COMMENTARY -- Sycamore Networks (Nasdaq: SCMR) did what it had to on its conference call -- give a great outlook to get investors interested again. The company succeeded, but the big question is how long the good cheer will last.
Sycamore, a fiber optic equipment vendor, reported fiscal first quarter earnings of 2 cents a share on sales topping $120 million. The sales tally was well ahead of estimates, but the key line to watch was deferred revenue, which fell slightly last quarter and kicked off three months of worry. This quarter deferred revenue jumped $20 million.
On a conference call with analysts, officials seemed to be well aware of Wall Street's questions about the company and systematically tried to shoot them down.
Simply put, Sycamore put to rest the perception that it had been "bullish without substance" in the prior quarters.
So everything should be just great with Sycamore, right? Not so fast. There are a few outstanding issues. The biggest issue is competition. Sycamore is running out of time to land a significant "incumbent" carrier. These carriers are the big telcos that aren't going anywhere. It's an elite club that counts AT&T (NYSE: T), Baby Bells and WorldCom (Nasdaq: WCOM) among its main members.
Ahead of Sycamore's results, Seth Spalding, an analyst with Epoch Partners, said the biggest knock against the company was its lack of big incumbent carriers as customers. BellSouth is a fine customer win and a good start, but it doesn't have the clout of AT&T, which has been rumored to be considering Sycamore gear.
There are two reasons why you should focus on Sycamore's attempts to land a big-name customer -- Nortel (NYSE: NT) and Ciena (Nasdaq: CIEN).
Sycamore piggybacks with Nortel gear when it comes to pitching clients. Sycamore's main pitch is that its equipment is interoperable with Nortel products. The catch is that Nortel has expanded its product portfolio and is likely to pitch its own gear in the future. Nortel can consolidate vendors and billing. If Sycamore can't ride shotgun with Nortel, it'll have big problems expanding.
The other thorn is Ciena, which is entrenched with incumbent carriers. Toss in companies like ONI Systems (Nasdaq: ONIS), which is gaining significant traction, and you can see why folks were worried about Sycamore and its P/E of 550 (and that's after a big dip).
For Sycamore, it all comes down to landing a big customer. The company had a lot of answers, but the incumbent question is a biggy. Without a big telco on the customer list, Sycamore could quickly find itself in a bind. The good news is there's an easy cure -- a big contract announcement with an incumbent carrier.TDAIN
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