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Optical/IP

Redback Edges Into Qwest

In the metro transport market, there's more dust flying than Noah's flood could settle. Today the fight advanced, as a Redback Networks Inc. (Nasdaq: RBAK) announced that Qwest Communications International Corp. (NYSE: Q) will spend several million dollars over several years on its SmartEdge 800 product, Redback’s Sonet add/drop multiplexer that also does some amount of packet-switching and routing (see Qwest to Deploy Redback Switches).

This announcement is a big deal for Redback, coming days after a $120 million contract with Williams Communications Group (NYSE: WCG), which will deploy several SmartEdge boxes in its metro networks and long-haul networks over the next two years (see Redback Lands Deal With Williams ). Brean Murray & Co. Inc. analyst Gina Sockolow, in a note to clients, estimated the Williams deal could represent 10 percent and 20 percent, respectively, of Redback's SmartEdge revenues for fiscal years 2001 and 2002.

Qwest, one of the larger carriers, represents a key battleground with Cisco (see Redback's Qwest Deal: Optical Upside?), one on which investors and analysts have been eagerly awaiting the outcome. The SmartEdge platform is a distant second behind Cisco's ONS 15454 -- which boasts 22,000 systems in more than 500 customer locations with an annual revenue run rate of more than $1 billion -- but Redback appears to have beaten Cisco in the bid for a significant carrier customer.

Redback's other SmartEdge customers include Genuity Inc. (Nasdaq: GENU), Cable and Wireless (NYSE: CWP), Cistron Telecom, and Hargray Communications. Redback officials have only given specific contract details on the Williams deal and won't say how much its SmartEdge platform contributes to the company's overall revenues or how many SmartEdge boxes it's shipped to customers.

How does the company plan on winning against Cisco? Redback's marketing and sales pitch is about density and flexibility, according to Larry Blair, vice president for marketing.

"The SmartEdge has great advantages in terms of density, size, power, and future migration path," Blair says. Blair also says that the SmartEdge 800 has a five-year shelf life, as opposed to the two-year shelf life of competitors' products, a point that's not lost on large carriers. "First they want connectivity, then improved network efficiency, then they want converged IP services."

Industry analysts have given Redback credit for better data handling and service creation capabilities than Cisco's offering (see Redback Completes IP ASICs). And, in places like Williams and Qwest's networks, the SmartEdge can offer routing on a TDM (time-division multiplexing) platform without requiring a forklift upgrade.

But the game is Cisco's to lose. It got to market first with a cheaper Sonet solution that, despite having IP data capabilities, is mostly used as an OC48 add/drop box in metro rings. And only Cisco can turn its enterprise customers onto a carrier's telecom services in exchange for optical equipment buys from that carrier.

Further, as carrier networks evolve, so must Redback's business model. The SmartEdge 800 is a lower margin product that sells into a larger, more competitive market than Redback's subscriber management products. But as it lands more big deals with big carriers, the product's material costs will drop, which will be welcome news for investors.

Partly due to this Qwest announcement, Redback shares rose $4 (10%) to 44.25.

Representatives of Qwest did not return calls seeking comment. Cisco declined to comment specifically on Redback's announcement.

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com
DCITDave 12/4/2012 | 8:56:45 PM
re: Redback Edges Into Qwest Investors are watching Redback's margins closely as the company's optical business ramps up. Does anyone have other concerns about Redback's technology, customers, or product strategy?
Cisco Watcher 12/4/2012 | 8:56:44 PM
re: Redback Edges Into Qwest Phil,

> Investors are watching Redback's margins
> closely as the company's optical business ramps
> up. Does anyone have other concerns about
> Redback's technology, customers, or product
> strategy?

I'm curious if you are able to substantiate the rumors that Redback could not develop the SmartEdge 100 internally fast enough to stave off the Cisco 15327, so they are OEM'ing it from Merlin Systems. If this is true, do you think this will impact them in anyway? I'm sure they'll take the time to integrate it into the same management system as the 800 (NetOp). Any rumors about OC-192 support for the 800? I believe Cisco has been demonstrating 192 support for the 454 for several months now.

As far as customer's go, I think they are going to continue to be a second source of equipment. Though I don't think they're going to crack the RBOCs, unless they get their TL1 in order and go through the OSMINE process.

In the foreseeable future I think they will continue to lag behind the Cerent products while fighting off Cyras and other new entrants.

