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Executives

Mark Floyd - Chief Executive Officer

Mike Hatfield - President

Mike Zellner - Chief Financial Officer

Analysts

Simona Jankowski - Goldman Sachs

Cyan, Inc. (CYNI) Goldman Sachs Tech and Internet Conference Call February 12, 2014 1:20 PM ET

Simona Jankowski - Goldman Sachs

Good morning everyone. Why don’t we go ahead and get started. My name is Simona Jankowski, Commtech Analyst at Goldman Sachs. It’s my pleasure to welcome this morning Cyan with us. We've got Mark Floyd next to me here, the CEO; we've got Mike Hatfield, further to my left and then Mike Zellner, the CFO. Thank you for joining, appreciate it.

So I think maybe just for a little bit of level setting at the beginning, if you can just give us a brief overview of the company for those who may not be familiar with Cyan.

Mark Floyd

Sure. So Cyan’s in the networking space and we enable network operators to move their networks from a very static structured network to a software defined more flexible access network. We have a packet optical platform coupled with our Blue Planet SDN platform and together that allows network operators to move their networks for a more productive easy to provision and lower cost both on the CapEx and the OpEx.

Question-and-Answer Session

Simona Jankowski - Goldman Sachs

Okay. So you guys have been public less than a year now. And it’s been a somewhat challenging first year just relative to initial expectations; you had a couple of disappointing quarters here at the end. What are the main drivers behind that if you can just go into that in a little bit of detail.

Mark Floyd

Sure. So in the June quarter and the September quarter we were doing well with what our guidance was and our performance and in the fourth quarter we changed our guidance and lowered it because we saw the whole economic happening in the whole networking space. I mean [inaudible] Cisco and [inaudible] and Calix, a whole bunch of companies that have lowered their expectations for fourth quarter. We have the very large customer which is a customer concentration which is Windstream.

And then at the end of the quarter they just [froze their] [ph] CapEx and that’s what threw us off. The thing you got is that when you have a network transition, not only is it when you have just the economics stuff that’s going on but what we’re seeing is that when you have a technology transition in networking you have people stop and they analyze what they’re doing, plan what would they need to change and during that period of time it’s pretty choppy, but that’s the nature of the beast of the telecom industry. I’ve been in this business for 30 plus years and we’ve seen it in every technology migration, it’s not just nice linear up, it’s pretty choppy, but year-over-year you see the changes.

Simona Jankowski - Goldman Sachs

And I’ll come back to Windstream and some of the other drivers in here. But just to bring Mike into the discussions here from a cash flow perspective. So last quarter I think you ended with about $60 million, I think following the IPO was close to $89 million and I think you burnt about $13 million in cash last quarter which if you extrapolate it doesn’t look very good for the next two quarters out. How should we think about cash flow, are you taking any steps to try to limit that burn?

Mike Zellner

Sure. So, the way we think about it, we feel very good about our cash position vis-à-vis the initiatives that we have and programs that we have in place to allow us to grow the company going forward. We have our operating expenses which we added to quite significantly in 2013. We will now leverage that profile going forward and in addition and specifically associated with Q4 cash profile, working capital worked against us a bit. We ended the quarter with approximately $5 million to $6 million more inventory than would typically be the case than we would have liked but that was directly associated with the revenue profile that we talked about.

So we’ll get the other side of that actually going into Q1 as we burnt down inventory and things like that. So we feel good about our capital structure vis-à-vis what we have to do going forward to take advantage of the market. We have levers if we need to if things turn out to be different than we see them today, we can absolutely make some adjustments if need be, but the way we see it today as we think we are, we think we are fine.

Simona Jankowski - Goldman Sachs

So you guys hired last year quite a bit so just thought that you are not looking at cutting OpEx at this point but you are not going to be adding aggressively either, you will try to kind of hold it flat here and try to grow your way out of the cash situation.

Mark Floyd

Yes, I think that’s what we are [working] [ph] to do.

Simona Jankowski - Goldman Sachs

Okay. And then let’s come back to some of the issues you brought up. So just first on Windstream; I wanted to understand a little bit your visibility for that customer for this year. I think you talked about on the call last night that you have deepened visibility into them being a customer or a meaningful customer even this year, but can you go into a little more granularity on what exactly that visibility is?

