A Switch of Fortune for Osicom?

The simple name change to Sorrento may not do much, but hot telecom products and takeover talk might give the optical-switch maker a fighting chance

By Sam Jaffe

Usually, when a company changes its name, it's management's way of announcing that the company has changed the way it does business or that it has a new attitude. In the case of Osicom Technologies (FIBR ), which will be known as Sorrento Corp. as of Jan. 17, the change signifies little more than an alteration of the corporate structure.

The company no doubt hopes the new name also signals a change in its fortunes. As one of the first manufacturers of "metropolitan area" optical switches for telecommunications networks, Sorrento should be a market leader in a burgeoning market. Instead, the company barely eked out $7 million in revenues in its fiscal third quarter, which ended in October. As a result, the company's once-hot shares, which hit a high of $149 in March, were down to $18.75 on Jan. 16 -- up from a 52-week low of $10.

Sorrento, however, may have a better story to tell than Wall Street is giving it credit for. Although the company is tiny, with a market capitalization of just $221 million, it has won some major contracts for its equipment and is starting to show the kind of top-line growth that will allow it to compete with the biggies such as Cisco Systems (CSCO ), Nortel Networks (NT ), and Lucent Technologies (LU ). "It's an interesting story," says Kevin Landis, manager of several Firsthand technology funds, which own a 12% share of the company. "They're in the right market with the right products, but they don't have [investors] looking at them as if they're a legitimate competitor."

The name change is simply the last act of a strategic shift by Osicom that started amid last fall's tech slump. Osicom was originally a holding company whose different subsidiaries were involved, in one way or another, with optical networking. Its main division was Sorrento Networks, which makes equipment that allows local carriers to connect their telecommunications networks within a metropolitan area.


  But Osicom's stock was getting pummeled, so the company decided to sell off its three other divisions and concentrate completely on Sorrento. It has successfully completed the sales. Good-bye, Osicom. Hello, Sorrento.

Such a move might have stirred excitement in the ranks of tech investors a year ago, but these days it's being met with a justifiable yawn. Sorrento, after all, has failed to capitalize on a multiyear lead in one of the hottest markets in all of telecommunications: the metro-network optical equipment market. In that market, an early bird that fails to get the worm tends to die off quickly.

Unlike long-distance networks, which have enormous bandwidth and stable data-traffic flow, metropolitan networks (data and voice networks that cover a city or metropolitan area) have highly variable traffic patterns. Extremely flexible equipment is needed to monitor and route the flow. Every telecommunications company today is in the process of moving its metro networks from analog to digital-optical switching. Metro optical switches -- large computers that take packets of electronic data, convert them to pulses of light, and then transfer them to the next leg of the network -- must be able to communicate between several different telecom protocols. It's a complex task. Metro switches are akin to an electronic dictionary that can translate half a dozen languages into every other language -- and do so in real time.

The good news about makers of such equipment is that the market is enormous and growing rapidly. Every major telecom company is looking to spend hundreds of millions of dollars on this type of gear. The bad news is that everyone wants to get a piece of the market. In the last two years, Cisco and Nortel both paid enormous sums for startup companies working on new optical-switching products. Cisco bought two outfits for a combined total of $7.4 billion in 1999: Cerent and Monterrey Networks. The products based on those companies' technology are just reaching customers now. Nortel bought startup Cambrian Networks for $300 million in 1998. And in December, Ciena (CIEN ) paid $2.6 billion in stock for Cyras just to be able to provide an optical-switching product for the metro market.


  Meanwhile, Sorrento's first product appeared in 1997, long before any of its rivals'. It was a switch that divided pulses of light into different shades of the spectrum, allowing one fiber to carry multiple channels of traffic simultaneously. Such a task is known as dense wavelength division multiplexing (DWDM), and Sorrento's product was the first DWDM switch to be designed specifically for the metro market. Most of its competitors are selling modified long-distance switches. "When I talk to Sorrento's customers, they say that its products are the best and most flexible for the metro market," says Joe Gladue, an analyst with Chapman Co., a money-management firm. "Because it's designed for the metro environment, and not a repackaged long-distance product, it meets their needs better and is cheaper."

In the past year, Sorrento has signed on a number of impressive customers. Most notable was its December deal with Cox Cable (COX ), which could equal as much as $40 million in sales over the life of the contract. Sorrento also counts AT&T Broadband, storage network company Inrange (INRG ), and several emerging local telecom carriers as customers. The company estimates that its current contracts could bring in as much as $520 million, and it is aggressively competing for more contracts.

The sales effort is just starting to show up on the company's top line, but it will have quite a ways to go before it hits the bottom line. The $7 million it generated in its most recent quarter doubled the company's revenue in the previous quarter. Sorrento expects to reach $10 million in sales in the fourth quarter, which will end on Jan. 31. But the company lost 63 cents a share in the third quarter, and it doesn't expect to turn a profit for several years, according to public filings. The company refused to comment for this story. Its executives are "too busy," according to outside public-relations consultant Jennifer Adams of Blanc & Otus.

Despite the lack of profit, Sorrento makes a tempting takeover target. "They have a product that customers clearly want, an excellent group of engineers in a field that is starving for talent, and they even have an impressive customer list," says Gladue. "Most takeover targets in the optical-networking space are startups that have never sold anything and sometimes don't even have a product yet."


  Indeed, speculation abounds that potential acquirers are sniffing around Sorrento. Industry newsletter lightreading.com reported in December that the company was in talks with Sycamore Networks (SCMR ). Both parties refused to confirm or deny the rumor -- although, as of yet, nothing material has been announced.

Sycamore isn't the only possible suitor. There are plenty of telecom equipment manufacturers that would like to add Sorrento's stable of engineers and products to their arsenal. Gladue points out that if a buyout occurs, it won't be for a bargain-basement price. "You have to pay the employees a decent price," says Gladue, "or else your most valuable asset will be walking out the back door."

Whether or not Sorrento gets acquired, it will continue to grow and compete in a rapidly expanding field dominated by giants. Right now, the market is assuming that only the big names will survive. But maybe there is room for the little guy, too.

Jaffe writes about the markets for Business Week Online in our daily Street Wise column

Questions or comments? Please visit our Ask Sam Jaffe interactive forum

Edited by Thane Peterson

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