticipate [multiple] customer deployments. And as a result, we expect gross margin to grow modestly to Q2 levels. Over time however, we expect to continue towards our three to five year target model of 56% to 60%. We believe this longer-term target model driven by multiple factors including increasing sales of our Blue Planet SDN platform as well as the sale of new Blue Planet software applications increasing sale of our packaged solutions to existing and new customers and improvements in cost of good scale.

Total operating expenses increased 20.3 million for the second quarter up from $17.1 million last quarter and $10.4 million for the second quarter 2012. As a percentage of sales, operating expenses increased to 54%, up from 45% in the same period last year and declined slightly from 65% last quarter.

For Q2, operating expenses were lower than anticipated as a result of shifts in the timing of projects as well as the timing of new hires. These expenses are expected to ship to the current quarter. Additionally, we are accelerating spending in investments so that we can strengthen our market position to capitalize on the large opportunities in front of us. As result of these factors, we are anticipating mid-teen level percentage increases in operating expenses Q3 over Q2.

Net loss for the quarter was $6.6 million or $0.24 per share based on 27.4 million weighted average shares outstanding. In connection with our May IPO, we issued 8.9 million shares of common stock. In addition, $34.7 million preferred shares converted into common stock. We ended the second quarter with $46.3 million shares of common stock outstanding.

Turning now to the balance sheet, cash and equivalent at quarter end was $92.9 million as compared to $14 million on March 31st. The increase in cash was of course due to the net proceeds of the IPO of $91 million. Cash used in operations were $2.3 million in the second quarter and an additional $2.1 million was investing in capital equipment.

During the quarter, we paid down the revolving line of credit we got in place in the amount of $7.6 million Note that we continue to have and outstanding term loan in the amounts of [$5 million].

DSO were 67, up from 59 in the prior quarter. Generally, we expect DSOs to range 0.55 and 65 days. If you exclude the sequential increase in deferred revenue, DSOs would have been approximately 61. We ended the quarter with $13 million in inventory, which was up $300,000 for March 31st.

Inventory turns approved to 6, up from 5, last quarter. Inventory remains well managed as we strike the appropriate balance between reacting to our customers' needs and efficient working capital management. Deferred revenue was $23.2 million at June 30, up $5.7 million from the first quarter. Deferred revenue consists primarily of shift and built hardware awaiting customer acceptance. The remainder consist description-based software along with support and maintenance revenues that is recognized ratably over the related contractual period.

I would now like to turn to our outlook of the third quarter of 2013. As a reminder, our outlook is based on information we have today, August 6, 2013, and actual results may differ materially.

For the third quarter of 2013, we currently expect revenues to range between $36 million and $38 million. Non-GAAP net loss for the quarter is expected to be approximately $6.7 to $8.1 million, or on a per share loss of $0.14 to $0.17 based on an estimated 46.3 million weighted average basic shares.

At this point, I would like to turn the call back over to Mark.

Mark Floyd

Thank you, Mike. Before opening up the call for questions, I want to reiterate that we are excited as ever about the opportunities in front of us. We had a great second quarter and we are forecasting quarterly growth of 14% to 20% in the third quarter. We will continue to focus on the following. First, we are investing to further our progress in new target markets such as international, enterprise and data center operators. Second, we are expanding our efforts to demonstrate thought leadership and gain mindshare for our industry leading SDN and network function virtualization solutions. Third, we are engaging with new Tier-1 carriers with the goal of entering their networks sometime next year. Finally, since we have many new opportunities, we are increasing investments to expand our product portfolio focusing on developing additional Blue Planet applications and element adapters, network virtualization functionality and key Z-Series platform enhancements.

In closing, we are building a great company. Cyan is poised to capitalize on the widespread transformation and virtualization of network architectures that is happening now. Our unique SDN solutions position us to lead this transformation. We are proud of the very solid second quarter and excited about our future.

