Sycamore Switches Focus

Sycamore's talks with larger partners end in a deal with Siemens in which it will focus on its optical grooming switch

June 20, 2002

4 Min Read
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Talks held by Sycamore Networks Inc. (Nasdaq: SCMR) with telecom giants Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Siemens AG (NYSE: SI; Frankfurt: SIE) have apparently ended in a loose pact in which Siemens will help resell Sycamore's optical switch.

Sycamore seems to be refocusing its business in conjunction with the deal. It says it will discontinue two optical transport products; fire about 235 employees; and take a charge against earnings in the range of $45 million to $50 million (see Sycamore Reorgs, Lays Off, Teams Up).

These actions have come about after Alcatel and Siemens ended their bargain-hunting expedition, in which they were looking at buying Sycamore, sources close to the companies say (see Siemens, Alcatel Seeking Sycamore?). The deal-breaker was apparently the price -- both Alcatel and Siemens were looking for a rock-bottom price, say the sources. With Sycamore trading at roughly its cash position, just a little under $1 billion, and the coffers stuffed with enough cash to wait out the telecom deep freeze for at least another year, Sycamore officers may have felt in no rush to have a garage sale. Now the company appears determined to reorganize around its optical switch.

Wednesday's announcements follow a "top-to-bottom business analysis" that Sycamore started last quarter (see What's to Save Sycamore?). The company has cash and investments totaling more than $1 billion, but its market share in the long-haul DWDM equipment market and the overall Sonet/SDH market has consistently lagged its competitors.

Sycamore is now addressing its problems and has decided to stop building and selling its SN 8000 and SN 10000 optical transport systems for metro and long-haul networks. The company says it will instead bolster its SN 3000 and SN 16000 optical switching products.

The decision to focus on switching comes because Sycamore feels it has "a clear and sustainable technology advantage" there, according to Dan Smith, Sycamore's president and CEO. In line with its switching focus, Smith says Sycamore will increase its research and development spending in optical switching by about 20 percent a quarter.

Analysts breathed sighs of relief that Sycamore was finally picking its battles and showing some direction. "I think the move is very positive," says PointEast Research LLC principal Rick Thompson. "In the overall optical transport market, most of the opportunities will be in [optical] switching and when the [telecom spending slump] turns around, transport products will probably look very different than they do now."

"I think it's also good to see companies such as Sycamore make those kinds of tough decisions," adds Thompson, a Sycamore veteran. "It shows that they're moving forward with some kind of coherent strategy."

For its fiscal fourth quarter, Sycamore now expects revenues in the range of $5 million to $10 million. It expects a pro forma net loss in the range of $19.5 million to $26.0 million, or 8 to 10 cents a share. The company sees itself using between $20 million to $25 million during the quarter.

The company will take a $9 million to $10 million charge related to layoffs; a $13 million to $16 million charge for closing and consolidating some offices; a $22 million to $27 million charge related to the write-down of its optical transport assets; and a $1 million to $2 million charge for writedowns on equity investments.

Separately, Sycamore is also teaming up with Siemens in an agreement that will at least give Sycamore another channel through which to sell its switches. Both companies will also work to integrate Siemens' TransXpress Infinity MTS long-haul transmission systems and Sycamore's optical switches.

Unfortunately for Sycamore, no money changed hands and Sycamore's executives didn't signal that Siemens has much reason to champion its switch over anything else they might sell. "Our agreement is an alliance where we're going to cooperate technically, and in sales, on our switching platform," says Smith. "It's a broad agreement and that's the extent of it."

"I'm not going to [expect] any incremental revenue over the next fiscal year to come from Siemens," says Merrill Lynch & Co. Inc. analyst Simon Leopold, referring to his firm's financial model that predicts Sycamore's performance. "It'll be tough, over the next few quarters, to criticize this. If nobody's buying, we won't know enough to declare it a success or failure."

At least at first blush, Sycamore's Siemens arrangement seems a consolation prize for a couple of merger opportunities that didn't pan out. Sources close to Sycamore say that after Alcatel kicked its tires, the equipment giant backed away because Sycamore was asking for too high a price.

Outside of getting an exceptional bargain, industry observers say an Alcatel-Sycamore combination would have been hard to picture. "I think Alcatel's acquisitions in the past have either been established companies with a leading market position, such as Newbridge Networks, or private companies with specialized technology to meet a specific product need, such as Packet Engines," says Krish Prabhu, the former Alcatel executive who is now a venture partner with Morgenthaler Ventures. "To me, Sycamore doesn't fit either description."

Shares of Sycamore closed down $0.13 (3.8%) to $3.25 on Wednesday.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com

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