Can Redback Come Back?
Redback Networks Inc. (Nasdaq: RBAK) saw its stock pop yesterday, as it announced the new SmartEdge 800 Edge Router (see Redback Unveils Edge Router). Wall Street was expecting the new product, but it was encouraged by the fact that the SmartEdge 800 is already generating revenue from three of its 15 trial customers.
Redback wouldn’t comment on specifics about the customers, but the news was enough to boost the stock up 0.37 (9.59%) to finish at 4.23.
The company has had a tumultuous year. Its stock has dropped from a high of almost $200 a share to roughly $4 today (see Redback Melts Down). Its original management has all but disappeared (see Another Redback Resignation). It has steadily reported declining revenues (see Redback's Rough Road). And it has lost the lead it once held in the subscriber management system (SMS) market to companies like Unisphere Networks Inc. (Nasdaq: UNSP) and Cisco Systems Inc. (Nasdaq: CSCO).
According to data from Infonetics Research Inc., Redback garnered 37 percent market share in the SMS market in the fourth quarter of 2000. By the second quarter of 2001, that percentage had fallen sharply to 23 percent. Cisco had about 41 percent market share in Q4 2000, and it saw its marketshare drop to 39 percent in Q2 2001. Unisphere, with its ERX platform, increased marketshare from 8 percent in Q4 2000 to 27 percent in Q2 2001.
But Redback is not ready to give up. And after months of silence on the product front, it finally has some new gear. It is attempting to make a turnaround with a new management team and a new product focus: the edge router market (see DeNuccio Joins Redback).
Georges Antoun, senior vice president of marketing for Redback, says that with the introduction of the new SmartEdge router and enhancements to existing products, the company will increase its addressable market to $2.7 billion next year from $900 million this year. Analysts predict Redback will hit between $240 million and $280 million in revenues next year.
But entering the edge router market may be easier said than done. Cisco currently owns that market with 66 percent share. It has a full suite of products from the lower-end 7500 routers to the newly revamped GSR line to fill edge aggregation needs.
Redback executives claim that the SmartEdge 800 beats Cisco's products on port density as well as software flexibility. This would make the SmartEdge a more economical and long-lasting product choice for service providers.
Density may be the best way to compete. Kevin Mitchell an analyst with market research firm Infonetics, says a recent study found that roughly 45 percent of 75 tier-two service providers in the United States and Canada say that density was the most important feature of an edge routing platform.
So how does Redback stack up on its claims of offering the highest density? Compared to Cisco's 12410, Juniper’s M20, Riverstone’s RS 8000, and Unisphere’s ERX1400, Redback’s SmartEdge 800 wins the port density argument for DS3 through OC48 interfaces (Riverstone and Unisphere don’t offer OC48 interfaces). But Cisco appears to beat Redback in almost every category with its newer and denser product the 12404. The only area where it doesn't beat its competitor is in OC12 density, where Redback offers 192 OC12 ports and Cisco offers 92 ports of OC12 per seven foot rack.
Table 1: Who's Denser?
|Redback SmartEdge 800||480||384||192||48||192|
|Unisphere ERX 1400||432||144||36||NA||432|
|*Port counts are per 7-foot telco rack|
While this is an important feature to address, even Redback agrees that port density can change with the introduction of new line cards.
“There will always be new additions to hardware that could surpass our density,” says Ravi Chandra, vice president of IP software for Redback. "But the biggest difference is in the software architecture. We are able to deliver a modular software architecture that Cisco is not able to deliver.”
Unlike Cisco’s IOS routing software, Redback’s software has been designed so that each of its routing protocols can be loaded separately. This is important because it allows the device to continue forwarding packets even when a piece of its software has been damaged. Cisco’s IOS can only be updated in one big chunk. Chandra, who used to work on the Cisco’s GSR products, says that if part of the IOS software breaks, the entire box goes down.
But is this feature enough to win a place in an already crowded market?
Some analysts say the company could have a shot, if it is able to exploit its existing SMS customer base.
"If they can leverage existing SMS customers and use those doors there to open doors for the SmartEdge product line, they have a good chance of taking some market share," says Infonetics' Mitchell. "They already sell to a lot of tier-one service providers."
Mitchell is still concerned that the SmartEdge 800 hasn’t gone far enough in terms of innovation. He says he expected Redback to include subscriber management in the product, putting it more firmly up against Unisphere. Cisco, which also has separate products for edge aggregation and edge routing, has already introduced at least one product that marries the two functions.
"In the long run, I think it will hurt them not to include subscriber management in the box,” says Mitchell. “I think the market is moving toward collapsed integration of these two features at the edge.”
— Marguerite Reardon and Phil Harvey, Senior Editors, Light Reading