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Technology Stocks : Sycamore Networks Inc-(SCMR)

SCMR 0.226

0.0%

Nov 30 4:00 PM EST

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From: bob zagorin	9/8/2008 9:10:30 AM
	of 2249

Sycamore Networks. Inc. (SCMR) Neutral P. Silverstein CP: US$ 3.38 TP: US$ 3.50 CAP: US$ 957.1m FY4Q08 Earnings Results, Lowering Estimates • Investment Thesis. Following SCMR's FY4Q08 results, we see no change in the intermediate to long-term outlook regarding SCMR's ability to generate meaningful, sustainable growth in operating profitability. We continue to expect SCMR to make additional strategic moves to try to enhance its addressable market opportunity and positioning. • Results. SCMR reported a second straight steep Q/Q decline in Rev/PF EPS (ex ESO) of $15.1mln/($0.03) v. our $24.4mln/$0.00 and Street consensus's $25.1mln/$0.00 estimates. • Estimates. We have revised our FY09 Rev/EPS (ex ESO) estimate to $67.2mln/($0.16) from $111.8mln/$0.02. We are introducing FY10 estimates of $108.1mln/($0.15). • Outlook/Est.s. We reiterate our Neutral rating given that the stock is trading near its cash balance of $3.32/share. SCMR's FY4Q08 operating and financial performance reinforces our LT view of the company's inability to generate meaningful and sustainable profit growth. We believe it is increasingly likely that SCMR will effect a significant strategic transaction to remake the company-for better or worse. • Highlights. (1) Rev Shortfall. Following on the significant rev shortfall of the preceding quarter, SCMR reported rev and EPS well below our forecast. Rev declined (28%) Q/Q and are now 64% below the FY2Q08 recent peak. SCMR's core optical switching business declined to $7.5mln. At this level, the softness clearly extends beyond Sprint to all of SCMR's major customers. (2) Increasing OpEx. Earnings will clearly suffer as SCMR increased its headcount in the quarter by over 5% and expects to increase its pro forma operating expenses by 8 - 12% in FY09 as it continues to invest in R&D for its new high capacity, intelligent bandwidth optical platforms that integrate switching and transport and are targeted to address the increasing convergence of the packet and optical layers of the network. SCMR does not expect to ship and generate any revenue from these products for at least another 18+ months. (3) Strategic. We believe that it is only a matter of time before SCMR effects a significant strategic transaction-for better or worse. • Valuation. We maintain our 12-month price target of $3.50 as we continue to believe that SCMR should trade slightly above its cash value of $3.32.

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