dcsimg
RealTime IT News

Sycamore Stands Tall

Like virtually every other Internet company, its shares have been brutally beaten down this fall.

But unlike those 'Net players closing shop or issuing earnings warnings, optical networking company Sycamore Networks shows no sign of succumbing to the Great Internet Economy Implosion of 2000.

Indeed, based on its Q1 revenues and upwardly revised forecasts, Sycamore is just beginning to gain momentum as most Internet companies stall or sink.

The Massachusetts-based maker of optical networking nodes and switches for telcos, ISPs and cable providers on Tuesday reported sizzling first-quarter revenues of $120.4 million, or 517% more than the $19.5 million in year-ago quarterly sales.

Sycamore also turned in its third consecutive quarter of profits, with pro forma net income of $6 million, or 2 cents per share, compared to a year-ago loss of $4 million, or 2 cents per share.

While SCMR's earnings figure beat the street by one cent per share, it was the revenue growth that shocked analysts, many of whom expected revenues of slightly more than $100 million.

Sycamore's previous quarterly report, back in late August, was similarly impressive. But back then, SCMR shares tumbled after earnings were released. This time around, investors boosted SCMR stock nearly 9% in the first hours of trading after the Q1 numbers were released late Tuesday afternoon.

There are several reasons for the market's differing reactions to Sycamore's recent quarterly results. For starters, in the face of concerns that overall spending for high-speed networking equipment is slowing down, SCMR executives on Tuesday boldly upgraded their revenue and earnings estimates for the next two years.

Second, Sycamore has addressed perhaps the biggest concern of investors by making great strides to expand its customer base. When it went public 13 months ago, Sycamore's lone customer was telco giant Williams Communications. Now SCMR has 10 customers, including BellSouth and another telco, EPIK Communications. While Williams still comprises about 60% of Sycamore's revenue, the other 40%, or about $48 million in the first quarter alone, didn't exist a year ago. I'd call that progress.

But the biggest factor explaining the market's enthusiastic embrace of Sycamore's Q1 results is that Sycamore is a better buy than ever. Back in late August, I argued that shares dropped in the wake of solid Q4 numbers because Sycamore was overvalued. And it was, trading anywhere between 178x and 195x trailing 12 months' (TTM) revenue of $198 million.

Thanks to the fall correction - which hacked 60% from the company's stock price - and soaring sales, Sycamore's valuation by Tuesday's close had shrunk to 52.8x TTM revenue of $299 million. That's not cheap, but compared to just three months ago, SCMR is a bargain.