Pat, I updated the CC for the Q&A
Sycamore Networks 2Q financial call, Feb. 13, 2001
Dan Smith
Pleased with results. 149.2 rev. 414% up, 24% seq. Net income of 18.1M, or 06. , a penny above consensus.
Progress on strategic fronts:
· Products: expanded breadth from core to edge, transport milestones [lists], 0C192 trials proceed to progress. Long haul this q and Metro next. Storm was new customer for core, sm8000. Half customer base uses the SM8000. Important inroads with long-haul and ultra-long haul. Will ship this Q and volume in 4Q. SM10000 goes up to 10g, and 4,000 kms with regeneration. OC3 to OC192. Added capabilities being developed. [for GigE and OC768] EtherOptics will extend current capabilities. SM8000 will be majority of revs in 2001. In 2001 SM10000 will increase. Switching: SM16000 intelligentOptical switch progressing with new customers. Rev. grew substantially from Q1. Will contribute in ’01 and may be 10 to 15% of revs. $15B market in 2004. Reach majority of mesh networks now. 512 X 512 added this Q. Allows new trials. Will have grooming capabilities by spring. Component constraints. VCELs worked through. Same challenges going forward. Also monitoring grooming fabric and in process of verification. Hoping for shipping this Q. If we don’t make it, we won’t be able to meet targets.
Optical Edge unit --- ahead of plan in terms of content and rev contribution. First customer now under way. LDCon(?) in UK is under way. All-switch intelligent network capability. Vodafone is customer for wireless. Becoming important in Metro environment going forward. ESNI build-out, excellent progress. Slight impact on margins going forward.
· Financial details: PL --- rev. 149.2M, 414% increase y/y, 24% seq., btob over 1, Williams reps. 50% of rev, declining as percent of rev, two new 10% customers this Q. Q1 deferred rev ???? consists of new product introductions and new features. Q1 deferred was notably higher b/c of 1) cust deployment, 2) new product intro, 3) new introductions . . . Should be $10M going forward. Vendor financing shipments aren’t represented. This Q we shipped to some. Rev. was from SM6000, 8000 and 16000. 8000 was majority, 6000 modestly. Rev. project: 8000 will be maj. 6000 modest contribution. SM10000 will cont in latter part of ’01. Edge shipping to new customers and are deferring revenue. This will come into stream in Q3. Upside potential in edge products. Q3 and Q4 of ’01. Increase international revs, over 20% this q. 27% gms. SM increased to 15%, SG&A were 3%, consistent with last Q. 4M increase in “other.” 18M was 12% of rev.
Balance sheet: Cash and equiv 1.4B, down from Q1 of 81M, increase of receivables. . . up 54M to 95M. Due to expanding customer base and trend to longer paying cycles from international. DSOs were 58 days, up 28 days. DSOs will be 60 to 90 days going forward. Inventory 66M up ?, new products and enhanced features. 33% raw, 45% in WSP, and 22% in finished. Inventory turns were 4.8, unchanged. Headcount 1071. Half in R&D and one third in sales and customer support.
Customer financing $200M we will extending $100M to ? Expanded rel. to Storm for $100M. No rev. on vendor financing during Q. Modest in the next Q. Together they have access to $800M in capital. Not over 250M in ’01 or ’02.
Desh:
Feb. 17 we will celebrate 3rd anniversary of Sycamore Networks. When we founded Sycamore, one goal was to bring to market solutions for customers for optical network. Reduce infrastructure and increase revenue growth. Intelligent optical networking. Approach that’s validated by financial entities and customers. Growth of telecommunications industry: reevaluation of cap-X makes it an interesting time in industry. Challenge is to derive more revenue from public networks. Current model is under pressure b/c of pressure on bandwidth prices. Will have to add value-added services. Overall cap-X --- I believe the value proposition of intelligent op network is not in question. Confident service providers will continue to buy services. One tech that’s gained attention is intelligent optical switching. B/c It brings increased simplicity and scale. It enables technology to drive cost of networks down and provide growth. As ISPs add services they will migrate to more efficient networks --- mesh. In 2 to 3 years it will prevail. Move to mesh architecture needs software intelligence at core. Some service providers, the transition will be incremental. Others will have mesh as the basis of network. We will be leader in this sector by end of calendar year. Why? Software. This plays an integral role in optical network/platform. This is beginning of new era of communications. Provisioning of bandwidth on demand will become mandate.
