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Sycamore Drops a Bomb

Times are tough in the telecommunications business. They just got really tough for Sycamore Networks Inc. (Nasdaq: SCMR).

In a pre-earnings conference call, the company tonight announced that it expects a major revenue shortfall for the quarter and that it will downsize and take special charges in a corporate restructuring in response to the dramatic fall-off in business. The company announced that sales for the third fiscal quarter of 2001, which ends in three weeks, will be in the $50 million to $60 million range, a huge drop from the $149 million in revenue the company reported in the second quarter (see Sycamore Revises Forecast).

Whereas Sycamore reported a pro-forma profit of six cents per share in the second quarter, it will report a significant loss during the third quarter, somewhere in the range of $150 million, in addition to taking special charges for downsizing and restructuring.

Sycamore had previously said they expected $163 million in revenue and a profit of 5 cents per share for the quarter.

The shortfall drastically changes Sycamore's financial position. Whereas just one quarter ago it was dramatically increasing revenues and beginning to generate profits, the company is now burning through capital. The question now becomes whether business can turn around before its capital -- which stood at roughly $1 billion at the end of the last quarter -- is completely incinerated.

"They say they'll burn about $150 million in the quarter, which brings them to $820 million," says Seth Spalding, an analyst at Epoch Partners. "At this rate, they have a good five and a half quarters left. If things don't get any better, that's their time horizon." The company will lay off 140 of its approximately 1100 employees and expects to take a $150 million one-time restructuring charge. Excluding the one-time charge, the company expects to report a loss of between 10 cents and 15 cents per share.

“This is shaping up to be a very difficult and disappointing time,” said Sycamore CEO Dan Smith.

Sycamore officials pointed to several factors affecting the quarter, including an industry-wide slowdown in spending by telecommunications carriers and a delay in the volume shipment schedule of the company’s 512x512-port SN16000 optical switch.

In after-hours trading on the Island ECN, Sycamore shares dropped 2.56 from Thursday’s closing price of 9.06, trading at 6.56.

In light of the carrier spending slowdown and weakness in the capital markets, Sycamore's high exposure to startup carriers and CLECs appears to be taking its toll. In addition, Sycamore’s largest customer, Williams Communications Group (NYSE: WCG), appears to be winding down its initial two-year contract and does not seem keen on expanding the relationship.

One executive at Williams, asking to remain unnamed, told Light Reading yesterday that the company has been disappointed with the performance of Sycamore’s products and that they are moving to competitive switching products in the same market.

Sycamore's other major customer, 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO), also appears to be reducing orders. According to sources citing information coming from within the carrrier, 360networks has cancelled orders for OC48 line cards for Sycamore metro gear.

During a conference call, several Wall Street analysts asked Smith about customer relationships, but Smith declined to give details about the status of individual contracts, including the $400 million Williams contract, which is in its second year. “They have announced a reduction in capital spending, but orders are still coming in,” said Smith of the Williams relationship. Smith also mentioned that Williams is no longer a 10 percent customer of the company.

Beyond Williams and 360Networks, Sycamore’s customer list includes BellSouth Corp. (NYSE: BLS), CoreExpress., Global NAPs, Tata Power Companies Limited (TPCL), and Storm Telecommunications Ltd.. With the exception of BellSouth, all of these customers are small CLECs or startup carriers targeting the data market. Such carriers, which require large amounts of funding to sustain their buildout plans, are particularly susceptible to the recent slowdown in the capital markets.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com
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iprsvp 12/4/2012 | 8:36:05 PM
re: Sycamore Drops a Bomb "The company will lay off 140 of its approximately 1100 employees and expects to take a $150 million one-time restructuring charge. "
--
That's big **** up. $150M... what the heck are they doing!! LR should get rid of SCMR from it's top ten stock listings!!!
optinuts 12/4/2012 | 8:36:04 PM
re: Sycamore Drops a Bomb yeah!

who do they think they are? lucent? :-)
optinuts 12/4/2012 | 8:36:03 PM
re: Sycamore Drops a Bomb sycamore's loss is ciena's gain. ciena does everything sycamore does, it also provides sts-1 grooming. the sn16000 is a monteray lookalike. tellium, hold your horses.
all-software-are-buggy 12/4/2012 | 8:36:02 PM
re: Sycamore Drops a Bomb Guys,
Did you look at one interesting observations. According to the article, Williams Communications is not satisfied with the product performance of Sycamore.