With that, I'd like to open up for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) Our first question is from Simona Jankowski with Goldman Sachs. Please go ahead.

Simona Jankowski - Goldman Sachs

Hi. Thanks very much. Mark, I wanted to ask you first about the second quarter guidance. It seemed a touch lower than I would have expected and I just wanted to see if there are any moving pieces behind that or is that just conservatism.

Mark Floyd

Are you talking about third quarter guidance?

Simona Jankowski - Goldman Sachs

Sorry. The third quarter guidance.

Mark Floyd

Yes. No, it's one of the things I think that I just stated that the international business is a little bit slower than we anticipated U.S. is coming in really strong. We feel pretty good about it. The guidance we've put up there I think is right within the consensus and we just feel pretty good about our business and just moving forward.

Simona Jankowski - Goldman Sachs

Okay. Then on the data center customer the [ones old] customer side, did you recognize revenue from that customer in the quarter and I think you had talked about four others in the sales pipeline. Any update on whether any of those four are going move forward or maybe just sales pipeline has expanded?

Mark Floyd

It's a great question and yes we did recognize revenue with the one I mentioned the last time in the quarter and we expect that to be a great relationship going forward and the others that we have the whole vertical of the Web 2.0 companies, we've had discussions with almost all the major ones.

We haven't closed any deals yet with the others. We think we are close on few, but at this point in time until you actually close it then you are still competing for the business, but the thing about it is the applications are generically the same for most of them and so as one rolls out the applications with Blue Planet and matches up with what a lot people are doing especially I think one thing that is surprising about these guys is their strong interest in network function virtualization going forward considering that's more of a network carrier function, the big data center operators and internet franchises had some strong interest in that.

Simona Jankowski - Goldman Sachs

Then just last one for me. You mentioned some potential opportunities with Tier-1 carriers into next year. Were you referring to U.S. or international, or both?

Mark Floyd

Both.

Simona Jankowski - Goldman Sachs

Okay. Thanks very much.

Operator

Thank you. Our next question is from Rod Hall with JPMorgan. Please go ahead.

Rod Hall - JPMorgan

Yes. Hi. Thanks for taking the questions. I just have a couple for you. I wondered on Windstream revenue if you could just comment on, when we calculate the numbers for the second half there would be implied by a flat Windstream number on 2012? It implies like a 19% or 20% half on half drop in revenues and that seems unlikely considering you did get a 5% sequential drop, so I am just wonder if you guys can comment on what you think that Windstream trajectory looks like for the year now given maybe a little bit better numbers here in the first part of the year.

Then the second thing I wanted to ask you about is, I don't know if you will be willing to talk about this, Mark, but that large internet customer, can you give us any idea what the opportunity size there might be? I mean, how material is that customer likely to be over the next few quarters for you guys. Then lastly, maybe just comment on the nature of these Tier-1 engagements. What kind of products are they engaging with you on? Is it Blue Planet or other products? Thanks.

Mark Floyd

Thanks, Rod. So, let me address your questions. Already you gave that, in Windstream it's hard for me to comment on Windstream. They are a great partner and a great customer of ours. We hope that the revenue, I think, they stated that their CapEx is going to be flat, maybe slightly down and I think it would be disturbance to direct partner if I commented on his CapEx, so yes, but we feel like it's a great customer and we think it's going to continue on as long as we perform and they have need for products, which I think which they do.

Number two, when you talked about the large web franchise, the opportunities are multiple opportunities. So, when you win one area, one data center interconnect one city, you will look at how many cities and how many data centers they have across the globe and those are all opportunities for us. So, we think each one of those could become a substantial good customer for ours.

Then on the last one about the Tier-1s, you know, it's one of those things where, as you know, it's a long road and when you win, you win big, and we just keep working at it, but I will tell you is that Blue Planet software they gets us on the door and I will let Mike talk a little bit about that real quickly, because we got some interesting that's why I described it the application and opportunity. Michael?