Dan –
Effect of Capital spending? Many have noted a slowing. 1) delays by incumbent service providers, 2) limited access to capital by emerging carriers. Incumbents are coming off high spend years, without parallel income in revenues. Demand for bandwidth will require additional spending. Will have to decide where to focus, metro or long haul? Some uncertainty for next two quarters. We may have challenges over these two quarters. We’re transitioning from emerging carriers to established. In spite of our success, prolonged conditions could impact us. This environment is more challenging. Emerging carriers were early adopters. Their success in marketing puts pressure on incumbents. This provides opportunities. This could impact the rate of adoption. This restricts our short-term visibility. Q3 and 4 are more conservative. Despite these challenges we are optimistic. What are top priorities? 1) successfully ramp product line, will build on this, engineering will support this portfolio, 2) expand customer base to more established carriers; partner with those who will be successful, 3) continue to manage our component suppliers as partners, must establish long-term relationships to support our needs, 4) carefully manage SCMR and focus on long-term vision. Focus on systems to take us to the next level.
Fran:
Guidance: Next 2 Qs and FY01, macro economic trends affecting us, no change in guidance, in range of 205 to 210% y/y, this guidance involves a decrease in sequential growth. We are not changing this at this time. GMs for 01 to decline to 45%, 2% below Q2, result of new products, product mix shifts, and additional in EFINT. New Products: SM30000 and 10000, Q3 and Q4 that won’t absorb startup costs. Economies of scale in RY02, SM 30000 margins will be lower b/c of competitive pricing. SM16000 will be higher b/c of software content. Edge ramping we anticipate any margin improvements by 16000 will be offset by ramp in SM3000 in short term. EFINT costs. Our products require complex buildouts. Short term we will build infrastructure to support deployment. Forecasting GMs is more difficult.
Expenses, increases in dollars, but decrease as % 2 to 3 percentage points. Q4 will decrease 3 to 4%. We will reduce non-essential spending. Interest income, decrease to 22M in Q3 and 21M in Q4. Tax rate at 34 to 36% for balance of year. Q2 281M shares outstanding, will grow 3 to 4M per quarter.
Consensus range was 23 to 24cents. We project these will be unchanged.
For FY02. Left guidance unchanged. Rev. growth of 65 to 70% off of 01 numbers. GMs moving ½ percentage each quarter off of 46.5%. Operating expenses will trend down out of 01. EPS of 32 to 39 cents, and based on guidance we will see consensus at low end of this range.
Moving out of Q2 01, we are extending range and reach of solutions. We have near-term challenges.
Q&A:
Q: On customer base, the 2 additions to 10% customers, how did this change?
A: Were not the same as Q1. Essentially orders tend to be large and lumpy. They can change in any given quarter.
Q: How to change?
A: Significant relationship with customers we’ve announced, and anticipate one or two will be significant in coming quarters.
Q: 512X512, any change to ASICs? Talk that you need a higher grooming density.
A: This is a different component that drives that piece.
Q: Gave guidance for optical edge for ’01, what about metro market for ’02? What is competitive position?
A: Metro market is our focus, but it is dwarfed by switching and optical edge. We have good position there today. Competitive position, we will have new products, SM3000 and SM4000 fits into this story. Switching everywhere is important. Currently they’re stacking SONET rings to the sky. Our solutions have cost benefits. In ’02 numbers, we haven’t been given breakout. We expect 3000 will be meaningful in ‘02.
Q: Update on competition re switch? What about optical switch fabric and how it will compete with non-grooming?
A: Remain pleased with momentum and backlog and acceptance in the market. We are winning dominant portion of mesh networks going in. As for grooming fabric we believe we will have it in short order and have largest capability.
Q: Who do see most frequently and pricing environment?
A: The pricing environment has limited competition. Traditional suppliers have low density crossconnects. We see CIEN. Traditional application for crossconnect is in grooming capability. Not many can demonstrate the same kind software capability that we have. We can go from 64x64 in our OC48 switch to 512x512 fully groomable situation this spring. The grooming capability is a component is a feeder into the main switching fabric and is an addon.
Q: Optical Fabric?
A: We announced partnership with OMM and GLW. 16000 series has all optical interconnect and backlinks Everyone who started three years ago relies on electrical interconnections. We believe we got the most effective path to integrate optical fabrics going forward. We think we built strong relationships. Optical switching now doesn’t allow any services from it now. Therefore the ability to terminate services on the OEO fabric is very important thing. As the networks have higher capacity pipes, OC-192 and higher, we see the economics start changing. The applicabilty of an all optical fabric in that part of the market called the “Deep Core” will fit nicely with the 16000 product family. All optical fabrics are a key to the deep core networks.
Q: Vendor financing drew 50M?
A: Yes, two customers drew cumulative this and last quarter.
Q: Decrease in margin?
