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i'll be watching this one very closely. from WFN: As broadband communications become increasingly “commoditized” service providers are aggressively seeking additional customer services to sustain margins and to retain customers. Virtual private networks (VPN), firewalls, and secure broadband services are being increasingly demanded by corporate customers. Traditionally, such services have been expensive to install and maintain and they are difficult to expand (i.e., not scalable). Each individual customer requires specialized equipment, which is installed at either the customer (CPE) or the service provider’s site. As demand increases, this adds a considerable physical burden and creates a “spaghetti” of maintenance requirements. CoSine provides an attractive alternative for both carriers and customers. Using its specialized switch and control software, it provides a networked vs. a discrete equipment solution. Specialized individual CPE equipment is not required and carriers may serve multiple customers from a single switch. This is a breakthrough technology that substantially reduces the burdens of additional services while simultaneously increasing the speed of installation and service quality. It also has the potential for customers to directly initiate services without requiring carrier intervention. The firm began shipping its first products in 3/00 and reception has been generally positive. Typical of any product of this nature, early demand is restrained until its performance is proven in a high volume production environment. The firm has two customers, Qwest Communications and AduroNet, and purchase orders from Nissho Electronics, Internet Initiative Japan, Broadband Office, Telia, Telenordia, and American MetroCom (which recently filed for Chapter 11 protection). Note that Nissho and Internet Initiative Japan are shareholders while Qwest, AduroNet, Broadband Office, and American MetroCom hold warrants. The firm emerged from start-up in 1Q’00, so there is little historic performance. Despite a cautious reception, revenues have been growing rapidly. In its first six months of operation, revenues have reached $11.3 million, with a 11.4% gross margin and a $34 million operating loss (adjusted for equity charges). Between 1Q and 2Q revenues increased by 119.8% and are even stronger when the $10.2 million in deferred revenues are taken into account. So while the fundamentals are weak, reflecting the firm’s nascent stage, the surge in revenues suggest a potentially strong outlook. Valuations in this sector are uncertain. This is a new technology with few comparables and comparisons with CPE providers is not appropriate. Some competition may be expected from Nortel Networks, which competes in every networking sector. Reflecting the promise of the new technology, pre-offering demand is reported to be accelerating and has increased from very heavy to “moonshot” territory (Street Scoop: 5 stars). Reflecting this demand surge, the preliminary offering range has already been increased to $15-$17 from $13-$15. Further boosts would not be unexpected. Conclusion: The combination of new technology and the perceived level of carrier demand is expected to drive this offering. The quick revenue start tends to confirm these expectations and first time sector plays also tend to receive early premium valuations. But make no mistake, this remains a very speculative offering. With only six months of reported performance, this is far from a proven winner. For offerings in a similar position, we would anticipate a very favorable early reception (e.g., 60+%) followed by volatility. UPDATE: Price range was boosted from $15-$17 to $20-$22. cosinecom | ||||||||||||||
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