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Redback's SmartEdge Perks Up

Redback Networks Inc. (Nasdaq: RBAK) reported a second-quarter loss of $7.2 million or 13 cents a share on revenues of $34.6 million while continuing to see pickup in B-RAS, Ethernet aggregation, and edge routing sales as carriers around the world upgrade their access networks (see Redback Trims Losses).

During Redback's year-ago quarter, the company reported a net loss of $10.7 million, or 20 cents a share, on revenues of $32.4 million.

The company reported a non-GAAP loss of $2.9 million, or 5 cents a share, beating analysts' expectations by 3 cents. Analysts were expecting the company to report a loss of $4.33 million, or 8 cents a share, on revenues of $35 million, according to Thomson Financial.

In early after-hours trading, the company's shares were up $0.12 (1.59%) to $7.65. In today's regular session, Redback shares closed down $0.26 (3.34%) to $7.53.

Investors, evidently, were jazzed to learn that Redback shipped to 20 new SmartEdge customers in the second quarter. And that news comes on top of the win at BT Group plc's (NYSE: BT; London: BTA) 21 CN, which was also revealed this quarter (see Alcatel Names Its 21CN Partners). "Our mid-year outlook couldn't be more positive," Redback CEO Kevin DeNuccio said during the company's earnings conference call.

The company's five largest customers for the quarter were SBC Communications Inc. (NYSE: SBC), BT, KT Corp., Verizon Communications Inc. (NYSE: VZ), and Arcor AG & Co. KG, the German CLEC.

Overall, the company continues its transition from an older product line to its newer architecture. It's SmartEdge routers and Service Gateways combine edge routing and subscriber management systems, allowing carriers to provision broadband connections and, later on, manage a variety of services running across those connections.

Previously, its edge routing was handled separately from subscriber management funtctions, which were the business of Redback's older SMS platforms. Now the SmartEdge family does it all, but the SMS business had a higher profit margin, so the transition will show a few bumps -- colored lumpiness, if you will -- on Redback's earnings, even though demand for its products haven't slowed down.

In fact, demand looks rather good for Redback's subscriber management technology given how briskly its customers in North America -- the RBOCs -- are slashing prices for DSL connections. More subscribers means more sales for Redback.

There's also an opex-saving story at work here. The company's new Ethernet aggregation card for its SmartEdge device gives carriers the option of eliminating the intermediary Layer 2 network elements between the edge router and the fiber and copper access gear. That's a big deal because it helps carriers create a single service control point, so they can manage services and subscribers in the same box.

But it's hard to say how all that technology positioning will play out in Redback's earnings.

Redback itself didn't give specific guidance, only that product revenues would be up and service revenues would be flat or down slightly. "It's not going to be up by $300,000. I mean, it's going to be up strong," DeNuccio said when pressed for a number.

For its third quarter, ending in September, analysts surveyed by Thomson Financial are looking for solid, steady revenue growth and lower losses. They have Redback reporting a loss of $2.7 million, or 5 cents a share, on revenues of $37 million for Q3. For the full year 2005, analysts say Redback should lose $10.28 million, or 19 cents a share, on revenues of $147 million.

The company's headcount for the quarter was up to 486 from 454.

— Phil Harvey, News Editor, Light Reading

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