Redback Hits the Wall

Shares of Redback Networks Inc. (Nasdaq: RBAK) were hammered today after the company foreshadowed a disastrous quarter in which it will fall well short of revenue estimates and announce a substantial loss.

In late afternoon trading, Redback shares were down 1.85 (15.81%) to 9.85, an all-time low since the company held its IPO in the summer of 1999.

Redback blamed that omnipresent bogeyman -- the weakening global telecom market -- yesterday when it announced that it will post a first-quarter loss and lay off 150 workers, or about 12 percent of its workforce (see Redback Backs Off on Guidance).

The announcement comes a little more than a month after merger discussions between Redback and other companies, most notably Juniper Networks Inc. (Nasdaq: JNPR), reached fever pitch (see Redback and Juniper Talked, Balked).

The company said it expects revenues for its fiscal quarter ending March 31, 2001, to be between $85 and $90 million. That expectation represents a 21 percent to 26 percent decline from its previous quarter, in which revenues were $114.6 million. The company's guidance at that time was for 20 percent sequential growth.

Redback was expected to turn a $0.05 per share profit for the quarter, according to analysts’ estimates. Now it expects to post a $0.15 loss. The company says it will give guidance for the remainder of the year during its April 11 earnings call.

Slowing economy aside, Redback's lousy quarter has some specific causes, according to a conference call held yesterday between its managers and Wall Street analysts:

  • Requests from two "major" customers, whom Redback did not name, led to a writeoff of some $24 million worth of unsold DS3 modules for its SmartEdge platform. Company officials claim the customers wanted some new TDM and IP routing-related features, which will be available in its next generation of DS3 modules. The new modules will begin shipping in the second quarter, according to Redback CEO Vivek Ragavan. By delivering the new stuff and scrapping the old, Redback is deferring some potential revenues from the DS3 modules until next quarter.

  • During the last two weeks, other unnamed customers of Redback's subscriber management system (SMS) product have slowed DSL deployments and told Redback they won't be snapping up its gear as quickly as once planned. Sales of the SMS products will be down "substantially" quarter to quarter, Ragavan said, but Redback "hasn't lost a customer."

    Redback's two largest customers for last year were Qwest Communications International Corp. (NYSE: Q) and Genuity Inc. (Nasdaq: GENU), which accounted for 15 percent and 10 percent, respectively, of Redback's total revenue. The company confirmed that it has already begun shipping to Qwest in fulfillment of its most recent SmartEdge contract with the carrier (see Redback Edges Into Qwest).

    Redback's charges against earnings for its second quarter will include a $23 million charge for office space and other facilities that Redback won't be using and hopes to sublet. The company will also take a $4 million charge to cover employee termination costs.

    The company's headcount, including contractors, is about 1,200. The layoffs, which will occur across all areas within the company, will knock that number down to around 1,050. This marks just one of many temporary and permanent personnel-related changes Redback has seen in the past calendar year (see Redback Hires New CFO, Kruep Leaves Redback for Procket, and Redback's Blair off to the Races).

    - Phil Harvey, Senior Editor, Light Reading http://www.lightreading.com
  • LocalYokel 12/4/2012 | 8:35:49 PM
    re: Redback Hits the Wall Anybody have any clues as to what specifically the new features are? I mean, how can you go wrong with a DS3 card? Specifically mentioned "TDM" and "IP routing-related" features. What are these?
    topper 12/4/2012 | 8:36:48 PM
    re: Redback Hits the Wall fk - a good plan for evolving from voice to data-centric architectures. After the broadband data network has been built, moving VOIP traffic will be a fairly small step. But it will be a few years before the business model will support a lot more $ growth in data. Voice still pays the bills.
    fk 12/4/2012 | 8:37:00 PM
    re: Redback Hits the Wall The right solution for most of the metro edge applications is one which takes advantage of the SONET infrastructure to provide a converged solution for TDM and data services. One box to manage, a carrier class solution to a carrier problem. Carving up the SONET bandwidth into instantly provisionable slices is key to leveraging the dynamic nature of bandwidth demand. Support for multiple services such as internet access and transparent LAN on the same fiber as TDM traffic provides carriers with the flexibility to to address all customer data and TDM needs with a single, easily managed platform.

    Fast Ethernet and Gig-E are the data interfaces of choice for the vast, vast majority of data customers. Give the people what they want. Let them have FE or GE interfaces to the public network. It sure makes life easy on the customer. From the edge device into the network, use SONET. Attach linearly or in rings as makes sense for the amount of BW you need. By using SONET, you can leverage the embedded TDM infrastructure for whatever TDM traffic you need to provision. The rest is available for a number of data services. Additionally, when all IP networks are actually deployed, you only need to change your interface into the network from SONET to RPR or whatever; the rest of the product remains intact.
    opstar 12/4/2012 | 8:37:07 PM
    re: Redback Hits the Wall A Sonet box with x-connect even WDM ready optics, isn't a fresh idea any more.
    The key to the next gen Sonet is its data packet processing functions, namely ATM/FR/GE/IP. This kind of Multi-Service Platform saves space/power, especially complexity thus carrier's operational cost. When will carriers evaluate MSP instead of T-1/3 density? I dont know.
    hisles 12/4/2012 | 8:37:08 PM
    re: Redback Hits the Wall I wish the ILEC/CLEC would wake up to the fact that it has to be a phased approach in the metro

