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Redback in Guidance Guessing Game

Craig Matsumoto
7/26/2006

Redback Networks Inc. shares did an about-face in after-hours trading last night despite the vendor's apparently solid second-quarter earnings.

Shares climbed after hours by about 5 percent, but gave back most of those gains during Redback's conference call with analysts, eventually settling up 18 cents, about 1.2 percent, at $14.95.

Investors might have been soured by Redback's forecast for the third quarter, which ends in September. In place of the customary revenue range, or a hint of percentage growth, Redback said only that the third quarter would be "up." Kind of the way Shaquille O'Neal is "tall" or Clay Aiken is "annoying."

"We're guiding on a more conservative basis, but we're not guiding flat and we're not guiding down -- we're guiding up," CFO Thomas Cronan told analysts when pressed for specifics.

Not exactly comforting words, given that Redback also said its book-to-bill ratio fell below 1 in the second quarter.

That sometimes indicates revenues are about to decline, but Redback officials said that's not the case here, as the low ratio comes "on the heels of the significant positive book-to-bill we experienced over the last several quarters," CEO Kevin DeNuccio said on the call.

Add it all up, and Redback is sitting on the "second largest backlog that we have had in the last five years," said the CEO.

Moreover, the third quarter is seasonally slow, Cronan said. He and DeNuccio indicated that they expect a strong fourth quarter.

For its second quarter, which ended June 30, Redback reported net losses of $1.8 million, 3 cents per share, on revenues of $68.2 million. For the previous quarter, Redback had reported losses of $2.6 million, 5 cents per share, on revenues of $57.9 million. (See Redback Reports Q2.)

For its second quarter a year ago, Redback reported losses of $7.2 million, 13 cents per share, on revenues of $34.6 million.

Pro forma net income of 10 cents per share beat the analysts' estimate of 7 cents as tallied by Reuters Research .

Redback is riding a hot streak of growth that saw the stock rise to $25 per share before the recent dip in the tech sector. Part of the story is that analysts are intrigued by Redback's growth prospects -- it's selling to all three U.S. RBOCs and has the potential to land even more business. Verizon Communications Inc. (NYSE: VZ) has a request for proposals (RFP) out for edge routers, and investors are still hoping AT&T Inc. (NYSE: T) -- the former SBC -- will buy Redback's SmartEdge routers to upgrade its arsenal of older Redback SMS boxes.

One glitch came in June when analysts noted the BellSouth Corp. (NYSE: BLS) deployment of SmartEdges was shifting to linecards rather than full systems, implying a less steady revenue stream. DeNuccio tried to deflect that concern when asked about the subject, though.

"We are still increasing the size of the footprint and the capacity in the COs [central offices] we're building," he said on the call. "We're still in a mode, in the second half of the year, of building footprint" for BellSouth.

Separately, Redback updated its status in the stock-options scandal, where it is among dozens of companies subpoenaed by the U.S. federal government and/or being investigated by the Securities and Exchange Commission (SEC) . (See Redback in Options Probe.)

As is the case with many other companies, Redback's board has launched its own review into past options practices. The investigation is not complete, but it hasn't turned up anything so far, DeNuccio said. "The committee has informed us that based upon the review thus far, it has not uncovered any evidence of fraudulent activity, nor evidence that raises any questions about the integrity of current management."

— Craig Matsumoto, Senior Editor, Light Reading

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googol_byte
googol_byte
12/5/2012 | 3:47:20 AM
re: Redback in Guidance Guessing Game
Redback continues to have a big backlog and should have continued big sales with BellSouth and the other RBOCs. They are doing a great job focusing on triple play. They also have an additional $100M on their balance that they raised in May, so why are they trading back down where they were in January?
Pete Baldwin
Pete Baldwin
12/5/2012 | 3:47:19 AM
re: Redback in Guidance Guessing Game
7 has a good point -- there's some nervousness about BellSouth and what will happen after the AT&T merger. DeNuccio put his best argument forth during the call, saying Redback has a good relationship with AT&T too... but who knows.

There's also the options scandal, and the fact that pretty much all of tech is down since March.

Redback does seem to be kicking butt for the moment, though.
paolo.franzoi
paolo.franzoi
12/5/2012 | 3:47:19 AM
re: Redback in Guidance Guessing Game

Because, BLS has them on hold. When the AT&T takeover occurs it is possible that they will get the boot and be replaced by the ATT-Alcatel Architecture. Not a certainty of course.

seven
databoy12
databoy12
12/5/2012 | 3:47:16 AM
re: Redback in Guidance Guessing Game
Redback is not on hold at BellSouth, nor is anyone else. Their deployment is still in full swing and were told their deployment plans would remain intact at least through 2007. I would imagine that what BellSouth has already bought has to be installed, provisioned, and turned up before they purchase anything else. This always takes some time to do when converting to a new architecture. But once this is accomplished, there should be another wave of orders to not only Redback, but Juniper and Alcatel as well. Regarding replacing everything that was purchased by BellSouth with Alcatel, that simply isn't going to happen. AT&T doesn't even know the Alcatel solution even works yet. Also, I don't think AT&T would be willing to simply write off $300M worth of equipment to replace it with an as yet untested architecture.
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