Sycamore Networks, Inc.

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Sycamore Networks, Inc.

150 Apollo Drive
Chelmsford, Massachusetts 01824
U.S.A.
Telephone: (978) 250-2900
Fax: (978) 256-3434
Web site: http://www.sycamorenet.com

Public Company
Incorporated: 1998
Employees: 944
Sales: $374.7 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: SCMR
NAIC: 334210 Telephone Apparatus Manufacturing; 511210 Software Publishers

Sycamore Networks, Inc. is a company that is devoted to its vision of an intelligent optical network for public and private telecommunications. Such a network would be faster and cheaper than existing fiber optic networks, which are based on SONET rings and rely on the conversion of optical signals into electronic signals and back again.

Sycamore’s tightly focused product line includes products, such as optical switches and nodes, that enable telecommunication service providers to adjust the capacity of their fiber optic networks based on customer demand. Sycamore’s networking products allow service providers to use their existing optical networking infrastructure to deliver high-speed services and meet the intensive bandwidth requirements of data traffic.

When Sycamore went public in 1999, its stock was favored by investors who saw a bright future for the company. Telecommunications companies were expected to spend heavily to add the optical networking capabilities made possible by Sycamore’s products. With the economic slowdown of 2001, though, telecommunications service providers and emerging carriers found that they had to cut back on their capital spending. Sycamore’s revenues fell dramatically, and its stock followed suit.

Founding Sycamore in 1998 to Provide Intelligent Optical Networking Products

Sycamore Networks, Inc. was founded in February 1998 by Gururaj Deshpande and Daniel E. Smith. The two entrepreneurs had recently sold Cascade Communications Corp. in 1997 to Ascend Communications Inc. for $3.7 billion. Deshpande founded Cascade in 1991 to provide ATM and frame relay switches to handle the soaring demand for data traffic over conventional telephone networks. A technical visionary with a Ph.D. in engineering from Queen’s University in Canada, Deshpande hired Smith, a Harvard University M.B.A., as CEO and president to run the daily operations of Cascade. Other members of Sycamore’s founding team included architecture director Richard Barry and chief scientist Eric Swanson, both from the Lincoln Laboratory of the Massachusetts Institute of Technology (MIT).

Sycamore’s focus was to provide equipment for fiber optic networks that would enable telecommunications providers to quickly expand or reduce the capacity of their fiber optic networks. Although Sycamore was formed in February 1998, the company did not reveal its business plan until December. Its initial products, scheduled for delivery in 1999, would enable telecommunications providers to set up high-speed optical connections directly from their own routers.

More specifically, Sycamore planned to develop a family of intelligent optical transmission and switching products in line with its proposal for an intelligent optical network. Such a network would be three to four times cheaper than existing networks and provide greater bandwidth for new services. The key to the intelligent optical network was its ability to manage multiple light paths or optical channels by minimizing optical-to-electrical conversions along the way. Existing networks were becoming congested, Sycamore believed, because they required optical signals to be converted to electrical signals and then back into optical signals. Sycamore’s plan called for eliminating optical/electrical conversions and making the optical light path the transport medium rather than the optical fiber.

Release of Its First Optical Networking Products in 1999

Sycamore launched its first group of intelligent optical networking products in March 1999, just about a year after the company was founded. These products were designed to increase the bandwidth and flexibility of telecommunications service providers. Providers could use Sycamore’s nodes and switches to migrate their telecommunications networks away from traditional ring architecture based on SONET equipment and into meshed optical architecture.

Sycamore’s first product was the SN 6000 Intelligent Optical Transport Node for wide-area networks (WANs), or long-haul optical transport systems. The SN 6000 was supported by a $24.5 million contract with Williams Communications, Sycamore’s first major customer. Williams had already tested the SN 6000 as well as Sycamore’s SN 8000, which was designed for regional networks. In addition, Sycamore offered the SN 8400 for metropolitan networks. Williams was in the process of deploying the SN 6000 throughout its fiber network. The SN 6000 accommodated up to 28 2.5 gigabytes-per-second (Gbps), or OC-48, ports per bay. The transponder-based product enabled Williams to adjust capacity between any two points on its network based on customer demand by plugging in more transponders to its installed base.

