Why did Sycamore Networks Inc.'s (Nasdaq: SCMR) stock price drop after it announced a $60 million dollar deal with Storm Telecommunications Ltd. (see Sycamore, Storm Telecom Ink $100M Deal) on Thursday morning?

One reason is that a number of analysts, including those from Epoch Partners and Wit Soundview, are revising downward their revenue estimates for the company, following an analysis of customer spending power. Another is investor concern about the vendor financing component of the Storm contract.

Morgan Stanley Dean Witter analyst Alkesh Shah asserted in a research note issued Friday that most of the Storm deal was gained through vendor financing, which involves the equipment vendor loaning money to the customer to pay for the merchandise (see Vendor Financing). Shah, however, did not specify where he obtained this information and did return calls by press time.

Shah did note that Sycamore has so far been conservative in its financing activity, noting that draw-downs on the financing commitments have been minimal and that no revenue has been recognized by Sycamore from vendor financing to date.

A Sycamore spokesman confirmed that vendor financing was part of the Storm contract, but said the company does not disclose details of its financing deals. Sycamore's budget for vendor financing is currently $250 million, according to a company spokesperson.

The Storm contract is an extension of a $40 million dollar deal announced last March, bringing the total value to $100 million. Sycamore will sell its SN 16000 optical switch and the SN 8000 MC metro core transport system.

Analysts are also concerned about Sycamore’s short customer list and the effects that shrinking capex spending budgets could have in the upcoming year. Yesterday Wit Soundview downgraded Sycamore from a Strong Buy to a Buy (see Wit Soundview Downgrades Sycamore). Analyst Kevin Slocum says, “I am concerned about Sycamore’s customer concentration and the power of larger vendors with deeper customer relationships than Sycamore.”

Epoch Partners lowered its revenue estimates to $583 million from $605 million, citing shrinking capex budgets.

Sycamore was down in early trading 0.31 (1.31%) to 30.50. Shares had already dropped 4.43, or 13 percent, on Thursday.

-- Matt Malina, research associate, and R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com