‘Staggering’ SmartEdge growth brings Redback profits

Redback Networks announced its first profitable quarter in more than five years last night, thanks to growth in sales of its SmartEdge router products that Chief Executive Officer Kevin DeNuccio called “staggering.”

The edge equipment vendor reported GAAP net income of $300,000, or $ 0.01 per share, for the fourth quarter of 2005. Fourth-quarter revenue was up 32% sequentially and up 50% from a year earlier, to $48 million.

“It feels really good to have delivered our first breakout quarter,” DeNuccio said during the company’s Thursday earnings call.

For the full year, Redback reported $153.3 million in revenue, a 33% increase from 2004.

Revenue growth was driven by the success of Redback’s SmartEdge routers, which accounted for 79% of the company’s total product revenue in the quarter. SmartEdge revenue grew 46% in the quarter to $32.4 million while its annual revenue more than doubled to $91.8 million. DeNuccio called the numbers “staggering.”

Redback added 13 new SmartEdge customers in the fourth quarter alone, giving it a total of 60 customers for the year, including the top three U.S. carriers and many of the world’s top carriers.

The SmartEdge is also cannibalizing Redback’s other product line, the SMS products, in legacy broadband networks. Revenue from the SMS line declined 22% in the quarter to $36.6 million, and the company expects it to continue declining steadily over time.

“The SmartEdge brand is becoming synonymous with IPTV and triple-play,” DeNuccio said. “[It] has become true growth engine for the company.”

DeNuccio is also optimistic that the company can parlay its success in consumer broadband to business service infrastructure. “Once carriers get north of 20 Mb/s, we think we’ll roll business customers onto this infrastructure,” he said. “It makes no sense to have T-1, E-1 business customers at 1.5 Mb/s when there’s a ubiquitous 20-Mb/s network built for consumers.”

Not surprisingly, the company’s outlook for 2006 is rosy. To start with, Redback expects a 5% to 10% sequential revenue jump in the first quarter. In the fourth quarter of 2005, the company’s order bookings and backlog reached their highest levels in five years.

“We’ve just begun a major infrastructure upgrade cycle by carriers, driven by significant new revenue opportunities and dramatically lower cost structures,” DeNuccio said. “We believe this investment cycle will be longer and larger than building the Internet itself the first time around.”

Company executives skipped over one analyst’s question about the company’s hiring plans in light of its anticipated future growth. Redback ended the fourth quarter with no more staff than the 505 employees it had at the end of the third quarter. The company uses big-brother partner Alcatel for more than 10% of its sales.

During the call, DeNuccio also hinted at a “significant” new product introduction planned for the end of the first quarter, but he declined to elaborate.

“Let me apologize in advance if today I were to stumble over words like ‘gain,’ ‘earnings,’ and ‘income,’” Chief Financial Officer Tom Cronan said. “These are words I’m not used to saying in Redback earnings releases. But they’re words I’ll have to get used to.”