No. of Recommendations: 20
Redback Networks (RBAK) KARB Analysis

See this post for NEW KARB criteria:
http://boards.fool.com/Message.asp?mid=13444144

A. Top dog, first mover, in an important, emerging industry that is currently in the Tornado (hypergrowth), or is in the early stages of Tornado/hypergrowth growth. (Most of the signs of Tornado formation/growth as laid out in the Gorilla Game FAQ must be met; refer to item #12 in this post:
http://boards.fool.com/Message.asp?id=1360002000838000


RBAK is a next generation networker (NGN) with a dominant position in subscriber management systems (SMS). Their boxes help regulate broadband traffic in consumer cable, DSL and wireless broadband systems. They also are expanding into the metro optical area with their SmartEdge products.

From their Yahoo! Profile:
http://biz.yahoo.com/p/r/rbak.html
"Redback Networks Inc. is a provider of advanced networking systems that enable carriers, cable operators and service providers to rapidly deploy high-speed access to the Internet and corporate networks. The Company's product lines, which consist of the Subscriber Management System family and the SmartEdge family, combine networking hardware with sophisticated software. Together, these product families are designed to enable customers to create end-to-end regional networks that will support all major broadband access technologies, as well as the new services that these high-speed connections will enable. The Company's Subscriber Management System connects and manages large numbers of subscribers using any of the major high-speed access technologies including digital subscriber line, cable and wireless. The Company's SmartEdge optical networking and multi-service products are being developed to simplify the architecture of regional voice and data networks."

From their latest 10-Q:
"Redback Networks Inc. is a leading provider of advanced networking systems that enable carriers, cable operators and service providers to rapidly deploy high-speed access to the Internet and corporate networks. Our product lines, which consist of the Subscriber Management System™, SmartEdge™, Enterprise Service Point™, and Service Management product families, combine networking hardware with sophisticated software. Together, these product families are designed to enable our customers to create end-to-end regional networks that will support all major broadband access technologies, as well as the new services that these high-speed connections will enable.

Our Subscriber Management System, or SMS, products connect and manage large numbers of subscribers across all major high-speed access technologies, including digital subscriber line, cable and wireless and bridge the gap between high-speed access concentrators and the routers which connect to the Internet backbone. Our SmartEdge optical networking and multi-service products simplify the architecture of today's regional voice and data networks, as well as improve their capacity and performance. Our Enterprise Service Point, or ESP, products are a new breed of intelligent carrier-managed devices designed specifically to help service providers capture high-margin revenue from advanced IP services. The Service Management products allow service providers to easily publish, activate and manage IP services and allow their customers to subscribe to these services on demand."

George (my friend scrim1) wrote this great article on RBAK and has a great explanation of what RBAK does:
http://www.technologyreports.com/reports/analystreports/redback.html
Redback makes a product that serves as a traffic cop between heavily trafficked subscriber lines and the Internet's backbone, helping to prevent logjams in the system. Because they subscriber management system (SMS) is geared towards cable, DSL and wireless providers, Redback is possibly the best broadband play. It doesn't matter which technology wins, Redback should benfit and that's one reason to be bullish on this stock.
Its Subscriber Management Systems (SMS) connect and manage large numbers of subscribers so companies can deploy high-speed broadband access to the Internet and corporate intranets. SMS 1000 supports up to 4,000 subscribers, while the SMS 500 system supports up to 1,000. The company expanded its business with the 2000 purchase of privately held Siara Systems, a maker of optical networking gear, for more than $4 billion. Redback's subscriber management systems makes it easier to manage how much bandwidth each user gets. For exmaple, some one who wants to stream video over the net will need more bandwidth, and with Redback an ISP could give you more bandwidth but also charge you more.
The SMS market will be worth $2 billion by 2002 and Redback is mostly likely will retain most of the market.
Redback's 4.3 billion dollar acquisition of Siara was key. This allows Redback to offer the total package to managing internet users, which no other company can offer. Siara products offer optical solution for the metro-network which is estimated to be a 20 billion dollar market in 2003. Siara also brings talented engineers that can help Redback with it's SMS offering. Redback currently uses off the shelf Intel processors in their product, but with Siara's engineers (that helped create the AMD Athlon chip) Redback can make their own high powered CPU instead of using Intels CPU. Siara's technology is at the edge of fiber optic backbones, directing traffic as it goes onto narrow-band connections and into your house through your phone line. At the time of the announcement, people were stun to hear Redback buying a private company for 4 billion. Some wondered why Siara just didn't go public. The merger between Redback and Siara reduced Siara's time to market by about 8 months, allowed Siara access to Redback's partnerships that they've made across the US and globally, and the two companies would offer a more complete end-to-end solution than by themselves.