Mark Floyd

Sure. I can’t speak on Windstream’s CapEx [and when they will spend it and such as] [ph] Jeff Gardner would be able to do that. But what we have is that we have a good partnership with Windstream, we have people actually [ship] [ph] at the Windstream office and office within their facilities. We have access to look at all that networks builds are doing and all the program that they had rolled out and planned for this year because we actually - our network engineers, [our SCs] [ph] actually worked with theirs to show them how they can physically build with the equipment and such.

So we have the idea about what they are trying to accomplish and the different services and type of services they are going to do. It’s just up to them to pull the trigger when they decide to go do it. And that’s what happened to us in the fourth quarter.

And so we can’t control that piece of it, but I can look into the account and I can see all the things that were in there and you can see how they are planning and we have a lot of [the notes] [ph] in Windstream’s network. And so we have the visibility into that piece of it, but when they decide to issue the purchase order, I don’t have the control of that.

Simona Jankowski - Goldman Sachs

Yes. Just to maybe kind of separate that out a little bit. So I think there is two type of spends you could potentially be exposed to, one would be for projects that they have already deployed you in, such as the mobile backhaul part of it or the business Ethernet services where they might just need more capacity to already installed chassis, so you can sell into that.

But then there could also be another opportunity just with new projects that maybe there’s RSPs out for that you can be involved in. Can you just address that question a little bit, is there opportunity more in the former kind of capacity still or more in the latter versus new footprints?

Mark Floyd

You know, it’s interesting, it’s probably about 50-50, the way I see it, because there is a couple of programs and they have not announce what they are doing and hopefully Jeff will be able to do that pretty soon that we think we are going to be a piece of going forward.

And then if you look at the -- not only is it the existing chassis where they expand the capacity, we move from 10 gig to 100 gig within all these chassis and such, but it’s some of the technology changes that they are trying to do, because they have purchased other networks and they are trying to [inaudible] more commonality versus the very disparate architecture. So it’s kind of both. Mike, you got anything…?

Mike Hatfield

Yes. The other thing I would add is that capacity expansion is a pretty significant one, because as equipment provider, one of the things you want to do is you want to get the footprint out there, so you can go expand on that. And that 10 gig to 100 gig transition is going to be a very important one. And since we have a lot of footprint there already that becomes a very easy decision one for Windstream to go do that conversion, because they don’t have a lot of logistics associated with it. And then obviously we benefit because that addition is a much better margin addition than if you’re having to deploy brand new shells which tends to be a lower margin proposition.

Simona Jankowski - Goldman Sachs

So, on the 10 gig to 100 gig that's probably a good segue to some of the new products you announced this morning as well basically providing 100 gig packet functionality. Can you expand either one of your own what we're just talking about with Windstream. So, do you see the opportunity there on the optical transport side or on the packet side for the 100 gig move in. and is that in existing chassis or deploying new chassis.

Mike Hatfield

Yes. So the announcement we made this morning was about the expansion of a complete suite of cards around our existing chassis. So, it's great because anywhere we have deployed a chassis, we can then go from 10 gig to 100 gig, that was the foresight we had and the initial design we would be able to make that transition, we knew that was important.

And what it gives us is both sides of that equation you are describing. So, in some cases the customers may only need just to transport a 100 gig at the optical domain, which is fine, we can do that. I think the more interesting one is the 100 gig packet because what we find is in a lot of cases we're going right up against the Cisco, Alcatel-Lucent or Juniper router infrastructure, which can be very costly. That 100 gig capacity then is on a packet optical form which is a much more economical easier network to run, that transition, they are really strong one for us.

Simona Jankowski - Goldman Sachs

Now [we previously] [ph] thought of you guys as more addressing the metro part of the network, not so much really the core part. And 100 gig is really not started to deploy out on the metro side. So, is this something with the new products that you see as an opportunity for this year or more really into next year?

Mike Hatfield

Yes. So, it's a this year thing. And what's happening is there has been a big movement inside the data center to go from 1 gig to 10 gig top of rack. What that means is that that’s got to, that's driving a significant growth of the capacity coming up. And when you talk about core, as the first place 100 gig happen that's true because you've got the biggest aggregation of capacity as they go across the country.

