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Redback Stock Stages RallyRedback Stock Stages Rally

Shares ramped 50 percent yesterday and are climbing again this morning on optimism and acquisition rumors

October 12, 2001

3 Min Read
Redback Stock Stages Rally

Shares of Redback Networks Inc. (Nasdaq: RBAK) rose 50 percent ($0.82) to $2.46 yesterday, as the company rode the market's momentum, enjoying some positive reaction to its latest earnings conference call and more guff about the company being a potential acquisition target.

The stock was off to the races again this morning -- climbing another 18.7 percent to $2.92 at press time.

Though a late afternoon note on Briefing.com said that rumors were swirling about Redback being an acquisition target for Cisco Systems Inc. (Nasdaq: CSCO), some stock watchers remained unmoved by the speculation; the same rumor has made the rounds many times.

"I think the biggest factor was that the market was red hot," says U.S. Bancorp Piper Jaffray analyst Conrad Leifur. "The stock is just now getting back to the levels it was at in September."

The telecom equipment maker's earnings call on Wednesday was a mixed bag, but in Redback's case, mixed news is good news; the company's fortunes have been in the crapper for a while.

One positive thing was that executive managers are actually joining Redback -- as opposed to leaving a cartoon hole in Redback's front door as they run to join one of its competitors. Since signing on in August, Redback CEO Kevin DeNuccio has added Georges Antoun as its senior vice president of marketing; Abrahim Abassi as its senior vice president of manufacturing; and Stuart Monks as its vice president of engineering for the Subscriber Management System (SMS) product line.

What did it take to convince such seasoned managers that Redback was a nice place? Cash, natch. That's why buried sarcophagus-like in Redback's quarterly results was the disclosure that it included $4.28 million in its selling, general, and administrative expenses (SG&A) for "executive recruitment fees and sign-on bonuses."

Another positive thing for Redback is that -- thanks to ongoing cost-cutting measures -- the company now needs quarterly sales of about $75 million to break even on an operating cash-flow basis. The catch? The company's quarterly revenues were $37 million, and they're expecting much of the same for next quarter.

Redback also said it has consolidated all of its outsourced manufacturing to one firm: Jabil Circuit Inc. The change, though, prompted one of its old manufacturing partners, Arrow Electronics Inc., to sue Redback for "in excess of $54 million" in damages relating to inventory left over from the severed relationship. Redback disagrees and says it will "vigorously defend itself" in court.

Redback's cost-cutting moves continue to be encouraging to Wall Street analysts. One of the research and development programs it cut was the SmartEdge 100 product. Interestingly, Redback just finished buying Merlin Systems, the startup that helped develop the SmartEdge 100 technology. After spending about $11 million in stock and bringing in about 50 new employees, Redback decided there wasn't a market for the product and killed it.

In all, though, Redback's new managers see a sunny picture for the company in the coming year. On Thursday, Antoun told Light Reading that the company feels its addressable market will grow from $900 million to $2.7 billion next year. He believes Redback will see this growth as it adds new SMS features, introduces its new SmartEdge 800R aggregation router, and sees sales of a new release of the SmartEdge 800 transport box.

Redback's revenue guidance for next year suggests that it only expects to capture about 10 percent of its addressable market. Though not all revised projections are in yet, several Wall Street analysts think that the company's internal projections are too optimistic, given the weakening economy and the fact that Redback is so far off its break-even point.

Though the new managers and Wall Street aren't yet in sync, at least, for a change, one side is actually optimistic about the company's long-term prospects.

- Phil Harvey, Senior Editor, Light Reading

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