Let me not forget the awesome RBAK FAQ compiled by our very own Phileo:
http://boards.fool.com/Message.asp?mid=13197592

RBAK as a Rule Breaker

RBAK was researched in various teams in the RB Seminar from last March:

from chenier:
http://boards.fool.com/Message.asp?mid=12166578
from livnlrn:
http://boards.fool.com/Message.asp?id=1400015000226000
from mark99ant:
http://boards.fool.com/Message.asp?id=1400014000377000
from pbonzk:
http://boards.fool.com/Message.asp?id=1400001001144000

RBAK was also profiled in the TMF Daily Double feature:
http://www.fool.com/ddouble/2000/ddouble000406.htm

Top Dog:
RBAK dominates the Subscriber Management System (SMS) space, with Nortel coming a distant second with their Shasta product.

First Mover:
Redback keeps racking up SMS wins and is aggressively moving into the optical Metro Area Network space with SmartEdge.

RBAK as a Gorilla:

GorillaGorilla Summary of RBAK:
http://boards.fool.com/Message.asp?id=1360002000184000

Paul Johnson, an analyst for Robertson Stephens (and a co-author of the Gorilla Game) covers RBAK:
http://www.nextgenerationnetworks.com/coverage/index.htm
and has referred to it as an emerging Gorilla in NGN.
An example in this post by DnH40:
http://boards.fool.com/Message.asp?mid=13714978
taken from this recent CNET article written on 11/15/2000:
http://www.cnetinvestor.com/yahoonews/newsitem-yahoo.asp?SYMBOL=R696999
"We believe that the following analysis renders the current situation as particularly appealing to investors and, as such, we believe the stock represents an attractive buying opportunity. We believe Redback is trading at a significant discount to their closest peers in the Next Generation IP and Optics arenas. The price to revenue multiples of their closest peers among the next-generation IP companies and the leading next generation optical vendors are more than double that of Redback's. In our opinion, this will change as Redback's optical business grows and as they increase their already "gorilla-esque" market share in the next generation IP arena."

From Phileo's FAQ:
http://boards.fool.com/Message.asp?mid=13197592
taken from George's article:
http://www.technologyreports.com/reports/analystreports/redback.html

a) Is there a discontinuous innovation or a proprietary open architecture?
Redback's products allow users to change the speed of their broadband connection with a click of a mouse. Whenever a user wants to watch a video on demand or use voice over IP the ISP can give you more speed. You can't do this on a narrowband connection and I'd imagine all ISPs wanting to offer this kind of service to their users.

b) Does it have the potential to grow into a mass market phenomenon, become a standard?
In total, Redback & Siara are going after a 22 billion dollar market (by 2003/04) and considering they offer an end-to-end solution will mostly mean they'll take a big chuck of the market.

c) Are there high barriers to entry and high switching costs?
The fact that they offer the best product in the market place should keep the barrier some what high. While this doesn't mean much, Redback has the trademark on "subscriber management system".
Also, once customers sign on to buy RedBack's expensive NGN gear for broadband IP services, the customers will find it difficult to justify the financial costs of switching to another system.

d) Have value chains developed?
There are still some chains that need to be developed in the cable space, but over 80% of DSL connection uses Redback's SMS products. Redback has won a major alliance with Aol.
An additional value chain will develop once RedBack and Abatis combine to deploy their on demand Broadband IP services.

e) Have they crossed the chasm?
In the DSL space they have. Redback's strong alliance with Aol should help Redback in the cable space. In my opinion, DSL has an edge over the cable guys maily because the US Government has forced phone companies to open up and this will create competition. Copper wiring is found all over the planet and has more advantages over cable. With increased competition from DSL, i'd expect to see cable push harder and this should increase Redback's sales to the cable space.

f) Existence of hypergrowth?
Yes, Redback is experience hyper growth. Year-over-Year growth was 479%


B. Sustainable advantage gained through business momentum, patents, visionary leadership, high barriers to entry, and high switching costs.


Business momentum:
RBAK is showing a great deal of business momentum as they expand their sales of SMS, here are some recent deals from this post by Phileo:
http://boards.fool.com/Message.asp?mid=13733416

RBAK breaks into the Spanish ISP market with a reseller agreement with Servicom2000:
http://www.redbacknetworks.com/pressrelease/default.cfm?PRID=289®ionID=3

Genuity (GTE) selects RBAK SmartEdge:
http://www.redbacknetworks.com/pressrelease/default.cfm?PRID=274®ionID=1

Singapore Telecom deploys RBAK SMS:
http://www.redbacknetworks.com/pressrelease/default.cfm?PRID=271®ionID=2

Korea Telecom selects RBAK SMS:
http://www.redbacknetworks.com/pressrelease/default.cfm?PRID=287®ionID=2

Tokyo Metallic Communications selects RBAK SMS:
http://www.redbacknetworks.com/pressrelease/default.cfm?PRID=302®ionID=2

