Celox Battens Down the Hatch

Celox Networks confirmed yesterday that it has laid off 65 employees, about 25 percent of its 265 person staff -- not surprising, given the wave of layoffs in recent weeks (see BrightLink Cuts to the Bone). But Celox wasn’t supposed to be one of those run-of-the-mill startups.

The company is building a large edge router designed to allow telecom carriers to aggregate disparate types of data traffic and deploy services such as virtual private networks. It just announced a huge $80 million round of funding in July, putting its total funding at $155 million (see Celox Bags $80M Funding Round). It has already announced that it has been testing its gear with AT&T Corp. (NYSE: T)for several months.

Hugh Kelly, vice president of marketing and business development for Celox, says the layoffs are not a sign of trouble [ed.note: except, presumably, for those laid off] but a proactive measure to make sure that the company can attain its goal of being cash-flow positive by the middle of next year.

“There wasn’t a large margin of error built into our original business plan,” he explains. “The world has changed in the last year. Now that there are fewer customers, one hiccup and you feel it dramatically. We couldn’t run the business like that.”

Kelly says the layoffs were across the board and hit both its Southborough, Mass., office and its engineering office in St. Louis. Almost every department was hit equally, with the exception of sales, which only lost one member of its team, he says.

Celox, like other networking companies, is feeling the painful effects of the carrier spending crunch. Not only are there fewer potential customers, but the ones that are buying are cutting back on their spending.

Celox claims to have a solid potential customer base. The company says it should start recognizing revenue by the end of the year from at least one of its customers. Kelly wouldn't name which customer, but some industry observers believe that it coul be AT&T, which has been testing Celox gear since July. Kelly says another large carrier just started lab trials two weeks ago. Also, a large Asian PTT is expected to start testing in the next few weeks. There are supposedly at least three more lab trials set to start over the next few months, he adds.

While Kelly is confident about the visibility the company has into these customers, he says the general economic climate is enough to make the company cautious. Celox’s original business plan called for it to reach cash-flow positive by the middle of 2002. By cutting its revenue expectations along with reducing operating expenses, the company says it can still achieve this goal within its original time frame.

“You don’t know if a program is going to be cut or if spending gets frozen because of M&A activity,” he says. “It’s all about timing the revenue. Companies used to see how fast they could get to market. Now, it’s how well can you get to cash-flow positive.”

Celox is marketing the SCx192, a box originally marketed as a large-scale IP services switch that would aggregate hundreds of thousands of subscribers and aid deployment of IP services such as VPNs and firewalls. Companies marketing similar products in the public market have been hit hard, though. For example, Redback Networks Inc.'s (Nasdaq: RBAK) stock is down 99 percent from its high and trading at around $1.28; and CoSine Communications Inc. (Nasdaq: COSN), which went public a year ago, has yet to earn $50 million in revenue and is trading at $0.35 a share.

Celox is aiming to differentiate itself, however, by combining the capabilities of a large TDM/IP/ATM aggregation router with an IP services platform. The company expects general availability of its product by the end of the month.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com