Updated from 3:25 p.m. EST

When it had its astonishing market debut last year,

Sycamore Networks

(SCMR)

showed the earmarks of a sapling with a lot of promise. Tuesday, the company posted earnings that beat Wall Street expectations, and indicated that it is catching up with the other trees in the optical-networking forest.

The Sycamore File

Operations

Business: develops and markets intelligent optical networking products

FY 2000 Revenue: $198.1 million

FY 2000 Earnings Per Share: 10 cents

2001 Estimated Earnings Growth: 18 cents a share

Stock Snapshot

52-Week Range: $47.25 - 199.50

Percentage Change from Jan. 1: -41.7%

Market Cap: $15.9 billion

P/E Multiple: 491

Shares Outstanding: 272.8 million

Source: Baseline, Morningstar.

The Chelmsford, Mass.-based maker of optical-networking hardware posted its fiscal year 2001 first-quarter earnings after the market closed Tuesday. But is the groundling still spreading its roots? Leading up to the report, Wall Street was paying close attention for three keys to the company's prospects: meeting revenue growth expectations, the outlook for 2001 and signs that it is nabbing new clients.

The early exit polls were positive: Sycamore beat Wall Street's first-quarter expectations by a penny, and said it remains optimistic about its ability to generate revenue growth that meets or exceeds the overall current growth of the optical-networking market.

The company reported first-quarter income, excluding the amortization of deferred stock compensation, payroll taxes on stock option exercises and acquisition costs, of $6 million, or 2 cents a share, a penny ahead of analysts' estimates, according to First Call/Thomson Financial. A year earlier, the company posted a loss of 2 pennies a share. Revenue for the first quarter ended Oct. 28 rose to $120.4 million from $19.5 million in the year-ago period. Revenue rose 33% from $90.4 million in the fourth quarter.

Operations

Sycamore's development of an optical network helped the company to eke its way into a corner of the marketplace, and it promises big things. While Sycamore began development late in the game, the company managed to bring its switch to market first. But Sycamore's client list is only 10 deep.

The promise surrounding Sycamore and other optics companies is that networks are migrating to a system of optical-fiber transports and optical switches, using equipment like Sycamore's to transfer data as light waves rather than converting it to electronic packets. Yet, clouds of doubt are looming over the cost of building out this network. Fierce competition for customers adds additional doubt. Investors will be watching to see if Sycamore has landed new business, or else it may be perceived as falling behind competitors like

Nortel

(NT)

and

Ciena

(CIEN) - Get Report

.

Sycamore has based its operations around the development of optical-network switches, devices that connect optical-network lines, route and reroute signals, and detect faults within the network. This is a major contribution to a data transfer network: Problems with the lines could delay transfer of data for long periods, a definite no-no in the days of Internet speed. With the ability to switch data routes in less than a second, as well as carry much higher volumes of data at greater speeds, Sycamore and its investors believe that optical networking is the way the world will get connected in the future.

The Stock

Sycamore made headlines in October 1999 with an initial public offering that shot up like Jack's magic beanstalk, then split 3 for 1, and followed up with a second stock offering within months. The stock's 386% opening-day gain was the fourth-best IPO ever.

The stock has posted a 41% drop so far this year and a 27% drop over the past 12 months. But after the IPO sent the stock to stratospheric heights, the most logical direction from a valuation standpoint was down. Given that the stock is priced for perfection, it may face challenges performing: Its current

price-to-earnings multiple is 491.

Morningstar.com

gives Sycamore an F rating on valuation but an A for financial health. Sycamore is also listed as having a beta of 1.6, beta being a measurement of stock volatility relative to the entire market. A beta greater than one typically means it rises higher on the market upswings, and falls lower on the downturns. Sycamore's biggest backers in the fund world, listed below, have been along for the bumpy ride.

Background Check
Check out these recent TheStreet.com stories on Sycamore Networks

Sycamore Rallies on Switch Sale to BellSouth (10/12/00) : Sycamore Networks won a contract to provide BellSouth with new-generation optical switches and transport equipment for its planned Internet gateway service center in Florida . . . more

Sycamore Slips as Pipeline Worries Come to the Fore (8/25/00) : The heat is intense at the top of the optical networking heap, and Sycamore is getting a little singed Friday for failing to give investors enough growth firepower to support expectations . . . more

Fund Managers See Big Earnings, Growth for Sycamore Networks (8/24/00) : Who knew how many fund managers were tree-huggers? Many fund managers have loved Sycamore Networks since they first laid eyes on it in October. They expected Thursday's earnings report to only make their passion more fervent . . . more

Networking IPO Sycamore Takes a Leaf From Cascade's Book (8/23/99) : SAN FRANCISCO -- It's no secret that investors in IPOs give prospectuses just a cursory glance these days, often overlooking telling details. With Sycamore Networks, the pertinent reading is found on pages 35 and 36: "Management." . . . more