Will Redback Close the Gap?

Redback Networks Inc.'s (Nasdaq: RBAK) transformation into a leading edge router player still appears to be a work in progress. The company has failed to land any big router deals and is hustling to make its numbers as the final days of the second quarter of 2002 tick away, according to several sources close to the company.

As of late last week, Redback had only reached about $21 million in revenues booked for the quarter, say the sources. That's a ways off from the $41 million in revenues expected by a consensus of Wall Street analysts surveyed by Multex.com Inc.

What gives? Redback continues to talk up the number of carriers testing its new edge router, the SmartEdge 800. At last count, the company says its edge router is in trials with more than 50 carriers, about one third of those in the U.S. The company says that nine of the fifty carriers have produced revenue, but that's only one more paying customer for the edge router than Redback had last quarter.

And it looks as if those customers won't be contributing much to the current quarter. Sources close to carriers and Redback confirm that the company hasn't yet booked significant revenues from its SmartEdge 800 this quarter. As of last week, sources say, Redback had shipped edge routers to Korea Telecom, WorldCom Inc. (Nasdaq: WCOM), Telus Corp. (NYSE: TU; Toronto: T), Pipex, and Taiwan's HiNet, the data communications group within Chunghwa Telecom Co. Ltd. The only revenue the company appears to have booked so far this quarter is $77,000 from Pipex and less than $2 million from HiNet, sources say.

In a recent note to clients, Morgan Stanley Dean Witter & Co. analyst David Jackson wrote that his sources pegged the Chunghwa contract as covering 23 edge routers at a total cost of $1.8 million, or roughly $78,000 per router. "We believe the $78,000 average selling price suggests that the majority of the edge routers sold to Chunghwa are less than 50 percent populated with line cards," he wrote.

Indeed, Wall Street analysts are beginning to question the buzz that Redback is trying to generate about new sales in China.

A while back, sources on Wall Street had been whispering that Redback had landed an edge router deal with Chinese Petroleum Corporation (CPC). Morgan Stanley's Jackson, however, recently rebuffed the chatter, writing in a note to clients that he thinks CPC bought $550,000 worth of routers in connection with an SDH transport contract that was announced in July 2001. "We believe these contracts are in Redback's historical financials, and are not adjusting our estimates," Jackson wrote.

Redback declined to comment on its quarter, its edge router sales, or any unannounced customers.

The company's progress in the edge router space is crucial because the company expects much of its growth and, indeed, its long-term survival to come from edge router sales (see Redback Rallies Itself). In fact, the company has been almost entirely rebuilt around the edge-routing product since the bottom fell out of the DSL aggregation market, the primary source of business for its Subscriber Management System (SMS) product.

Its focus on the edge is what spurred Redback's recent decision to stop development on new features for its SmartEdge optical transport product (see Redback's Edge Router Redux). The company isn't giving up the optical transport race, but it's clear that with Cisco Systems Inc. (Nasdaq: CSCO), Nortel Networks Corp. (NYSE/Toronto: NT), and Fujitsu Network Communications Inc. (FNC) dominating the space, Redback's resources may have been better spent on edge routing. Redback recently cut 40 full-time and contract employees, according to sources with direct knowledge of the layoffs.

Redback has touted the technical merits of its edge router, and carriers do seem interested in the product, as shown by its claim of 50-plus product trials. What is not known is how soon said trials will turn into revenues and how Redback will convince large carriers that it is just as good a vendor as its two larger rivals, Cisco and Juniper Networks Inc. (Nasdaq: JNPR), which is in the process of combining with Unisphere Networks Inc. (see Juniper Nabs Unisphere for $740M).

One big roadmark may be the current bid out for a huge edge router contract at Verizon Communications Inc. (NYSE: VZ). Redback is a key Verizon customer, but Unisphere is said to be the favorite in that deal (see Unisphere Close to $200-300M Deal?). Verizon accounted for 15 percent of Redback's revenues in 2001, but those sales were mostly from the SMS products. Although sources say a final decision on that purchase has still yet to be made, failure to sell Verizon on its edge router could spell trouble for Redback over time.

In the near term, though, Redback has its hands full trying to make its nut for 2Q02. Because capital spending budgets are tight, service providers have been known to put off buying gear until the last minute in hopes of greater discounts from vendors.

Ultimately, Redback's next few quarters could be a do-or-die situation, say some analysts.

"Forget Wall Street's expectations," says CIBC World Markets analyst Stephen Kamman. "This is about whether a company lives or dies. This is not a question of how your stock's doing. It's a question of whether you are in business at all."

— Phil Harvey, Senior Editor, Light Reading
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mplsrocks 12/4/2012 | 10:15:03 PM
re: Will Redback Close the Gap?
I think a couple of things should be considered:

1. The recent investment by Nokia in Redback means that in one to two quarters we should start seeing some traction being generated through the nokia channel. Nokia has strong relationships with wireless carriers and with a significant number of them beginnng to build out the IP backbones in the next year or so,there is good chance that with the proper value propositions redback might be able to generate significant sales from these vendors.

