THE DAY AHEAD: CMGI takes its 'IT dept.' public, Sycamore IPO to soar

Another CMGI Inc. wholly owned subsidiary is about to leave the roost for the public markets. NaviSite Inc., known to observers as "CMGI's IT department," will start trading today priced at $14, the top end of its upwardly revised price range. Sycamore Networks is also set for a big market debut.

NaviSite (Nasdaq: NAVI) is offering 5.5 million shares with Robertson Stephens and Hambrecht & Quist as the lead underwriters.

The NaviSite IPO is notable for a few reasons -- it's a growing player in Web hosting and network management market and is one of the few offerings that retail investors can buy at the IPO price.

NaviSite and Sycamore: IPO dynamic duo?

If you were a CMGI shareholder as of Aug 25 and owned at least 100 shares, you could be flipping shares with the institutional types. But judging from CMGI's other majority-owned IPO this year -- Engage Technologies -- you might want to hold shares a bit.

Engage (Nasdaq: ENGA chart), which CMGI shareholders could buy into, priced its IPO at $15 in July and now trades at about $31. SilkNet (Nasdaq: SILK chart), which was a venture capital investment for CMGI, priced at $15 and recently traded at $86.

In a recent interview, a NaviSite official said the company is trying to shed its image as CMGI's IT department and stake its claim as an independent entity. "We started as CMGI's internal IT shop," said Jay Seaton, NaviSite's vice president for marketing. "But we've turned that around and have a lot of customers are non-CMGI companies."

Keep in mind, however, that NaviSite's list of 126 customers is a moving target. AltaVista was a non-CMGI customer until the Internet incubator bought it in a swap with Compaq.

According to the latest regulatory filings, CMGI and CMGI affiliates accounted for 62 percent of NaviSite's sales for the quarter ending July 31. In the same period a year ago, CMGI was 90 percent of NaviSite's sales. CMGI will own approximately 70.9 percent of NaviSite after the IPO. Dell and Microsoft will each own roughly 4 percent.

Seaton said the reliance on CMGI affiliates will lessen as more companies outsource network and hosting. But NaviSite, which deals with a lot of e-commerce sites, will continue to utilize CMGI's extensive network of properties. Seaton added that NaviSite is aiming for the "sweet spot" of the market -- the middle ground between ISP-hosted sites on the low end and the high-end services offered by Electronic Data Systems (NYSE: EDS) and USInternetworking (Nasdaq: USIX).

So far that sweet spot hasn't resulted in profits. For the year ending July 31, sales were $10.5 million with a loss of $24.5 million. Sales more than doubled from $4 million in 1998. The company sees losses for "at least the next three years."

Sycamore set to soar

When a company almost doubles its IPO price range and then tops it, it gets your attention. Sycamore Networks (Nasdaq: SCMR) is set for one whopper of an IPO.

The optical networking equipment provider nearly doubled its price range to $35 to $37 from its previous range of $18 to $20. Sycamore priced at $38 for trading Friday. Morgan Stanley is the lead underwriter and the company is offering 7.5 million shares.

That's some heady stuff for a company that was in the development stage until May when the company shipped its first product. The company has lost $20.2 million since inception and has one customer Williams Communications (NYSE: WCG).

So is it worth the hype?

According to some analysts Sycamore is worth it. They wouldn't speculate on valuation for Sycamore referring to the old "it's worth whatever the market values it at" line.

For starters, Sycamore is selling high-end equipment. Sure it only has one customer, but Williams was good enough for $11.3 million in revenue for the quarter ending July 31.

But what Sycamore is trying to do is revolutionary. The company's products transports voice and data traffic over wavelengths of light. Current equipment converts optical signals into electrical signals and then converts it back. All those conversions increase network complexity and costs and gives Sycamore next generation market to chase. If Sycamore's products squeeze more capacity out existing fiber optic networks, the company will be on to something.

The company, headed by Cascade Communications and Ascend Communications alumni, has three of nine planned products commercially available.

Always good for a healthy dose of skepticism, we asked Craig Johnson, an independent analyst with the PITA Group to sort out the networking jargon.

"The technology is really interesting," he said. "It's smart light switching and has the best of ATM with the best of routing." It's a complete package.

Granted, the hype to reality ratio is about a year for Sycamore, but Johnson said the optical networking focus is on target -- networks will be run by that technology in 2 to 5 years.

Of course, Ciena (Nasdaq: CIEN), Lucent Technologies (NYSE: LU) and Nortel (NYSE: NT) are chasing the same technology, but have to worry about compatibility and other products. If Sycamore's hype-to-reality ratio is about a year, Lucent's and Nortel's could be about two years.

The good news? Sycamore has a head start on the big guys and can focus on its main product. It will take Lucent a good year or two to get a competing product on the market.

By then Sycamore will either be at the core of a bunch of networks or be one pretty takeover target for Lucent or Nortel.