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Long on the Ropes, Redback Finds Its Footing

The fourth quarter's looking surprisingly strong, but the game is getting tougher.



has picked itself up off the canvas, but it's still looking a little woozy.

The networking equipment maker has met its fourth-quarter financial expectations, Morgan Stanley analyst Chris Stix said in a note Monday. Better still, Redback may yet offer an upbeat appraisal of first-quarter trends, the analyst said.

Coming as it does amid a rash of

warnings by gearmaking rivals such as





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, Redback's strong performance looks nothing short of remarkable. The call helped push Redback shares up 51 cents, or 13%, to $4.35 in afternoon trading. Only three months ago, the San Jose shop's stock was at an all-time low of $1.20.

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Even so, doubts about Redback's long-term health loom as the company seeks to chip away at a market dominated by financially robust and operationally savvy competitors such as


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, Juniper and



. The financial clock is ticking on Redback, but not quite as loudly as before. Redback is expected to have about $180 million in cash remaining at the beginning of the first quarter and is burning about $35 million per quarter, down from $65 million per quarter last year.

Redback's solid fourth-quarter performance is attributable to stronger-than-anticipated sales of its subscriber management services devices, according to Stix. It looked like the sun had set long ago on the era of strong SMS sales. These systems use software applications to organize and manage a variety of network subscriber services such as dial-up, broadband and private-line offerings. Clearly, because SMS represents some 70% of revenues, Redback has enjoyed some lingering demand.

This is good news, because without SMS, Redback's

future would ride all too squarely on the painfully slow introduction and acceptance of a new edge router named SmartEdge 800. An edge router acts as a Net traffic management device by directing information to and from the endpoints of a network.

Redback says it has three SmartEdge customers and that 15 potential buyers are testing the new gear. But Cisco, always a tough competitor in terms of its technology and its salesmanship, holds an estimated 75% of the edge router business. Not wanting to let up on its dominance of the growing market, cash-rich Cisco recently launched a 0% financing promotion -- its first ever -- to help whip up sales.

Meanwhile, Redback's numbers themselves spell out the need for caution on the part of investors. Later this month Redback is expected to report a fourth-quarter loss of 21 cents a share on sales of $38.5 million. Stix expects Redback to hit $40 million in sales in the most-recent period. But even hitting that target would put Redback's sales at barely more than a third of their year-ago fourth-quarter level of $114.5 million


The real tell for Redback will be the traction it gets for its SmartEdge router," says a buy-side analyst whose firm is long Redback. "But this is going to be difficult in this market. The gloves are off."