2. It would be a good possibility for redback to sell of their DSL line of products to Alcatel etc. and bet the company on the edge box. Though the move might seem risky, it will surely generate good cash for redback and allow it to focus on the edge router.

Comments welcome.

Cheers ...

USA 12/4/2012 | 10:14:59 PM
re: Will Redback Close the Gap? How can any company expect to have 50 trials going on at the same time? That is ludicrous because of the capital and headcount required to support that many trials.

It seems to me that if that many trials are in progress and little equipment is being bought, either the product isn't cutting it and/or the techs like to be taken out to lunch by the sales guys.
Litewave 12/4/2012 | 10:14:59 PM
re: Will Redback Close the Gap? China's HiNet, the data communications group within Chunghwa Telecom

Phil, pulling a Dubbya? You meant Republic of China (ie. Taiwan) didn't you ;-)

dietaryfiber 12/4/2012 | 10:14:56 PM
re: Will Redback Close the Gap? MPLS,

1. Nokia is here due to its needs in the 3G wireless space which will require a new SMS like function and edge routing. I would not expect Nokia to push the Redback products outside the wireless space, except for possible combination with the ex-Dimond Lane DSLAMs. I am suprised they didn't just buy the bonds and wait for the implosion, could have the whole company for pennies on the dollar.

2. Redback has not been interested in slumming off their SMS business. Even though they are betting the farm on the Edge Router, the SMS brings home the bacon. It may be that $19M out of the $21M in revenue (noted in this article) is SMS revenue. This will not change their lives, but I think going to a situation where Denuccio's bonus is more than the quarterly revenue is probably (oh, I don't know) bad. I agree with you that having the 2 products defocusses them on a better chance of a win in routing.

dietary fiber
Light-bulb 12/4/2012 | 10:14:54 PM
re: Will Redback Close the Gap? USA,

Yes 50 trials is absurd. Perhaps what they meant to say, is from the product inception they have supported 50 trials? Depending on the Carrier a trial can take a week to months. They always find something they don't like or perhaps the PMs are not quite right, or the TCAs are not right, whatever it may be. My fear factor here is with 50 trials... That means 50 boxes sitting out there with most probably given away for the Lab trial. (I wonder if this will be an expense they show) That or the boxes are picked back up after the trial. (in which case they should have something I.E. Contract)

Of course the Techs always like free lunch!

Kevin is a Good guy I hope he can help Redback out, I just think its poor timing, and only very good sales people will be able to pull this off.

bluemtn 12/4/2012 | 10:14:52 PM
re: Will Redback Close the Gap? (hope this tbl is more readable)
,4/11,early June
Deployment (paying Cust):,2,?
Field trials(paying Cust):,6,?
(total Paying customers):,8,9

Beta/lab trials:,23,27

Customers in queue for trials:,13,18

Grand total:,44,54

bluemtn 12/4/2012 | 10:14:52 PM
re: Will Redback Close the Gap? 50+ trials is the Gǣcustomers touchedGǥ number. The break out is like this for 4/11/02 and the week of supercom:

4/11 early June
Deployment (paying Cust)2?
Field trials(paying Cust):6?
(total Paying customers)89

Beta/lab trials2327

Customers in queue for trials:1318

Grand total:4454

So the number of trials is 27, not 50. They have also said that they expect to win about 10 G 20 percent of the trials and make their 1st deployment announcements around the time that earnings come out next month. As far as revenue goes, the quarters are always back end loaded, they sounded happy enough in their June conf calls.

maryhadalambda 12/4/2012 | 10:14:51 PM
re: Will Redback Close the Gap? So Verizon is supposed to spend about $200 - $ 300 million on edge routers from Unisphere. If they can only spend that much, how big is total market? Can't be worth all that. Deadback is toast
BobbyMax 12/4/2012 | 10:14:47 PM
re: Will Redback Close the Gap? The demise of Redback started when it bought Siara Networks for about $4.5 Billion. Siara Networks did not have a single product and did not have any revenue. Redback wanted to emulate Cisco in terms of buying companies. It also wanted to artificially boost up its stock price and increase thge company valuation.

Redback also hired the President of Sycamore Network to be the President of Redback who did not much expertise. This action hastened the downfall of the company.

There are over 30 edge router companies with somewhat similar products and technologies. In view of this it willbe very difficult for Redback to survive.

Nokia will not buy Redback as it is recovering from the huge losses (about $500 million)after it acquired Amber Networks.

Many strange things are happening at Redback
scooby 12/4/2012 | 10:14:43 PM
re: Will Redback Close the Gap? >> 1. The recent investment by Nokia in Redback means that in one to two quarters we should start seeing some traction being generated through the nokia channel.

Yeah, that sure saved Ipsilon.
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