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Optical/IP

Redback's DeNuccio: We Can Go It Alone

Redback Networks Inc. (Nasdaq: RBAK) has generated a lot of news lately, with some big contract wins, a rising stock price, and the accumulation of stock by insiders (see Redback Boosted by TCV, Verizon Talk).

Acquisition rumors have surrounded the company's recent success (see Tellabs May 'Edge' Towards Redback). But the company itself might not be so inclined to sell out. That's what Light Reading learned in an October conversation with Redback CEO Kevin DeNuccio. (See Tellabs May 'Edge' Towards Redback and Redback Shares Rock: What's Up?)

DeNuccio, who was in Las Vegas for the Telecom '05 conference, said Redback's technology bets are just starting to pay off with big carriers and that the company's financial picture will soon reflect its technological advantage.

And with a healthier, profitable Redback on the horizon, DeNuccio went a step further and said that Redback could even benefit by incorporating some of the technologies that border its devices in carrier networks. He also said Redback itself could become an acquirer toward the middle or end of 2006.

But before Redback changes as a company, it has to convince carriers that, over the next few years, its SmartEdge platforms can do for video-centric IP services what its SMS (subscriber management system) products did for DSL subscriber management in the 90s. And DeNuccio says more proof of Redback's popularity with carriers is on the way.

"I think we're definitely about to change the profile of the company pretty significantly as we go forward here," DeNuccio said. "A lot of the design wins that we've been talking about over the course of the past year or two are now coming through to production.

"We've gone through our revenue transition from the legacy products to the SmartEdge, and the growth rate of the company is going to more look like what the SmartEdge growth rate has been and it will start to accelerate over the next couple of quarters."

One of Redback's largest shareholders, Technology Crossover Ventures, has already made some big bets on Redback's future -- just one clue that Redback is selling the right technology at the right time. (See Redback Boosted by TCV, Verizon Talk.)

DeNuccio says that the next few months could be big ones for the edge router specialist and that the company will reach profitability for the first time in its history during the fourth quarter.

Wall Street analysts have Redback earning zero cents a share on revenues of $42 million for the fourth quarter of 2005, according to First Call. If Redback hits that number, it'll be a 31 percent revenue improvement over last year. (See Wild Ride for Redback Shares and Redback Showing More Signs of Life.)

"SmartEdge is going to be driving the growth rate of the company and accelerating it," DeNuccios says.

Word on the street is that Redback can indeed hit those numbers, and that new contracts are ready to flow to the company. On the docket for potential new wins: A big U.S. RBOC such as (NYSE: VZ), or possibly more business from a big European PTT such as (NYSE: FTE). (See FOTE: VOIP, Video & Carlsberg.) One source in the investment community who monitors the company closely says he expects that Redback would have enough business to book $50 million in the fourth quarter.

But will the healthy, reinvigorated Redback remain a standalone company?

The answer is "not apparent at this point," DeNuccio says. "We can remain successful as an independent company."

On the one hand, DeNuccio explains, Redback is one of the few successful edge routing vendors. And because its device is complex -- combining IP routing, subscriber management, and Ethernet aggregation -- many carriers want a direct relationship with the vendor. (See Alcatel, Redback Score at BellSouth.)

On the other hand, DeNuccio says Redback needs integration partners to help scale and deploy carrier video and data networks. So it could benefit from being part of something larger about as much as it could going it alone against (Nasdaq: CSCO) and (Nasdaq: JNPR). (See Redback and ECI Buddy Up.)

DeNuccio calls Redback an "incredibly valuable" company and says as long as its customers are willing to do business with it and as long as Redback's market value keeps accelerating, "there's no urgency" to make a decision regarding Redback's future as a standalone entity.

Redback shares slipped $0.21 (1.76%) to $11.71 in midmorning trading on Monday. That's still up more than 160 percent from its 52-week low.

— Phil Harvey, News Editor, Light Reading

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