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CoSine's Quest for Cash

Light Reading
News Analysis
Light Reading
10/28/2002

For CoSine Communications Inc. (Nasdaq: COSN), which makes a scaleable IP services platform, announcing Tier 1 carriers isn’t a problem. It’s actually getting those carriers to buy boxes in bulk that's difficult.

Today, the company officially announced KDDI Corp., the number two service provider in Japan, as its latest customer. The provider has deployed its IPSX 3500 over the past three quarters, according to Mark Weingarten, vice president of marketing for CoSine. The company hasn’t publicly announced how much the contract is worth.

This is a big win for the company, considering that CoSine also counts NTT Communications Corp., Japan’s number one service provider, as its customer. And there are other top-tier names on its customer roster, as well: Sprint Corp. (NYSE: FON), Cable & Wireless (NYSE: CWP), Qwest Communications International Inc. (NYSE: Q), and China Netcom Corp. Ltd. are all customers using CoSine gear to deliver IP services like IP VPNs and network-based firewalling (see CoSine Sells VPN Combo to China Netcom).

“They seem to be getting all the right names on their customer list,” says Kevin Mitchell, an analyst with Infonetics Research Inc.. “But they’re still not making any money.”

Even with all these heavy hitters deploying CoSine’s IPSX 3500, the company still only reported $5.2 million in revenue for the third quarter of 2002. And it reported a pro forma net loss (excluding restructuring and impairment charges and non-cash credits related to equity issuances) of $11.5 million, or $1.19 per share. With boxes ranging in price from $100,000 on the low end to $500,000 on the high end, the company is likely selling fewer than 10 boxes a quarter.

”For CoSine to survive, they will eventually have to sell 15, 20, 25 boxes at a time, instead of the small or incremental purchases they've recently received,” says Mark Bieberich, senior analyst at Yankee Group. “I don't expect purchases of that size until mid-2004.” Part of the problem could be the scaleability of CoSine’s product, say some analysts. A single IPSX 3500 can support up to 3,000 virtual routers, while the IPSX 9500 supports up to 12,000.

“Their scaleability prevents large deals from the start,” says Mitchell. “On the one hand this is good, because carriers don’t want something that will run out of gas. But right now they are not building large-scale deployments, so they buy fewer boxes upfront.” CoSine’s Weingarten dismisses the idea that the IPSX 3500 is too scaleable. He says the product’s scaleability is its strongest selling point, because it lowers the price point for carriers to offer new services.

But he admits that carriers are not ready for large-scale deployments. He hopes that when carriers start spending again they will be looking for boxes such as the IPSX 3500 to generate new revenue from IP services. He says the company’s presence in many Tier 1 accounts will help it down the road in landing larger deals. In fact, he claims that in the last quarter 80 percent of CoSine’s revenue came from recurring business.

Still, Weingarten can’t help lamenting about the past. “I wish we had had our second-generation product three years ago when there were 240 competitive local exchange carriers [CLECs] to choose from instead of 24,” he says. “It would be great if there were more participants. And the CLECs were really able to act much more quickly than the incumbents.”

“The market has fundamentally changed since 1999 when CoSine first started shipping product,” says Mitchell. “It utterly shifted away from CLECs to incumbent carriers.”

CoSine isn’t the only company feeling the pain. No one in the network-based VPN and security business is doing well, says Mitchell. Nortel Networks Corp. (NYSE/Toronto: NT) has had some recent success in Asia, but, like CoSine, the platform is not generating much revenue, he says (see Nortel Wins Big in China). Lucent Technologies Inc. (NYSE: LU), which bought Springtide for its IP services box, has morphed that product into a wireless router and is trying to incorporate its technology into a services switch (see Lucent Clarifies Product Strategy). Startups like Celox Networks, Corona Networks Inc., and Quarry Technologies Inc., which have been developing similar products, are also struggling to find paying customers (see Meet Me in Southborough, MA?).

Mitchell also notes that the competition will only get more fierce for these purpose-built boxes, as many edge routers -- like the ERX from Juniper Networks Inc. (Nasdaq: JNPR), the 7500 and 10000 series routers from Cisco Systems Inc. (Nasdaq: CSCO), and the SmartEdge router from Redback Networks Inc. (Nasdaq: RBAK) -- integrate IP services into their products (see VPNs Grow Up ).

“In the long run it’s going to be hard for any company with a single product to survive in this kind of environment,” says Mitchell.

On the upside, CoSine has plenty of cash on hand -- $113.6 million, to be exact.

