Redback Router Carrying a Heavy Load

A new product rollout has Redback (RBAK Quote - Cramer on RBAK - Stock Picks) rolling the dice.

New product announcements are always a big deal for cash-burning, revenue-short tech startups. In addition for paying for long hours of research and development, successful products impress customers and build momentum. A victory in even a small niche can keep shareholders happy for months.

But increasingly, a product push that fails to catch on can decide in short order whether a company continues under its own power or ends up on a steadily mounting scrap heap. With big phone companies signaling they'll cut spending by at least 20% next year, the telecom gearmakers are feeling more stress than ever before.

For its part, Redback has hung its shingle on a long-awaited router it calls the SmartEdge 800, which it unveiled Monday after nearly a year of hype. With three unnamed buyers and 15 phone companies testing the gear, Redback expects to book sales from the new router this quarter. It could certainly use the help: Redback saw sales plunge 38% sequentially last quarter amid increasing phone company penny-pinching. The stock rose 10% Monday to $4.26.

Like many networking gearmakers, Redback has gone from struggling to fill its orders to having a barren sales book in one year. Now, Redback and rivals such as Tellabs (TLAB Quote - Cramer on TLAB - Stock Picks) are crossing their fingers in hopes a popular product can carry them through the telecom recession.

High Hopes Networking's stable of make-or-break products
Company	Product	Function	Results
Ciena	CoreDirector	Optical switch	Rare success story.
Tellabs	Series 6000	Optical gear	Stumbling badly.
Sycamore	SN 16000	Optical switch	On life support.
Nortel	HDX	Optical switch	Phantom of the optics.
Juniper	M5, M10	Edge router	Gains against the grain.
Tellium	Aurora	Optical switch	Third customer soon.
Redback	SmartEdge 800	Edge router	Three buyers, 15 trials.
Source: Companies, Detox.

Routers have been a reasonably bright spot in the bleak networking market of late. Serving as traffic management systems within the Internet, routers have enjoyed some popularity as phone companies seek ways to move data cheaply. Juniper (JNPR Quote - Cramer on JNPR - Stock Picks) managed to post impressive third-quarter numbers as Internet router sales slogged on despite the nasty downturn in purchasing industrywide.

Redback's router is months late, industry observers say, perhaps as a result of executive shuffling. The router is among the anticipated fruits of Redback's 1999 acquisition of Siara Systems, and was developed by a group headed by Ravi Chandra, a member of the Cisco Internet protocol gang that fled to populate some router upstarts.

Now, Redback has precious little time left to turn its router effort into revenue growth and bring the company back to profitability, a target the company says it can reach next year. As of the end of the third quarter, Redback had $247 million in cash and about $500 million in debt. The company is burning through $50 million in cash per quarter.

To make a go of it, Redback is making big demands of its SmartEdge products, which have amounted to about 20% of revenue typically. It will be an enormous challenge to take the newest router, SmartEdge 800, from zero to significance in short order, especially when it has to go against formidable rivals such as Cisco and Juniper.

But at this point, companies like Redback have few options except playing the cards they have and letting customers decide who gets dealt another round.