A: The majority (75%) of decrease in margin is attributed to the product mix shift and the volume production of the 3000 and the 10000, rest was the EF&I buildout.
Q: SN16000 10-15% of rev for q4 or all FY? Ultralong haul 10-15%?
A: The SN10000 product is very unique as the same platform can support 10G waves for 4km and greater the 10G wave for a short distance without regeneration. Can do long and thin and short and thick is very unique. The 8000 will be sig contributor for metro for rev for ’01 and ’02. The SN10000 will be installed in some application instead of the 8000 in the future. The SN16000 was 5%+ of revs. The SN16000 rev are ramping as planned and see sizable increase next quarter and can be 10-15%.
Q: Edge of the network with 3000 and 4000 platform competition with Cerent and Redback? 10000 over 8000 ramp?
A: The 8000 doesn’t serve the ultralong haul, but will contribute to rev. Optical edge market is price competitive. SN3000 and 4000 have similar capability as the Cerent and Smartedge 800, we believe they are higher from a density perspective in those applications. They are stacking rings to the sky. You then have to connect those to feed in the long haul regional backbone. The power of switching is immense as far capex and more importantly lower opex. The other platforms are not multiservice do not have switching with their platform.
Q: First deployment for the SN10000? 3000 and 4000 trials?
A: The first deployment of the SN10000 is weighted toward the high capacity applications. Just announced LDCom as first customer for the 3000/4000 product. Other were existing customer. One customer is unannounced.
Q: DSO going up? 512 port with grooming ships spring?
A: DSO of 28 days increase not associated with vendor financing. Q1 DSO of 30 days was exceptionally low. DSO model is 60-90 days due to diverse customer base and more international customers. We will see 512x512 grooming fabric product rev this quarter. No one shipping close to 512 as far as the grooming perspective. Seeing interest in larger grooming fabrics going forward. 512x512 is very attractive to our customer. No magic ASIC for the 512x512. It is a three stage flow fabric and another small fabric that is provide for the grooming capability. We have shipped small grooming fabrics for the last three quarters.
Q: Williams indicated that they will not pay for equipment in 2001 until business justifies it. They were pushing out capex into 2002. Does it impact SCMR? Change in service provider spending for existing networks? Can SCMR products drop into existing networks?
A: Williams is similar to others in adopting caution tone on capex. Clearly one of the challenges for us forward. With respect to the complexity of Greenfield (new networks) vs. existing networks , we been involve in both. Greenfield which we installed from the emerging service providers and existing such as WCG. Our product is adept at both. Qualifying and testing need to be done in existing networks.
Q: Equipment vendor financing pushes lower pricing?
A: Always a buyer/seller dynamic. People who have cash try and seek an advantage.
Q: Metro market getting bids for the SN8000? Key variable in this market?
A: SN8000 compete very favorably with the niche players in metro. Wave counts that can be supported and operating costs are another issue. When stacking SONET rings, you get a lot of boxes. The benefits of switching in these application that we provide, we save capex. The metro core is a meaningful market, but dwarfed by other market segments like long haul. We have one common code branch that runs on all our platform. Helps in upgrades.
Q: IP vendor partners with JNPR?
A: JNPR and CSCO and others that generate IP packets are complementary to what we are doing and will be beneficial to us. People will need equipment to handle this increase traffic. We are adherent to standards. We have seen a requirement that says we need to see IP routing on our platforms.
Q: Standards activity? # of customers in q?
A: We are committed to following OAF standards and ODSI standards. Seeing a convergent of the two approaches. We will support either one. We will be the first to be compliant with either standard with our new products. The climb to network interface or UNI will come out before the NP/lamba switching protocol. We shipped to 14 service providers and one international distributor.
Q: Color on Europe? SN10000 component shortages such as Raman ampliefiers?
A: Great deal of activity. Western Europe is focus. Capex is a concern there also for emerging companies. Half of out customers are international. Deployment interesting on the switching side and SCMR will be a main part of that. SN10000 components could see some tightness. Have to be vigilent in that area.
Q: WCG and 360 contract?
A: 400M agreement with WCG and it was over 50% drawn down. 400M with 3600 and less than half of the contract drawn down.
Q: Can you provide end to end switching?
A: Yes, can go from block to block and across the nation. On 360 network can go across all their network. With respect to Redback, they would get a circuit from SCMR end to end. The industry needs the standards for Layer 1 and Layer 2 so industry can go end to end across the world.
Q: 512 price vs. OC-48.
A: Don’t see a price difference between grooming vs. nongrooming. SN16000 has five customers. They are deploying the product now.
Great notes on the first half by Pat.
Jack |
