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Redback Melts Down

Light Reading
News Analysis
Light Reading
9/26/2001

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

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lightbulb0
lightbulb0
12/4/2012 | 7:48:15 PM
re: Redback Melts Down
I was just wondering what had happened to all those Siara people RBAK had acquired. Most of the early batch should be fully vested by now.
Neophone
Neophone
12/4/2012 | 7:48:15 PM
re: Redback Melts Down
why they give up SMS and turn to smartedge ?
so poor decision.

and now they will trun smartedge to router,
it'll be another loser cause some many router
player there.
sandiego
sandiego
12/4/2012 | 7:48:14 PM
re: Redback Melts Down
sublease that space along 237 before Brocade puts their facilities on the market, bearing in mind that according to today's Wall St Journal Cisco has 900k sq ft to sublease along Tasman. The next big story in tech will be the exodus out of Silicon Valley, where it's much too expensive and unlivable for anyone but the beareaucrats at Applied Materials and HP. Bet the AMC 20 would folks like to take over the Exodus building -- plenty of air-conditioning!
Kevin Mitchell
Kevin Mitchell
12/4/2012 | 7:48:12 PM
re: Redback Melts Down
Redback had to move away from the SMS platform or at least enhance it. The edge is collapsing with routing, subscriber management, and IP services existing on one platform (we aren't there yet, but the movement is in that direction). Note Unisphere's success in this area where their ERX is both a router and a BRAS platform. Also, Cisco's shifted from specialized platforms to multi-function routers that provide additional services. This is a complete 180 degree turn from their positioning of 18 months ago.

Redback rested on their laurels and shifted investment from the SMS to the SE. The SMS business rapidly moved beyond infancy and is already mature. Pure subscriber management/BRAS platforms do not have much time left.

SE had great potential and at the time that market was red hot, but Redback has not executed properly. I bet Cisco has underpriced them as well.
Neophone
Neophone
12/4/2012 | 7:48:10 PM
re: Redback Melts Down
but i think redback should focus on SMS field too,
at least, unisphere is leader in this field,not
redback. and redback loss lots of cases.
as SE, it's little early to push it out to markets
when no much customer need it
Kevin Mitchell
Kevin Mitchell
12/4/2012 | 7:48:07 PM
re: Redback Melts Down
What happened to those Wallstreet analyst messages? Why were they deleted from the msg board?
Scott Raynovich
Scott Raynovich
12/4/2012 | 7:48:06 PM
re: Redback Melts Down
The messages were deleted because they were sloppily written, hard to understand, peppered with foul language, and generally not building the value of the board.

Expressing such opinions is fine but if somebody wants to contribute such opinions I suggest they write them in a more grammatical fashion and avoid the use of expletives.

--Scott
zande
zande
12/4/2012 | 7:48:05 PM
re: Redback Melts Down
What did the WS analysts messages say? I didn't get a chance to catch them.

Kevin Mitchell
Kevin Mitchell
12/4/2012 | 7:48:00 PM
re: Redback Melts Down
They mostly consisted of bashing Wall Street financial analysts for ++ber idiots.
fhe
fhe
12/4/2012 | 7:47:59 PM
re: Redback Melts Down
I don't believe my message was "inappropriate". Maybe I just replied to the wrong mesasge title...

What I said was, why are these analysts still putting up "estimates"?? If we think about it, is it really the companies that are missing the target? or it is actually the analysts who are missing the numbers?? I think it is the latter.

and if the investors treated the analysts misses like what they treated the companies when they missed, all the analysts would be collecting unemployment benefits right now, and most of the investment banks would be trading as penny stocks...
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