CW
lookkoolux 12/4/2012 | 8:56:44 PM
re: Redback Edges Into Qwest For Q3 OO (July-Sept), they said in the CC 20% of the 80 million revenues were from Smart Edge, the first quarter it shipped. For Q4 00 (Oct-Dec), they didn't break the 115 million revenue down in the CC, but had guided for 25 million of Smart Edge revenue in this lightreading article below.

http://www.lightreading.com/do...

<<redback's $10="" $100="" $16="" $25="" $81="" (out="" 2000,="" analysts="" announced="" coming="" company="" company's="" earnings="" exceeded="" expect="" expectations.="" expected="" financial="" first="" for="" forecast="" fourth="" from="" had="" hit="" in="" its="" line.="" million="" million),="" million.="" most="" of="" officials="" only="" quarter="" reiterated="" revenues="" sales="" sales,="" saying="" smartedge="" statement="" that="" the="" their="" they="" third="" this="" total="" week="" while="" with="" year,="">>

Since Q4 revenues were 115, higher than the 100 million Q4 guidance, it seems reasonable to assume that some of the upside was due to the Smart Edge, and so they shipped more than the guidance of 25 million.

The company seems to have gone all mum for competitive reasons on how it is doing in specific segments, quoting just total revenues, so will probably have to rely on Dell' Oro, RHK or some other research group to track market share. At the moment RBAK must have less than 20% (if all the sequential revenue growth were Smart Edge, meaning they shipped 50 million worth in the last quarter, compared to CSCO's 250 million), probably 12-14% (30-35/250), but could be rising rapidly off of this small base.
</redback's>
lookkoolux 12/4/2012 | 8:56:44 PM
re: Redback Edges Into Qwest For Q3 OO (July-Sept), they said in the CC 20% of the 80 million revenues were from Smart Edge, the first quarter it shipped. For Q4 00 (Oct-Dec), they didn't break the 115 million revenue down in the CC, but had guided for 25 million of Smart Edge revenue in this lightreading article below.

http://www.lightreading.com/do...

<<redback's $10="" $100="" $16="" $25="" $81="" (out="" 2000,="" analysts="" announced="" coming="" company="" company's="" earnings="" exceeded="" expect="" expectations.="" expected="" financial="" first="" for="" forecast="" fourth="" from="" had="" hit="" in="" its="" line.="" million="" million),="" million.="" most="" of="" officials="" only="" quarter="" reiterated="" revenues="" sales="" sales,="" saying="" smartedge="" statement="" that="" the="" their="" they="" third="" this="" total="" week="" while="" with="" year,="">>

Since Q4 revenues were 115, higher than the 100 million Q4 guidance, it seems reasonable to assume that some of the upside was due to the Smart Edge, and so they shipped more than the guidance of 25 million.

The company seems to have gone all mum for competitive reasons on how it is doing in specific segments, quoting just total revenues, so will probably have to rely on Dell' Oro, RHK or some other research group to track market share. At the moment RBAK must have less than 20% (if all the sequential revenue growth were Smart Edge, meaning they shipped 50 million worth in the last quarter, compared to CSCO's 250 million), probably 12-14% (30-35/250), but could be rising rapidly off of this small base.
</redback's>
twistedcopper 12/4/2012 | 8:56:44 PM
re: Redback Edges Into Qwest does anyone know how much revenue redback pulled in from the smartedge product over the past three quarters (each quarter)?
-twisted
DCITDave 12/4/2012 | 8:56:42 PM
re: Redback Edges Into Qwest >> I believe Cisco has been demonstrating 192 support for the 454 for several months now.

Do you know when they'll be shipping it or announcing it? If you have some info here, drop me a line at [email protected]

Thanks.
dc boy 12/4/2012 | 8:56:39 PM
re: Redback Edges Into Qwest Ciena - June 2001 (demo.)
Cisco - Promised but availability date not set.
Redback - 2nd Half, CY01 (commercially available).

source: Brean Murray, Redback research report dated 1/8/01.

Redback is focused in on only one competitor, Cisco. They made that extremely clear in their last conference call. Obviously, Cisco is the market leader, but it seems like market share is continually shifting. Contracts like these do not happen just for the heck of it.
tecpatl 12/4/2012 | 8:56:35 PM
re: Redback Edges Into Qwest Does anyone know off hand the margin numbers Redback was tossing around for the SmartEdge product line? What where they running w/just the SMS products?

-Stu
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