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Optical/IP

Street Gets Tough on Sycamore

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

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appncomm 12/4/2012 | 8:57:11 PM
re: Street Gets Tough on Sycamore Is SCMR falling down??? Any Ideas??
ng_mui 12/4/2012 | 8:56:59 PM
re: Street Gets Tough on Sycamore Sycamore is not falling down.

If you read the analyst's report from Epoch, you
can see the expert opinion is that Sycamore remains a strong company with innovative products,
but is being hit by the general macro-economic
slowdown and funding weakness on the part of the
service providers.

Sycamore has a strong customer base (in double
figures - unlike Corvis), and is very attractively
priced compared with it's competitors.

This is a buying opportunity for long-term
investors.
calsurf23 12/4/2012 | 8:56:42 PM
re: Street Gets Tough on Sycamore I would concur - the entire fiber sector is getting hammered now, as the short-sighted, chicken-little traders run and hide.
I would concur with poster #2 that this represents a tremendous buying opportunity for anyone with over six months of ownership horizon.
We'll see if the SSCL's are right when earnings are released in the next few days...I'm long 'n strong on SCMR, and scraping together my pennies to add to my position...
dondema 12/4/2012 | 8:54:38 PM
re: Street Gets Tough on Sycamore I have put up some posts on the SCMR board re SCMR's P/E. I think the stock's relative valuation is ridiculously low particularly after allowing for the cash that they have. Here's another simple comparison that I found on another board -

(All figures in $ Million)

CY2000 CY2001 CY2000 CY2001 CY2001
Rev Rev Earnings Earnings P/E
------ ------ -------- -------- ------
SCMR $830 $1200 $80 $150 32*
CORV $350 $700 -$80 $25 245
ONIS $190 $380 -$20 $30 210
SONS $200 $400 $10 $40 155

* Adjusted for $1.5bn Cash

Yet all these stocks have the same market value ~$6-7 billion. I hope that the market sees some sense in SCMR's quality. Even if the guidance is lower, the revenue and earnings numbers will be much higher than these other companies.

Its odd that all the analysts are downgrading now!! I think even with lower visibility its a great time to buy at $20-25/share. Two years down the road the stock will could easily double or even quadruple!

casual reader 12/4/2012 | 8:54:38 PM
re: Street Gets Tough on Sycamore Do you think SCMR's low P/E being same as/lower than Redbacks and Corvis is justified??
Harley 12/4/2012 | 8:54:35 PM
re: Street Gets Tough on Sycamore Forget all that, I just want to hear more about their CFO.
Harley 12/4/2012 | 8:54:31 PM
re: Street Gets Tough on Sycamore Not at all, take a look at their website and you'll know why.
allidia 12/4/2012 | 8:54:31 PM
re: Street Gets Tough on Sycamore Why are you interested in their CFO? Is this another Lucent situation?
Harley 12/4/2012 | 8:54:19 PM
re: Street Gets Tough on Sycamore In case you missed what I meant, click this link:

http://www.sycamorenet.com/abo...
Harley 12/4/2012 | 8:54:18 PM
re: Street Gets Tough on Sycamore Brains, looks, and $$$$$!!!

What a combo!
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