Redback on the comeback trail

On Wednesday, the broadband equipment maker announced that Bosnia Herzegovina-based BH Telecom will use its SmartEdge Service Gateway router to build a new nationwide broadband and Internet Protocol network. The network will bring DSL services and IP access to the country for the first time, as part of its rebuilding effort after the war.

On Monday, Redback announced a deal with Turk Telecom, the national telephone operator in Turkey, to supply it with SmartEdge gear for its next-generation broadband network. Last week, the company announced a contract with Taiwan service provider Chunghwa Telecom.

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"I think people who had written the company off for dead might want to take a second look now," said Steve Kamman, an analyst at CIBC World Markets.

In July, Redback said it would supply Korean telecommunications company KT, one of the largest providers of DSL in the world, with SmartEdge routers to build its next-generation broadband network. And in May, it announced a deal with China-based CNC International.

Redback, which makes edge routers and broadband subscriber management gear, was once a high-flying darling of the telecommunications boom. The company was the first to develop and sell gear aimed at helping carriers manage subscribers on DSL networks and aggregating broadband traffic. It quickly became the dominant player in this niche market.

But when the telecommunications market crashed, so did the company's prospects. It filed for bankruptcy protection in November 2003. In January 2004, it emerged a much leaner company, having shed $467 million in debt.

Since January, the company has been hard at work, trying to turn itself around. And so far, it looks as if it's having some success. In the past three months, it has announced at least five new contracts.

In the second quarter of 2004, the company reported that it had increased revenue by 45 percent. It still reported a loss, but it was significantly better than the same quarter a year earlier. In the second quarter of 2004, the company reported a net loss of $2 million, compared with $21.5 million in the second quarter of 2003.

Most of the company's revenue still comes from upgrades and follow-on sales of its older DSL Subscriber Management System product, according to Kevin DeNuccio, chief executive officer of Redback. It supplies gear to 14 of the 20 largest DSL providers in the world, he said.

In the United States, Redback is the exclusive provider of DSL aggregation gear to Verizon Communications. It has 95 percent share in SBC Communications' DSL networks. In fact, DeNuccio said SBC is one of its fastest-growing accounts. It shares BellSouth's DSL network with Nortel Networks.

While the SMS is still an important product, particularly in U.S. accounts, growth in the future will likely come from Redback's SmartEdge IP router. This product combines subscriber management with Ethernet switching, IP routing and broadband aggregation capabilities. It will be used in next-generation networks that are combining voice, video and data for a single network. Redback's SmartEdge router competes head to head with the 10000 router from Cisco Systems and the ERX series from Juniper Networks.

"Now that we have our financial model stable, we need to focus on growth and new-customer acquisition," DeNuccio said. "It's all about winning business in the next-generation network."

The good news for Redback is that all of its newly announced overseas deals are for the SmartEdge router. This is not surprising, considering that Asia is way ahead of the United States in terms of deploying cutting-edge DSL technology.

"The fact that Korea Telecom (KT) and China Netcom (CNC International) are choosing the SmartEdge product is a positive endorsement from people who actually know a lot more about DSL than the U.S. carriers," CIBC's Kamman said. "These wins may not carry as much weight as one from a U.S. carrier, but the truth is that Asia is ahead, in terms of broadband and IP development, (of) the carriers in the U.S."