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Strategies & Market Trends : Quarter to Quarter Aggressive Growth Stocks -- Ignore unavailable to you. Want to Upgrade?

To: Jack Hartmann who wrote (1877)	2/16/2001 4:22:21 PM
From: Jack Hartmann	Read Replies (1) \| Respond to of 6924

SSB on SCMR February 14, 2001 SUMMARY * In fiscal 2Q01, Sycamore Networks announced vendor TELECOMMUNICATIONS financing with two customers, CoreExpress and Storm EQUIPMENT Telecom, totaling $200 million. B. Alexander * Despite investors' concerns about vendor financing in Henderson the current market environment, management believes the two companies have accessed sufficient capital from top-tier investors. Timothy Anderson * We believe that Sycamore's conservative revenue recognition policies are likely to keep the risks associated with these deals at a reasonable level. Daryl Armstrong * The company does not anticipate vendor financing commitments to exceed $250 million in either 2001 or 2002. * Sycamore has increased and diversified its customer base to include 14 service providers and one international distributor. Additionally, the company has two new 10% customers in addition to Williams. FUNDAMENTALS P/E (7/01E) 98.1x P/E (7/02E) 70.5x TEV/EBITDA (7/01E) NA TEV/EBITDA (7/02E) 92.3x Book Value/Share (7/01E) $5.79 Price/Book Value 3.9x Dividend/Yield (7/01E) $0.00/0.0% Revenue (7/01E) $611.4 mil. Proj. Long-Term EPS Growth 50% ROE (7/01E) NA Long-Term Debt to Capital(a) NA (a) Data as of most recent quarter SHARE DATA RECOMMENDATION Price (2/13/01) $22.56 Current Rating 1H 52-Week Range $189.94-$22.44 Prior Rating 1H Shares Outstanding(a) 284.0 mil. Current Target Price $35.00 Convertible No Previous Target Price $35.00 EARNINGS PER SHARE FY ends 1Q 2Q 3Q 4Q Full Year 7/00A Actual ($0.24)A $0.01A $0.05A $0.08A $0.19A 7/01E Current $0.06A $0.06E $0.05E $0.06E $0.23E Previous $0.06A $0.06E $0.05E $0.06E $0.23E 7/02E Current $0.06E $0.07E $0.09E $0.10E $0.32E Previous $0.06E $0.07E $0.09E $0.10E $0.32E 7/03E Current NA NA NA NA NA Previous NA NA NA NA NA First Call Consensus EPS: 7/01E $0.22; 7/02E $0.35; 7/03E NA Calendar Year EPS: 12/00E $0.23; 12/01E $0.30; 12/02E $0.56; 12/03E NA VENDOR FINANCED DEALS DO NOT SEAM TO BE A MAJOR REASON OF CONCERN 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. Jack