Will Sycamore Call It a Day?
Optical switch supplier Sycamore Networks Inc. (Nasdaq: SCMR) is known to be looking for an out. But what will the company's fate be when it finally scores a buyer for its customers, support contracts, products, and intellectual property -- or any combination thereof?
The question hangs in the air as a source close to the company tells Light Reading that once Sycamore unloads some parts of its business, its plan is to buy its stock back from shareholders and close up shop for good.
Light Reading can't immediately confirm the claim, but, regarding Sycamore's eventual fate, almost nothing would be too far-fetched.
The significance here is that Sycamore is the very definition of a company that has never lived up to its potential. The company continues to frustrate, because it has an asset that every telecom company needs -- cash -- and it doesn't appear to be doing anything with it. The company had cash, cash equivalents, and investments totaling about $958 million as of October 30, 2004. More than $201 million of that was pure cash and cash equivalents. The company has been on a wild ride, to be sure. At the turn of the century the Chelmsford, Mass.-based company was a rising star in a hot optical equipment market. Sycamore's revenues peaked at $149.2 million at the beginning of 2001, with net income of $13.8 million. But roughly 15 months after the company's IPO in 1999, the telecom capex spending slump set in, and Sycamore's revenues fell. Hard. The company never recovered -- by the fourth quarter of 2004 it had lost a cumulative $788.9 million -- and now, just four years later, it could finally be closing time (see What's to Save Sycamore?).
But, as stated, almost no Sycamore exit strategy is beyond the pale.
In fact, another well placed source says that Sycamore chased at least two end-game plans in the past year or so. The first plan: Sycamore would sell its hardware line, acquire an OSS company, and morph into a telecom software supplier. The second plan: Sycamore would acquire a telecom product line in a "growth" segment of the market, with the primary requirement being that it already have an existing revenue stream. Sycamore, which reports earnings on February 22, declined to comment on its strategic options.
What is well known is that Sycamore has hired some eyes and ears. Several months ago, it brought in Morgan Stanley to assist "in the review of strategic and financial alternatives for our company,” according to its SEC filings. Sycamore confirms that the investment bank is still on retainer.
The company reveals in its SEC filings that it would consider selling itself; merging with or acquiring another company; remaining a standalone company; or "recapitalization alternatives, including stock buybacks and cash distributions."
Sycamore has several marquee customers, including Sprint Corp. (NYSE: FON), Vodafone Group plc (NYSE: VOD), and the U.S. Military, but it is still putting up relatively small revenue numbers (see Sycamore Signs Sprint, Seeks Help). And, for the first fiscal quarter of 2005, a large chunk of its revenues -- 37 percent -- were tied to the Defense Information Systems Agency's Global Information Grid Bandwidth Expansion (GIG-BE) project (see GIG-BE Winners Named). "Last quarter their revenues were $14 million, their cost of goods was $8 million, and their operating costs were $17 million -- and that’s in a quarter where they had 78 percent revenue growth -- so you do the math,” notes Argus Research Co. analyst Jim Kelleher. “They are a mile from profitability, and the longer they stick around, the longer they burn cash.”
— Mark Sullivan, Reporter, Light Reading