bull of the day thesis form zacks...
"....INVESTMENT SUMMARY
We continue to believe that greater bandwidth requirements exist for broadband Internet infrastructures.
In particular, the emergence of distributed high-speed applications and video-streaming, along with the
launch of numerous fiber-to-the-home (FTTH) networks provide strong indications that core network
transport will grow significantly.
Shares of SCMR continue to be viewed from a value perspective. The company’s net cash of $3.45 per
share provides adequate safety margin and potentially limits downside risk should we see a market
contraction. We believe that there is substantial stock upside should other major deployments take
place. In our view, optical switching is potentially an unrealized growth market, albeit still in a period of
quiet planning and spending constraints. When this segment turns around, we assume Sycamore will be
one of the primary beneficiaries in terms of revenue growth and stock price movement.
Bandwidth Needs: We believe that bandwidth intensive demand, such as distributed Storage Area
Networks (SANs), video-streaming and customers’ appetite for greater bandwidth will require service
providers to expand optical switching networks. Sycamore’s offerings provide a compelling value
proposition to lower carrier Capital/Operating expenses. These platforms remove the need for
purchasing and maintaining separate equipment, including digital cross connects, add-drop SONET
multiplexers and DWDM optical transport gear. By consolidating the functions of multiple products,
service providers can reduce the amount of equipment and eliminate awkward cabling at each node.
Combining these functions in one network element significantly lowers capital costs. Furthermore, it
reduces equipment rack space, power consumption, multiple points of network failure, and, at the same
time, improves provisioning of services - quickly and effectively – driving down operational expenses.
Partnership with Siemens: We expect Siemens to position Sycamore’s product lines as part of Siemen’s
capabilities portfolio for optical solutions. Siemens has one of the largest global telecom customer bases.
Zacks Investment Research Page 3 w w w.zacks.com
Existing customers using the Siemens Surpass product line may find Sycamore’s optical switching
platforms a natural extension with complete interoperability. Sycamore is already experiencing the
benefits from this relationship. The agreement, which began in 2002, enabled Siemens to market
Sycamore’s optical switches along with its own broad line of telecom gear to Siemens’ large global
customer base. During the first quarter of fiscal 2005, Sycamore finally booked revenue from the
Siemens partnership (mostly for network trials) and KT Corporation was recently announced as a new
end customer.
Contracts and Customers: Customer trials continue with some several years old. We believe that
relaxed capital spending constraints among carriers will create opportunities for revenue growth based on
these carrier evaluations. There are carrier RFPs (Request for Proposals) providing indications of
improved optical switching demand. Efforts to expand the customer base have been successful
considering the challenging industry environment and SCMR’s relatively narrow product line. For
example, Sycamore was one of the winners (along with partner Sprint) in the U.S. Department of
Defense’s Global Information Grid Bandwidth Expansion (GIG-BE) project. The GIG-BE program is an
effort to build an advanced communications network to improve national security intelligence,
surveillance and reconnaissance, and command and control information sharing. The program will
provide increased bandwidth and diverse physical access to approximately 100 critical sites in the
continental United States and in the Pacific and European theatres. While revenues from GIG-BE have
provided a much-needed boost to the top line, the initial phase of the program has been completed.
Fortunately, the company recently announced an agreement to sell optical switching products to Sprint
and KT.
Balance Sheet Remains Strong: Sycamore’s balance sheet remains one of the strongest in the telecom
industry. With $966 million Net Cash and positive net earnings, sufficient financial resources allow the
company to pursue new technologies and to remain viable in what has been a challenging optical
network deployment environment. The company’s significant cash position was a result of a secondary
offering back in March 2000 where Sycamore sold an additional 8.428 million shares at $150.25/sh
yielding $1.266 Billion in cash. The timing could not have been better. We emphasize balance sheet
fundamentals and product differentiation as parameters to consider on a long-term valuation basis. The
stock is trading at a slight premium to the value of the firm’s net cash and investments balance ($3.45 per
share), which implies that investors believe there is no value to SCMR’s ongoing business. This is an
overly pessimistic view in our opinion. There is always a possibility of consolidation interest, in particular
for companies with positive earnings momentum and strong cash positions...." |
