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Sycamore Drops a BombSycamore Drops a Bomb

Q3 revenue numbers will decline 60 percent from Q2 levels; layoff and restructuring to begin immediately

April 5, 2001

4 Min Read
Sycamore Drops a Bomb

Times are tough in the telecommunications business. They just got really tough for Sycamore Networks Inc. (Nasdaq: SCMR).

In a pre-earnings conference call, the company tonight announced that it expects a major revenue shortfall for the quarter and that it will downsize and take special charges in a corporate restructuring in response to the dramatic fall-off in business. The company announced that sales for the third fiscal quarter of 2001, which ends in three weeks, will be in the $50 million to $60 million range, a huge drop from the $149 million in revenue the company reported in the second quarter (see Sycamore Revises Forecast).

Whereas Sycamore reported a pro-forma profit of six cents per share in the second quarter, it will report a significant loss during the third quarter, somewhere in the range of $150 million, in addition to taking special charges for downsizing and restructuring.

Sycamore had previously said they expected $163 million in revenue and a profit of 5 cents per share for the quarter.

The shortfall drastically changes Sycamore's financial position. Whereas just one quarter ago it was dramatically increasing revenues and beginning to generate profits, the company is now burning through capital. The question now becomes whether business can turn around before its capital -- which stood at roughly $1 billion at the end of the last quarter -- is completely incinerated.

"They say they'll burn about $150 million in the quarter, which brings them to $820 million," says Seth Spalding, an analyst at Epoch Partners. "At this rate, they have a good five and a half quarters left. If things don't get any better, that's their time horizon."The company will lay off 140 of its approximately 1100 employees and expects to take a $150 million one-time restructuring charge. Excluding the one-time charge, the company expects to report a loss of between 10 cents and 15 cents per share.

“This is shaping up to be a very difficult and disappointing time,” said Sycamore CEO Dan Smith.

Sycamore officials pointed to several factors affecting the quarter, including an industry-wide slowdown in spending by telecommunications carriers and a delay in the volume shipment schedule of the company’s 512x512-port SN16000 optical switch.

In after-hours trading on the Island ECN, Sycamore shares dropped 2.56 from Thursday’s closing price of 9.06, trading at 6.56.

In light of the carrier spending slowdown and weakness in the capital markets, Sycamore's high exposure to startup carriers and CLECs appears to be taking its toll. In addition, Sycamore’s largest customer, Williams Communications Group (NYSE: WCG), appears to be winding down its initial two-year contract and does not seem keen on expanding the relationship.

One executive at Williams, asking to remain unnamed, told Light Reading yesterday that the company has been disappointed with the performance of Sycamore’s products and that they are moving to competitive switching products in the same market.

Sycamore's other major customer, 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO), also appears to be reducing orders. According to sources citing information coming from within the carrrier, 360networks has cancelled orders for OC48 line cards for Sycamore metro gear.

During a conference call, several Wall Street analysts asked Smith about customer relationships, but Smith declined to give details about the status of individual contracts, including the $400 million Williams contract, which is in its second year. “They have announced a reduction in capital spending, but orders are still coming in,” said Smith of the Williams relationship. Smith also mentioned that Williams is no longer a 10 percent customer of the company.

Beyond Williams and 360Networks, Sycamore’s customer list includes BellSouth Corp. (NYSE: BLS), CoreExpress., Global NAPs, Tata Power Companies Limited (TPCL), and Storm Telecommunications Ltd.. With the exception of BellSouth, all of these customers are small CLECs or startup carriers targeting the data market. Such carriers, which require large amounts of funding to sustain their buildout plans, are particularly susceptible to the recent slowdown in the capital markets.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com

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