On the strength of its vision for an all-optical telecommunications network, a few products, and one customer, Sycamore had a very successful initial public offering (IPO) on October 21, 1999. The company sold 7.5 million shares, which represented a 9.6 percent interest in the company, at $38 each and raised $284.1 million. The IPO gave Sycamore a market capitalization of $2.97 billion. At the end of the first day of trading, shares of Sycamore closed at $184.75. By November 1 the company’s stock had reached $220 a share. Investors were apparently unconcerned that Sycamore had reported a net loss of $19.5 million on revenue of $11.3 million for its first fiscal year ending July 31, 1999.

Before the end of the year, Williams Communications announced that it would spend $100 million a year for the next four years on Sycamore’s optical networking equipment. Sycamore also released the SN 16000 wavelength switch, which used an optical-electronic design to convert optical signals into electronic signals. The product allowed telecommunications companies to take advantage of the speed offered by optical networking and still utilize their installed connectivity that relied heavily on electronic technology. The product would serve as a bridge between current networking technology and was the next step toward Sycamore’s goal of a purely optical telecommunications network.

Acquisitions and Restructuring in 2000

Sycamore’s next optical networking product was introduced in February 2000. It was a 1 Gpbs LAN (local area network) connection that could be added on to the SN 8000. Called the Gigabit Ethernet module for the SN 8000, the product made it possible for telecommunications service providers to offer their enterprise customers the ability to connect their corporate networks to the high-speed core of the Internet. The new module was designed to overcome the bandwidth bottleneck that existed at the point where LANs access the public network.

Sycamore’s stock continued to soar, reaching $290 in early February 2000. In March the stock split. By April, telecommunications stocks were being pummeled on Wall Street. Sycamore’s stock declined by 70 percent from its 52-week high to close at $59.75 on April 13. By June the stock had recovered to slightly more than $100 a share.

Around this time Sycamore announced that it would acquire Sirocco Systems for approximately $2.9 billion in stock. Sirocco developed optical access systems, devices, and switches primarily for the metropolitan market. Sirocco’s portfolio of intelligent optical networking products, which focused on access, complemented Sycamore’s product line, which focused on transport. Following the acquisition Sirocco became Sycamore’s new optical access division, with former Sirocco president and CEO Jonathan Reeves in charge as the division’s general manager and vice-president. By the time Sycamore’s acquisition of Sirocco closed in September 2000, the transaction was valued at $3.55 billion.

With the SN 16000 hybrid switch shipping to customers and the acquisition of Sirocco Systems, Sycamore reorganized its executive structure around four product groups: intelligent switching products, transport products, access products, and next-generation core optical products. Around this time Sycamore invested in Tejas Networks India Pvt. Ltd., a start-up based in Bangalore, India, that was working to develop intelligent optical networking products that would complement products developed by Sycamore. For its fiscal year ending July 31, 2000, Sycamore reported earnings of $20 million on revenue of $198 million.

Company Perspectives:

Nothing less than a future vision for the public communications network, shared by talented leaders in data networking and optical technology, led to the creation of Sycamore Networks —and the concept of Intelligent Optical Networking —in 1998. Nothing short of new, disruptive technology can transform the underlying infrastructure of the public network into a data-optimized Information Super-highway. From day one, Sycamore’s mission has focused on helping our customers create networks of unparalleled flexibility and capacity, based on entirely new parameters for intelligence and performance. Whether you need to build out new areas of your network or to enhance competitiveness by cutting costs and improving service offerings, Sycamore’s innovative optical solutions will meet the unique requirements of your network today, and migrate gracefully toward your own vision for the future.