But a lot of these metros now are being strongly influenced by what's happening inside the data center. And ultimately you have to get out of the data center to go somewhere that very much impacts the metro. The other thing that's a big influence there is a lot of the residential services, we’re seeing an implication for that, because a lot of video service used to be broadcast, so there is a certain amount of capacity where you send a single channel down that everybody watches.

Now that everything is moving to unicast, where every individual is watching whatever they want to, the aggregate impact of that has really put pressure on the metro networks and so we’re seeing a number of upgrades associated with that as well.

So this movement from 10 to 100 is actually happening this year. We think that it’s the right time to be doing what we’re doing. We’re not doing that in anticipation at some point this will break. We are seeing that capacity need right now.

Mark Floyd

And if I may add, what’s interesting is some of our international customers which we’re going to start deploying they started 100 in the metro. I mean we have one major customer would be deploying in this year that - and we have always talked to about 10 gig, they are looking at us like, no, no, we want to start at 100. So I think it’s here.

Simona Jankowski - Goldman Sachs

So as we think about some of the margin implications, both of the move to 100, but also the new packet cards introduced this morning how should we think about that, is it margin neutral to the business or do you see that changing the mix one way or the other?

Mark Floyd

Right now because it’s brand new cards I think it is margin neutral. I think as we sell more packet side of the card that's going to drive the gross margin into higher level. Because what you compete with the router, if you think about, there is a study just happened with ACG that just got announced and what we’ve seen in the total cost of ownership between an [inaudible] routed architecture and our routed architecture in a five year TCO we save 71% of the cost and that’s a combination of OpEx and CapEx. And so, we see that being a big driver.

Simona Jankowski - Goldman Sachs

Let me ask a little bit about the customer base outside of Windstream. So, this is somewhat lumpy, so you had a very big June quarter with that customer base, it’s been kind of more flattish or up and down since then. Can you just maybe highlight a few of the larger customer opportunities there both in terms of what you have right now and what you might gain in the future?

Mark Floyd

Sure. If you look at our non-Windstream business, it grew 34% year-over-year from ‘12 to ‘13 and we expect it to continue to grow. What happens if you look at our -- we have this land and expand strategy, as you go on our website you can look in our -- there is a, in our investor website, there is a slide that shows the top 25 customers and what their initial purchase is and their follow-on purchase is.

And what happens is that because of how they deploy their networks they’ll buy and then might take a quarter or so to digest [to either] [ph] deploy [inaudible] and such and so that’s the nature of the beast we deal with. But as far as the different types of customers, if you think Windstream is our longest, TDS was a 10% customer last year.

I think going forward we have one very large Internet content customer that is rolling out multiple more metros with us and I see them doing that as time goes on and I see us get several more of those this year. And I think the international business, which I mentioned was slow to develop last year and I think we’re going to find this year that we’ll continue to spend on the international side. So, we feel pretty good about our non-Windstream business.

Simona Jankowski - Goldman Sachs

Can you also talk a little bit about some of the international customers you’ve announced, I think NTT was one in the past, Colt another?

Mark Floyd

NNT, Colt -- one thing about Colt, which I think is very important is that Colt is demonstrating today the first what we believe is the first software-controlled network out there. And if you think about provisioning, the whole business class Ethernet services, there is really two things; number one, it’s not a best effort service, they can actually give an SLA with this which means they can charge more for this. And they can [provision] [ph] and they say less than seven days and reality is it’s in hours.

The competition they are going up against are the big highlights that take 30, 40, 60, 90 days to provision these types of services and a lot of that is best effort. So, we are going to see how well software-controlled networks will compete with that. But we have most of our other ones that we’re in right now that we haven’t announced. And when we do, I won’t be able to talk about.

Simona Jankowski - Goldman Sachs

Okay. In the Colt example that was Blue Planet you were referring to?

Mark Floyd

That’s correct.

Simona Jankowski - Goldman Sachs

So, on Blue Planet our understanding is that so far you have been getting a lot of customers using it, but you are not really charging a lot for it right now. So, can you -- and I think a lot of that is because it’s levered to the number of [Ethernet] [ph] equipment that it’s basically managing? So presumably the idea is that you will be monetizing it more as it manages more equipment. But can you just -- you had talked before about it hitting a 10% mark perhaps at the end of this year. Is that still, how reasonable is that target at this point and what do you need to see to get there?

