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No. of Recommendations: 20
With the recent carnage, some of the optical stocks are looking as if they might present themselves to be reasonable bargains (relatively speaking, of course). I have to say that I personally don't yet care for Avici, Avanex or ONI Systems as they are still well in the red. Corvis is too, and they don't even have a product (rather, they don't have revenues). So I haven't looked closely at them, and likely won't for a little while yet - could be my loss, that's just the way I prefer to play it.

Sycamore, however, appears to be doing well in their market, so I figured I'd take a look. Recent pronouncements also have Sycamore solidly profitable, so I thought I better check them out while the company is on sale. Here are the results...

Naturally, Sycamore does really well when it comes to sales growth. Unfortunately we don't quite have any year-over-year numbers just yet. But still - what a performance! Most recent quarter revenues were nearly $60M, just more than a doubling of the previous quarter. Very nice. Hope to see more of the same.
                  04/29/00   01/29/00   10/30/99   07/31/99
QTR seq growth 103.8% 48.8% 72.2% N/A

Sycamore's free cash flow is a bit disturbing. Not altogether bad, mind you, as the cash deficit appears to be primarily due to capital expenditures - throwing off good numbers, just spending a lot of it in upgrades to the company.
                  04/29/00   01/29/00   10/30/99   07/31/99
FCF -1.5 1.1 0.6 -14.2
FCF margin -2.6% 3.9% 2.8% -125.7%
QTR seq growth -235.4% 105.5% 103.9% N/A

There is a bit of fluctuation in the flow ratio - solid downward movement was great until the most recent quarter, where we hit a little blip up - best guess at this point is that we will see a stabilization from this point, keeping a flow ratio in the neighborhood of 1.1 - not bad, by any means. An excellent movement, cutting DIO in half this quarter, was countered by a similar change in DPO. Couple with an increase in DSO from 37 to nearly 47 days, this bumped the cash conversion cycle by nearly 200%. I don't like this trend - but will keep an eye on it. The most disturbing piece of information was the growth in receivables. 100% sequential revenue growth is great, but you need to get those people to pay you!
                  04/29/00   01/29/00   10/30/99   07/31/99
Flow ratio 1.12 1.09 1.51 2.18

DSO 46.3 37.1 57.8 90.6
DIO 76.4 150.9 65.8 70.0
DPO 58.8 165.0 91.7 61.0
CCC 64.0 23.0 31.8 99.7

ARG/SG (seq) 1.5 -0.1 0.1 N/A
ING/SG (seq) 0.0 4.9 0.2 N/A
PYG/SG (seq) -0.3 3.4 1.2 N/A

AR seq growth 154.3% -4.3% 9.7% N/A
IN seq growth 3.3% 241.3% 14.5% N/A
PY seq growth -27.4% 167.6% 83.3% N/A

Gross margins are solid as a rock at 47% (actually, I checked this - they really vary from 46.95% to 47.24%). Operating margins are creeping up, though they aren't yet positive. Net income hit positive territory in the most recent quarter, but it was due primarily to interest income. On a NOPACT basis, we're still in the red - but getting awfully close!
                  04/29/00   01/29/00   10/30/99   07/31/99
Gross Margin 47.0% 47.0% 47.0% 25.2%
Operating Margin -0.3% -19.6% -31.5% -83.3%
Net Margin 15.9% -5.6% -29.3% -82.9%
NOPACT Margin -0.2% -12.8% -20.5% -54.2%

EPS Calcs
EPS - NOPACT -0.0005 -0.0155 -0.0167 -0.0257
EPS - NOPACT (TTM)-0.0584 -0.0579 -0.0424 -0.0257
QTR seq growth 96.7% 7.3% 34.9% N/A

In comparison to their competitors, Sycamore seems to be gaining ground. They are still a bit behind Ciena in most metrics, but appear to have better control over their balance sheet (though we could be witnessing the beginning of the deterioration of that as well). Certainly worlds ahead of other competitors, who cannot even lay claim to a net income when including interest income. Also, Sycamore's $1B+ on hand, with zero debt, can't hurt them in the long run. Other competitors don't seem to be quite as well capitalized.

The Corning announcement was definitely a good one, and could bode well for Sycamore in the long run.

However, I'm not quite sure what to think of the ongoing missteps in the ODSI. If this comes through, great - but I've noticed a lot of press on Sycamore pushing this group for standards, and if it doesn't happen, that is a lot of effort to continue to waste... just something to think about. Of course, Sycamore's still got 100% sequential growth, even without those standards - and I'm not familiar enough with the current state of other standards to know if this is truly wasted time or not. Perhaps someone else can shed some more light on this as an issue.

Disclosure: I own shares of CIEN.

Free Cash Flow (Cash-King Margin) Explained:

Flow Ratio Explained:

Cash Conversion Cycle Explained (Including DSO, DIO, DPO):

Using NOPAT Explained:

NOPACT Explained:
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