Sycamore Hit by Capex Cuts

Capital spending concerns are still taking aim at equipment companies. And Sycamore Networks Inc. (Nasdaq: SCMR) is the latest optical company to find itself caught in the cross hairs.

Yesterday, 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO), one of Sycamore’s largest customers, announced during its earnings call that it is reducing capital spending targets significantly (see 360networks Posts $158M Q4 Revenues).

The service provider said it would be lowering its target by $500 million from a range of $3.5-$4.5 billion to a range of $3.5-$4 billion. One of the largest areas to be cut is spending on terrestrial equipment, which 360networks plans to reduce by $250 million over the next year. This is particularly bad news for Sycamore, which supplies this equipment and lists 360networks as one of its two biggest customers, accounting for more than 10 percent of its revenue in 2000.

These cuts have analysts nervous about short-term growth for the company, in part because of Sycamore’s recent earnings announcements, which only beat analyst expectations by a penny (see Sycamore Dodges Cisco Flu). This morning, Salomon Smith Barney, Epoch Partners, and Credit Suisse First Boston issued notes to investors.

At Credit Suisse, analyst Jim Parmalee reduced his fiscal 2001 revenue forecast to $570 million from $605 million and EPS (earnings per share) estimate to $0.19 from $0.22. "Our negative revision in the short term (FY01) reflects ongoing issues at major customers Williams and 360networks," wrote Parmalee in his research note (see Credit Suisse Lowers Sycamore Outlook).

Other analysts expressed concern about what impact the cuts will have on short-term earnings results.

“This makes us considerably nervous given that Sycamore has repeatedly spoken about the limited visibility within their business,” write Alex Henderson and Tim Anderson, research analysts with Salomon Smith Barney. “While we continue to be optimistic about the long-term prospects of the company, the short-term overhang weighing on the company’s outlook remains.”

But 360networks didn’t stop with just cutting its spending targets. The service provider also indicated that it was negotiating delayed payments with a number of equipment vendors to conserve cash flow. This is of particular concern for Sycamore, given that the company announced last July that 360networks had agreed to buy $420 million worth of equipment, including the new SN16000 optical switch, SN8000 optical transport products, and the SILVX optical network management system (see Sycamore Ships Its Optical Switch). Because Sycamore doesn’t publicly release rates or shipping schedules on its contracts, it’s hard to tell how much of the Sycamore gear has actually been shipped and paid for already and how much still remains.

“We don’t know if the contract is paid in full up front or if it's paid piece-meal,” says Anderson, of Salomon Smith Barney. “So we don’t know how much is left at this point. We choose to think of the situation in terms of lowered visibility into earnings. Sycamore has done well to this point through continued strong wins. For them to continue to grow, they need more contract wins.”

But most analysts, including Anderson, still have reason to be optimistic. For one, the company plans to ship its 512-by-512 port optical switch this quarter. It also plans to ramp shipments of its SN3000 and SN4000 edge devices soon, which should boost revenue, writes Seth Spalding, director and senior analyst at Epoch Partners, in his note this morning.

“Bottom line is that we continue to admire Sycamore's product portfolio, strong balance sheet, and management team,” he writes. “Near term, we cannot point to any positive catalysts for the stock, which we expect to trade sideways or down from here due to over-arching uncertainty. However, in the longer-term outlook Sycamore's market opportunity remains significantly larger than some of the niche equipment vendors that carry premium valuations we feel are unsustainable.”

While carrier woes have had an impact on much of the optical networking industry (the most noteworthy casualty being Nortel Networks Corp. [NYSE/Toronto: NT]), it hasn’t affected everyone equally (see Nortel's Nasty Surprise). Ciena Corp. (Nasdaq: CIEN), a direct competitor to Sycamore, announced during its earnings call this month that it saw no indication of a slowdown, and the company actually raised its guidance going forward (see Ciena: What Slowdown?).

Sycamore was hit slightly by the negative news, trading at $16.75 a share at midday, down only 2.5 percent from the previous day.

Sycamore was not available to comment at press time.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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