The common theme following the Sycamore Networks Inc. (Nasdaq: SCMR) quarterly conference call, held last night: Where’s the SN16000 product?

That product, a core switch that comes in a 512-port version, would provide “grooming” of smaller telecom circuits known as STS1 (51.8 Mbit/s) and would compete with Ciena Corp.’s (Nasdaq: CIEN) CoreDirector switch. Many consider it key to Sycamore’s long-term success. Only one problem: It's slipped behind schedule and is still not shipping in volume.

Sycamore reported a miserable fiscal third quarter that was in line with a warning the company issued three weeks ago (see Sycamore Drops a Bomb). The company reported quarterly revenue of $54.2 million and a pro forma net loss of $46.2 million, excluding special charges that included $168 million for restructuring. This compares with $149 million in revenue the company reported during the second fiscal quarter.

In the warning, the company had announced that revenues would come in the range of $50 million to $60 million and that it would report a pro forma loss of $35 million to $45 million.

In Wednesday morning trading, Sycamore shares fell 0.22 (2.36%) to 9.10.

By all measures, Sycamore is at a crossroads. Its $400 million contract with Williams Communications Group (NYSE: WCG) is winding down, with less-than-enthusiastic reviews from Williams. 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO), another one of Sycamore’s major customers, is cutting back on capital spending as its balance sheet deteriorates (see 360networks Posts Q1 Returns). And the SN16000, Sycamore’s next-generation product, is, as noted, behind schedule. Officials now believe it will start shipping in volume during this quarter.

In the Tuesday night conference call, Sycamore CEO Dan Smith said that he considers the SN16000 product key to the company's future and that he hoped to gain a majority market share with it.

Analysts say the company had better start ramping new products and landing new customers -- soon. The tone expressed by many was one of impatience.

”To have a big exposure to 360networks and Williams drying up... That’s going to be a difficult row to hoe for the company,” said Alex Henderson, an analyst with Salomon Smith Barney, in a message to clients issued Wednesday morning. Henderson recommended that investors “stay on the sidelines” with regard to Sycamore stock.

“There wasn’t a lot to point to, and not a lot of confidence in, gross margins -- the gross margins were pretty weak,” said Seth Spalding, an analyst with Epoch Partners, just after the call. In a note to clients issued Wednesday morning, Spalding couldn’t recommend buying the stock: “We believe that Sycamore shares at current levels are near fair value and maintain that downside risk lies at the $4-6 level. However, we are not buyers without any near-term catalysts in sight."

Jim Parmalee, analyst at Credit Suisse First Boston, noted the Sycamore balance sheet continued to “deteriorate” and that it has largely become a waiting game to see if Sycamore can start volume production of the SN16000.

At the end of the quarter, Sycamore held $740 million in cash and marketable securities, down from $974 million at the end of the second fiscal quarter. Parmalee noted that the length of shipments is rising due to customers asking for better payment terms.

The production of the SN16000 has mainly been stalled due to a supply of chips not being generated quickly enough. According to some analysts, the yields are too low to produce significant quantities of product. Sycamore has not identified the supplier.

— R. Scott Raynovich, Executive Editor, Light Reading
http://www.lightreading.com