Sorrento Picks Up Brokerage Coverage

Helping move Sorrento Networks Corp. (Nasdaq: FIBR) out of the hinterlands of Wall Street stock coverage, a second investment bank has started covering the company.

Analysts at Robert W. Baird & Co. Inc., a brokerage based in Milwaukee, have picked up coverage on Sorrento. In a report issued this week, analysts wrote that there is "tremendous upside" for the company if it can work out its financial troubles and come through with a big carrier customer. The firm gave Sorrento's stock a Market Perform rating, its third-highest out of five possible ratings. The report also dubbed the stock a "speculative risk" and gave the stock a price target of $12.

Baird is only the second brokerage house to provide research coverage of Sorrento. The other firm is The Chapman Company, a Baltimore-based investment bank that has held a Strong Buy rating on Sorrento since December 14, 2000. At that time, Chapman put a price target of $160 on the stock. On May 30, 2001, Chapman reiterated its Strong Buy rating, but its price target for Sorrento is now at $30.

Sorrento shares got a small boost from the action, jumping 0.48 (5.83%) to 8.71 in late afternoon trading on Friday.

Light Reading has also learned this week that several investment banks are busily conducting due diligence on Sorrento. The company is trying to raise between $15 million and $30 million in new funding, according to people familiar with the situation.

Sorrento's attractive qualities include its technology and the fact that it has 24 customers, the Baird report says. These customers include AT&T Broadband, Cox Communications Inc. (NYSE: COX), Deutsche Telekom AG (NYSE: DT), United Pan-Europe Communications NV (UPC) (Nasdaq: UPCOY), and Inrange Technologies Corp. (Nasdaq: INRG) -- the five companies that represented 75 percent of its first-quarter 2002 sales. The report also says Sorrento was "in field trials with three carrier class customers and we believe a contract announcement should result within a couple of months, once financial issues are resolved."

The report also notes that Sorrento's GigaMux metro DWDM product has a high overall capacity (640 Gbit/s) and can multiplex 64 protected channels onto a single fiber. This compares favorably with products from Ciena Corp. (Nasdaq: CIEN), Cisco Systems Inc. (Nasdaq: CSCO), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Nortel Networks Corp. (NYSE/Toronto: NT), ONI Systems Inc. (Nasdaq: ONIS), and Sycamore Networks Inc. (Nasdaq: SCMR).

But before Sorrento can attempt to take market share from its competitors, it must wrangle with two key financial issues. First, Sorrento must resolve a dispute it has with its preferred shareholders. The preferred shareholders have filed to sell their shares, but Sorrento says it doesn't have a legal obligation to pay up since it can only redeem those shares using "positive retained earnings and capital surplus."

The second issue is that Sorrento could use some cash. Baird's analysts estimate that Sorrento has about $5 million in cash, while the company's burn rate is between $2 million and $2.5 million a month. The company has about $30 million in marketable securities or investments that could be sold for cash. It also has credit facilities totaling $8 million, of which $1.3 million has been drawn down.

Sorrento has yet to secure the $15 million debt financing from Silicon Valley Bank that it spoke of during its May 23 earnings conference call.

Raising money is a crucial thing for Sorrento, because its lack of cash might cause a potential customer to turn tail, says Baird analyst Dan Shin, who, along with analyst Ted Moreau, wrote the report. "If you're a big carrier, you want to be sure that a supplier is going to be around to service you for a couple of years," Shin says.

Besides its financial plight, Shin sees some potential for Sorrento's technology. His firm’s opinion is that the company's low valuation compared to its peer group might make it an acquisition target.

The Baird report compares Sorrento’s valuation to ONI Systems, a more highly valued metro DWDM pure-play. Sorrento has been in the metro DWDM space much longer than ONI, but the company is only about half the size. And, while ONI carries a $2 billion-plus valuation, Sorrento's valuation is in the $100 million range.

