CSFB maintain BUY, PEG < 1
Excerpts follow 2/14/01
SN8000 still dominates product mix; future largely hinges on switching products: Once again the
SN8000 optical transport node accounted for the bulk of revenue in the quarter. As of the end of January,
more than 700 nodes have been deployed in 12 carrier networks. We estimate aggregate contribution from
the SN6000 and SN16000 was less than 15%. The Company has not yet recognized revenue from the
SN10000 and SN3000/4000 products.
New product development initiatives appear to be on-track. The SN16000 switch is arguably the
Company's most important product. We believe its 512 x 512 size, optical backplane, STS-1 grooming
capabilities (which should be available by end of Q3), and transparent upgrade path should position the
16000 product well. However, competition in this space continues to intensify from Ciena (CIEN/$69/B),
Tellium, Corvis (CORV/$15/B) (Edge Switch and Optical Switch), and in the future Brightlink, Cinta,
Nortel (NT/$30/B), Lucent (LU/$14/LTB), Calient, and others. Progress with the SN3000/4000 and
SN10000 also appears to be solid. Deferred revenue from SN3000 shipments should flow through this
quarter, but competition in this market from Cisco (Cerent) (CSCO/$29/B), Ciena (Cyras), Redback (Siara)
(RBAK/$31/NR) and others is tightening. Management is optimistic about the SN1000 and expects sales to
exceed SN8000 sales during FY:02. Given the technical hurdles associated with ultra long-haul
transmission and the nature of that market, we believe the sweet spot for this product may prove to be
"standard" long-haul applications.
Awaiting traction with incumbents: During the quarter Sycamore continued to expand its customer base,
but we're still awaiting contracts from IXCs and (later) ILECs. The Company recognized revenue from
fourteen service provider customers and one international reseller (up from ten and one, respetively, in the
prior quarter). Williams (WCG/$16/NR), with greater than fifty-percent of sales, was again the largest
customer. Two other customers accounted for more than ten-percent. In light of Williams' comments today
at its analysts meeting indicating this carrier will reign in capex this year, we think upside at this customer
for Sycamore may be limited. However, the relationships with 360Networks (TSIX/$12/NR) and a number
of other customers remain strong. However, the issue remains Sycamore's ability to add new significant
new customers, especially as the Williams contract winds down.
Lowering estimates to reflect lower end of guidance range.
To reflect the lower end of management's guidance range we are adjusting our estimates. New
estimates are $604M/0.23 for FY:01, and for FY:02 we are going from $1057M/0.37 to $1005M/0.32. At
current levels, Sycamore clearly trades at a discount to most of its peers. Moreover, even using our revised
estimates, the stock trades at a P/E-to-growth of less than one. Clearly at this valuation, the stock has room
for appreciation should visibility improve. We are maintaining our BUY rating on SCMR shares. |