RBAK signs reseller agreement with Homeyen:
http://www.redbacknetworks.com/pressrelease/default.cfm?PRID=305®ionID=2

The above scorecard says that RBAK has 4 product design wins (as reseller agreements don't count as a product design win), and we're only halfway through this quarter. Last quarter, RBAK announced 9 contract wins (reference:
http://boards.fool.com/Message.asp?mid=13262550 )

Today (Dec. 4th) there's a press release with the progress RBAK is making in China:
http://biz.yahoo.com/bw/001204/ca_redback.html

BruceBrown seems to think that RBAK has great business momentum in his Fat Pipe #2 post:
http://boards.fool.com/Message.asp?mid=13195558

You might recognize that Cisco and Unisphere also appeared on the NGN core internet router list of competitors. Once again, we have the two different strategies of companies that participate in the 'end to end' solutions category as well as 'best of breed' niche category. Redback has owned the number one position in this edge portion of the NGN since the category began. However, there's simply no need to state the size, power and market position of companies like Nortel Networks and Cisco Systems. That's some serious competition. As I mentioned in the Fat Pipe #1 - core post, the customer base of a Cisco or a Nortel utilizes the 'moat' and 'value chain' that they have access to without a doubt. In spite of all that, Redback is hot and has been on the acquisition trail to beef up the stew and expand the offerings. The most important acquistion to date was the $4.3 Billion one of Siara which also brought the new CEO to Redback, Vivek Ragavan. The market that Siara competes in is expected to be around $20 Billion in 2001. Redback pretty much 'owns' the SMS (Subscriber Management Systems™) market which is around $2 Billion. The acquisition of Siara puts Redback in the total New Access Network market going forward in a big way.

On a side note. A few dollars in share price fluctuation of Cisco's stock price equals the entire market cap of Redback. That's a big company....

Also under the category of visionary leadership you can check out BB's visit to RBAK HQ with his kids:
http://boards.fool.com/Message.asp?mid=13095597

I got this by e-mail from GorillaGorilla as part of a larger article he is writing:
RBAK Management

Ravi Chandra - responsible for IP development at Siara, he previously had management role in Cisco's IOS software group

William Kind - Senior VP of Product management and Marketing, and was COO at Siara. William has been president of Lucents's Access products division. Has worked as Cisco.

Pankaj Patel, Senior Vice President of Engineering - Patel has more than two decades of experience in the data communications and computer industries. Most recently, he was with Cisco Systems as senior director of engineering, responsible for mid-range, multi-service routers and enterprise WAN switches. At Cisco/Stratacom, Patel managed development of routers and switches in executive and senior director-level positions.

Vivek Ragavan is replacing Dennis Barsema as CEO.
Siara product has revenues potentially 10X Redback's and in an area with expanding opportunities.


PATENTS
From the latest 10-Q on 11/17/00:
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We have filed a limited number of U.S. patent applications. There can be no assurance that these applications will be approved.


"C. Excellent Growth Metrics"

RELATIVE STRENGTH:
RBAK's Relative Strength in the past 12 months, according to www.moneycentral.com, is 58 (as of 12/04/00). According to IBD (as of 12/01/00) RBAK had a RS of 60.

0 points.

(Note though that this is actually pretty good compared to the networking group, and strong past price appreciation can be seen if we go back 18 months).

hanson001 posts the latest YoY numbers for RBAK in this post:
http://boards.fool.com/Message.asp?mid=13747443
note the Flow ratio is under 1 at 0.79

Here are some notes from Bruce Brown on the latest quarterly earnings release:
http://boards.fool.com/Message.asp?mid=13467093
An excerpt:
60.2% gross margins (lower due to new products, SmartEdge has lower gross margins than the SMS product line, but will increase in 2001 as they add value added services)

The first half of 2001 should see gross margin at 60% increasing in the second half of the year as the value added applications (IP functionality) are coupled with the SmartEdge. SmartEdge gross margins started out at 40-50%, but will increase as the IP functionality is added over the next few quarters. SMS gross margins are 70%. SMS 10000 has gross margins in the 60's. They don't want to get too specific due to competitive reasons, but the SmartEdge margins will increase. They see no pricing pressure all over the world in their SMS wins. Bingo for dominance there!

IP functionality in beta by year end and should be added to product in Q2.

Net Income should increase to 18% by Q4 (not sure if that was 2000 or 2001, but I think they meant 2001)

Quarter ended with $474 cash (down $18 million from previous Q)

Increasing demand for products warrant increased inventory to meet demand.

Jabil will manufacturer the SMS product line going forward.

$645 Million in revenue for next year is the "2001 guidance"

30 customers in trials now for SmartEdge - ramping up in 6 months

50% revenue came from the new products (SMS 10000 and SmartEdge)

SmartEdge provided $16 M of the $80 M in revenue.

