VENDOR FINANCED DEALS DO NOT SEAM TO BE A MAJOR REASON OF CONCERN. Excerpts from SSB 2/14/01
On the fiscal 1Q01 conference call, Sycamore announced two vendor financed
deals without naming the companies. One turned out to be CoreExpress and the
other Storm Telecom. Given the current market environment, some investors are
likely to continue to view the vendor financing arrangement as a concern. On
the earnings call, management provided a detailed update on its vendor
financing activities. Sycamore's management feels confident in the business
models of these two customers. It also pointed to the fact that the two
companies have accessed cumulatively more than $800 million in capital from
top tier investors. We believe Sycamore's vendor financing and revenue
recognition policies are conservative enough to keep the risk associated with
the two transactions at a reasonable level.
SCMR Will Recognizes Revenue On A Cash Basis. Only Modest Contribution From
Vendor Financed Customers Expected In FY01. In the quarter, SCMR announced
vendor financing with two customers totaling $200 million. To date, vendor
financing draw-downs total around $50 million and are currently included at
cost on the Other Assets line in the balance sheet. This line increased by
$44 million in the quarter. The company has not recognized any revenue on
vendor financing in 2Q FY01 and expects only a modest contribution from these
deals over the next quarters. The company does not anticipate vendor
financing commitments will exceed $250 million in either 2001 or 2002.
CoreExpress Is Sycamore's First Vendor Financed Customer. Sycamore
announced in December that it has signed a multi year contract for its
SN16000 platform with CoreExpress Extranet. CoreExpress specializes in
providing premium services such as performance monitoring, security and
extranet connectivity, including reliable delivery of mission critical
applications over its 22,000 mile fully redundant OC-192 network.
Management indicated that the total value of the contract is up to $100
million. This was the first of the two vendor financed deals that the company
has anticipated on their fiscal 1Q01 conference call. Information required to
assess CoreExpress' financial health is scarce given that this is a privately
owned firm. Nevertheless, we believe that Sycamore's conservative revenue
recognition policies are likely to keep the risks associated with this deal
at a reasonable level. Sycamore's management indicated that they recognize
revenue from vendor financed deals on a gradual basis as the customers pay
off the obligation. Moreover, CoreExpress announced that it has secured $573
million in funding from major names including: Benchmark Capital, Morgan
Stanley Dean Witter, Nortel and Cisco among others. Sycamore management
indicated it does not expect this agreement to have a significant impact on
its fiscal 2001 revenues.
Sycamore To Provide Up To $100 Million In Vendor Financing To Storm Telecom.
On February 1st Sycamore announced an extension of its strategic agreement
with Storm Telecom. The agreement allows for the purchase of an additional
$60 million worth of equipment following the announcement of $40 million
announced in March 2000. Storm is expected to deploy SN16000 and SN8000
equipment as part of its international mesh based intelligent optical
backbone now built throughout Europe. Storm telecom has strong financial
backers as well. In February 2000, Storm's management completed a management
buy-out backed by investment affiliates of Soros Private Equity Partners.
Further backing by affiliates of Merrill Lynch & Co. came in May 2000.
Sycamore Continued To Increase And Diversify Its Customer Base In The
Quarter. Customer concentration is one of the typical risks faced by
companies in Sycamore's developmental stage. The company went a long way
from selling exclusively to Williams back in 1999 to 14 service providers and
one international distributor today in the US and abroad. This compares
with 11 service providers plus one international distributor in the previous
quarter.
Sales To Williams Continued To Decline As Percentage Of Revenue. According
to Sycamore in the fiscal 2Q 2001 Williams accounted to 50% of revenues as
down from 60% in the previous quarter and 92% in fiscal year 2000. Based on
this information, we believe that Sycamore is more than 50% through their
contract with Williams.
SCMR Announced Two Additional 10% Customers Besides Williams. On the
earnings call management noted that the 2 additional 10% customers in the
current quarter are not the same as the 10% customers in the first quarter
and pointed to this fact as an illustration of order lumpiness.INVESTMENT THESIS
We believe Sycamore is one of the strongest of the next-generation players in
the optical networking arena. Sycamore is well positioned to benefit from
the transition of carrier networks from a ring to an optical mesh topology.
As a result, we believe that Sycamore will be one of the fastest-growing
companies in this arena and should continue to add market share. Sycamore
is one of the few companies that is well positioned with purpose built
equipment into each of the segments within the optical end markets.
Sycamore's goal is to drive the integration of intelligence into the optical
transport arena that should improve the competitive capabilities of its
carrier customers. |