Mark Floyd

Yes, I will talk about that and then I’ll ask Mike talk to explain a little bit more about the deployment of it. But yes, can we get the 10% software by the end of the year? I think it’s achievable, but if it’s not the end of the year, hopefully it will be the first part of ‘15. But we see software becoming larger and larger piece of our business. And I’ll let Mike explain how the Blue Planet works.

Mike Zellner

Sure. So, you mentioned that in terms of -- how they shot up on the revenue, a big factor in that is that it’s a LAN and expand opportunity just like we do, we talked about before in terms of getting the shares out there and then you add the line card. Our approach on the software to get it out there in whatever form initially to get that footprint. A lot of cases it’s simply controlling our own hardware in that case it’s not a huge monetization of that. And then what you find is what people have the footprint and they see what they can do with that, they begin to expand it. Colt is a perfect example of how they’ve expanded into other pieces of equipment and then also additional applications on top of it. So, it may have initially started with a fairly simple application, they can then expand on it. Example of that is (inaudible) which is a -- initiative for network function virtualization which is to move what has been a hardware-based approach into a software realm.

Well, that gives carriers an opportunity to add software to their existing offering. So, instead of having just a bared Ethernet [type] and that’s all they sell, they can bring in using the Blue Planet, bring in functions on top of it, something like encryption or firewall cannot be integrated in using that Blue Planet. So, we may have only been initially being used for Ethernet provisioning, we now can be leveraged or enhanced services. So, that’s what you’ll see over the course of 2014 is that expansion, ‘13 was about getting the footprint, ‘14 is about expanding the used cases.

Simona Jankowski - Goldman Sachs

And can you give us an update on how many of or how often the Z Series sold with Blue Planet and vice versa. I think you’ve provided some of those metrics in the past?

Mike Zellner

Sure. So, everyone of our Z Series customers as we deploy is now a Blue Planet. So, we’ve not sold any new Z Series that didn’t include Blue Planet. And we have a number of customers who are Blue Planet only. So, we continue to win on software-only deals that don’t have any hardware, some of which then subsequently become hardware deals, but the initial sale it’s software-only.

Simona Jankowski - Goldman Sachs

Like a (inaudible). Thank you, Mark.

Mike Zellner

It’s a perfect example, it started as Blue Planet only and they saw what we are doing, we talked about our hardware and now they are integrating that and they’ve been a significant customer for both the hardware and the software component.

Mark Floyd

Yes, the Colt was the same, Mike. They started as just pure software company and then started adding our hardware into it. In fact, what’s interesting, the larger the carrier, the more interested they are in our software and at first they say, guys we got enough hardware in our network. We got enough vendors in our network, but we really love your software and what you're doing. But once we get into our software, we've been successful though for hardware as well.

Simona Jankowski - Goldman Sachs

Yes. I’d like to talk about something that Mike mentioned on the [HC] proof-of-concept initiative and you guys highlighted two of those examples that you participated in on the call yesterday. What would it take for those kinds of proof-of-concepts to actually become a piece of business? Because it seems like what you have come to market with Blue Planet, it's fairly well aligned with what some of these energy initiatives are, but its unclear what is it going to take for the whole ecosystem to move in that direction and translate to an actual RFP for you to participate in it?

Mike Zellner

Sure. So, the overarching piece of that gives us a lot of confidence and the path that we've taken is that, if you look at AT&T just announced something Domain 2.0. That is a sourcing initiative where they told the industry, look we're going to change the way we're building our networks, we're going to do it in a different way, we're going to pull $4 billion of CapEx out, we're going to pull $4 billion of OpEx. And that approach is very much based on this new way of doing things, network transformation we think to more software-based than hardware-based.

So, we don't have to be carrying that message on our own that it need to happen. Certainly you referenced [actually saying] that helps a lot to have a standard body saying this is something that's going to move forward.

Now in terms of commercialization, we really like the two used cases that we have shown, because we think they have great viability and they don't need a lot to change in order for them to move forward. And one is we're demonstrating that at Mobile World Congress this month and that is the Evolved Packet Core used case where we orchestrate that some heavy headers in that with Red Hat and Intel driving that forward. And I think that's another component of how to commercialize this by showing that major players are moving this direction as well. So that's important that we’re doing it, but we are not alone in this. And so, that ecosystem demonstrating to the carriers that it’s viable, I think that helps move it into commercial stage versus just a test case.

