HQ:conducing >10 SN16K trials,U.S. IXCs account for two or more of these trials.
5/16/01
Still in search of incumbent customers: Sycamore has largely been dependent on two customers:
Williams, which constituted a large proportion of transport revenue, and 360Networks, which is purchasing
the SN16000. Together, we estimate these two customers represented more than 75% of Sycamore’s sales
over the last two quarters. Both of these customers have dramatically reduced their capex spending. It has
become critical for Sycamore to gain traction with top-tier IXCs and ILECs - a feat that is becoming more
difficult in the current environment.
SN16000 switch remains Sycamore's most important product: Given carriers' current priorities, it
remains critical for Sycamore to accelerate volume production for its large-scale grooming SN16000,
especially considering Ciena's (CIEN,$55.44,B) early success with its CoreDirector and Nortel's
(NT,$13.4,B) planned Q4 or Q1 release of its HDX. Although SN16000 revenue was down Q/Q, the
Company is conducing >10 trials, and we believe U.S. IXCs account for two or more of these trials. The
grooming 16000's ramp has been slow to date due to a number of supplier-related problems (VCSELs,
outsourced switch fabric). But we believe most of these problems are behind Sycamore, and the Company
should be able to leverage this product's feature set (512x512 port count, STS-1 grooming with arbitrary
concatenation, density, and availability of OC-192 interface) to address a sweet spot in the generally soft
carrier market. Importantly, margins for this type of product should be >60% once production problems are
ironed out.
Good news/bad news - SN10000 transport should eclipse slowing 6000/8000. The bad news is that the
SN6000 and SN8000 products, both of which are optimized for specific, regional applications, appear to
have slowed dramatically. The good news is that the new SN10000 product addresses the larger but more
competitive IXC market. While this segment remains soft in general, even small market share gains could
meaningfully impact Sycamore's top line. Considering the technical hurdles associated with ultra long-haul
transport (1200-4000+km), we believe the best application for the SN10000 is high-density "standard"
long-haul applications (<1000km). In light of the overall pricing and competitive environment in the long-haul
DWDM segment and Sycamore's unproven track record for this type of equipment, our assumptions
for the SN10000 remain reasonably conservative.
Sirocco SN3000/SN4000 basically on-track. As far as other new products go, the SN3000/4000 from the
Sirocco acquisition appear to be basically on-track in the context of an overall spending slowdown. While
the SN4000 should ship in the current quarter, the SN3000 contributed to Q3 revenue. Although the
Company has gained limited traction with existing customers Vodafone, 360Networks, and LDCom, we
are also looking for success with some of the larger IXCs and ILECs that are planning to deploy this type
of equipment. Furthermore, in the increasingly price competitive metro/access segment (competitors
include Cisco (Cerent), Ciena (Cyras), Redback (Siara), Metro-Optix, White Rock, and others) where the
3000 competes, we believe it's critical for Sycamore to sell the 3000 along side complementary product
offerings (e.g., the SN16000). In other words, the success of the 3000 is at some level dependent on the
success of other Sycamore products.
Adjusting estimates; current valuation in-line with our estimates. We are adjusting our estimates from
$371/(0.14) to $377/(0.16) for FY:01 and from $277/(0.25) to $300/(0.38) for FY:02. Our assumptions for
the SN16000 and SN10000 aren't overly aggressive, but we are assuming Sycamore will gain meaningful
traction in the opaque switching market, and modest traction in the long-haul DWDM and metro/access
markets. Applying a sum-of-the-parts valuation to our product-by-product revenue estimate for Sycamore,
we calculate an implied value of $2.6B, slightly above the Company's $2.3B market cap. Given current
valuation and the high level of risk in our 2002 estimates, we maintain our Market Performer
recommendation. Should Sycamore ramp the SN16000 faster than we have modeled and achieve modest
acceptance for its SN10000 and SN3000 products, we will revisit this rating. |
