CoSine Cuts to the Bone

News Analysis Light Reading 9/9/2004

Whatever CoSine Communications Inc. (Nasdaq: COSN) is planning, it apparently doesn't require any people.

Late yesterday, CoSine announced it will lay off "most of its employees," keeping only a small crew on board to pursue "strategic alternatives," presumably a combination with some other company (see CoSine to Cut Nearly Everybody). This comes after the company has fought for months to prevent shareholders from liquidating the company and divvying up its assets (see CoSine Liquidation Threat Over and CoSine: Not Ready to Sell).

CoSine announced in July that the company would be looking into alternatives such as a possible sale, having enlisted Broadview International as its financial advisor.

The company employed 148 full-time staffers as of December 2003, according to Securities and Exchange Commission (SEC) documents.

It's an odd situation -- foremost because CoSine should still have enough cash to continue operating. As of the quarter ending June 30, the company had $45 million in cash and short-term investments, the equivalent of $4.34 per share. But the company's been burning about $10 million a quarter in cash for the past four quarters: At that rate it could be down to its last $35 million or so.

For more than a year now, CoSine has faced declining sales and various rows with its shareholders, many of whom asserted that the company was worth more dead than alive (see CoSine Investors Lash Out, Mellon Hires Banker for CoSine, and CoSine: The Big Sell-Off?). Here's a tally of the company's seven-and-a-half years of losses:

Table 1: CoSine's Losses

	2004*	2003	2002	2001	2000	1999
Revenues ($M)	8.7	14.6	23.6	34.3	31.1	0
Net Losses ($M)	16.6	34.9	94.0	146.3	158.6	37.7
Loss per share ($)	1.70	3.57	9.72	15.09	52.27	74.99
Source: CoSine 10-K * First six months only

The company noted that the cost of keeping people around "could potentially decrease total stockholder value." (See CoSine to Cut Nearly Everybody.) Investors may have found this ironic, as shares traded down on the news. Today CoSine was changing hands at $3.21, down $0.25 (7.23%).

In addition to cutting people, CoSine noted in its April conference call that it had terminated all excess real estate leases.

CoSine's main problem was marketing a niche IP services switch in a declining telecom spending market. Its product, designed to allow service providers to roll out advanced services such as virtual private networks (VPNs), did receive some notice -- in fact, its IPSX 9500 switch earned “Best Product Overall” honors in the B-RAS category, in the Heavy Reading report, "Next-Generation DSL Equipment: The Path to Profitability," published last fall.

But CoSine's product lineup was narrowly focused and fell short on a wide array of features and services when compared with other products. Giant competitors like Cisco Systems Inc. (Nasdaq: CSCO), could toss in some of the VPN functionality with routers and Ethernet swtiches. According to the Heavy Reading report noted above, the nail in the coffin may have been the fact that the IPSX 9500 lacked Fast Ethernet interfaces, which killed it in competition with Cisco. At any rate, it's clear CoSine had a hard time competing with players that had wider product portfolios and resources, such as Cisco, Juniper Networks Inc. (Nasdaq: JNPR), and Nortel Networks Ltd. (NYSE/Toronto: NT).

Given its stock price, CoSine certainly could be acquired just for the cash and a chance to gain a public stock listing. It's been done before, as in Zhone Technologies Inc.'s (Nasdaq: ZHNE) acquisition of Tellium last year (see Zhone Gets a Symbol (and Layoffs)).

Another option that's been proposed by investors but rejected by the board -- returning the cash to shareholders -- doesn't seem to be in the cards, given the board's past opposition to such a strategy.

— Craig Matsumoto, Senior Editor, and Phil Harvey, News Editor, Light Reading

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