Sponsored By

Redback's SmartEdge Still No Savior

Redback keeps cutting expenses, as SMS products pave the road for its edge router business UPDATED 3:30 PM

April 11, 2002

5 Min Read
Redback's SmartEdge Still No Savior

Redback Networks Inc.'s (Nasdaq: RBAK) proclaimed savior, its SmartEdge 800 edge router, hasn't yet answered the company's prayers (see Can Redback Come Back? ).

Just before Redback reported results Wednesday for its quarter ended March 31, its stock closed down $0.26 (9%) to 2.59. In trading on Thursday, Redback shares were down 0.24 (-9.27%) to 2.35.

Redback is trying drum up sales for a new product line, its SmartEdge router. The idea is for the company to translate its large Subscriber Management Services (SMS) customer base into next-generation edge router sales. For the moment, however, its SMS DSL-aggregation product still makes up 80 percent of its business in the March quarter.

This is precisely why Gartner Group switching and routing analyst Jennifer Liscom calls the company a diamond in the rough. To the extent that its SMS product penetrates the market, Redback has a "good chance" of picking up edge router wins, she says.

Meanwhile, the stock is taking a beating from those who don't yet see the progress in the cold, hard revenue numbers for the SmartEdge router. "The stock, we think, is a leveraged bet on the success of the new router," writes Morgan Stanley Dean Witter & Co. analyst David Jackson in a Thursday note to clients. "The product looks good, the target market large, and trial activity healthy. But the router is a new product with limited revenue visibility competing against products from Cisco Systems Inc. (Nasdaq: CSCO), Unisphere Networks Inc., and Juniper Networks Inc. (Nasdaq: JNPR)."Redback's net revenues for 1Q02 were $40.6 million, up slightly from the $40.2 million it booked for 4Q01. Its revenues for the first quarter last year were $90.9 million. Redback's pro-forma loss for the quarter was 19 cents a share, versus a loss of 13 cents a share in the year-ago quarter. This was right in line with analysts' expectations.

When restructuring charges, amortization of intangibles, and other miscellany are added, Redback's net loss for the quarter soars to $34.7 million, or 23 cents a share. That loss, however, is still less than the $400.5 million (67 cents a share) it lost in 4Q01 and the $2.92 a share it lost during the year-ago quarter, including special charges.

The company's SmartEdge optical transport product added $2.5 million in revenues to its quarterly numbers. The SmartEdge 800 router contributed $4 million, up from $1 million in the previous quarter.

The company has also released new salary info. CEO Kevin Denuccio pulled down more than $3 million in bonuses last year, according to SEC filings.

Table 1: Redback Salary Survey

Name and Title




Kevin DeNuccio, President and CEO




Georges Antoun, SVP, Marketing




Dennis Wolf, CFO




Lars Rabbe, SVP, CIO




Pankaj Patel, SVP, Engineering




Vivek Ragavan, Former CEO







Note: Richard Bibb, Redback's SVP of Sales, left the company on January 4, 2002. His severance pay was $100,000, plus a $7,602 for six months of medical benefits.

Source: SEC filings

Looking ahead, Redback's immediate future rests on its SMS business – and that product's IP-routing features. "Most RBOCs have projected 75 percent growth in the number of DSL subscribers," says Denuccio. "There could be more significant upside to this forecast depending on the regulatory environment."

Thirty-six customers, including SBC Communications Inc. (NYSE: SBC), Qwest Communications International Inc. (NYSE: Q), and Korea Telecom, are currently deploying Redback's SMS 10000, the company says.

Meanwhile, the prospect for a quick uptick in sales looks grim. CFO Dennis Wolf says Redback's revenues will be "flat to slightly up" for 2Q02 and the company expects "a very difficult Sonet business environment," with no major contributions from the SmartEdge product line.

So where does that leave Redback? It will continue to cut costs.

Operating expenses for the quarter were $40.8 million, down 3 percent sequentially, according to Wolfe. The company's headcount dropped by ten to 805.

Wolf says Redback's operating expenses are down more than 33 percent from their historical high, "but there is still more work to do."

Redback had $156 million in cash at the quarter's end; it burned $45 million fewer dollars than last quarter, on essentially flat revenues.

As the capital-spending crunch wears on, Redback continues to back off its yearly guidance. Analysts currently predict that Redback will hit $200 million in revenues for the year; however, Wolf says he expects that while the company will be cash-flow breakeven by the year's end, it will bring in "somewhat less than $200 million in revenues."

Late last year, Redback said it "did not disagree" with analysts projections that the company will bring in between $240 million and $280 million in revenues for 2002.

However, there is some good news for Redback. Its largest customers continue to be the RBOCs such as Verizon Communications Inc. (NYSE: VZ) -- the ones with the most spending power. Indeed, the company is inching further away from the wreckage that was fiscal 2001, the toughest year in its history. During that year, its quarterly revenues dropped from $114.6 million in 4Q00 to $37.0 million by 3Q01. Its stock price dropped from a high of $198.50 in 2000 to a low of $1.17 in 2001.

— Phil Harvey, Senior Editor, Light Reading

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like