Redback's Qwest Deal: Optical Upside?

In Redback Networks Inc.'s (Nasdaq: RBAK) earnings conference call last Wednesday night, company executives alluded to an important contract with Qwest. It may be a bigger deal than people think.

These days, discussing contract numbers is problematic within itself, given the proliferation of non-guaranteed amounts and loose terms. But Redback will shortly be announcing a deal with Qwest that includes an initial purchase order of roughly $6 million of its metropolitan optical product, the SmartEdge 800. More importantly, however, the deal has the potential to reach hundreds of millions of dollars over the next couple of years, according to Light Reading sources.

The SmartEdge 800 is Redback's first optical product, which it gained in its acquisition of Siara last year. The SmartEdge 800 competes directly with Cisco Systems Inc's (Nasdaq: CSCO) ONS 15454 product, which came out of Cerent. Cisco last year bought Cerent for $7 billion and Redback bought Siara for $4.3 billion. Both companies came from a common heritage of engineers.

"Cerent will have a lot more revenue than Redback's optical product this year, but following that conference call we are a lot more confident in [Redback's] ability to become more prominent in that market," says Conrad Leifur, analyst with U.S. Bancorp Piper Jaffray. "The [SmartEdge 800] was an interesting product from an architectural perspective, but it had development risk," said Leifur. "Now they've shown it's being deployed in networks." Redback officials have raised their "guidance" numbers on the SmartEdge product line with finanical analysts, indicating they foresee an increase in sales growth. They believe the company can ship $10 million worth of SmartEdge products in the next quarter and $150 million during 2001, says Leifur. Redback officials confirmed that details about a Qwest purchase order for a number of SmartEdge products are forthcoming. One Redback spokesperson described the number of SmartEdge units involved as "North of dozens but South of thousands." The product lists for between $70,000 and $150,000, depending on the configuration.

A spokeswoman from Cisco downplayed the Qwest contract, saying Cisco has already shipped $70 million worth of its optical gear to Qwest. She also noted that Qwest has relationships with many vendors.

But Redback's rising visibility at Qwest may mean the telecom engineers are taking a closer look at the IP services promised for the SmartEdge. The product is designed to include seven application specific integrated circuits (ASICs), four of which handle Sonet and TDM capablities (available now) and three of which will handle IP services (not yet available). The IP services capabilities set the SmartEdge product apart from Cisco's offering (see Redback Unveils Siara Product).

Qwest officials did not respond to requests for interviews by press time.

--R. Scott Raynovich, Executive Editor, Light Reading
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