Sycamore Mulling More Cuts?

Some sources say Sycamore Networks Inc. (Nasdaq: SCMR) is ready to make more cutbacks, more specifically layoffs, in order to preserve cash and better prepare to wait out the potentially lengthy telecom slump.

The chatter intensified after Sycamore on Tuesday night warned that its revenues for the quarter ended April 27, 2002, would likely be between $13 million and $14 million, rather than the $17.1 million analysts were expecting. The company says its pro forma net loss for the quarter will be between 10 and 12 cents a share and that its cash burn will be about $23.5 million (see Sycamore Posts Preliminary Q3).

The layoff rumors focus on the fact that Sycamore's headcount has remained relatively unchanged since the end of October 2001, when it employed about 701 people. As of January 26, 2002, Sycamore employed 694 people. Yet between October 27, 2001 and April 27, 2002, Sycamore's revenues seem to have dropped about 36 percent -- from $21.2 million to roughly $13.5 million (see Sycamore: Everybody Hurts).

A gaggle of analysts surveyed by First Call predict that Sycamore will lose about 49 cents a share in 2002 and about 41 cents a share in 2003, assuming there are no layoffs. In order for Sycamore to improve its operating loss for 2003 amid the telecom sector's persistent stagnation, it appears the company would have to make some cuts.

Table 1: Sycamore's Headcount

Date	Headcount
31-Jul-99	148
30-Oct-99	228
29-Jan-00	344
29-Apr-00	513
28-Oct-00	904
27-Jan-01	1,071
28-Apr-01	986
27-Oct-01	701
26-Jan-02	694
Source: SEC filings

"Layoffs would allow [Sycamore] to improve its operating loss, and such a move wouldn't be surprising," says Merrill Lynch & Co. Inc. analyst Simon Leopold. However, given how much cash Sycamore has and how tough it would be to make further cuts, Leopold is "not sure that it's a safe conclusion" to assume Sycamore will downsize significantly in the near future.

Sycamore's cash and investments totaled $1.08 billion as of January 26, 2002, with about $294 million in cash and cash equivalents.

The company has already cut about 35 percent of its staff since January 2001, and any further cuts would be problematic. The company's already taken a chunk out of its general and administrative expenses -- the costs needed for operations but not directly associated with product development. Further cuts would likely come from the research and development side, which would cripple the company's future prospects if it cuts too many too fast.

On a more positive note: Sycamore's cash burn, at about $23.5 million, is down significantly from $68 million in the prior quarter. That could be taken as a sign that Sycamore has found a way to curb operating expenses without cutting more jobs.

Sycamore frequently comes up as an possible acquisition for a larger company looking to get into optical switching; for example, the rumor mill recently churned up Siemens AG (NYSE: SI; Frankfurt: SIE) as a potential buyer. Most analysts dismiss that possibility, saying it's more likely that Sycamore, with a significant cash position, would lay off more people and lay low until the market -- and it's stock price -- improved.

CEO Dan Smith and Chairman Desh Deshpande, who remain majority shareholders in Sycamore, have said they are averse to a takeover and prefer to remain independent.

Others point to Sycamore's depressed stock price as making it an attractive acquisition. "While we do not anticipate any fundamental catalyst in the first half to push up the stock, we believe Sycamore remains a potentially attractive takeout candidate at these levels and note that any meaningful customer/sales traction could boost the stock significantly," writes CIBC World Markets analyst Rick Shafer, in a report he sent to clients Tuesday.

Shares of Sycamore were down $0.17 (5%) to $3.21 in midday trading on Wednesday.

Sycamore declined to comment for this story.

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