Redback Falls on Verizon Hopes

Redback Networks Inc. is hoping for a better day after giving up 10 percent of its stock price yesterday.

Analyst Nikos Theodosopoulos of UBS AG issued a note Sept. 5 downgrading Redback to Neutral from Buy, citing contacts who said Redback wasn't likely to win a Verizon Communications Inc. (NYSE: VZ) edge-routing request for proposals (RFP).

Redback stock was down 14 percent most of the day but rallied late, ending the day down $1.90 (10.1%), at $16.79.

Redback stock went on a tear at the start of the year, climbing to $24.99 per share in June compared with $8.54 one year ago. The run-up was attributable to strong sales -- including a nice win at BellSouth Corp. (NYSE: BLS) -- and a tie-in with IPTV, as the long-suffering company finally reached profitability, albeit temporarily. (See How Redback Won BellSouth, Redback Hits the Numbers, Profits, and Redback Results Fail to Impress.) But Redback also benefited from the promise of the future, with investors banking on new business from Verizon and AT&T Inc. (NYSE: T). The latter is a customer of Redback's older SMS routers, and there's been speculation that AT&T could start using the newer SmartEdge line as well.

Concern arose earlier this summer that BellSouth, having completed a phase of SmartEdge deployment, might provide a less steady stream of revenues for Redback. Analysts seem to be appeased that that won't happen, but there still remains the question of how BellSouth's plans might change after its acquisition by AT&T. (See Redback Gets a Boost, Redback Shares Stumble, and Will AT&T Value BellSouth's Vendors?)

— Craig Matsumoto, Senior Editor, Light Reading

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edzed 12/5/2012 | 3:42:03 AM
re: Redback Falls on Verizon Hopes To say the least, his situation has been well-orchestrated. The rest of the truth will get me a phone call from Redback's lawyers. Mr. Denuccio has 6 million reasons to be happy today from his share sale. Moo-lah-lah indeed.
Pete Baldwin 12/5/2012 | 3:42:02 AM
re: Redback Falls on Verizon Hopes Interesting perspective. So, would you have the same take on the possibility of more AT&T business?
edzed 12/5/2012 | 3:42:01 AM
re: Redback Falls on Verizon Hopes It is funny, Craig. Because less than a year ago Redback management was telling analysts that SBC is very happy with the performance of SE for triple play applications. On one CC, management was asked whether they were in Project Lightspeed. They replied that SBC is rolling out Project Lightspeed and that SBC is a Redback customer. Then the next day most of the analysts come out and pump the Lightspeed angle.

I had to talk to SBC/T myself to confirm that the SMS platform was handling legacy ATM-over-DSL traffic for plain old high speed internet access. Triple play customers are being connected to the Alcatel aggregation equipment.

As to your question about the potential for more T business for Redback, I do think it is likely. Just like Redback other existing BRAS customers, T wants a denser, cheaper platform for plain old DSL internet access. At Globalcomm, Thomas Cronan III, Redback's CFO referred to it as "non-Lightspeed opportunities".

Once we are at it Craig, what the heck is going on at BT? If the home gateway device is Ethernet-based and the Alcatel equipment is running Ethernet, does Redback still have a place in the BT 21stCN? What has me speculating is BT's recent discussion of simplifying network OAM. Again it is mere speculation because I do not have any detailed insight into their netowrk architecture.
chook0 12/5/2012 | 3:41:58 AM
re: Redback Falls on Verizon Hopes The same analyst report named Juniper as the likely winner of the RFP and JNPR jumped 5% on the news, but this part of the news went unheralded in LR.

Now I wouldn't have the faintest idea if the analyst report is gold or moonshine, but at least the report does give me an insight into LR....

Pete Baldwin 12/5/2012 | 3:41:56 AM
re: Redback Falls on Verizon Hopes Chook, you'll find the same pattern was true of other news outlets that covered the report. (Reuters comes to mind.) Being down 14% (at the time), Redback was the news that required more explanation.

But to your point: yes, you're right ... Juniper is being pegged as having won the Verizon RFP. Should have mentioned that in the story.

One point of dispute is whether a Juniper win means Redback was shut out ... some folks think it's possible Redback could get in as a secondary vendor.
perry1961 12/5/2012 | 3:41:49 AM
re: Redback Falls on Verizon Hopes Does Redback really have 2/3's of China,and virtually all of Thailand locked up? If so,the loss of Verizon over a refusal to slash margins doesn't look so bad at all.
chook0 12/5/2012 | 3:41:48 AM
re: Redback Falls on Verizon Hopes
Fair enough.

chook0 12/5/2012 | 3:41:48 AM
re: Redback Falls on Verizon Hopes I think you are thinking of Huawei. They do well in Thailand. Nobody else could have 2/3 of China locked up.


[quote]Does Redback really have 2/3's of China,and virtually all of Thailand locked up? If so,the loss of Verizon over a refusal to slash margins doesn't look so bad at all.[/quote]
gottappp 12/5/2012 | 3:41:47 AM
re: Redback Falls on Verizon Hopes Why would anyone believe anything DeNuccio says after this debacle. Verizon was a "lock" for RB. The RFP was just a "formality" in order to bring in what was clearly the best broadband router on the planet with no one even close... Now reality strikes.
Sure, 2/3's of China is all locked up by RB. DeNuccio's words no doubt. Keep smoking the pipe, man. Analysts have to be questioning their positions at this point. Denuccio is quite the salesman of Redback - well at least of their stock.
RB has an event horizon which they are quickly approaching. Sure, they picked up market share this year, but then again, Juniper deferred lots of Verizon revenue, right? Those shipped ports aren't counted in market share until the revenue is recognized, so RB's ms gain is artificial. Juniper is now shipping the enhanced E320 and 10G cards, and cisco is on the verge of shipping a new broadband platform. A one trick pony isn't going to compete in the consolidated telecom world, where carriers spend billions of dollars with multi-product vendors each year and look for cross-the-board incentives on every deal. Not sure why the analysts don't see this. One direction for RB - down...
twill009 12/5/2012 | 3:41:47 AM
re: Redback Falls on Verizon Hopes In defense of the LR article, the way it looks to me is that JNPR was always assumed to continue to be the VZ supplier, but that CSCO came out of the wings to bump RBAK out of the #2 position. Sounds like it was largely due to price, which highlights the danger of being a "one trick pony". Also provides a roadmap about how to win future RFPs versus RBAK -- that is the more lasting negative takeaway from the VZ RFP -- if the decision is indeed final.

As far as JNPR is concerned, there continues to be fairly broad agreement among industry people i talk to that they are under seige: CRS-1 in the core, Alcatel and Redback on the edge, no traction in enterprise.
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