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|Shares Out. (in M):||29||P/E||0.0x||0.0x|
|Market Cap (in M):||570||P/FCF||0.0x||0.0x|
|Net Debt (in M):||465||EBIT||0||0|
The way I think about near term EPS based on the info below is if VOD Europe alone has 50k base stations at which IQS can be implemented and the company tries to get a 50% GM (along the lines of their corporate average), they will sell the product at about $6k/base station. Assuming they choose only to implement in 10k base stations for the sake of being conservative, that’s still $60m in revenue and $30m in gross profit. Since opex is minimal and they aren’t paying taxes, let’s assume 35% of revenue flows to FCF, that’s about $1 in cash EPS for 1/5 of VOD’s European base stations. They are also in trials with 4 other operators. Even if only 2 come through, that could be $2 in cash EPS. On a $19 stock with $16 in cash and $3.50 in NOLs (though we don’t want to double count since we are assuming 35% cash flow margins), that $2, even at a 10x multiple would mean an additional $20 to the stock. So, worst case, if things don’t work out, they have alluded to closing down the company in the next year. If that happens, we get $16 in an extraordinary dividend (untaxed). Our downside is $3 but our upside could be $20+. We have downside protection here and the ability to participate in massive upside should this solution work out.
-IQStream (IQS) is a departure from what they’ve previously done
-Innovator in smart optical networking in 98-2000, had a unique offering but the business became commoditized very quickly as larger operators at scale developed comparable products and cross sold through larger suites to carriers
-SCMR still maintained carrier relationships and continued to sell commoditized products, putting only enough R&D in to stay competitive
-Company has been dormant for several years but checks have shown Vodafone was looking to optimize their network solution (had an RFI with 10 vendors ranging from offloading video optimization to streaming/shaping technologies) when SCMR ‘knocked on their door’ with a very different solution, unlike the others, a data deduplication system that’s similar to WAN optimization like Riverbed or Bluecoat (these cos help enterprise customers accelerate access from branches w/in private networks)
Sycamore’s technology can compress the traffic and apply it to the wireless backhaul space
-This is challenging bc (1) it’s not a typical IP based environment and (2) backhaul is encrypted between mobile devices and RNC (Radio Network Controllers) at the head end of the backhaul
-IQS operates in the backhaul space and has implemented large scale encryption capabilities and maintains the user session while maintaining the handover
-Encryption and bookend caching are the major barriers to entry here
Caching solutions are at the heart of the product
-Others have looked at doing a simple cache like LLNW or AKAM, but conventional caching just sits at the end of the network looking for requests, i.e. sees HTML for a website already in the cache which saves network bandwidth
This single cache system is hard for wireless backhaul
-In wireless backhaul it is hard to inject cache into the RNC and the Node B (Node B in basestation) since the RNC sits further back in the core of the network and controls 150 base stations—hard to dual cache from one RNC to many Node B’s
-Very tight relationship between the Node B and the RNC, so it’s hard to cache/sit in between
-This problem doesn’t really exist in 4G networks because there is no RNC so LTE networks are not as tightly controlled
-SCMR is addressing the problem of today—so this is not a solution with revenue a few years down the road, the addressable revenue opportunity is today so revenue should be coming in very soon
-Bottom line is that the technology allows something like caching but not quite normal caching
-In IQS, there’s a large device co-located within the RNC which works with a number of smaller devices in each Node B
-Each node supports communication protocols, it takes a pair of devices and spooks the RNC into thinking it’s talking to the Node B directly. It looks invisible, just a bump in the wire and is not visible to either device so it just passes tokens over the backhaul network
-Backhaul is the largest capex/opex expense for the operators
-HSPA has stepped up throughputs but unit costs in backhaul bandwidth are not coming down
-The alternative is to push fiber to the backhaul but that’s very expensive except in urban areas—as such, there’s a strong desire to find innovative ways to upgrade
-There have been improvements in microwave radios to increase bandwidth of microwave networks but not enough to make a big difference
Back to IQS—here’s how it works
-Everyone in a certain area watches a viral video on youtube from their tablets or smart phones and it becomes a heavily watched video
-W/out IQS this results in individual streams to users from their wireless carrier which is very bandwidth intensive
-IQS recognizes a bit patent it has seen before the second time the video is viewed. The RNC box recognizes this. The base station box also has this stream in its cache and it recognizes the bytes since it has it in its cache. As such, it doesn’t need to re-send the data over the backhaul, just a small token to remind which bit patent was sent across the backhaul preivously for the video
-This is a book ending approach which spoofs the RNC and the Node B into believing they are talking to one another which a normal caching system can’t do—otherwise the RNC and Node B would get out of step since a conventional cache can’t pair devices
Trials with Carriers
