Redback Melts Down

Now making a case for one of the most spectacular meltdowns in the networking sector, Redback Networks Inc.'s (Nasdaq: RBAK) stock today plunged 21 percent (.50) to a new low, closing at $1.84 a share, down 99 percent from its 52-week high of $171. The fallout came after the company’s Tuesday disclosure of a big revenue shortfall for the current quarter ending Sept.30.

Company officials now predict quarterly revenues will fall in the $35 million to $40 million range, a sequential quarterly decline of between 33 and 41 percent, and far below the analyst consensus of $54 million. Even the most skeptical of the 20 analysts who follow the company forecasted $45 million.

The announcement triggered a spate of analyst notes lowering estimates and at least one downgrade, which hammered the stock price. Prior to the disclosure, the consensus expected a 25 cent per share loss for the quarter.

Afterwards, SG Cowen Securities analyst Christin Armacost downgraded Redback from “buy” to “neutral”, and predicted a 31 cent per share pro forma loss for the quarter. Armacost blamed the revenue shortfall mainly on troubles the company faces in ramping up sales of its SmartEdge optical product for simplifying network architecture.

Deutsche Banc Alex Brown LLC analyst George Notter maintained his “market perform” rating but cut his estimate from a 30 cent to a 35 cent loss. He blames the shortfall on excess service management system (SMS) equipment capacity in incumbent local exchange carrier (ILEC) networks, sluggish DSL line growth, declining capital expenditure budgets of carriers, and falling carrier interest in SmartEdge for Sonet transport.

U.S. Bancorp Piper Jaffray analyst Conrad Leifur, who already had a “hold” on the company, also cut his loss estimate from 28 cents to 31 cents. First Union Securities is sticking with its 26 cents per share loss estimate and a “buy” rating until the company discloses details in its Oct. 10 earnings call. And in what may be the understatement of the day, W.R. Hambrecht & Co., which has a “buy” on the stock, notes, “We would assume a much larger loss than our current forecast of 23 cents per share.”

Like virtually every other company that has announced negative financial news over the last two weeks, Redback blames “uncertainty surrounding the events of Sept. 11” for having caused order postponements or cancellations. CEO Kevin DeNuccio, who left Cisco less than a month ago to join Redback, is responding to the setback by taking writedowns for excess inventory, goodwill and restructuring charges. Although he didn’t announce any job cuts, it is fairly certain that many of Redback’s roughly 1,000 employees will be out of work.

Although some analysts see a further decline in revenues for next year, they expect the cost-cutting measures will lower losses. For instance, Leifur now estimates a 66 cents per share loss on $200 million revenues in 2002 compared with a projected 93 cent loss on $227 million revenues this year.

When a stock goes this low, it is not unusual to look at "worst case scenarios" and wonder whether the company is on the verge of bankruptcy. This is not likely for Redback in the near term. The company still had $314 million, or $2.23 per share, of cash on its balance sheet at the end of the last quarter. Redback will likely burn more cash this quarter than the $66 million it incinerated during the prior quarter. However, with the cost-cutting measures, analysts expect the burn rate to drop to around $30 million in subsequent quarters. At that rate, Redback still has about two years to become cashflow positive, raise more money, or find a buyer for the company.

— Tom Davey, special to Light Reading, http://www.lightreading.com