Sycamore Networks (SCMR)

Sycamore Networks continues to experience disappointing financial performance as revenues and earnings are trending lower on a sequential quarter basis. The company's fourth quarter fiscal 2008 financial results were significantly below our expectations, primarily attributed to a contract loss from one of its major customers.

On September 5, Sycamore announced fiscal fourth quarter 2008 earnings results. Total revenue of $15.1 million was down 60.3% from the year-ago quarter and down 24.9% sequentially. Gross margin was 28.7% compared to 46.5% in the prior-year quarter. Adjusted diluted EPS, excluding impairment charges, was a loss of $0.03 for the fourth quarter of fiscal 2008.

We remain concerned that Sycamore may have difficulty generating sustainable business from carriers for its product capabilities as larger vendors address these markets with competing solutions. Furthermore, demand for optical networking appears to be more favorable than in past years, but Sycamore's financial reports suggest year-over-year revenue decline in spite of the acquisition of Eastern Research in 2006. We downgrade our rating to a Sell due to a lack of near-term visibility for improvements and concern that business will depend on only a limited number of customers.

We do not find any meaningful investment catalysts for the company that may drive a near-term valuation improvement. According to our view, revenue will remain lumpy through Fiscal 2009 as Sycamore is dependent on only a limited number of customers for revenue. Expenditures are expected to increase due to new product introductions and integration related costs associated with the acquired entity.