How can it be. When engineering managers and engineers --------
who analyse, design and code the hardware and software play politics most of the time hardly caring about the customers,

who write the code or the design the system make it buggy mostly.

who do not do any testing at all any of the time and when customers (pity them) become testing sites instead of doing any revenue generation with the boxes.

--------how can the product work. This is not with respect to Sycamore, but with respect to any software and networking companies. Revenues is based on market condition, but a true product is based on its class and quality which should never ever be compromised at any cost whatsoever high it may be.

why 12/4/2012 | 8:36:01 PM
re: Sycamore Drops a Bomb or anybody else who knows the answer:

The article says:
"One executive at Williams, asking to remain unnamed, told Light Reading yesterday that the company has been disappointed with the performance of Sycamore?s products and that they are moving to competitive switching products in the
same market. "

Any ideas on what Williams did not like in particular? Is it really software, as
all-software-are-buggy mentioned?

puddnhead_wilson 12/4/2012 | 8:36:00 PM
re: Sycamore Drops a Bomb This is from Schemer's conference call, 3:12 into Q&A, I played it a few times to make sure i have it exactly word-for-word:

"Related to grooming fabric, have we seen any kind of pricing pressures from Nortel or Ciena going into this space?" A: "We have not seen a change in the pricing environment for that type of product in the marketplace, and, as you've stated, there is a limited set of participants in the marketplace at this point in time, and that would be contributing to that."

Tell me anyone if I am misunderstanding this, but doesn't this reinforce the Williams unnamed source, and imply pure and simple that SCMR is just not executing, not that the market for switches is suffering that much? In other words, this problem is largely SCMR-specific, and CIENA isn't out there taking away business by undercutting their price, nor would there seem to be any need for them to do so to get their contracts?
y2k 12/4/2012 | 8:35:58 PM
re: Sycamore Drops a Bomb "doesn't this ... imply pure and simple that
SCMR is just not executing, not that the market for switches is suffering that much?" -- puddnhead_wilson

Absolutely, the same can be said about Cisco dumping Monterey. The demand for all-optical network is definitely there and Ciena and Corvis are having a field day. Here are some testaments from one happy customer.

http://www.lightreading.com/do...
http://www.broadwing.com/press...

--y2k--
lu-alum 12/4/2012 | 8:35:57 PM
re: Sycamore Drops a Bomb Gotta agree with optinuts. With the demise of the Montery product and the issues that sycamore is having, )ot to mention that tellium is a dog) ciena is looking damn good. Core director is the ONLY core optical (Yes I know its OEO) switch with STS-1 level grooming.

And to scmr...
Thanks for taking the time to hose us ALL Dan and Desh!! Thanks for waiting for the one blessed up day we've had in a month of Sundays and then ruining the party for all of us.
lu-alum 12/4/2012 | 8:35:56 PM
re: Sycamore Drops a Bomb BROADWING LIGHTS ITS ALL-OPTICAL SWITCHED NETWORK NATIONWIDE
Broadwing Communications lit its all-optical switched network nationwide. Its eastern optical ring was completed in February, followed by its central optical ring in March. The all-optical network now spans 18,500 miles across the US. Broadwing completed its field trial of Corvis' long-haul network technology last June. In December, Broadwing deployed CIENA's CoreDirector optical switching systems to provide on-ramps to the network. Broadwing said its new network would enable it to deliver liquid bandwidth, "which for customers means bandwidth that can be poured anywhere, anytime, in any amount, and billed only for what is used." http://www.broadwing.com/press...
Broadwing, April 5, 2001
rafaelg 12/4/2012 | 8:35:55 PM
re: Sycamore Drops a Bomb Guys,
Beware of unnamed sources...

The true fact is the 150M charge...
How can one not see that coming if in close contact with the corporation? Seems like a mislead to me. Too drastic for a company that supp. had previous good qrts.

Smells like fish...

:-)
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