And the second one that I mentioned earlier, which is the one we’re doing with CenturyLink on the virtualization of Ethernet services, functions for the firewall and encryption. Those two functions then are very natural enhancements to an existing infrastructure. So, we think that's going to be a significant driver because it’s a natural then for an enterprise to say okay I’ve got this link I’m going somewhere with it, I want to encrypt it, I want to control that.

So, I think again this is another example where you’re not waiting for some new way of doing things in order for that to commercialize. I think the inherent need is there and now it’s a matter of proving to the carrier that it actually works, so they can then turn into service offering. And we’re excited about the momentum that is going to have because of this natural addition to the Ethernet service.

Simona Jankowski - Goldman Sachs

And since you mentioned that AT&T’s Domain 2.0 initiative, they are in the process of vendor selection this year. Is that something that you’re participating in, in terms of that specific RFP?

Mark Floyd

We can’t comment on that. I mean if you think about this, there is any RFP out there from any carrier has anything to do with software defined network or this transformation, we think we’re going to be [putting our] head in the ring, but it’s all up to them to decide who is going to be in the running or not.

Simona Jankowski - Goldman Sachs

And when we talked about some of your customers outside of [Windstream], you mentioned the large Web 2.0 customer. In the past you’ve talked about a handful of others that you are in the sales process with, what is the update on that? Have they gone forward with either an alternative vendor or is that still an open process?

Mark Floyd

It is very much an open process. To my knowledge the ones we’ve talked to have not moved, made their decisions yet. I think what they’re moving from and historically in that space some of the legacy competitors have always dominated that space. And what they’ve looked for is just data center to data center, low cost optical point home run connections. Now we’re looking at well how do we use the software to new capacity around and make it elastic. And that gives us an advantage I think from our Blue Planet software because the one large one we have right now that’s one of the main features what they’re using it for. So, we’re demonstrating this, we’re working with some of the others. And I hope to report pretty soon on success.

Simona Jankowski - Goldman Sachs

Yes. And one other thing that was interesting in the last couple of quarters is that we’ve actually seen a number of vendors recover that, has really seen a lot of success with that particular customer base and it was a big source of strength for Infinera and Juniper and we don’t get the sense of that customer base move slowly. So, I guess I would be just a little bit curious on why, it seems like it has taken you guys about a year to close in on those opportunities. Is it -- have some opportunities closed and others are now open to trust for you or what is the dynamic?

Mark Floyd

Well, I think it’s much easier to sell just an optical pipe or a line, but when you start looking at architectures of the software we have to re-think the whole way they’re doing it across their data center versus just buying the network connection. And that’s why it’s taking them to figure out -- there is multiple ways of doing that and is our way the better way of doing it. But yes, selling these optical links to any the -- either the carrier or these competent providers, it’s an easier sell to do right.

Simona Jankowski - Goldman Sachs

I am going to leave some time for questions within the audience as well, but I did want to come back to one other point which was on the international expansion. So you had talked about that coming short of your expectations last year but you view that as an area of growth for this year. Can you talk a little bit about what exactly you are doing there? I think you are going with partners, if maybe you can quantify how many those are or how much they are up year-over-year?

Mark Floyd

Sure.

Simona Jankowski - Goldman Sachs

And just why you think that this year will be a stronger year there?

Mark Floyd

Yes. So we are in 15 different countries with 26 different partners. In U.S., we sell direct, it’s all direct. And if you look at the international market, we have direct touch but a lot of our these customers, are potential customers have channel partners they want to deal with. And for us to go in and sell into a very large tier 1 type of carrier, let’s say in Asia, with our support infrastructure, we couldn’t do that by our self. That’s why we need a partnership. And then you got to get your partners signed up, you got to get them trained, you got to get that whole process going. And that took little bit longer than what we had anticipated.