    Phase 1
    N X1 Gigabit ethernet in the rings
    Yes it is carrier class( ie Extreme Networks have EAPS-Extreme Automatic Protection Switching-subsecond failover in rings)

    Phase 2
    NX10 Gigabit Ethernet in the rings-coarse wave division multiplexing)
    People like Extreme are shipping that too at a tenth of the cost of sonet/Pure metro DWDM

    Phase 3
    when 10 Gig is a standard(march 2002) then turn the 10 Gig rings out to heavy users or spurs/leaf off the ring and start plugging N X10 ethernet into the Sycamores and Nortels Metro DWDM kit

    So easy but the Carriers Techies are hung up -quite rightly because the product people don't have a clue how to move from T1/T3- on legacy

    Please Carrier techies speak to your executives and see that $200m+ VC has flowed in from non vendors financiers into Yipes, Telseon and Fibercity-after the crash-and they are building purely on ethernet!!!

    Why?, the business plan flies!!

    thats how you make money from broadband data

    StartUpGuy1 12/4/2012 | 8:37:12 PM
    re: Redback Hits the Wall A SuperSONET (or Sonet GOD box) is a system that combines a SONET ADM and other functions like cross-connect, IP switching, Frame Switching, ect into one platform. These functions have traditionally been handled by separate platforms.

    The Redback SmartEdge 800, the Cisco 15454, the Cyras (now Ciena) K2 and Metro-Optix CityStream are all examples of SuperSONET boxes. There are many more players out there in this space...
    PBC 12/4/2012 | 8:37:12 PM
    re: Redback Hits the Wall Cool THX,

    God Box is the term I'm used to

    But is it a God box because it supports many
    types of configs. (i.e. ADM, Cross Conect/Switch) or is it because of its multi sevice capabilities

    Please ED U KATE me?

    PBC 12/4/2012 | 8:37:13 PM
    re: Redback Hits the Wall opticaluser,

    Great post, just one question:

    Super SONET box...please define?

    StartUpGuy1 12/4/2012 | 8:37:15 PM
    re: Redback Hits the Wall Redback is in the same boat that is rocking NT, CSCO, SCMR, ect. The carrier market is not absorbing new technology in their networks as fast as these vendors need them do. The RBOCS are rolling equipment that is generating revenue today, and that is T-1/T-3. They are using their existing infrastructure and upgrading it to service theirs needs now.. That is why a company like Tellabs has not gotten wacked as bad as most in the Telecom equipment space. 65-70 percent of their revenue comes from good old Crossconnects, which the RBOC's are upgrading to handle the glut of T-1/T-3 business. Super SONET and other technologies will be there but not this year.

    As for IXC's, they will deploy the redbacks of the world but it will take time. The eval and testing process can last from 12 to 18 months, and then you need to trial and deploy, which can take another 6 months.

    If you look, most of these vendors started shipping their Super SONET and Optical boxes in 2000/2001. Look for real deployments late this year and next year.

    Not good for this years stock price, though...
    fanfare 12/4/2012 | 8:37:16 PM
    re: Redback Hits the Wall I don't understand.

    Should we chock this up to industry ... or company specific?

    Seems RBAK may be steering us wrong here?
    DCITDave 12/4/2012 | 8:37:18 PM
    re: Redback Hits the Wall According to what was said on the call, RBAK's customers preferred to wait for newer features rather than take shipment of what was already built.

    But, still, something sounds out of place, doesn't it? Let's see what turns up during the Apr. 11 call. RBAK'll probably be more forthcoming with financial details then and some more context might help.
    DCITDave 12/4/2012 | 8:37:19 PM
    re: Redback Hits the Wall So I went too easy on them, eh?

    I thought the numbers told the story well enough, but maybe I could use the help of a more critical observer.

    Care to point out specifically what I glossed over in Redback's favor?

    If you have the spine, please do give me a call at 817-922-8689. I'd like to hear your concerns, especially given the seriousness of your repeated accusations.

    If you don't, then at least keep on posting. That way youGÇÖll go down in history like the angry newspaper subscriber who GÇ£gets even" by buying more papers.
    cd 12/4/2012 | 8:37:20 PM
    re: Redback Hits the Wall Any ideas on why they couldnt sell this? Really
    interesting since this "inventory" was built this
    quarter and written off the same quarter. Sets
    a new pace for obsolescence!
    shoorvir 12/4/2012 | 8:37:26 PM
    re: Redback Hits the Wall Why do you read LR if you don't like it.

    I've found their articles to be unbiased.
    If your argument is that advertising biases LR what about the rest of the media.

    I belive that it might be time for the critics to start another site. I lookforward to seeing the
    critcs show an example of "unbiased journalism"

    Innovation Circle 12/4/2012 | 8:37:30 PM
    re: Redback Hits the Wall Money well-spent, Redback.

    The guys from LR ate right out of your hand! Couldn't have been an easier analysis of an otherwise disasterous state of affairs.

    Money well spent, money well spent.

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