Corvis-Sycamore Battle Looms

With Corvis Corp. http://www.corvis.com preparing for a high-profile IPO, Sycamore Networks Inc. http://www.sycamorenet.com (Nasdaq: SCMR) shareholders may start wondering what it means for the company's high-flying shares.

Sycamore Networks defined itself in the emerging optical arena with an IPO in the fall of 1999 that set records for first-day gains. The stock quadrupled, Sycamore's name was splashed across worldwide media outlets, and founder and chairman Desh Deshpande and CEO Dan Smith went from being star names in the venture capital and investment banking business to household faces on CNBC.

The Corvis IPO will put a ripple in Sycamore's status as a leading optical play. The company, which is developing long-distance transmission and all-optical switching products based on Dense Wave Division Mulitplexing (DWDM) technology, appears to be making a run for Sycamore's space. And the two companies have nearly opposite strategic approaches to the optical long-haul gear: Sycamore believes in buying third-party components and adding value to its systems with software, while Corvis hopes to set itself apart with best-of-breed transmission hardware, amplifiers, and laser technology.

With Corvis supported by Kleiner Perkins Caufield Byers' http://www.kpcb.com high-profile venture capitalist, Vinod Khosla, who holds a Corvis board seat, the stage is being set for a battle of optical networking pedigree.

Sycamore is more of a known entity. Many of its products are already shipping, and the company has booked over $100 million in revenue in under a year, whereas Corvis has yet to ship a product. But Sycamore stock has never quite regained the momentum it had immediately following its IPO, leaving some to wonder whether the current crop of IPOs are giving public investors more optical startups from which to choose. If Corvis pulls off an IPO expected to give it a valuation north of $10 billion (see Doctor Huber's Revenge), it will emerge as another well-funded public startup in a market currently dominated by networking heavyweight Nortel Networks http://www.nortel.com

One analyst points out that the long-haul DWDM optical gear is still in its early stages, and the startups are marketing products that aren't likely to come into their own until later this year or next.

"We've found only six carriers that do OC-192 speeds," notes Gina Sockolow, an analyst with Brean Murray & Co. Inc. http://www.breanmurray.com. It's not economically viable for them yet. When they get enough traffic to go OC-192, who will they pick?"

That means that Corvis still has time to complete its product and get to market. A higher capacity product may have an edge on Sycamore, notes Sockolow, who currently rates Sycamore stock a "Hold." Sockolow also points to recent activity in Sycamore shares, which have had trouble holding at prices over $100.

Other experts note that most of the shares of optical startups have been bid up largely due to speculation about future market development.

Mark Lutkowitz, president of Trans-Formation Inc. http://www.trans-formation.com, a networking equipment consultant, says that Corvis has been relatively secretive about its product, leaving many to question how close it is to shipping.

"If you're [Corvis CEO] David Huber, you don't want to exaggerate the science-fair mentality," says Lutkowitz. "One thing about Sycamore is they have something here now."

Lutkowitz also stresses the dominance of Nortel in the current high-speed OC-192 market, and he believes that many investors have been overly optimistic about the speed at which carriers deploy next-generation equipment.

"You can't over-estimate how slowly things really move in the public network arena," says Lutkowitz.

--by R. Scott Raynovich, Executive Editor, Light Reading (http://www.lightreading.com)

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