If you think about the opportunity out there, this is -- used to be, I update myself here and go back, used to be that we would define the technologies in U.S. we would rule, the U.S. and we rule, Europe then take it to Asia then we take it to South America. That’s not the case anymore. The whole network evolution of moving from a static network to a software defined network is happening on global stage. And if you look at this, that is driving a lot of it in a [deep] functionality and there are lot of American carriers in there. So it’s an international thing that’s happened at the same time and we just got to make sure that we have the right resources really in the right countries going after the right customers. And I think we got that set now. And now, it’s just a matter of we just got to execute on, plain and simple.

Simona Jankowski - Goldman Sachs

You have been set meaning that you have the partners signed up, they’re trained on your equipment, and so it’s blocking and tackling now as opposed to signing on new partners?

Mark Floyd

That is correct. I think we might sign a little bit more partners this year, but the ones we have like we have CLAdirect, it does all the South America for us. We got their whole staff trained technically and now hopefully we will see some momentum in there. Telefield, which I mentioned that in Korea, we did a [process] with the government there, that I think that’s going to give us other opportunities within Korea as well. So yes, I feel pretty good about it.

Simona Jankowski - Goldman Sachs

Okay. Let me see if there is any quick questions in the audience and we do have a mic, one there.

Unidentified Analyst

(Inaudible Question).

Mark Floyd

Yes. So I truly believe we got the right product, and we are in the right space. And to me it is matter of when you have a new network transition, it takes longer than what you think, that’s plain and simple. And we have been out there, Mike and I’ve been in this industry, each of us for close to 30 years a piece. And I’ll give you an analogy, just like DSL we did an efficient network. So, it took us three years to convince people that DSL was going to be something really important. And once the tipping point hit, the company just flat took off. And I am not saying that’s exactly what’s going to happen here. What I am saying, we haven’t seen the tipping point of people going to an SDN, a software controlled network versus the current network status.

The legacy guys are out there saying hey, it’s three years off, but keep buying my high price router. And that's what we're up against. So, I mean our main opportunity, we lean up against in for us router architecture compared to an SDN packet based layer two architecture. And it is execution, it's selling, it's convincing. And [doing] when people decide to move that way, you got to get your whole internal organization set to go that way. Colt is a perfect example. We won Colt over year ago. They just now started deploying the software in the way it supposed to be deployed in the fourth quarter this year. It just takes longer and that's a nature of the beast in technology and telecom. It's…

Unidentified Analyst

So, now the question is so why do I go to you guys versus going to an ALU with new eyes or going to VMware Nicira, you hearing some and I think SDN is a way either way. But the technology it's going to come, it's going to be there in my opinion right. So, the question is who I go with? So why do I go with you guys versus going with the ALU and Nuage or VMware and Nicira.

Mark Floyd

Well, most of those guys are in the data center, right. We're the only company I know of that’s deployed a five nines quality SDN platform in the LAN. And so it's kind of apples and oranges. The legacy guys don’t want to do it on LAN because it disenfranchises our router and switching business. And so but and the data center, there are lot of people doing SDN data center and you virtualize it.

So, here it is for example, we virtualize the compute world, we've already done that. Now we virtualize the data center and today over 70% of the spend in the data center is software. The only thing that hasn't changed in the whole IT infrastructure in the last 30 years, 25 years is the network itself and now we're going to virtualize that. And that's where we're focused on and going forward and that's where we think we have a chance to win. Do you want to add any more?

Mike Hatfield

The other thing I add is take the example of U.S. which is Nuage. Nuage again fits in the data center and one of the customer deployments we have were actually complementary to what Nuage is doing. So, it’s not, they’re not making decision about Nuage or us, we can leverage that existing Nuage footprint as a complement to what we’re doing. So, we actually orchestrating a layer above what Nuage is doing.

And they’re tying all the pieces together because more and more what you are going to have is the data center is not going to operate in isolation, the network is not going to operate in isolation like it’s been, it’s going to be more fully orchestrated, so things are working in concert, that's where our software comes.

Unidentified Analyst

I just have one more question. How long do you think it’s really going to take the Telco’s to move to it in that because that's a whole different infrastructure for those guys?

Mark Floyd

Well, I give you two ideas of what we think about that. Number one, if you look at -- just look at Colt plays in 29 cities across Europe as Pan European business carrier classic company, they compete primarily with BT, DT and FT. And those guys will take time, there is no doubt about it. But the more they take customers away from the incumbents because of the service, the quality, and the ability to react very quickly, the more is going to drive those guys.

