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Analysts losing patience with Redback

Industry observers all but turn their back on the networking company after its most recent profit warning.

Redback analysts have all but turned their back on the networking company after its most recent profit warning.

Many downgraded the stock and lowered estimates for 2001, while some deferred changing their projections and hinted that a conference call in two weeks could bring more negative news.

Redback, a provider of networking equipment for broadband services, has hit troubled times as its customers, telecommunications companies, have put off purchases. Shares, down $2.67 to $8.64 by market close Thursday, have fallen far from their 52-week high of $181. The decline accelerated when CEO Vivek Ragavan resigned in May.

The company reported after Wednesday's bell that its profits and loss for the second quarter will both miss expectations. Redback also said it will take a charge to write off excess and obsolete inventory in the quarter.

Excluding the inventory charge and other one-time items, Redback's pro forma loss will be 27 cents to 32 cents per share. That's much steeper than the 11 cent per share loss predicted by First Call.

Redback said revenue will be $55 million to $60 million. First Call had expected revenue of $87 million.

"Delayed network deployments by the largest carriers and service providers reduced overall order visibility,'' said CFO Dennis P. Wolf in the company's press release. That, coupled with a majority of the company's orders being crammed into the last week of the quarter, made it tough to predict the shortfall, he added.

Analysts said several large orders from SBC Communications and Bell South failed to materialize, and "deferrals from emerging carriers Genuity and Williams compounded the problem," according to Morgan Stanley analyst Christopher Stix.

Stix, like most analysts, lowered estimates, but said they could change again when the company gives a conference call on July 11. Stix cut his price target on the stock to $14 and lowered his calendar 2001 revenue estimate from $365 million to $271 million, and his loss estimate to 90 cents a share from 46 cents a share.

CIBC Oppenheimer analyst Steve Kamman, who reiterated a "hold" rating on the stock, decided to hold out on adjustments to his long-term estimates pending the call in two weeks. "We would not be surprised to see further negative surprises," he cautioned.

On a positive note, he believes that Redback's customers did only defer orders, not cancel them.

Deutsche Banc Alex Brown analyst George Notter didn't wait for more bad news--he cut estimates steeply and lowered his rating to "market perform" from "buy."

The company's announcement is "indicative of the worsening capital-spending environment and very consistent with large earnings misses at Nortel and Tellabs over the last several weeks," Notter wrote, adding that carriers are continuing to defer spending.

Lehman Brothers analyst Steven Levy also downgraded the stock, to "market perform" from "buy," and called the company's revenue shortfall "much greater" than he had expected.

Levy noted that the company should still be able to avoid a cash shortage and return to cash-flow positive results in the next few quarters.