-SCMR has been very successful so far and the benefit here is that through the trials we’ve seen that interoperability works with IQS because of spoofing the RNC and Node B into believing they are talking to one another
-Despite this being used mostly for 2G/3G, it will likely be used in base stations for 10-12 years given the amount of time required to build out LTE
-There is a role for IQS in 4G too but it will be easier for competitors to enter the space for the reasons listed above
Movik Networks—VC startup trying to do something similar for LTE
-Cell sites are classified into categories as to where IQS is feasible to use
-Pricing: We don't have much color on pricing but we know the Kasumi Encryptions are the most expensive cost at about $500 or so and are needed on both ends. The cost will generally come to $3k/base station—pricing by B Node, thus a 50% gross margin would price it at $6k
-Sycamore is generally not scaled to do worldwide fulfillment, which is why they are currently speaking to RAN vendors and have announced partnerships with them—this will also help them to create a more general product that they can sell directly through each operator
-The costs are minimal to SCMR. Trials are done in 2 steps, lab based trials at minimal costs and field trials—there are not many units out in field trials. Customers have been very cooperative—there were just a few SCMR employees in Portugal when VOD was doing their trials there. The trials were mostly conducted by VOD employees
-We have no sense as to when the trials with VOD or anyone else might finish but given that it's been going on for over a year, it seems like a conclusion, one way or another, is imminent in the next few months.
-From our checks we are seeing some new technologies to help with challenges of congestions but none of them are competitive with IQS for backhaul in 3G networks
-Congestions happening today is already a problem and carriers are proactively pushing for a new tool in the toolbox and IQS is just that
-Because it’s cheap and can be implemented per base station, the value here is that it can tactically be pushed out over a small number of base stations to start so SCMR can begin to see revenue from many operators for a small number of base stations
|Entry||11/16/2011 10:59 AM|
Interesting thesis. We have a small position right now as well.
1) How do you calculate $3.50 of NOLs? Would be very helpful if you could paste in your calculation. As of 7/31/11, they had $805mm of federal and $145mm of state NOLs, plus some r&d carryforwards.
2) Saw that you cited $19.00 as your stock price in the header. As the stock closed yesterday at $19.93, is your recommendation only to buy below $19 or was that a typo?
|Subject||RE: SCMR questions|
|Entry||11/16/2011 11:55 AM|
I will take a look at my NOL calc and get back to you on exactly how I got to $3.50, but I meant to say NPV of NOLs is $3.50.
On the stock price, yes--didn't look at the closing price. We've been buyers from 21-17 so have average around 19, so I'd say it still makes sense at 19.93.
|Subject||RE: RE: SCMR questions|
|Entry||11/16/2011 11:57 AM|
For the record, one of my biggest pet peeves on VIC is when people post an idea but say it's only worth investing in at a price very different from the current stock price so, it was just a typo!
|Entry||11/16/2011 04:01 PM|
If this product doesn't gain traction, does management throw good money after bad or will they just pull the plug? If not, what makes you think so?
|Entry||11/16/2011 05:31 PM|
So far we haven't seen any trials cancelled by the carriers. Using VOD as an example since it's furthest along, I have gotten the impression from the company that if VOD suspends the trials, we will see management return cash to shareholders. This is a very good management team, in my opinion. The chairman owns 4.5m shares and the CEO owns 1.6m shares. The chairman recognized how overvalued his stock was in 2000 so he did a follow-on and instead of making dumb acquisitions or overspending on the optical switching business, he simply sat on the cash and has already done two special dividends. He also rightly recognized the commodity nature of the optical product and didn't spend like CIEN or JDSU on it but rather spent only enough on R&D to optimize FCF which they've spent on the IQS product. I'm not saying IQS will definitely work, but all of this gives me confidence that they are good capital allocators and haven't destroyed any value here. My family knows the chairman (though I've only met him twice) so I can vouch for his modesty and lack of ego.
|Subject||management / IQS competition|
|Entry||11/17/2011 10:15 AM|
thanks for the idea. we have looked at this name before. i agree with your assesment that mgmt is very focused on not burning cash on stupid ventures, and they are owner operators - but so is Ron Perelman!!
could you give me some more color on IQS - is this the best product out there for compression? what are its limitations? who is the competition etc. it looks like you have you talked to customers so would like some color.
have you looked at OPWV? the thesis there was similar. new video optimization product would drive future earnings with cash on b/s to protect downside. i am not sure what their product does but was going after a similar bandwidth optimization problem. it looks like the new product has not been getting any traction. so, what gives you comfort on IQS?
|Subject||RE: management / IQS competition|
|Entry||11/17/2011 12:44 PM|
Thanks for the idea. I skimmed their most recent conference call and didn't see anything specific about the timeframe for when they would consider shutting down the company and returning cash if IQS doesn't work. Have they stated this publicly anywhere?