It's no fluke that ONI is a more valuable company than Sorrento, and its easy to see why Baird suggests Sorrento as an acquisition target. Sorrento's revenues were $13.1 million last quarter, a company record. ONI's revenues were $45.1 million during its most recent quarter; and it had $799.1 million in cash and cash equivalents as of March 31.

"Given [Sorrento's] strong engineering and product leadership with relatively low valuation, the company would be an attractive acquisition target for a larger incumbent optical networking vendor wanting to get into the metro market," the report says.

- Phil Harvey, Senior Editor, Light Reading
B 12/4/2012 | 8:03:46 PM
re: Sorrento Picks Up Brokerage Coverage This seems to be a fair article for LR regarding Sorrento. I believe FIBR is on the cusp of breaking out and Baird recognizes this.

lightreader 12/4/2012 | 8:03:43 PM
re: Sorrento Picks Up Brokerage Coverage wonder what ONI's revenues would be if they
didnt have their investors buying their equipment
with pre-IPO stocks.....probably very sorrento
like i would imagine.....dont know the details
of either's revenue breakdown...but sorrento
just seems to hang in there...not bad for not
having big-name vc backing......probably their
technology is pretty decent....my guess is that
with the increased focus on metro by all big
players, these guys will get more visibility
going forward......metro seems like a real
tough space, and few seemed to have achieved
decent traction.....at least for transport gear..
pretty much remains Nortel, onis, sorrento....
the other guys are pretty much background noise..
....lousy transport with SONET grooming slapped
Noorizen 12/4/2012 | 8:03:36 PM
re: Sorrento Picks Up Brokerage Coverage Phil Harvey claims:

"Shin sees some potential for Sorrento's technology."

Lets see if Shin agrees with Phil's portrayal of Shin's view of Sorrento's technology. Here are some excerpts from Shin's July 18, 2001, research report:

"Industry-Leading Technology for the Metro Area. Sorrento Networks addresses the needs of the metropolitan area by providing end-to-end solutions for transport, switching, access, and management of next-generation metropolitan
optical networks. We believe Sorrento has one of the broadest product lines for the metro market in the industry."

"San Diego-based Sorrento Networks addresses the networking needs of the metropolitan core and
access in delivering bandwidth needs of the end user. RHK estimates the market for global metropolitan DWDM to grow from approximately $1 billion in 2000 to approximately $4.3 billion in 2004 representing a CAGR of 44.0%. Sorrento provides end-to-end metropolitan optical networking solutions from access, transport, switching, and management solutions for metropolitan carriers. Sorrento Networks is one of the two pure-play metro optical networking companies along with ONI Systems. Other competitors in the space include Ciena, Nortel, Lucent, Sycamore and Tellabs (TLAB-16.24)1. Sorrento has one of the most comprehensive product lines in this universe."

"Blue-chip Customer Base. Sorrento with its first-mover advantage and superior products has been able to secure some key customers in the metropolitan optical-networking space including AT&T Broadband, Cox Communications, UPC, and Inrange among others. Sorrento Networks continues to grow its customer base. The company now has over 24 customers as of end of FQ1 2002 (April 2001), most recently adding Focal Communications, Terabeam, Swiss Academics and Research Network (SWITCH), and Gig Exchange (GigX) as customers within the past three months."

"Our checks with several of SorrentoGÇÖs customers confirm the exceptional performance characteristics of the Sorrento products. Every customer we contacted initially trialed multiple vendors including Nortel, Ciena, ONI, among others and chose SorrentoGÇÖs metro solution based upon superior performance, ease of installation and use, and customer service as well as the best price for functionality. We are confident that SorrentoGÇÖs end-to-end solution for the metropolitan opticalnetworking sector is second to none and should continue to gain additional customer wins going forward."

Well it is no fluke, Phil will always be Phil.

Techhead 12/4/2012 | 8:03:21 PM
re: Sorrento Picks Up Brokerage Coverage Seems reasonable to assume that the smaller houses find the smaller up and coming companies before the large houses. Once the floats gets big enough to handle their brokers and clients then they notice them. Perhaps the next report will add to the pressure to cover them.
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