Sycamore, Extreme fall on downgrades

Summary:A day after both companies announce profit warnings and layoffs, analysts bash Sycamore Networks and are more forgiving of Extreme Networks.

Sycamore Networks plunged and Extreme Networks tumbled after the companies warned that their third quarters wouldn't live up to the Street's expectations.

The network equipment makers were hit with analyst downgrades Friday. Sycamore, which builds equipment for service providers, fell $2, or 22 percent to $7.06. Extreme, whose hardware speeds content over the Internet for businesses and service providers, was off $1.06, or 4 percent, to $24.56.

Analysts reserved some of their most vehement sentiments for Sycamore, which warned Thursday that it expects revenue in the range of $50 million to $60 million for the third quarter and a pro forma loss between 16 cents and 19 cents per share, excluding charges.

That compares with First Call's consensus estimate of $151.8 million in revenue and a profit of 5 cents a share. Management cited slow product transition to its new SN16000 switch, declines in new orders, current quarter order cancellations, customer spending cuts, and the general economic climate. Executives said they will restructure by consolidating business units, delaying expansion plans and cutting 140 jobs.

Pacific Crest Securities Aalok Shah called the pre-announcement "brutal" and lowered his rating to "market perform" from "buy."

"We are stunned by the magnitude of the pre-announcement," Shah wrote. The analyst lowered his earnings and revenue estimates and said he believes that "the company has two more difficult quarters." He also withheld estimates for 2002.

"We believe the company is now fighting an uphill battle" to find customers, Shah wrote.

WR Hambrecht analyst Tim Savageaux maintained his "neutral" rating, but called the pre-announcement "catastrophic."

"The stock most certainly has downside from current levels given the size of the miss and associated charges and restructuring, but even so it is likely we are nearing the bottom," Savageaux wrote.

The WR Hambrecht analyst doubted Sycamore's timeline for a rebound in customer spending, cited uncertainty about whether carriers would adopt the company's end-to-end vision, and expressed skepticism about whether Sycamore's products could compete on an individual basis.

Salomon Smith Barney's B. Alex Henderson also downgraded Sycamore to "neutral" from "outperform," and Banc of America analyst Alexander C. Williamson downgraded shares to "market perform" from "buy."

Out of Extreme's hands
Analysts were more optimistic that Extreme's problems were based on problems outside the company's control.

Extreme said Thursday that it will lose between 6 cents and 8 cents per share for the third quarter with revenue between $110 million and $115 million. Analysts expected a profit of 12 cents per share on revenue of $159.8 million, according to First Call. Executives said they plan to cut expenses by 10 percent, which will include laying off 12 percent of the company's overall work force.

"The magnitude of Extreme's miss, in light of public comments made in the last two weeks of the quarter regarding strong international sales, creates uncertainty about management's ability to accurately forecast," wrote U.S. Bancorp Piper Jaffray analyst Frank R. McEvoy, who lowered his rating to "neutral" from "buy."

McEvoy also slashed his price target to $16 from $40 a share and said that based on discussions with industry contacts, the "slowdown in Europe is perhaps more pronounced than Extreme has indicated, and pricing pressure will come as a result of Cisco's inventory overhang."

C.E. Unterberg Towbin analyst Martin Pyykkonen downgraded the stock to "neutral" from "buy" and said that he expects the company's customers--corporate enterprise and emerging service providers--are likely to be slower to recover than the service provider segment overall.

"The issue and the reason for our downgrade of Extreme is one of market position and not really an issue of Extreme having fundamental product or technology weakness," Pyykkonen wrote.

Dain Rauscher Wessels analyst Sanjiv Wadhwani downgraded Extreme to "buy" from "strong buy," while Robertson Stephens analyst Paul Johnson reiterated a "buy."

Topics: IT Employment, Cisco

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