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June 18, 2002
Redback Networks Inc.'s (Nasdaq: RBAK) transformation into a leading edge router player still appears to be a work in progress. The company has failed to land any big router deals and is hustling to make its numbers as the final days of the second quarter of 2002 tick away, according to several sources close to the company.
As of late last week, Redback had only reached about $21 million in revenues booked for the quarter, say the sources. That's a ways off from the $41 million in revenues expected by a consensus of Wall Street analysts surveyed by Multex.com Inc.
What gives? Redback continues to talk up the number of carriers testing its new edge router, the SmartEdge 800. At last count, the company says its edge router is in trials with more than 50 carriers, about one third of those in the U.S. The company says that nine of the fifty carriers have produced revenue, but that's only one more paying customer for the edge router than Redback had last quarter.
And it looks as if those customers won't be contributing much to the current quarter. Sources close to carriers and Redback confirm that the company hasn't yet booked significant revenues from its SmartEdge 800 this quarter. As of last week, sources say, Redback had shipped edge routers to Korea Telecom, WorldCom Inc. (Nasdaq: WCOM), Telus Corp. (NYSE: TU; Toronto: T), Pipex, and Taiwan's HiNet, the data communications group within Chunghwa Telecom Co. Ltd. The only revenue the company appears to have booked so far this quarter is $77,000 from Pipex and less than $2 million from HiNet, sources say.
In a recent note to clients, Morgan Stanley Dean Witter & Co. analyst David Jackson wrote that his sources pegged the Chunghwa contract as covering 23 edge routers at a total cost of $1.8 million, or roughly $78,000 per router. "We believe the $78,000 average selling price suggests that the majority of the edge routers sold to Chunghwa are less than 50 percent populated with line cards," he wrote.
Indeed, Wall Street analysts are beginning to question the buzz that Redback is trying to generate about new sales in China.
A while back, sources on Wall Street had been whispering that Redback had landed an edge router deal with Chinese Petroleum Corporation (CPC). Morgan Stanley's Jackson, however, recently rebuffed the chatter, writing in a note to clients that he thinks CPC bought $550,000 worth of routers in connection with an SDH transport contract that was announced in July 2001. "We believe these contracts are in Redback's historical financials, and are not adjusting our estimates," Jackson wrote.
Redback declined to comment on its quarter, its edge router sales, or any unannounced customers.
The company's progress in the edge router space is crucial because the company expects much of its growth and, indeed, its long-term survival to come from edge router sales (see Redback Rallies Itself). In fact, the company has been almost entirely rebuilt around the edge-routing product since the bottom fell out of the DSL aggregation market, the primary source of business for its Subscriber Management System (SMS) product.
Its focus on the edge is what spurred Redback's recent decision to stop development on new features for its SmartEdge optical transport product (see Redback's Edge Router Redux). The company isn't giving up the optical transport race, but it's clear that with Cisco Systems Inc. (Nasdaq: CSCO), Nortel Networks Corp. (NYSE/Toronto: NT), and Fujitsu Network Communications Inc. (FNC) dominating the space, Redback's resources may have been better spent on edge routing. Redback recently cut 40 full-time and contract employees, according to sources with direct knowledge of the layoffs.
Redback has touted the technical merits of its edge router, and carriers do seem interested in the product, as shown by its claim of 50-plus product trials. What is not known is how soon said trials will turn into revenues and how Redback will convince large carriers that it is just as good a vendor as its two larger rivals, Cisco and Juniper Networks Inc. (Nasdaq: JNPR), which is in the process of combining with Unisphere Networks Inc. (see Juniper Nabs Unisphere for $740M).
One big roadmark may be the current bid out for a huge edge router contract at Verizon Communications Inc. (NYSE: VZ). Redback is a key Verizon customer, but Unisphere is said to be the favorite in that deal (see Unisphere Close to $200-300M Deal?). Verizon accounted for 15 percent of Redback's revenues in 2001, but those sales were mostly from the SMS products. Although sources say a final decision on that purchase has still yet to be made, failure to sell Verizon on its edge router could spell trouble for Redback over time.
In the near term, though, Redback has its hands full trying to make its nut for 2Q02. Because capital spending budgets are tight, service providers have been known to put off buying gear until the last minute in hopes of greater discounts from vendors.
Ultimately, Redback's next few quarters could be a do-or-die situation, say some analysts.
"Forget Wall Street's expectations," says CIBC World Markets analyst Stephen Kamman. "This is about whether a company lives or dies. This is not a question of how your stock's doing. It's a question of whether you are in business at all."
— Phil Harvey, Senior Editor, Light Reading
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