Mike Hatfield

Sure. So, Rod, one of the things that's been interesting to watch in this dynamic is that within the Tier-1, there's a lot of this that's coming from the top down, so typically a lot of technology introduction comes from the [and] organization finding new technology and then bringing it to the network and integrating it. What we are seeing is this engagement in terms of the software definition at such an impactful movement within industry that a lot of strength from a top down saying "Hey, we need to go do these projects. We need to get this done" As you know, with a large carrier, there's also a lot of [over] resistance to making big changes like this, so it's pretty interesting to watch how that dynamic is and so we are seeing a lot urgency around this because of that dynamic, where we are getting cold enough to come in and do things quicker than what we would have expected with this kind of dynamic. Now, still a long haul, but I think that that dynamic is a positive one for us.

Rod Hall - JPMorgan

Okay. That's great, Mike. Mark, can I circle back just to follow-up on one of the things you said. On the data center customer, are you guys winning even won a handful or some grouping of data centers in that deal or are you having to bid on one-by-one? I am just curious kind of how that business is likely to play out?

Mark Floyd

That's a great question, Rod. The answer is yes to both simple. It's one of those things where once you bid and you get in and you get. Again, Blue Planet is a differentiator for us and when they value of that and start deploying it, you never can take any business for granted, but you would think that that if that is successful then they'll keep replicating that, but most of these guys now today because the numbers tend to get quite large, they are going to look at what else is out there and talk with their vendors. There is not one that we sign to do with that we have all their data centers moving forward. We just have to be competitive and I think that the key really is Blue Planet, the applications right on top of that gets really sticky as you are deploying go-forward, so we think we got a benefit, but we don't take it for granted.

Rod Hall - JPMorgan

Okay. Thanks a lot, guys.

Operator

Operator

Thank you. Next is George Notter with Jefferies & Company. Go ahead please.

George Notter - Jefferies & Company

Hi. Thanks very much. I just wanted to ask more around Blue Planet. So, the 85 customers this quarter, are those all revenue generating here in the June quarter?

Mike Zellner

We have a couple of different business model mechanism some of it's (Inaudible) and we have some that are lot of the direct guys as a picture model, but the lion share are coupled for that.

George Notter - Jefferies & Company

Lion share? Okay. Got it. Then any sense for the amount of revenue. Is that something that's above the threshold where you you'd start to break it out or are we still well below that? What's the thought on revenues?

Mark Floyd

Yes. George, we'll start breaking that out when it breaks to 10% mark right now, so it is less than 10% of our overall revenue right now.

George Notter - Jefferies & Company

Got it. Okay. Then can you talk about the number of devices that you've integrated with from the number of vendors as you've integrated Blue Planet with. I'd love to get an update there.

Mike Hatfield

Sure. So, we've got approximately 50 different devices that are under Blue Planet now. And, there are number of different companies, so I think it's about 22 different companies that we have products that are integrated. And everyday there's another one seems...

Mark Floyd

..about that George is that a lot of our customers are starting to see the benefit of that and asking us to add multiple more systems.

Mike Hatfield

Yes. And what I would say is the interesting phenomena on this quarter that we saw was that a significant rush for the third-party equipment guys to come to us now, so typically we've come in to a carrier, they would have existing equipment, they would ask us to integrate having the third-party equipment guys knock on our doors and say "Hey, let's do something here to integrate.".

George Notter - Jefferies & Company

Got it. That's interesting. Okay. The traction of Blue Planet seems really compelling. I think you went from 35 customers at the end of last quarter to 85 here. I mean, is that in line with what you guys were expecting? Is it faster adoption? Is it slower adoption? What's the perspective and is there some color behind why you are seeing the pace of adoption that you are?

