Celox Networks, a Southborough, Mass., startup developing an IP service router, shut down its research and development facility in St. Louis, Mo., on Monday.

This move doesn't appear to be your run-of-the-mill startup layoff. Rather than just slashing a percentage of staff, Celox appears to have cut an entire development center -- the very same development center it once touted as being cutting-edge and key to its product. But the company argues that it's not as bad as it sounds, because it's offering to relocate employees.

The St. Louis facility, which developed the hardware and firmware for the company's SCx19 edge-routing and broadband aggregation product, employs 90 people, most of them engineers. According to Hugh Kelly, executive vice president of Celox, the facility will remain open for 60 days. Only eight of the 90 employees -- all of whom were support staff -- were laid off. The remaining 82 people were all engineers, and each of them has been offered the opportunity to relocate to the Southborough office.

Kelly says the facility was closed because it became too expensive to run two separate facilities. The company has already raised $155 million in three rounds and is supposedly out looking for a fourth. But Kelly says the short-term goal is to cut costs, a process which began in October of 2001 when it laid off 25 percent of its staff, reducing its total headcount to 200 employees (see Celox Battens Down the Hatch). Just prior to the closing of the St. Louis facility, the company was down to about 180 employees.

But engineers from the St. Louis facility see the situation differently. In an email to Light Reading, one engineer wrote:

"This box was conceived, designed, and built with St. Louis know-how. Yes, we worked long, hard hours and created a kick-ass product. The founders now are very discouraged. They sold their dreams and their hopes to Kent [Mathy], on empty promises. Kent stated, 'We need a Boston presence in order to be a telecom company.' Well, the Boston presence has been the biggest drain on company resources."

In addition, several employees noted in other emails to Light Reading that there are dozens of employees with H-1B visas likely to lose their jobs.

Even though the majority of the St. Louis staff has been asked to transfer to Southborough, it’s still too early to tell just how many will actually make the move, says Kelly. "We expect that some people will feel rooted to the St. Louis area and won’t want to leave," he says. "But we know of some who will come with us."

Of course, a move to Boston is not exactly an enticing deal if you have St. Louis roots -- the cost of living is much higher in Mass. than it is in Mo.

But further, several employees noted in their correspondence that the removal of the facility could kill the engineering soul of the company.

The company's five founders, Manju Hegde, now CTO of the company, Otto Schmid, Jean Bordes, Monier Maher, and Curtis Davis, had all been working in St. Louis in January 1999 when the company was founded. A year later, they brought in Kent Mathy, an 18-year AT&T Corp. (NYSE: T) veteran, to take over as CEO. Later that year, he relocated the company’s headquarters to Massachusetts.

While most of the hardware expertise still remained in St. Louis with the founders, the marketing, sales, and software teams were based out of the Boston area. At the time this move seemed necessary, as startups were fighting to recruit engineers.

"There really wasn’t anyone in St. Louis knowledgeable about product marketing or routing," Kelly says. "You needed to be in Boston or California to be able to recruit those people."

Most analysts and experts agree that Celox has a real working product and its performance is impressive. It can scale to over 6 million broadband subscribers in half of a telecom rack. It supports a full suite of routing protocols including support for MPLS. But it hasn’t been able to nail down a customer. Some say the box’s performance is too much for some service providers. Others blame it on carriers' reduced capital spending plans.

But Celox is targeting an already crowded market, and one that hasn't developed as quickly as it would have liked. It faces competition from companies such as CoSine Communications Inc. (Nasdaq: COSN) and Nortel Networks Corp. (NYSE/Toronto: NT). It’s also feeling increased pressure from IP edge router companies such as Cisco Systems Inc. (Nasdaq: CSCO), Juniper Networks Inc. (Nasdaq: JNPR), and Unisphere Networks Inc., as well as from subscriber management companies such as Redback Networks Inc. (Nasdaq: RBAK), all of which are adding IP services to their boxes (see Edge Routing Gets Service Friendly ). Then there are the startups, such as Corona Networks Inc. and Quarry Technologies Inc., which haven't made much headway in terms of customers either.

"Some companies like CoSine are announcing wins, but if you look at their revenues they are still down," says Kevin Mitchell an analyst with Infonetics Research Inc.. "That to me means these wins are pretty small. The market isn’t really there yet."

While CEO Mathy was able to get the Celox boxes into trials at AT&T, those tests haven't resulted in revenue yet. Kelly says the company is being tested in other carrier networks, but that the process is just taking longer now. Unfortunately for Celox, time and money may be running out.

"No money, no sales, and no engineering," writes a disgruntled engineer from St. Louis. "Good-bye Celox. This is not a hibernation but a deathblow."

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