BOSTON CAPITAL
As Sycamore's clients get
squeezed, Desh and Dan
billionaires no more
By Globe Staff, 3/2/2001
Here's a lesson torn from the pages of the
Business 101 textbook: If all your customers
are having problems, you have problems, too.
Everyone on the short customer list at Sycamore
Networks Inc. is facing squeezes of one kind or
another right now. All of them have to do with
money.
Business had been growing by leaps and bounds at Sycamore, the
high-profile maker of optical network equipment based in Chelmsford. But
two weeks ago, the company joined the corporate chorus warning of an
inability to predict business over the next six months.
Sycamore, hands down the state's biggest first-year stock success story of
all time, has plunged 91 percent in the last year. The company, valued at
more than $40 billion at its peak, now trades at a market capitalization of
$4.7 billion.
No one has taken a punch in the portfolio like the people who run the
company, which went public in October 1999: chairman Desh Deshpande
and chief executive Dan Smith.
Desh and Dan, as they are known everywhere, are Sycamore billionaires
no more. The pair, who own about a third of the company between them,
clock in at about $800 million apiece today. Take a moment to pencil out
what a 90 percent decline meant to them.
For his part, Deshpande will shed no tears in public. ''I'm as excited today
as I was a year ago, when the stock was $200, and two years ago, when
the stock was zero,'' he said. Sycamore stock closed yesterday at $17.19
per share.
''The value of the stock price is not what I can control,'' he said. ''What I
can control is the fact that we have the right strategy and are building the
right products.''
The problem for Sycamore and most other optical gear makers is that their
big customers building out high-speed telecommunications networks have
hit the spending wall.
''They [Sycamore] are doing exactly what they said they would do, and the
way they're doing it is very smart,'' said Barbara Friedman, manager of the
John Hancock Mid-Cap Growth fund. ''The problem is demand is drying
up; it's a macro issue.''
Conventional wisdom, spoken a year ago, insisted that those telecom
customers would continue to spend because they couldn't risk being left
behind the technology curve. No one says that anymore, because the
customers have been abandoned by capital markets and can't raise the
money to spend. No one says anything today, because no one knows what
will happen over the next six months.
''We're all clueless together, companies, investors, and the Street.
Everyone. The watchword is visibility, and there ain't none of it,'' said
David Smith, portfolio manager at Loomis Sayles & Co. in Boston.
Sycamore may be particularly vulnerable because its products, off-the-shelf
hardware brought to life by the company's proprietary software, are way
out there on the cutting edge. A cash-strapped customer may logically think
to save money there first.
One danger signal: A huge customer, Williams Communications Group
Inc., announced two weeks ago that its capital spending budget had been
trimmed by a ''couple hundred million dollars.''
For a young company working in a developing field, Sycamore has ramped
up revenue and earned a profit in short order. It has earned $33 million on
revenue of nearly $270 million in its first fiscal half, which ended Jan. 31.
But there's a catch on the bottom line. Sycamore doesn't really make much
money selling products to customers. All but $2.5 million of its $51.2
million pretax profit in the first half was interest income, earned on hundreds
of millions of dollars Sycamore raised through its IPO and a big secondary
offering, when the stock traded at $150.25 a share.
As for revenues, an unspecified chunk of them were recorded because
Sycamore loaned its customers the money to buy the gear in the first place.
Sycamore has disclosed commitments of up to $200 million in the
controversial practice of customer finance, but will not say how much of
that credit has actually been drawn down.
The good news: Everyone agrees Sycamore's talent is first-rate and its
products attractive. It helps that the company has nearly $1 billion in cash
and marketable securities to see it through tougher times.
''This game is not really a game for a year or two or three,'' Deshpande
said. ''Even if the visibility is somewhat diminished, the market in the long
term is very robust.''
His message: It may take longer to build out and upgrade the high-capacity
communications networks everyone saw for the future, but there's no doubt
it will happen.
And no one thinks Deshpande and Smith, who made a fortune building and
selling Westford-based Cascade Coummunications Corp. four years ago,
are going to turn Sycamore into another subsidiary in the meantime.
''There have always been a lot of [East Coast] start-ups, including
Cascade,'' he said. ''But most of them have become colonies of the West
Coast. This time, we're committed to building an anchor company in
Massachusetts.'' |
