What's to Save Sycamore?

There were no huge developments coming from Sycamore Networks Inc.'s (Nasdaq: SCMR) earnings conference call Tuesday, despite a frenzy of rumors leading up to the quarterly results.

Earlier today, rumors had Sycamore either announcing a large layoff or an acquisition by networking equipment giant Siemens AG (NYSE: SI; Frankfurt: SIE) during its conference call.

Sycamore often comes up as an acquisition target because of its low stock price. But the recent rumor involving Siemens as a buyer just won't go away. Most analysts, however, 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 its stock price -- improve (see Sycamore Mulling More Cuts?).

On the conference call, Sycamore executives intoned that some changes are ahead -- layoffs being most likely. Frances Jewels, Sycamore's CFO, says the company is doing a "top-to-bottom business analysis" so it can "further rationalize [its] cost structure... making sure [the company is] properly aligning existing resources with strategic initiatives."

In other words, budgets are being yanked all over the place and a large-scale layoff remains possible.

Sycamore's revenues for its third fiscal quarter, ended April 27, 2002, were $13.6 million, compared with $54.2 million during the year-ago period. Its pro forma net loss, which excludes restructuring charges and a basket of other items, was $26.3 million, or 10 cents a share, versus a pro forma net loss of $46.2 million, or 19 cents a share, for the year-ago period.

Wall Street expected the company to post a loss of 11 cents a share on $13.25 million in revenues, according to a consensus of analysts surveyed by Multex.com.

The company's headcount shrank to 665, with 29 people leaving the company, including Jeff Kiel, the vice president and general manager of Sycamore's Core Switching Business Unit.

The company burned through $23.3 million in cash during the quarter, which included $18.2 million in restructuring liability payments. With all charges added in, Sycamore's net loss was $22.8 million, or 9 cents a share, versus a net loss of $225.1 million, or 4 cents a share, during the year-ago period.

For the first nine months of its fiscal 2002, Sycamore recorded an actual loss of $306.1 million, or $1.21 per share, compared with a net loss of $237.5 million, or $1.01 per share, for the same nine month period in fiscal 2001.

The company has a market capitalization of $979.8 million, though its cash and investments total $1.06 billion. Indeed, analysts say Sycamore's crowning assets, as an acquisition target, are its cash and its optical switching product.

"Sycamore's cash position is what is supporting the stock right now," says Hasan Imam, an analyst at Thomas Weisel Partners. "We have been concerned by companies such as Sycamore, Corvis Corp. [Nasdaq: CORV], Sonus Networks Inc. [Nasdaq: SONS], and others that lagged in aligning their business models to market realities."

"They're working hard, but this is a tough road for the less established equipment vendors," says Jeffrey Lipton, an analyst with J.P. Morgan Chase Bank & Co.

Looking at the market share of its non-switching products, it's no wonder that Sycamore's cash and optical switching are its crown jewels. Sycamore held the sixth market share position out of 10 vendors in 2001 for long-haul DWDM gear, according to market researcher Dell'Oro Group. It held the tenth market share position out of 11 vendors in the overall Sonet/SDH market for 2001. (Data for its optical switch market position was not available.)

Sycamore CEO Dan Smith remained upbeat about the company's technology. "Our software continues to be our greatest technology asset," he says, noting that Sycamore will complete its Osmine certification processes in the fourth quarter of 2002.

"Though the overall business market continues to be challenging…the optical switching market doesn't sit still," he says.

That said, product revenues were down across all Sycamore's product lines and the company pulled in as much of its revenues from services as it did from product sales.

Because of its current fit of self-scrutiny, Sycamore declined to give any revenue or gross margin guidance for the coming quarter. It only said that it expects to end the period with "well more than a billion in cash."

Sycamore shares closed down $0.07 (1.9%) to $3.58 in trading on Tuesday.

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