Rapid acceptance from customers.

RBAK is in the tornado, with hypergrowth seen for its SMS and soon for its SmartEdge products.

SALES GROWTH (numbers in thousands):

YoY (3 month numbers):
Sep 1999 - Sep 2000: $80,558
Sep 1998 - Sep 1999: $20,590

That's a growth of 291.2%.

2 points.

Sequential (3 month numbers):
Jun 2000: $48,728
Sep 2000: $80,558

That's a sequential quarterly growth of 65.3%, that is simply amazing sequential growth!

2 points.

"D. Clear signs of solid execution by a strong management team; Value chain in place or shows clear signs of developing (eg. alliances, joint ventures, partnerships, signing up distributors, third party developers, and VAR's)"

RBAK has a strong value chain, taken from RBAK's investor FAQ:
http://www.redback.com/about/home_faqs.asp
Who are Redback's customers?
Redback markets its products to carriers wanting to provide wholesale data services and to service providers worldwide that want to deliver broadband connectivity and value-added services on a mass scale. Key customers in the U.S. include carriers such as SBC, GTE, Bell Atlantic, Bell Canada, and Qwest. Redback also is a strategic supplier to U.S. service providers including, UUNET, EarthLink, PSINet, Concentric Network, Verio, and others. Overseas customers include Casema and Estonia Telecom in Europe and MosCom and Singapore Telecom in Asia.
Who are Redback's distribution partners?
Redback markets its products directly through its worldwide sales force, with offices throughout the U.S. and Canada, the U.K., France, Germany, the Netherlands, Japan, Hong Kong, Thailand, Singapore, and Australia, and through its strategic distribution partners, including Nokia and Fujitsu. Additionally, the company has Value-Added Resellers (VARs) that participate in its PowerPartners program worldwide.



"E. Company products and brand name are well recognized and respected by its customers, peers, competitors and partners in the relevant industry."

RBAK dominates the SMS space, and it is building on those sales of SMS to enter bigger markets.
See a previous summary of RBAK I posted here:
http://boards.fool.com/Message.asp?mid=12507953
You should also check out this lightreading.com space sponsored by RBAK for the latest news:
http://www.lightreading.com/redbackreading/

"F. Valuation metrics: "
(as of 12/04/00)
http://biz.yahoo.com/p/r/rbak.html

MktCap: $11.4 B
P/E: 150 (based on FY01 $0.50 est.)
P/S: 42.72


Risk:

There is a lot of risk with RBAK, first and foremost is the threatened slowdown in capital expenditure by telecom carriers that could slow RBAK revenues. RBAK also faces strong competition from giants CSCO and NT, as well as smaller nimbler opponents such as SCMR.

From their latest 10-Q:
We Expect Increased Competition

We may be unable to compete successfully with current or future competitors. If we do not compete successfully against current or future competitors, our business, results of operations and financial condition will be materially adversely affected. Currently, competition in our market is intense. The broadband access markets we are targeting, including digital subscriber line, cable, wireless and optical, are new and rapidly evolving and we expect these markets to become highly competitive in the future. In addition, we expect new competitors to emerge in the broadband access market as that market evolves due to technological innovation and regulatory changes. We face actual and potential competition from public and private companies providing routers connecting to the Internet backbone, access concentrators and subscriber aggregation systems. For instance, Cisco Systems, Inc., the leading provider of routers connecting to the Internet backbone, offers products that compete directly with our products, and also provides a comprehensive range of broadband access systems and network access systems.

We expect companies that offer access concentrators and routers to incorporate, or in the future will incorporate, some subscriber management functionality into their products. These companies include Cisco, Nortel Networks, and Lucent Technologies. In addition, there are several other companies that provide subscriber management features in access concentrators or routing platforms.

Many of our principal competitors, including Alcatel, Cisco, Fujitsu, Lucent Technologies, Nortel Networks, Siemens/Unisphere and some companies that may compete with us in the future, are large public companies that have longer operating histories and significantly greater financial, technical, marketing and other resources than we have.


There are some indications that RBAK's market share may be slipping in its core market, but the question is whether these are aples to apples comparisons.

The current risk du jour for NGN companies is that the market will no longer award premiums to hypergrowth companies, and thus value them with low multiples to revenues and earnings. We'll have to see how the market behaves, but this is a risk all RB stocks face when the Nasdaq heads south.


SUMMARY:

RBAK is a young company, leading in licensing some critical networking technology. RBAK dominates SMS which is a small market but growing well, it may be able to leverage this advantage into the larger metro optical space. I believe RBAK is emerging as a Gorilla and a force to be reckoned with in the edge networking sector for NGN. As far as I'm concerned, it is a Rule Breaking stock and deserves to be included in KARB.

-xerohype

(Disclaimer: I own shares of RBAK and have been known to buy some more if the share price declines significantly.)

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