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
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opticaldude 12/4/2012 | 10:21:25 PM
re: What's to Save Sycamore? BB,
Love your thoughts on this. I think that all these start ups are still living in the past and dreaming of days when getting money was like it was growing on a tree in your back yard. It also still looks like a few of them are actualy making people think that it is just a matter of time until we get back to those days. I for one am not holding my breath.
Optical_kleenex 12/4/2012 | 10:21:25 PM
re: What's to Save Sycamore? Was there any explination on why Jeff Kiel bolted (besides the obvious)?
BB 12/4/2012 | 10:21:25 PM
re: What's to Save Sycamore? all these optical switching companies believed they had "disruptive technology" but they only had "sustaining technology" and they bet big on conquering the market as a result. For a technology to be really disruptive it chases undefined market.....does not go head to head against the heavyweight... (for more read "the innovator's dilemma"). they may have enough cash to survive but only at a shadow of their expectations. learn this now and learn this well...optical switching is "sustaining technology" and thus isn't replacing any of the incumbents anytime soon. hope may be to find use for optical networking outside of data Xport.


enigmata9 12/4/2012 | 10:21:25 PM
re: What's to Save Sycamore? Somebody say amen!
Kangaroo 12/4/2012 | 10:21:22 PM
re: What's to Save Sycamore? Hey, give these new companies (Sycamore, Corvis, Ciena,..) a break, they have great innovative products.

What they do not have is a Sales and Support infrastructure that the big Carriers around the world are comfortable with, they are often excluded from bidding for lack of Support.

Given that there is a lack of pressure to build out networks, Carriers are now taking more conservative approach and going with incumbent Vendors rather than take a risk with an innovative new Vendor with no local Support infrastructure.

Sycamore, Corvis, Ciena... need a "big daddy channel to market", and I think in the case of Sycamore Siemens would be the logical choice.

If you look at the Unisphere/Juniper deal it delivers for a Juniper a "big daddy channel to market" and a support Infrastructure -in Siemens, that large Carries around the globe expect. So not surprising that Juniper went with Unisphere rather than Redback.

Dan Smith CEO of Sycamore and Craig Benson (Ex-Cabletron and a relative of Riverstone ) is on the Board of Unisphere. Having just sold Unisphere and delivered Siemens some cash it will be interesting to see what Siemens does with this cash.

It looks like a bit of a "love triangle" forming between Siemens---Juniper/Unisphere----Sycamore. Don't be surprised if Riverstone join in.

sroy 12/4/2012 | 10:21:22 PM
re: What's to Save Sycamore? Based on spending priorities in the core space DWDM was a disruptive technology, the cost structure being attacked was that of deploying fiber and the associated cost structure with lighting it. No IXC/LEC talks about how many new miles of fiber they will lay out in the coming year, they know use DWDM on any near-capacity lit strand.

The problem that they, Corvis, Ciena, and of course the optical units of Nortel, Lucent, Alcatel, Siemens, etc. have run into is the need for the new bandwidth at the core is almost non-existant now without drivers to push data at the access/metro. Until something fundamentally changes this, there will not be demand in the core.

optical 12/4/2012 | 10:21:19 PM
re: What's to Save Sycamore? Does anyone find it odd that Sycamore doesn't have a VP Sales for North America? Does anyone know what kind of a sales force is left for NA? Just curious.
Mad Max 12/4/2012 | 10:21:15 PM
re: What's to Save Sycamore? Sycamore has over 100 in their outside sales and sales support roles.... which is substantial given A) the market opportunity and B) their minimal market traction. Desh and Dan have delayed filling the VP Sales position because their current strategy is hibernation. Nobody can say they donGÇÖt have market coverage like the big guys!

Couple of comments:
- Sycamore based their entire (original) strategy on the belief that the RBOC business model was dead. That the telcom people and culture were old and tired and clueless, that IP mentality would dominate because it was inherently smarter. But even he under estimated exactly how slow and stoggy the "RBOC's" were (are). He also missed WHY it was so important to be slow and stoggy when your margins are razor thin. And by the way, just like Apple found out, the smarter choice doesn't mean squat.

- Understanding the feeding frenzy of the 90's, Desh choose to offer smoke and mirrors. Hey....Life is so much easier when you can avoid providing actual value and just bribe the likes of Enron.... I mean Williams instead....but, they all got rich.

- Desh extended his contempt for telcom to his hiring practices, opting for router people rather than telcom people. They executed well on an innovative strategy, only neglecting the small issue of how the market (the real market) would adopt it.

Even so, they have ~$1B in the bank and some good optical assets. They consider themselves a public startup without funding issues. There is no reason why they can retrench and come out strong... but only if they can pull their collective heads out of their router asses.

Tom Yumsoop 12/4/2012 | 10:21:11 PM
re: What's to Save Sycamore? Friends,

Very interesting (and enlightening) discussion on Sycamore's strategy.

But, what about Sycamore's products.

Will an "alignment" with an "established vendor" like Siemens be enough to gain ILEC mindshare (and hopefully deployment)?

Or, has Sycamore designed something "odd" into its product line that would "spook" the "stodgy" ILECs (e.g., a packet-based switch fabric for a SONET system)?

A commnet by "Mad Max" ("Desh extended his contempt for telcom to his hiring practices, opting for router people rather than telcom people.") prompted this question.

Serenity now,
Mad Max 12/4/2012 | 10:21:09 PM
re: What's to Save Sycamore? IMHO, they have some excellent optical technology formed in conjunction with several of their component vendors. But their fundamental premise is untenable to the ILEC market. Their architecture espouses an optical mesh topology with intelligent optical switching to route signals (OEO).... an optical IP network if you will. In their mind, the "wasted" bandwidth of dedicated protection (associated with SONET rings) made their solution more economical. I believe they were saying 20% to 30% more economical.

In reality however, the complexity of associations between terminals ((n^2)/2) quickly limited the size of the network. More importantly however (to the ILEC market), it provided no migration path from today's SONET ring based topology to this mesh. So they ended up with great products which were only slightly more bandwidth efficient than what ILECGÇÖs have todayGǪ. And required a complete reforming of the existing OAM&P processes. Of course, CLEC's were less encumbered by a significant embedded base.

One other problem they had is that they focused on a Ultra-long haul transport product rather than a IOF version. Besides the collapse of the ULH market, the IOF transport market represented 90% of all applications.

The GREAT strategy they did spearhead is the focus on system integration and de-focus on in-house development. ItGÇÖs too bad Lucent and NOTEL couldnGÇÖt get past their NIH behavior to learn from Sycamore in this regard.

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