Optical/IP Networks

Redback's Rough Road

Redback Networks Inc. (Nasdaq: RBAK) recorded a $3.2 billion quarterly loss and cut 200 more jobs as the economic recession continues to take a toll on the company's slowing business.

The telecom equipment maker reported pro forma revenues of $37 million for its quarter ended Sept. 30, 2001. This is well below the $59.4 million in revenues it reported last quarter and the $80.6 million it recorded during the year-ago period (see Redback's Q3 Another Downer).

Table 1: Redback Networks (RBAK) Historical Q3 Revenues
Year 1998 1999 2000 2001
Revenue (in millions) 2.93 20.59 80.55 37
Source: Multex.com

Redback's pro forma net loss for the quarter -- which excludes all kinds of charges -- was $40.9 million or 28 cents per share, compared to net loss of 26 cents a share for the prior quarter and pro forma profit of 2 cents a share for the year-ago period.

Despite the huge loss, Redback numbers beat Wall Street's earnings expectations by 2 cents. Analysts predicted a pro forma loss of 30 cents a share.

Going forward, though, Redback sees a few more dismal quarters before its business picks up and its new products find buyers. Redback CFO Dennis Wolf says the company's revenues for the fourth quarter will be "about where Q3 stood."

The company didn't give an outlook for next year, outside of saying that it "did not disagree" with analysts projections that the company will bring in between $240 million and $280 million in revenues for 2002.

Redback's biggest customers for the quarter were France Telecom SA and Verizon Communications Inc. (NYSE: VZ), which withstood significant damage during the September 11 attack on New York City.

On Sept. 26, about a month after CEO Kevin DeNuccio took his post, the company said its quarterly revenues would fall in the $35 million to $40 million range, a sequential quarterly decline of between 33 and 41 percent. At that time, Wall Street analysts were expecting the company to report $54 million in revenues for the quarter (see DeNuccio Joins Redback).

Redback's most recent job cuts include 103 engineers in its research and development organization, said DeNuccio. Those employees were working on projects that didn't look to be contributing to the company's bottom line in the near future, he said.

Table 2: Redback Networks (RBAK) Employee Headcount
Month/Year Feb-98 Sep-99 Jun-00 Feb-01 Dec-01
Employees 39 229 702 1,200 825e
Source: SEC filings, Company projections

The cancelled R&D projects include the development of a SmartEdge 100, a smaller version of Redback's optical transport product, the company said.

With layoffs and other cost-cutting measures, Redback has cut its operating expenses by $10 million per quarter -- putting operating expenses in the "low $40 million range," Wolf said. In order to break even on an operating cash flow basis, the company now needs quarterly sales of about $75 million, down from about $90 million earlier this year, he added.

"Right now it makes sense to take a survival-mode approach to cost cutting," says Richard Church, an analyst at First Union Securities. "Redback needs to focus on survival in the near term. Once it crosses that bridge, it will likely see some product demand on the other side [of the economic slowdown]."

During the quarter, Redback continued to tout its Subscriber Management System business. The company cited data from three different industry analysts showing that it was still a substantial leader in the broadband aggregation equipment market.

Redback's SmartEdge 800R, which adds IP routing capabilities to a Sonet transport box, is in trials with 15 carriers and is expected to be generally available in October, its managers said.

Redback also made several staff changes during the quarter. Among them were the addition of Georges Antoun, formerly Cisco Systems Inc.'s (Nasdaq: CSCO) vice president of worldwide optical sales, as its Senior Vice President of Marketing. Antoun replaces Larry Blair, who left the company in March to go play with race cars (see Redback's Blair off to the Races).

DeNuccio also pointed out that he cut out two levels of sales management between himself and Redback's customers.

- Phil Harvey, Senior Editor, Light Reading
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