SCMR Business Developments
Excerpts from Epoch 2/13/01
The SN16000 is undergoing a major upgrade that would take Sycamore to the front of its class in optical switching. The new 16000, available in early spring contingent on VCSEL and ASIC availability, will feature 512 x 512 port density with sub-wavelength granularity (down to STS-1). This could jumpstart Sycamore in a business critical to next-generation optical networking. Pricing should be comparable to the company's existing 64 x 64 switch, but margins will be above the corporate average. The switch is in trials with well-recognized post, telephone and telegraphs (PTTs) and international exchange carriers (IXCs).
The SN10000 long-haul and ultra-long-haul platform will ship in modest quantities by the end of FY01. In FY02 however, the SN10000 could potentially exceed shipments of the SN8000, which makes up the majority of revenue today.
In addition to long-haul applicability, the SN8000 is an option in the metro core with industry-leading channel count and transmission distance flexibility. However, the product has failed to gain traction in that market, with contracts going to competitors Nortel, Ciena and ONI Systems at Sycamore's expense. This momentum away from Sycamore's metro product is a near-term phenomenon in our opinion, and as networks continue to evolve towards mesh topologies, Sycamore's SN8000 should establish more traction in the metro core.
Optical edge devices, the SN3000 and 4000, are seeing a faster than expected revenue ramp, and could give Sycamore upside in 3Q and 4Q of this fiscal year. We are concerned that margins for these products (particularly the 3000) are well below the corporate average (already factored into new margin guidance), due to intense competition from Cisco, Redback, and potentially Ciena in the metro segment.
Headcount grew by 167 in 2Q to 1,071 (about 50% of which are in research and development, and 33% in sales, marketing, and support). Despite a falling stock price, Sycamore appears to effectively recruit and retain employees.
Our Recommendation
The 2Q01 results put to rest several negative factors that have dragged the stock down in recent weeks, so the stock should trade up following this earnings release. Specifically, though visibility is not good, guidance did not come down as was anticipated. In addition, concerns relative to Sycamore's technology position were largely put to rest based on accelerated deployment of the SN3000 and 4000.
Consistent with our
call to action made on Feb. 5, Sycamore is still attractively valued relative to peers (see table below). Companies with much smaller addressable markets trade at a stark premium to SCMR, and continue to be fundamentally good candidates for pair trading opportunities in our view.
CY 2001E Revenue Multiple (as of 2/13/01)
Company
Market Cap.
($Mil.)
CY01E
Multiple
CY00-01E
Rev. Growth
Avici Systems 999.8 11.2x 461.6%
Ciena 20,691.2 12.2x 74.3%
Corvis 5,298.7 16.2x 373.9%
Juniper Networks 25,047.4 14.8x 151.8%
ONI Systems 5,386.4 23.4x 285.3%
Sycamore Networks 6,154.3 7.8x 112.8%
Mean 14.3x 243.3%
Source: Epoch Partners |