By my count they have about $15.60 per share in TBV which is very close to cash, but they are burning about $0.50 per year. So if they let this go on for a year the potential distribtion would be $15.00 per share. So there is maybe $4.00 per share or about $100M in value being attributed to the existing business and IQS. Any particular view on how much the existing business could be worth? If the answer is not much, $100M seems like a reasonable but not dirt cheap option on the new venture.
|Subject||RE: RE: management / IQS competition|
|Entry||11/21/2011 01:56 PM|
Thanks, good points, specialk. I'm assuming they can probably get 1.5-2x gross profit on their optical business in which case we might get an additional $1-2/shr in value after tax. Not sure what the tax status on this business would be so I'm fully taxing it. I'm assuming this covers cash burn over the time it would take to sell and distribute with a little bit leftover, hence $16. Yes, we are paying about that much for the option here so it's not free, but if it works (I've gotten comfortable that the probability is fairly high), there's a massive opportunity here. My thought process being, this one might not work but if I get 20 of these over my careers, I am willing to bet on all of them!
My conversations with management have lead me to believe they will shut down the company assuming this doesn't work. In Dec 09 they distributed $10/shr in a special dividend and another $6.50 in Dec 2010 so they are certainly moving in that direction. This is obviously a more tax advantageous strategy for both desh and dan smith since they won't incur any taxes on the special dividend distribution.
Heffer, not sure what the comparison is to Ron Perelman here? Just that they are both owner/managers? As per my thoughts above, I think they are good owner/managers and not all owner/managers are totally alike. As per more color on IQS, I've listed most of it above. Doesn't seem like there's really any totally unique competition to it--no one else is doing the exact same thing except Movik (as listed above) but as far as I know, they aren't yet in any field trials. Other guys are using streaming/shaping technologies but no one is really doing anything on the deduplication side. Haven't gotten any color on limitations from the field trials, but as I mentioned it doesn't add much value in LTE. Thankfully, the first base stations to be upgraded to LTE are the ones in high population areas where this solution isn't really needed. Again, color from customers above. In terms of openwave, the product is very different. Openwave started as a conversion mechanism to convert data to be properly viewed on a small 1-2 inch cellphone screen. They essentially optimized a video or webpage to be viewed on a feature phone. This is now done internally on smartphones. Since then Openwave has attempted to create an optimization product that compresses data between the phone and the network through a server that sits on the network. This is different since it doesn’t work on the wireless backhaul (between the RAN and base stations) which is where most of the congestion is. Doesn’t seem like any of the currently available network optimization products target the backhaul.
|Subject||RE: RE: management / IQS competition|
|Entry||11/21/2011 02:16 PM|
SpecialK - you are being conservative in ascribing no value to the NOLs, I assume? I might argue that is being too conservative. Including a discounted value to the NOLs, you could get to a significantly lower implied value for the business...
|Subject||RE: RE: RE: management / IQS competition|
|Entry||11/21/2011 05:38 PM|
But I think we can only value the NOLs if we assume IQS works. Don't see this as a CLRS type 'buy a private co and harness NOLs' if IQS doesn't work.
|Subject||RE: RE: RE: RE: management / IQS competition|
|Entry||11/21/2011 06:20 PM|
Sure, but NOLs do have value if SCMR was sold, albeit at a reduced IRC 382 schedule determined amount.
|Subject||RE: RE: RE: RE: RE: management / IQS competition|
|Entry||11/21/2011 07:08 PM|
But I think given the low cost basis, a return of capital through a special dividend is more likely than a sale but I do see your point. Thanks
|Subject||RE: RE: RE: management / IQS competition|
|Entry||11/21/2011 07:42 PM|
May not be an either/or situation. Could be both a special dividend and a sale to maximize NOL value....
|Entry||11/22/2011 10:08 AM|
Interesting idea, thanks for posting the update. Could you give some more detail on your industry contacts (titles, relationship with SCMR, etc) and what some of the specific feedback was? Any additional detail on your comfort level with IQS getting traction would be great.
|Subject||RE: Primary research|
|Entry||11/22/2011 12:03 PM|
In terms of names of people I can share, there's a GLG consultant, Andy Jones who was helpful. I also spoke to IR and the CSFB analyst. The rest were in my own network. Hope that helps.
|Entry||05/22/2012 02:49 PM|
any update here? below cash but the market seems more skeptical that IQS will work? thanks
|Entry||05/23/2012 02:00 PM|
Down further post-earnings today, despite increasing cash balance. We initiated a position sub 14 today, which is about $1 below current assets-total liabilities.
