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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Tom Yumsoop 12/4/2012 | 10:21:07 PM
re: What's to Save Sycamore? Mad Max,

Thanks for the intelligent response.

After reading your response, I quickly looked at the Sycamore website to become slightly familar with its product line.

Let's say we concentrate on what seems to be their "flagship" products, the SN16000MC and SN16000SC.

Also, for now, let's ignore the control plane (mesh based networks) aspects of Sycamore's strategy. I assume that the SN16000 products will handle the "termination" of multiple SONETs rings from the "access" and "core IOF" networks.

Based on my limited analysis, it seems that the SN16000 products would be similar in capabilities to the Lucent LambdaUnite.

Can you provide your insight on this comparison?

Mad Max 12/4/2012 | 10:21:05 PM
re: What's to Save Sycamore? I'm glad to offer (just another) opinion. Actually, that's the problem with the SN16000....it does not terminate rings. Similar to the IP model, protection is provided by rerouting failed signals through the mesh. Given that all ILECs heavily rely on rings, it makes network migration (to mesh) nearly impossible.

At the risk of being dismised as a Lucent groupie, I view the Unite as a supperior architecture in terms of optical technology used and (particularily) in terms of topology supported. It clearly fits the current (and long term) ILEC/IXC network model. (damn... now I've gone and shaken the bees nest!)

chromatic aberration 12/4/2012 | 10:21:04 PM
re: What's to Save Sycamore? Mad Max
- Desh extended his contempt for telcom to his hiring practices, opting for router people rather than telcom people.

This contempt for 'all things old' probably explains the apparent contempt for quality as well. From what I've heard the equimpment they sold to a network in Bombay, India, was of extremly poor quality. Hardware, and the much touted software.

Tom Yumsoop 12/4/2012 | 10:21:04 PM
re: What's to Save Sycamore? Mad Max,

Thanks. I'm starting to understand.

Also, you have whetted my curiosity appetite.

Specifically, what in terms of optical technology used by Lucent is better?

(In a previous post, I believe you indicated that Sycamore used "off the shelf" technology. Can I assume that Lucent is better solely based on Lucent developed components?)

Thanks again,
Mad Max 12/4/2012 | 10:20:51 PM
re: What's to Save Sycamore? Hmmmm. I don't mean to imply that Sycamore has less capable componentry than Lucent just because they looked to others to design and build them. On a cost basis, it's probably just the opposite....and maybe on a technology basis as well. But I'd hate to get into who has what.

Strictly from a functionality perspective to the ILEC market, I don't see the OSPF/GMPLS only architecture as viable for several years... until OOO switching is need. The Unite is also (arguably) denser, cheaper and synergistic with the Lucent portfolio (Extreme, Router, DMX, Ion, etc.).

Regarding Sycamore's performance in India, every vendor has those horror stories. I believe Sycamore has overcome them.

telco head 12/4/2012 | 10:20:49 PM
re: What's to Save Sycamore? MM.. thanks for providing good posts/reading.

I agree with your comments that ILECs need
the support for ring architecture.

The leading vendor in this space (Ciena) has
been adding the support for UPSR/BLSR so that
its solution can provide support for terminating
all the metro rings and in addition provide
mesh architecture in the core which is considered
more efficient. And sure, the vendors use
different solutions in there for switching e.g.

Is SCMR not planning to support UPSR or BLSR?

telco head
Mad Max 12/4/2012 | 10:20:43 PM
re: What's to Save Sycamore? Is SCMR not planning to support UPSR or BLSR?


Good question. It doesn't appear to be in the plans today and it certainly goes against their existing strategy. But as part of their ongoing product/corpoate overhaul, they may reconsider.

Ciena took a big chance implementing a proprietary control plane(to GMPLS), but understood well the need to evolve the network and co-exist with rings.

Outsider 12/4/2012 | 10:20:42 PM
re: What's to Save Sycamore? If Sycamore has all of these problems, which optical system company stock would you then invest in today to see some upside in the next 3 years? (Insiders, especially Sales people please speak up.)

lettherebelight 12/4/2012 | 10:20:39 PM
re: What's to Save Sycamore? MM,

You said: I'm glad to offer (just another) opinion. Actually, that's the problem with the SN16000....it does not terminate rings.

Although I am not a connoseur, all the information on their web site (even the diagrams) indicate that the SN16000 DO terminate rings (close rings). By the way, they also say they can terminate linear, ring, and mesh all at the same time in the same unit.

Am I wrong or are you misinformed about this?

Phanatron 12/4/2012 | 10:20:39 PM
re: What's to Save Sycamore? The SN 16000 can terminate rings, meshes, and linear spans on the same box.
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