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Sycamore Signs Sprint, Seeks Help

Light Reading
News Analysis
Light Reading
8/20/2004

At last, Sycamore Networks Inc. (Nasdaq: SCMR) appears to be doing something. Shares in the sleepy firm leapt up in after-hours trading when the company announced Sprint Corp. (NYSE: FON) as a new customer and said it had hired investment banker Morgan Stanley to help it undertake a strategic and financial review.

Talk of Sycamore beating out Ciena Corp. (Nasdaq: CIEN) and Nortel Networks Ltd. (NYSE/Toronto: NT) to win a deal with Sprint had surfaced late last year (see Sycamore Sneaking Into Sprint?).

Having closed the day down one cent at $3.72, which valued the company at $1 billion, news of the new customer, and that Morgan Stanley would help Sycamore to review "strategic and financial alternatives aimed at maximizing shareholder value," sent the stock racing up by 28 cents, more than 7 percent, to $4.

Sycamore founders Dan Smith, the current CEO, and Desh Deshpande had hinted at some significant news when they bumped into Light Reading at Supercomm (see Supercomm Snippets).

The news came as the optical switch vendor announced its fourth-quarter and full-year 2004 results, which showed a net loss of $44.9 million, or 17 cents per share, that exceeded revenues of $44.5 million (see Sycamore Reports Q4 Loss). Analysts had estimated a 15 cents per share loss for the year.

Fourth-quarter revenues of $14.5 million exceeded analysts' average expectations, though the loss of 3 cents per share, or $9.2 million, was as anticipated.

The company ended the financial year with $961.3 million in cash and investments, down $34 million from a year earlier.

Now the company is searching for ways to revamp itself as "our business continues to be impacted by industry-related conditions," stated Smith during the company's conference call.

And not before time, it seems. While the company is slowly increasing its revenues and cutting losses (see chart below), it is hardly setting the financial world alight.

Table 1: Sycamore Cuts Losses, Increases Revenues

Q4 2004 Q4 2003 Full Year 2004 Full Year 2003
Revenues $14.5M $10.9M $44.5M $38.3M
Operating Loss $13.4M $14.9M $60.8M $78.4M
Source: Sycamore Networks Inc.




It is also heavily reliant on a small number of customers. It derived 41 percent of its full-year revenue from one customer, the U.S. military's GIG-BE project, in fiscal 2004, and another 27 percent from Vodafone Group plc (NYSE: VOD). (See DISA Deal Is Done and Sycamore Spreads Its Roots.)

In the fourth quarter, the company generated all its revenue from just 10 customers.

Smith noted during the firm's conference call that the Sprint deal, which has yet to bring in any revenues, was completely separate from the GIG-BE project, where the carrier is Sycamore's partner. No further information was available on the Sprint deal.

And the management was keeping its cards close to its chest over the options it is discussing with Morgan Stanley and over its expectations for the first quarter of 2005. On the company's future, Smith declined to "elaborate on our strategic alternatives," saying only that a broad spectrum of possibilities would be considered, including alliances, mergers and acquisitions, financial projects such as a stock buyback or a cash dividend, and plowing on as a "standalone entity."

And CFO Frances "She's a Treasure" Jewels said the company decided not to offer any revenue or margin guidance for the current quarter because it was too hard to predict quarterly revenues from the GIG-BE project.

— Ray Le Maistre, International News Editor, Light Reading


For more info on the state of industry financials, check out the coming Light Reading Live! event:

  • Light Reading's Telecom Investment Conference, in New York City, November 10.

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