Mark Floyd

George, I would say it's definitely exceeded, but if you look at sort of what we had went into the offering, they had a certain sense for that in terms of what the adoption would be on faster and I would also say that just the temperature gaze on this initiative around software defining this next phase of networking, it has really heated up a lot and so we are getting, those engagements I was talking to Rod about in terms of Tier-1 engagement, there's a lot of poll happening now versus us coming in and saying, Hey, something [crew] are doing, They are suggesting things to us that they want to do as a part of their rolling this out and once you get to that stage it gets very interesting.

George Notter - Jefferies & Company

Got it. Then just to be clear, the revenue that you are getting I presume is not for trial activity. These are commercial deployments, or how would you characterize that?

Mark Floyd

We don't have any trials that are producing revenue. Any revenue we are getting from this is all production.

George Notter - Jefferies & Company

Got it. Great. Then, what's the perspective on when this starts to become material in terms of revenue stream. Is it still 2014?

Mark Floyd

Yes, George. That's what we think it is. You got to remember a lot of the carriers what they'll do is that will start deploying Blue Planet in a part of their network and they will continue to add more network elements as they get more comfortable with it and so we expect 2014 that we'll break that 10% barrier and that's what our goal is by far.

George Notter - Jefferies & Company

Got it. Okay. Then last thing I was just curious about just sort of how the adoption model works. I mean, is there a similar set of cases that you are seeing where they are deploying particular modules or aspects of Blue Planet and not others? Is there any kind of common theme that you are seeing across how they are using it right now?

Mark Floyd

George, there's a couple of dimensions to that. One is that you got better base that leverages the lot of the Z77 application, so you tend to see those guys expanding off of that in a meaningful way in terms of bringing in third-party equipment into that and expand in the used case. The other dimension, our customers that buy only the software from us, but have no hardware components to that. That used case tend to be more at the services level as they are trying to orchestrate across different elements, where they are looking for that capability and so that engagement tends to be more of a surveillance and provisioning type of dimensions to the product. Then the third piece is these Tier-1 engagements which were all about the fundamental network transformation at Cyan and network functions virtualization provides. Those were the three main components right now.

George Notter - Jefferies & Company

Got it. Great. Okay. Thanks very much for the time.

Operator

Thank you. Next is Brent Bracelin with Pacific Crest Securities. Please go ahead.

Brent Bracelin - Pacific Crest Securities

Thank you. I guess, first question is really around deferred revenue. Certainly, very strong there up 33%, sequentially, what drove the strength in deferred revenue this quarter?

Mark Floyd

As I mentioned, it's predominantly hardware that's awaiting sign-off, so it's that. Really, it's we have a couple of larger customers that we deployed the solution form and we need to get to a point where everybody is satisfied, so it's really hardware-oriented.

Brent Bracelin - Pacific Crest Securities

Okay. Then as it relates to the momentum in the quarter itself around kind of revenue excluding Windstream clearly very strong 40% plus sequential growth. It sounds like that was mostly U.S. How big of a component of that driver of kind of the non-Windstream business was the internet data center side?

Mike Hatfield

Brent, it's less than 10%, because we don't break it out, but I'll tell you what is really promising for us at Cyan that Windstream continues to be a great customer, but yet other customers are starting to take off as we had hoped and anticipated. We are seeing the traction and predominantly you are correct. It is the U.S. and we expect international to take off. We've got some pretty interesting engagements internationally, but it's just taking a little bit longer than we had anticipated.

Brent Bracelin - Pacific Crest Securities

Okay. Fair enough. Then just to be clear on the data center Web 2.0 opportunities, are those a combination of Blue Planet and Z-Series or is it just the Blue Planet that you see the opportunity there?

Mike Hatfield

Yes. So, those are combined, so in those data center applications is both the hardware and the software that we won in that business. As Mark mentioned, we are seeing a pretty common used phase in terms of what that looks like and so sales team, they are able to take that out and replicate that with other engagement.