So I’m not -- we are not hanging our hope on those big incumbencies, but I will tell you in Asia, most of the big companies, NTT which we’re already in, and there several others, they are actually looking to deploying 2015, they want to get all the trials done this year and will be in several different trials this year. And if we’re successful, will start deploying in ‘15. I think if you look in the U.S. market, the tier 2 guys were already in, or doing some SDN as well, but I think it’s just going to take the -- bigger the carrier the longer it’s going to take it at the end of the day. And so, we don’t have to -- we’ll be successful this year in 2014 without winning a tier 1 or deploying the tier 1. In ‘15, we got to be in the tier 1 and that's what our goal is.

Simona Jankowski - Goldman Sachs

May be just as a follow-up to that, so since you mentioned that some of this is kind of just taking longer than people would expect given that it’s a very significant technology transformation, other than just kind of waiting for 2015 to happen, what are other insertion points or plan B that you kind of work on in the meantime to generate some business while some of these large long lived projects unfold?

Mark Floyd

Yes. I mean we’re not concentrating 100% of our efforts just on Tier 1. I mean we think that Tier 2 market and Tier 3 market is still very viable for us on a global basis not just in the U.S. and also the different market verticals. We’ve been working in the MSOs for a while and hopefully you’re going to see us break in to some MSOs in 2014. And the geographic areas, there are just things that are smaller carriers that’s just taking us little bit time to get to. But I feel pretty good about getting that up and going until the Tier 1 is kicked in. I mean we can build the nice company without being in the Tier 1, but I think it has to be the success and do what we want to do long-term I think we’ve got to demonstrate we can play in the Tier 1.

Unidentified Analyst

In the Tier 1, how much of an impediment are the existing OSS systems for your vision around Blue Planet? I mean it seem like massive install base is there, lots of workflows around those legacy systems, how do you as a small vendor commence to Tier 1 to take a bet on Blue Planet?

Mark Floyd

Sure. I’ll answer the first part and I’ll let you answer the second part. It’s really ironic when you look at the big carriers. If I go into a Tier 1 and bring my hardware in and want to a vendor to deal with the hardware, you answered the question, but that’s just too hard.

Unidentified Analyst

You have more trouble with hardware.

Mark Floyd

You better believe it. But we’re in the software, I mean Tier 1s buy softwares from all sorts of companies, small companies, private companies everything. I mean that’s not the inhibitor and as far as the OS system…

Mike Hatfield

The other thing I’d add is that there is now a recognition that that OSS model is broken, so you are starting to see -- they are not going to build a replace overnight, you are not going to see them just sort of scrap it and start up fresh, what you are starting to see is to take pockets of that and transform it. And one of the big focus we have is with APIs of our software to other software points, that whole web API notion has really making its way now into that telco environment where you can piece together software in a way that wasn’t possible before, it was very monolithic. And so we are starting to see the cracks in that old way. I mean basically for the last 30 years, it’s all been the same stuff. And what we are seeing now is a recognition, it’s got to change in this AT&T initiative on the Domain 2.0. I think they announced I don’t know something like 12 domains and 10 of them are software. Why is that because they are going right at the heart of that issue because they know if they don’t change that, the network itself can’t change.

So we are really encouraged by what would have been a bed rock can ever touch just the way it is to actually seeing the signs of real transformation happening there. We are in the middle of a couple of big projects on that.

Unidentified Analyst

Follow up, so I mean does this business really -- does it make sense to keep the hardware business and the software business, which look actually radically different from one and other together. Could somebody, a larger player take that software business and really get it to scale and give the carriers confident to embrace much more you have to keep these two businesses together?

Mark Floyd

For us, they have been very complementary because the part of that network transformation is not just software. That underlying hardware infrastructure for a period of time is still very significant. The announcement we made today about the 100 gig, I mean that’s real stuff that you need in order to take the network where you want to go. So we see them as highly complementary and not a diversion or sort of a separate thing. People from the outside may view hardware and software is fundamentally different, but we are focused on this network transformation that takes both components to pull it off.

Simona Jankowski - Goldman Sachs

That’s all the time we have unfortunately, but Mark and Mike and Mike thank you so much for joining us. I appreciate it.

Mark Floyd

Thank you. Thanks for having us.

Mike Hatfield

I appreciate it.

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