Redback cuts expected fourth-quarter revenue 18%

Redback Networks cut its fourth-quarter revenue expectations by 18% late Thursday, citing lower than expected sales of its legacy gear and disruption caused by a proposed acquisition by Ericsson.

Redback now expects to report $64 million in fourth-quarter revenue, which represents a nearly 10% sequential decline and a 33% increase from a year earlier.

In a statement released Thursday, Redback Chief Executive Officer Kevin DeNuccio called the fourth quarter the best one ever for the company’s next-generation SmartEdge routers, attributing some of the fourth-quarter weakness to a slow transition among some large customers from legacy gear to the SmartEdge. He also cited “distribution channel disruptions caused by the timing of our proposed acquisition by Ericsson.”

The fourth-quarter warning was the second unwelcome surprise from Redback in a row. Revenue from its historically largest customer, BellSouth, dipped more than expected in the third quarter as BellSouth moved closer to its merger with AT&T. At the time, Redback assured investors that sales to BellSouth would recover in the fourth quarter. However, Morgan Keegan analyst Simon Leopold believes sales to several large customers--BellSouth, AT&T and British Telecom--were weak in the last three months of the year.

“We thought Redback could squeak by with better business in Asia and other European accounts,” Leopold said in a research note issued today. “[Redback’s] management has maintained an optimistic demeanor, and many had believed key customer BellSouth had recovered. In light of this, we find the degree of shortfall surprising.”

“Although management highlighted record SmartEdge sales, we believe this product fell short of our expectations too,” he added.

Ericsson’s plans to acquire Redback are unchanged by the latter’s fourth-quarter warning, DeNuccio said.

“We expect that substantially all of the delayed purchases will become revenue in 2007,” he added.

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