Extreme, Sycamore warn of lower profits

The networking equipment makers announce profit warnings and layoffs as sales slump because of the U.S. economic downturn.

Sycamore Networks and Extreme Networks announced profit warnings and layoffs Thursday as sales slumped because of the U.S. economic downturn.

Sycamore, a maker of optical equipment, said it expects revenue in the range of $50 million to $60 million for the third quarter ending April 28 and a pro forma loss between $38 million and $45 million, or 16 cents and 19 cents per share, excluding charges.

That compares with Wall Street estimates of $151.8 million in revenue and a profit of 5 cents a share, the consensus estimate of analysts surveyed by First Call.

Extreme executives said the company will lose between 6 cents and 8 cents per share for the third quarter ended March 31 with revenue between $110 million and $115 million. Analysts had expected a profit of 12 cents per share on revenue of $159.8 million, according to First Call.

Both companies plan to restructure and cut costs. Sycamore executives said the company will consolidate business units and cut 140 jobs out of the current 1,100 employee head count. Extreme said it plans to cut expenses by 10 percent, which will include laying off 12 percent of the company's overall work force.

The two young network equipment makers are the latest victims of the cooling U.S. economy and slower sales of networking hardware to telecommunications carriers and Internet service providers. Many emerging carriers, such as DSL providers, have struggled financially, slowing down their spending on networking equipment. In recent quarters, Cisco Systems, Nortel Networks, Lucent Technologies, 3Com and Foundry Networks have warned of lower profits.

"Due to market conditions, it is necessary that the company reduce a portion of its operating expenses," Sycamore Chief Executive Dan Smith, said in a statement.

Extreme Chief Executive Gordon Stitt said the company suffered from weak U.S. sales to both service providers and businesses. Deals fell through during the last part of the quarter, he said.

"We were affected by late purchasing decisions by our largest customers," Stitt said in a conference call with analysts. "We saw a lot of tightening budgets."

Sycamore said carrier-spending cutbacks combined with production delays caused most of the revenue shortfall.

"Two of our largest customers have slowed capital expenditure and have little or no bookings during the quarter," said Frances Jewels during a conference call.

Jewels also attributed about $30 million of the revenue miss to production delays and canceled orders, and an additional $20 million lost from delays in shipping Sycamore's SN1600 switch.

"There's a lot of macroeconomic issues going on and clearly they are exposed," said Seth Spalding, an analyst at Epoch Partners. "I think what people didn't have a sense of is the lack of traction they're getting from their new switching products."

Sycamore's customer mix also makes them vulnerable. Paul Johnson, an analyst at Robertson Stephens, said that Williams Communications comprises roughly 50 percent of Sycamore sales, and that relationship might not last.

"The Williams contract is winding down, and they could have new products to fill the gap, but with the spending slowdown, it's harder to get new products through the hoop," said Susan Kalla, an analyst at online trading firm

Extreme, which builds equipment that speeds content over the Net for businesses and service providers, will take a restructuring charge of $41 million. Sycamore, which builds equipment for service providers, will take a charge between $140 million and $150 million.

Sycamore declined to give further guidance until its third-quarter earnings are released May 15. Extreme will announce its third-quarter results April 18.

Investors hammered the companies' shares in after-market trading. Sycamore fell $2.06, or 28 percent, to $6.50 in after-hours trading, while Extreme dropped $2.02, or about 13 percent, to $16.01.