Sycamore gains on evergreen outlook

Sycamore Networks rises after topping second-quarter estimates and maintains its outlook for the next two years.

3 min read
Sycamore Networks rose 8 percent Wednesday after the company topped second-quarter estimates and maintained its outlook for the next two years. Analysts didn't change their ratings, but were mixed on whether the company could prove to be a harbor in rough telecom equipment waters.

Shares were up $1.88 to $24.44 after the optical-equipment supplier reported second-quarter earnings that exceeded expectations Tuesday and showed revenue was up more than fivefold from last year.

The company's stock has been dragged down lately by worries about carriers' spending and limited interest in its new optical switch. While other optical systems and component vendors have been warning about visibility right and left over the past month, Sycamore hasn't said anything.

Despite acknowledging reduced near-term visibility Tuesday, management reiterated both top- and bottom-line guidance for fiscal 2001 and fiscal 2002. Although some analysts took this as a sign that the company was roaring ahead, others sounded a cautionary note.

Lehman Brothers analyst Steven Levy reiterated a "strong buy" and called the company an "optical port in the telecom storm." He praised the company's ability to maintain its strong projection, which calls for growth in excess of the 40 percent annual rate expected for the overall global optical-networking market.

In the telecommunications storm which has left most investors "shivering as they cling to their dinghies," there is an island, Levy wrote in his research note, and it "appears to be covered with...Sycamore trees."

Raymond James & Associates analyst Todd Koffman was more alarmed by the cautionary note, and trimmed his fiscal 2002 earnings estimates to reflect margin pressures and a more conservative demand environment. He also noted that margin pressures are likely to constrain earnings during the next few quarters.

WR Hambrecht analyst Tim Savageaux maintained his "neutral" rating and expressed concern about the company's "mild note of caution" on the top- and bottom-line outlook for the second half of fiscal 2001 and fiscal 2002.

Many analysts focused on the growth potential of the company's new products, particularly its new SN16000 optical switch, which is now expected to contribute 10 percent to 15 percent of fiscal 2001 sales.

Morgan Stanley analyst Alkesh Shah was excited about the new SN16000 switch, and said another new product, the SN10000 ultra long-haul transport system, should start to generate revenue as soon as next quarter. Shah maintained his "outperform" rating and $50 price target Wednesday.

But Credit Suisse First Boston analyst James Parmelee had a more skeptical view. The analyst said his reiterated "buy" rating is based on long-term potential. "Given the reduced visibility...we believe closely tracking the company's progress in new product intros...is crucial," he wrote.

Parmelee noted that though Sycamore added three new customers for the SN16000 switch during the quarter, the company is still fiddling with the switch's software and tweaking its capabilities.

Another soft spot for the company could be its concentration of business with Williams Communications, which accounted for over 50 percent of revenue in the quarter.

Levy said this was the company's biggest risk and could be one reason "management has chosen to take a more cautious view of future sales growth."

Parmelee also expressed concern about Williams' business, but said that the company is making progress with diversification, having shipped to a total of 14 customers, up from 10 in the previous quarter. It also added two customers, which accounted for more than 10 percent of sales.

On the subject of valuation, analysts were mixed.

Shah said that Sycamore is "poised to capitalize on the explosive growth in optical networking," and its stock is "highly attractive" with $3.47 per share in cash.

Koffman, who maintained a "market perform" rating, said that although he's impressed with the company's market position