“Fortunately for CoSine, they've reduced their cash burn rate to survive until the turnaround,” says Yankee Group’s Bieberich. “They're also the preferred IP service switch vendor in several Tier 1 carrier networks, such as Sprint and Qwest, so they're well positioned to land those larger deals when the economy rebounds.”

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.com Want to know more? The big cheeses of the optical networking industry will be discussing VPNs and multiservice switches at Lightspeed Europe. Check it out at Lightspeed Europe 02.

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hiddentiger
hiddentiger
12/4/2012 | 9:27:42 PM
re: CoSine's Quest for Cash
According to COSN's latest (Q3) results- for the last nine months 2002- they had a total operating expense of $85M which lead them to a whopping total revenue of $18M.

How long is their cash going to last?
HD
The Loopy Electron
The Loopy Electron
12/4/2012 | 9:27:37 PM
re: CoSine's Quest for Cash
Actually, CoSine is not that bad off.

While the Company may have had $85 million in expenses for the latest nine months ended period, recognize that nearly $25 million of those were due to restructuring and impairment. A lot of that is non-cash. Almost all of it is non-recurring. Therefore, the real number is more like $60 million. And bear in mind that much of that is due to losses incurred in earlier periods. For a more accurate picture, look at the latest three month ended period. If one were to flatline losses for the latest three month ended period and project them 9 months into the future, annual losses would be roughly $38 million.

CoSine has at least a couple of years left in them.

Secondly, the Company has managed to break gross margin positive on sales of its systems. The margins are roughly 60% now, which is healthy. Now all the Company needs is volume to cover much of the overhead.

Kindest regards,

The Loopy Electron
Bitwise
Bitwise
12/4/2012 | 9:27:27 PM
re: CoSine's Quest for Cash
snip>>> G«£Fortunately for CoSine, they've reduced their cash burn rate to survive until the turnaround,G«• says Yankee GroupG«÷s Bieberich. G«£They're also the preferred IP service switch vendor in several Tier 1 carrier networks, such as Sprint and Qwest, so they're well positioned to land those larger deals when the economy rebounds.G«•

Sprint and Qwest are also Nortel Shasta customers. I doubt if those carriers have expressed a preference for either switch, and any future large deal would certainly merit a look at newcomers too. This is just another analyst talking up his holdings.

BobbyMax
BobbyMax
12/4/2012 | 9:27:18 PM
re: CoSine's Quest for Cash
It is not clear how many IP Service Switch would the carriers buy from Cosine. There are many top notch vendors selling more or less the same kind of product
Spaz
Spaz
12/4/2012 | 9:27:17 PM
re: CoSine's Quest for Cash
This article really tells quite a story. Here's a company that has real product, is selling it to (multiple) real customers, but is still having trouble making it. So what are the chances for a company like Maple, who has a product that's all smoke and mirrors, is chasing 1 customer, and is running out of cash? It probably doesn't matter though. At the rate employees are running out the door, they'll be out of people before they run out of money.

Spaz
joe_average
joe_average
12/4/2012 | 9:27:16 PM
re: CoSine's Quest for Cash
Where are these people going? Nobody is hiring.

--------------------------------------------

As an ex-Mapler, I can attest that Spaz is correct. And the answer to jamesbond is - anywhere they can. If you look long enough, you'll find something. Almost all of the ex-Maple folks found *better* jobs, some lots better which is encouraging.
jamesbond
jamesbond
12/4/2012 | 9:27:16 PM
re: CoSine's Quest for Cash
This article really tells quite a story. Here's a company that has real product, is selling it to (multiple) real customers, but is still having trouble making it. So what are the chances for a company like Maple, who has a product that's all smoke and mirrors, is chasing 1 customer, and is running out of cash? It probably doesn't matter though. At the rate employees are running out the door, they'll be out of people before they run out of money
--------------------------------------------

Where are these people going? Nobody is hiring.
henry_class
henry_class
12/4/2012 | 9:27:14 PM
re: CoSine's Quest for Cash
I was informed that Maple has closed doors
about a week ago. Raza Foundation or who-so-ever
their VC is (never heard of them before) has lost $40 million on the deal. No idea where the engineers went.
walter_100
walter_100
12/4/2012 | 9:27:10 PM
re: CoSine's Quest for Cash
Really? Isnt the product done?
Spaz
Spaz
12/4/2012 | 9:26:58 PM
re: CoSine's Quest for Cash
walter_100 wondered:

Really? Isnt the product done?

_____________________________________

Maple's done, not the product.

Spaz
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