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Redback Shares Stumble

Redback Networks Inc. , one of the highest flying stocks in 2006 so far, took a dive today as an analyst predicted a pause in the company's hot streak.

Joanna Makris of investment firm Canaccord Adams issued a report this morning saying Redback might see a slowing of revenues from BellSouth Corp. (NYSE: BLS). [Ed. note: Who?!]

"BellSouth has deployed the SmartEdge chassis to roughly 600 of 1,100 central offices. With remainder of chassis scheduled to ship in 2007, Redback’s revenue should shift in [the second half of 2006] to line card sales," Makris writes. As line cards are deployed only as needed, revenues from them will be more sporadic than SmartEdge router revenues, she adds.

Makris downgraded Redback to Hold from Buy and lowered her earnings projections. For calendar 2006, Makris expects Redback to earn 25 cents per share on $257.2 million in revenues, compared with her previous estimate of 27 cents per share on $258.5 million revenues.

Analysts polled by First Call think Redback will report net income of 30 cents per share on revenues of $261.4 million for calendar 2006.

Redback shares were down $2.47 (11.9%) at $18.31 in afternoon trading.

BellSouth and AT&T Inc. (NYSE: T) are Redback's largest customers, each accounting for more than 10 percent of revenues last quarter. The BellSouth win, announced early in 2005, was a key part of Redback's resurgence after its 2003 bankruptcy reorganization. (See How Redback Won BellSouth and Redback Closes a Chapter.)

Redback has long sold its SMS routers to AT&T -- formerly SBC -- and now has a shot at deploying its newer SmartEdge line as well, Makris notes. But she adds that wouldn't apply to Project LightSpeed, the broadband-access buildout started by SBC. (Alcatel (NYSE: ALA; Paris: CGEP:PA), the systems integrator on the project, has noted Redback is not included in Lightspeed.)

Other analysts see good prospects for Redback. Mark Sue of RBC Capital Markets recently raised his estimates for Redback based on potential wins at AT&T and Orange (NYSE: FTE) -- Redback had admitted to the latter during its April earnings call. (See Redback Results Fail to Impress.) "We believe Redback is making headway in terms of selling SmartEdge routers to AT&T, which typically only purchased older SMS products," Sue writes.

Verizon Communications Inc. (NYSE: VZ) could end up deploying SmartEdge, too, based on an edge-router request for proposals (RFP) the carrier recently issued, Makris writes. Most of these new opportunities wouldn't bring in revenues until 2007, she notes -- hence, her downgrade for Redback .

Redback stock has been on the rise all year, and its Friday close of $20.78 was 234 percent higher than its 52-week low of $6.22.

— Craig Matsumoto, Senior Editor, Light Reading

Pete Baldwin 12/5/2012 | 3:50:37 AM
re: Redback Shares Stumble It's presumed that the Juniper E320 is a frontrunner for this RFP; Makris notes the new features trotted out for that box at Globalcomm.

So we have the possibility of Juniper as a primary source, Redback as a second source. Any other bets?
materialgirl 12/5/2012 | 3:50:35 AM
re: Redback Shares Stumble Dear Craig:
Do not forget that VZ is holding off payment to JNPR for 6-12 months. There is a problem. Perhaps this is an opening for RBAK.

Secondly, I thought Ed Whitacre took no prisoners, meaning that all decisions would be made by old SBC, including what edge router to use (ALA).
gottappp 12/5/2012 | 3:50:34 AM
re: Redback Shares Stumble My understanding from the Juniper analyst conference call was that Verizon was not withholding payments, but Juniper was deferring revenue. Cash in, but revenue deferred. That's a big difference from not receiving payments. It should show up on the cash flow statement as positive cash in the form of deferred revenue, or some such mechanism.
materialgirl 12/5/2012 | 3:50:33 AM
re: Redback Shares Stumble Good point. However, it does mean the product does not meet some agreed to spec, some "undelivered element of value". In any event, it could represent an opening for RBAK if VZ is unhappy about something.
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