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Sycamore Raises Forecasts

Light Reading
News Analysis
Light Reading
11/14/2000

Sycamore Networks Inc. (Nasdaq: SCMR) beat expectations again on Tuesday when it announced first-quarter 2001 earnings. Analysts were looking for continued revenue growth and the addition of new customers. The message was mixed, but the overall feeling on the Street was positive, as Sycamore’s shares rose to $72 in after-hours trading.

Sycamore beat analyst expectations by a penny with income of $6 million, or 2 cents a share, for the first fiscal quarter of 2001. A year earlier, the company posted a loss of 2 cents a share.

But there are signs that Sycamore’s growth is slowing. While quarterly revenue grew 33 percent from $90.4 million in the fourth quarter of 2000 to $120.4 million this quarter, it slowed from the 50+ percent sequential growth from Q3 to Q4 2000 and the 100+ percent sequential growth from Q2 to Q3 of 2000.

Despite this slowdown in growth, on the call with investors Sycamore officials were optimistic about the company’s future. With confidence stemming from the introduction of three new product lines into the fold, Frances Jewels, chief financial officer for Sycamore, raised yearly earnings expectations 205 percent in 2001 to more than $500 million. She also raised the company's earnings forecast as much as 3 cents to 24 cents per share in fiscal year 2001.

Even with the addition of the new SN3000 and SN4000 metropolitan area products from newly acquired Sirocco Systems, along with the ultralong-haul SN10000 product and the SN16000 optical switch, Sycamore officials still say that the majority of revenue for next year will come from the flagship SN8000 long-distance optical transport platform.

Analysts and investors have also been anxious to hear about Sycamore’s customers. Again the news was mixed. From the beginning of the call, CEO Dan Smith tried to ease investors' minds regarding the rumors that there had been significant software difficulties when equipment was deployed by Williams Communications Group (NYSE: WCG), delaying the roll out of key pieces in the network.

“There is no fundamental flaw in our software,” said Smith on the call. “We pride ourselves on the ability to work with customers, and we’ve done an outstanding job. The key to our success has always been our software.”

He went on to say that lab tests are just lab tests and that sometimes things need to be worked on at the customer site during deployment. He added that this situation did not affect the company’s relationship with the customer.

As far as adding new customers, Sycamore reported that it had expanded its base to 10 customers. Still, Williams is by far the largest, accounting for almost 60 percent of its sales.

“This is going to be an ongoing issue with Sycamore until they add more customers,” says Paul Johnson, senior technology analyst for Robertson Stephens. “It’s not necessarily a negative, but more customers definitely is a sign of maturity.”

Sycamore says it hopes to expand its customer base even further and feels that the combination of its metro area access products, along with its ultralong-haul product and optical switching product will give it a broad portfolio that will appeal to established carriers looking for an end-to-end solution as well as smaller carriers looking for best-of-breed products.

But it is clear that competition is heating up, particularly from the large players. In order to combat this, Sycamore officials said the company began offering vendor financing this quarter and that three new customers are on the way.

“We expect to announce these customers once we get the legal documents done,” said Jewels. “These customers have to meet certain business milestones, and draw-downs are contingent on them meeting those goals.”

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

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