Brent Bracelin - Pacific Crest Securities

Okay. Fair enough. Then as you look at the 85 kind of Blue Planet customers, how many of those would you say are in that kind of software-only. I am just trying to parse out if you think about the ramp that you are seeing now in Blue Planet. How many are now really looking for software-only versus how many are there kind of existing kind of Z77 customer base is now kind of adding Blue Planet. Any color there would be helpful.

Mike Hatfield

Yes. About 20% of our customers are software-only. Okay? So, let me give you a little bit more color on this as well which I find interesting. The larger the carrier, the more interested they are in the software, but as they get deeper down the road, we have one international Tier-1 that has now started initially just with our software and they basically told us we just really want to talk to you about your software, but as we've gone down the road and they've spent some time over here in Petaluma and our labs and everything, now they have interest in our hardware. So, it's one of those things of the initial interest is that Blue Planet software, because it's the only carrier SDN platform out there that we are aware of and yet it really when they start looking at that and they start looking at our packet optical platforms, it really is a great way to migrate our hardware into some of the very large guys.

Brent Bracelin - Pacific Crest Securities

Interesting. Last question is really around the model. Sales and marketing clearly came in little more than what I had modeled. As you think about the opportunity, clearly Blue Planet materializing kind of faster, heating up here, do you plan to continue to kind of aggressively invest in the sales and marketing side to capitalize on that? How should we kind of think about kind of the investments and where you are going to be making investments not only kind of in the next three months, but looking kind of beyond the next three months.

Mark Floyd

Sure. I'd tell you at this point in time, and I don't want to say this has surprised us, but yet we've had lot of strong interest in Blue Planet, and so we had to put the resources in place to make sure we capture the market while we are out there and we have the opportunities and so we are going to invest in both, the Blue Planet software more applications on top of that, more network element adaptors below that and we are going to continue to expand our marketing and sales. It really is amazing. The good thing about it is that it's happened globally. The more interesting thing about it is happening simultaneously across the globe, so we just have to be able to put some investment in place and then take advantage of it and then that's where we see it today.

Brent Bracelin - Pacific Crest Securities

Okay. Great. Thank you so much.

Operator

Thank you. Next is Brian Freckmann with LS Capital. Please go ahead.

Brian Freckmann - LS Capital

Can you talk just of the 85 customers you guys have, I am just trying to get a clear sense of what number of those are for Blue Planet are sort of add ons for just the Z-Series and sort of how many are sort of standalone? It sounds like from reading your S-1 that you guys are expecting, historically Blue Planet has been around 2009. There are some sales that just go along with Z-Series and so trying to figure out kind of how much of that going forward do you expect to be sort of Z-Series related and then how much you just sort of standalone?

Mark Floyd

Yes, Brian. So, there's about 20% of our customers that are software-only, so they are completely separate from any Z-Series connections. As Mark mentioned, a number of our software-only customers over time are converted to being both, software and hardware. It's just nature of that engagement.

In terms of the components that's currently related to the Z-Series, what we've seen there is that certainly they used the Blue Planet to control the Z77, but because we can control other third-party equipment gives us a natural ability to expand and a number of our customers were taking advantage of that where they started with the Z-Series that were only used for the Blue Planet, but then as we got these other equipment they are taking advantage of the ability to provision across multiple network elements, so a significant number of our customers are making that transition and I think over time you will see more and more of them take advantage of that.

Operator

Thank you. (Operator Instructions) I am showing no further questions. I'll turn the call back to Mark Floyd for closing remarks.

Mark Floyd

Thank you. While we had a strong second quarter, I think we are got a great opportunity in front of us. I have been very impressed and excited about the adoption of Blue Planet and I think that's the biggest (inaudible) that we have going forward and being engaged with a significant more Tier-1, so we're having. We expect a really good future, so thank you and we'll be talking to you soon.

Operator

Ladies and gentlemen, this concludes our conference for today. We thank you for your participation. You may now disconnect.

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