In the second half of 2000 Sycamore announced that it had an order backlog exceeding $1 billion. The company also gained some new customers. In November and December Sycamore signed several new deals, including a $40 million contract for optical switches with Vodafone Group PLC of the United Kingdom. That followed a deal with BellSouth Corp., in which BellSouth chose Sycamore’s intelligent optical switches and transport platforms for its Florida Multimedia Internet exchange network in South Florida. At the time South Florida was becoming a major Internet hub, connecting routes in the United States with Latin America, the Caribbean, Africa, and Western Europe. BellSouth planned to deploy Sycamore’s SN 16000 intelligent optical switches and SN 8000 intelligent optical transport platform to build an infrastructure that could rapidly route and re-route data traffic in response to customer demand. Around this time Sycamore also gained L.D. Communications of Bellaire, Texas, as a customer. Before the end of the year European carrier LDCOM entered into a multiyear, multimillion-dollar contract with Sycamore for its metro products, including the SN 3000 access switch and the SN 4000 edge switch. LDCOM owned a 14,000-kilometer fiber network as well as metro fiber rings. It planned to offer intracity and long-haul services in about 20 cities by mid-2001.

Slowdown in Capital Spending Affecting Sycamore in 2001

Sycamore’s revenue and stock price in 2001 was markedly affected by a slowdown in capital spending by telecommunications providers. Sycamore’s revenue peaked in its second quarter ending January 27, 2001, when it reached $149.2 million, more than five times revenue in the same quarter of 2000. For the quarter Sycamore reported net income of $13.8 million.

For the rest of fiscal 2001 and into its next fiscal year, Sycamore’s revenue plunged. The company reported a loss of $225.1 million on revenue of $54.2 million for the quarter ending April 28, and a loss of $42.2 million on revenue of $50.9 million for its fourth quarter ending July 31. For fiscal 2001 ending July 31, Sycamore had total revenue of $374.7 million and a net loss of $279.8 million.

Sycamore attributed its decline in revenue to a slowdown in capital spending by telecommunications providers and a lack of available capital for emerging carriers. The company’s strategy in this difficult time was to strengthen its existing customer base by focusing on key projects for its customers, continue with technological innovations, and conserve cash. As part of its cost-cutting measures, Sycamore cut 140 jobs in April 2001 and another 240 in October. The company also delayed construction of a new corporate headquarters.

Sycamore’s stock price was around $10 in mid-2001, then dropped to around $5 when the company announced its results for fiscal 2001. The company expected its first quarter revenue for the next fiscal year to be as much as 75 percent below the previous year’s levels. For the quarter ending October 27, 2001, Sycamore in fact reported revenue of only $21.2 million, compared to $120.4 million for the same quarter in 2000.

Financially, Sycamore was in a strong position with more than $1 billion in cash and short-term investments. With customers such as Williams Communications cutting back on capital spending and other customers, such as Canada-based 360networks Inc., filing for bankruptcy, Sycamore announced that it would narrow its product line to focus on optical switching, optical edge products, transport, and network management.

As 2001 drew to a close, demand for optical switching products was expected to remain flat until 2003, according to a report from Pioneer Consulting LLC. Beyond that, long-term demand for optical switching and core optical networking equipment was expected to increase. Meanwhile, it was reported that Tellabs Inc. and Sycamore were negotiating a possible merger.

Principal Competitors

Agere Systems Inc.; Ciena Corp.; Cisco Systems Inc.; Corvis Corp.; Nortel Networks Corporation; ONI Systems Corp.; Sorrento Networks Corp.

Key Dates:

1998:: Sycamore Networks, Inc. is founded by Gururaj Deshpande and Daniel E. Smith to build optical networking products.
1999:: Sycamore introduces its first optical networking products and becomes a public company.
2000:: Sycamore acquires Sirocco Systems Inc. for $3.55 billion in stock.
2001:: Sycamore’s revenue plunges as telecommunications companies cut back on capital spending.