Would guess that there is decent chance there's some good patent value here.
|Subject||RE: RE: update|
|Entry||05/23/2012 03:11 PM|
any reason why they're sitting on so much cash? Despite previous special cash distribution? I've never understood this company but there have been times to buy it below cash "waiting for lightning to strike" as described by Third Avenue in a letter years ago.
|Subject||RE: RE: RE: update|
|Entry||05/23/2012 04:07 PM|
Option value, I would guess. Plus, founders own a lot of stock so perhaps they don't want to trigger tax event. Probably would rather sell the company? Just a guess.
Good news is that mgt doesn't have incentive to piss away cash, do deals, etc.
|Subject||RE: RE: RE: RE: update|
|Entry||05/25/2012 03:29 PM|
i think they will do it soon if they don't see iqstream working since it's a return of capital which would not be a taxable event. on iqs, seems like no change which means it's probably less likely it'll go through though no one is really abandoning trials yet so i guess that's a good sign. it's unfortunate to see the stock down so much but still a cash alternative where you aren't paying anything for the option now.
|Subject||A bonehead downgrade|
|Entry||05/31/2012 08:33 AM|
Argus downgraded SCMR to "sell" this morning. At $13.51? Really? I understand impatience and short-termism, but is this not the latest sell call of all time, particularly with SCMR's net cash per share of $15.25 and a very low historical cash burn rate (note no mention of NOLs). I have no idea what the probability of success is as it relates to IQStream but you are not paying anything for a potentially very lucrative free call option. If someone sells today based on this downgrade call, they should not be managing anyone's money.
|Entry||09/20/2012 09:18 AM|
Question remains whether we will ever see anything from IQStream but nice to see a tech mgmt team repeatedly avoid blowing cash on something stupid.
CHELMSFORD, Mass. -- September 20, 2012
Sycamore Networks, Inc. (NASDAQ: SCMR) today announced revenue for its fiscal fourth quarter and year ended July 31, 2012 of $16.8 million and $57.3 million, respectively. This compares to $13.0 million and $48.7 million for the comparable 2011 fiscal periods. All revenues were derived from sales of the Company’s Intelligent Bandwidth Management products and services.
The Company ended the year with cash, cash equivalents and short and long-term investments of $439.4 million compared to $441.4 million at July 31, 2011.
Full financial results for the Company’s fourth quarter and fiscal year 2012 are pending completion of impairment testing for long-lived assets, which the Company is periodically required to assess. The Company expects that charges, if any, would be non-cash and are estimated not to exceed $2.0 million. After completion of this analysis, the Company expects to release its final financial results within its required filing deadlines.
The Company also announced that, on September 19, 2012, its Board of Directors approved a special cash distribution of $10.00 per share of common stock. The cash distribution will be paid on October 11, 2012 to stockholders of record as of October 1, 2012. In accordance with NASDAQ Rule 11140(b), the ex-dividend date will be October 12, 2012, the first business day following the payment date for the cash distribution.
|Entry||10/24/2012 10:51 AM|
Thoughts on the plan of liquidation? More specifically, potential proceeds from IQS? Thanks
|Entry||10/24/2012 12:15 PM|
Not my board, but could the proceeds really be that meaningful? In terms of management signals it doesn't seem positive for IQS. If there was alot of value in it, I would think they would have ran with it for a bit (particularly with THAT much cash even after the $2 distribution)....
|Subject||RE: RE: Update?|
|Entry||10/24/2012 07:25 PM|
Apologize for posting such a poor idea with so much downside. I thought the optical business would be worth more in a liquidation. If I look at cash, wind down costs, sale proceeds, I'm pretty at where the stock is trading today so any sale of IQS is upside though I think that's unlikely.
|Subject||RE: RE: RE: Update?|
|Entry||03/04/2013 06:50 PM|
any update after the 8k today? depending on how long it takes for this to liquidate and how much they spend in the process, it could be a zero or could see between 0.60 to 1.0 recovery...