Sycamore Enters Crisis Mode
Sycamore Networks Inc. (Nasdaq: SCMR) had nothing but bad news last night after the markets closed. Not only did it lower its revenue expectations by about half, but it also announced a 25 percent reduction in its staff and a generally dismal outlook for the future.
"Every single incumbent carrier has lowered its Q1 02 capital spending outlook, and many have lowered Q2,” said Daniel E. Smith, president and CEO of Sycamore, on a call with analysts last night. “I’d be surprised if they even meet that. Long-haul transport has been hit particularly hard. It’s always been a cyclical business, and I think we are in the middle of a down cycle right now.”
The company lowered its revenue guidance for the first fiscal quarter of 2002, which it will report in mid-November, from its originally stated figure of between $30 million and $40 million, to between $20 million and $25 million.
The company also announced that it would be further restructuring its operations. In the first quarter, it expects to take charges of $200 million to $210 million. Roughly $100 million to $105 million will be written down for excess inventory and purchase commitments. Another $7 million to $8 million will be charged for related workforce reductions of approximately 240 employees. And $93 million to $97 million will be charged for consolidation of facilities and the write-down of certain impaired assets, such as writeoffs from vendor financing, as well as certain strategic equity investments.
The company expects to report a pro forma net loss for the fiscal first quarter, which excludes amortization of deferred stock compensation, payroll taxes on stock option exercises, restructuring, and other charges, in the range of $40 million, or $0.16 per share, to $44 million, or $0.18 per share.
Smith cited three factors that contributed to Sycamore’s current situation. First was the aforementioned carrier spending cutbacks. Second, some business that was expected to close has fallen through. And third, he cited longer evaluation periods for products, which has lengthened the sales cycle and further pushed out revenue.
While analysts aren’t surprised by this pre-announcement, some say they had expected Sycamore to announce that they were doing more to remedy the situation and return the company to profitability. The layoffs had been expected in many quarters, but some had expected them to be larger (see Sycamore: More Layoffs Coming?).
Rick Schafer, an analyst with CIBC World Markets says he doesn’t think that the company has trimmed enough of its expenses to meet its stated profit margin goals. On the call, Frances M. Jewels, CFO for Syacmore, said that the company plans to improve the current 5 percent to 7 percent gross margins to about 20 percent over the next few quarters. But she also said that the announced cuts were all the company planned to make. This means that the only way for the company to reach its 20 percent gross margin target is if sales volume increases, something that seems highly unlikely given the fact that the book-to-bill ratio is expected to be below one for the next two quarters.
”The outlook is pretty grim,” says Schafer. “If you say that you’ve made all the cuts you can but volume still remains low, how can you expect to improve margins? It doesn’t make sense.” Others say they are disappointed that the company didn’t announce a dramatic change in its product strategy. Kevin Slocum, an analyst with Wit Soundview says he would like to see the company get rid of its SN8000 and SN10000 product lines. He says the company has never made significant traction in the transport business and should focus on its SN16000 optical switching product.
“I wanted to see them do something gutsy and bet all the marbles on the SN16000,” he says. “I know they have a lot of dough in the bank, but I think they need to dedicate it to making sure that there is a valuable Sycamore story in the next couple of years. The SN8000 and SN10000 don’t strike me as important products to be spending their cash on.”
Sycamore was trading down 0.74 (18%) to 4.10 in after-market trading.
— Marguerite Reardon, Senior Editor, Light Reading