The cable spectrum overlay company Vyyo Inc. (Nasdaq: VYYO) announced Monday it has received a $25 million vote of confidence from Goldman Sachs & Co. (See Vyyo Snares $25M From Goldman.)

Palo Alto, Calif.-based Vyyo makes, among other things, gear which can be used to dramatically increase the bandwidth potential of cable operators’ hybrid fiber/coax (HFC) access networks.

Goldman’s investment strongly suggests some cable companies are looking very seriously at placing Vyyo's technology in their networks.

“If you look at the facts, this is a company that has a $130 or $140 million market cap, a company that does $200,000 in revenue, so clearly Goldman Sachs did a lot of due diligence to put $25 million behind these guys,” one Wall Street source familiar with the situation tells Light Reading.

That due diligence almost certainly included conversations with Cox Communications Inc. regarding its plans for Vyyo’s technology, the source says. (See Vyyo Bets Big on Cable Overlay.)

Vyyo has for some time been working diligently in the board rooms and labs at Cox to win a place in the MSO’s last mile networks. And recent public statements by Cox suggest Vyyo's work is about to pay off.

Vyyo CEO Davidi Gilo put it this way during a conference call with equities analysts Monday: “Cox announced to the industry at the CableLabs Winter Conference their intention to integrate 3GHz passive devices in their next-generate architectural design.”

“We are strongly encouraged by their announcement for both near-term and long-term prospects as we believe we are the only provider of 3Ghz passives,” Gilo said.

That, at least, sounds warmer than what Cox said in December. “We don’t have any kind of a business agreement with them; we haven’t bought any of their products that I know of," Cox spokesman David Grabert told Light Reading at the time.Vyyo’s node-based amplifiers and premises-based passive optical devices (“passives”) increase bandwidth capacity by dramatically widening the normal frequency range of hybrid fiber/coax (HFC) pipe, according to the company.

The end result is fiber-like speeds of up to 100 Mbit/s to the home, Vyyo people say. That capability may become increasingly important to cable companies like Cox as their telco counterparts begin ramping up bandwidth in their DSL networks. (See Broadband BlahBlahBlah.)

Vyyo already has a contract with Cox to provide its T1 over HFC technology. A half a million in orders are being shipped now, and the revenue should begin contributing to Vyyo's bottom line in the first or second quarter of this year, Vyyo spokesman Walt Ungerer says.

Ungerer told Light Reading Cox has already “certified” Vyyo’s spectrum widening gear for deployment in its networks. He adds that his company is expending considerable recourses trying to win the same distinction in the networks of other North American cable companies.

That process is a big part of the reason Vyyo needs the new funding from Goldman. Vyyo’s quarterly burn rate in recent quarters has been in the $4 million to $5 million range. That fact, combined with meager revenue numbers, has been a concern for both public and private investors in the company.

Goldman’s $25 million funding package includes a $10 million convertible loan at 10 percent interest, a $7.5 million senior loan at 9.5 percent interest. The rest is venture capital in return for which Goldman receives 1.3 million Vyyo shares and warrants to buy 299,000 more. The credit lines come due in 2011, according to a March 20 SEC filing.

Goldman bankers must be staking their investment on Vyyo’s future prospects, because the present isn’t looking very pretty. Vyyo Monday reported a fourth quarter 2005 loss of $14.8 million, or 96 cents per share, compared to a loss of $8.9 million or 57 cents per share in the in the year earlier quarter.

Revenues for the quarter came in at $286,000, considerably less than the half million three analysts polled by Reuters Research had expected. Revenues for the year ago period were $225,000. Vyyo's Gilo said in a release Monday that 2005 was "designed as a year to re-position Vyyo for the future."

The combination of the funding announcement and the fourth quarter earnings made for a turbulent day on the NASDAQ for Vyyo. The stock had been trading in the $8.00 to $8.50 range last week, then opened Monday at $9.20 -- a 52-week high -- presumably on news of the Goldman Sachs funding.

But Vyyo’s earnings, announced after the markets opened, may have sobered some investors. Its shares sank $0.35 (4.7%) to $7.10 in mid morning trading on Tuesday.

— Mark Sullivan, Reporter, Light Reading