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Redback Sees Rebound

Says its big drop in Q3 revenues is an anomaly; revenues will return to 'above $30M' next quarter UPDATED NOON

October 10, 2002

3 Min Read
Redback Sees Rebound

Redback Networks Inc. (Nasdaq: RBAK) said Wednesday its third-quarter revenues dropped 53 percent from a year ago, thanks largely to delayed equipment sales to carriers and weak carrier capital spending (see Redback Q3 Revenues Plummet). Though disappointing, the results met Wall Street's recently lowered expectations (see Redback Limps Into Genuity and Redback Warns).

The company reported revenues of $17.4 million for the quarter ended September 30, compared to year-ago revenues of $37 million. The company's pro forma loss was $34.8 million, or 20 cents a share. Redback's actual (GAAP) quarterly loss was $52.9 million, or 30 cents a share.

Its revenue decline was both sharp and unexpected (until a couple of weeks ago), but Redback maintains that the third quarter was an anomaly. "We do not believe these numbers reflect a new trend in business activity for Redback," says Kevin DeNuccio, Redback's CEO.

Redback's chief financial officer, Dennis Wolf, told investors and analysts that next quarter the company's revenues would "reach above $30 million."

The company says it will cut quarterly expenses by $6 million to $9 million, but declined to specify where the cuts would be. During the quarter, Redback's operating costs were $37.6 million, of which about 80 percent are fixed costs and 20 percent variable, according to Wolf.

In a research note sent Thursday morning, Morgan Stanley Dean Witter & Co. analyst David Jackson writes that Redback ought to "lower its breakeven quarterly revenue run-rate below [its] $40 million target due to the difficult operating environment."

DeNuccio tempered his optimism by cautioning analysts not to assume that it would get back all of its deferred business from the third quarter. "I think that in Q3 we definitely had delayed revenues, but I don't think you recapture the whole bit."

Redback's cash and investments were $138.3 million at the quarter's end. DeNuccio says Redback's board is still aiming to get the company to cash-flow break-even by the first half of 2003.

"We have enough cash to sustain us through the industry downturn," DeNuccio says.

DeNuccio reiterated that some Redback sales were lost in the third quarter because customers were anticipating a new release of Redback's subscriber management system (SMS).

The new technology that carriers are waiting for are new cards that plug into the SMS 10000 chassis, DeNuccio says. The new cards let carriers manage the same number of broadband subscribers while allowing each individual subscriber a higher amount of bandwidth, DeNuccio says.

British Telecommunications plc (BT) (NYSE: BTY; London: BTA) and Shanghai Telecom each made up more than 10 percent of Redback's revenues.

Nokia Corp. (NYSE: NOK) made up about 16 percent of Redback's quarterly revenues. Redback's sales through Nokia were all to carriers outside North America and, so far, Nokia has only put them into wireline networks, DeNuccio says.

Since Nokia invested $36 million in Redback earlier this year, the wireless equipment maker has become Redback's largest customer (see Nokia Invests $36M in Redback). Redback, however, hasn't said which carriers it has penetrated with Nokia's help, nor will it reveal how much it makes on each Nokia sale of its gear.

The company's SmartEdge router continued to show growth during the quarter, bringing in $6 million in revenues from four new accounts. DeNuccio says Redback's objective is to be the "primary edge router alternative to Cisco Systems Inc." (Nasdaq: CSCO).

Redback shares were up $0.01 (3.85%) to $0.27 in trading on Wednesday. The company's stock hasn't been above a $1 since August 30.

— Phil Harvey, Senior Editor, Light Reading

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