Redback Networks

Type: Wholly Owned Subsidiary of Telefonaktiebolaget LM Ericsson
Address: 100 Headquarters Drive, San Jose, California, 95134, U.S.A.
Telephone: (408) 750-5000
Fax: (408) 750-5599
Web: http://www.redback.com
Employees: 800
Sales: $153.3 million
Incorporated: 1996
NAIC: 334290 Other Communication Equipment Manufacturing; 423690 Other Electronic Parts and Equipment Merchant Wholesalers; 541990 All Other Professional, Scientific, and Technical Services
SIC: 3669 Communications Equipment Nec; 5065 Electronic Parts & Equipment Nec; 7389 Business Services Nec

From its headquarters in San Jose, California, Redback Networks, Inc., designs and markets networking technology that Internet service providers (ISPs) and telecommunications firms use to deliver and manage broadband Internet subscriptions and support popular online activities such as video and gaming.

Redback's portfolio of hardware and software products is marketed under the name SmartEdge, and is based on Internet protocol (IP) technology used on broadband or high-speed networks. IP is the communications protocol or method that is used for transmitting information between computers on the Internet. Toward the end of the 21st century's first decade, residential and business customers were relying on IP to receive multiple communication services, such as voice, data, and video, via the Internet, as opposed to purchasing them separately from different providers. This same trend allowed providers of multiple services to reap savings by consolidating separate service networks into one broadband-based network.

During the first decade of the 21st century, Redback's customer base consisted of approximately 500 service providers worldwide, including AT&T, BellSouth, British Telecom, Covad, France Telecom, China Netcom, China Telecom, Sprint, and Verizon.

Formative Years: 1996-2000

Redback was established in 1996 by former executives from Bay Networks and Cisco Systems. During its first three years the company, then based in Sunnyvale, California, received about $20 million in funding from firms like Sequoia Capital, Oaktree Capital Management, Mayfield, Lighthouse Capital Partners, Comdisco Ventures, and Accel Partners.

Dennis L. Barsema served as Redback's CEO during its formative years, beginning in 1997. After earning a management degree from Northern Illinois University in 1977, Barsema began his career as a salesman for Burroughs and later worked for Paradyne Corp. He eventually relocated to San Jose, California, to work for Centigram Corp. in 1996.

According to an article in the November 2000 issue of Telecommunications, Barsema explained that he was "stone-broke" when he landed the job as Redback's top executive, with nothing to lose. "My greatest concern was picking the right people," he explained. "In a small emerging company, you don't get to make hiring mistakes for key positions. You have to put the right people into the right jobs."

Like many technology start-ups, Redback was not profitable during its early years. The company lost $142,000 in 1996, a figure that grew to $4.4 million the following year, and $9.9 million in 1998. However, Redback gained an edge on competitors like Cisco and Nortel Networks by being the first to market with subscriber management equipment. The company also offered products that were compatible with different brands of network equipment.

During the 1990s Redback offered products such as the Subscriber Management System 500, which small and midsized ISPs could use to manage up to 1,000 concurrent subscribers connecting via cable modem or digital subscriber line (DSL). DSL is a form of high-speed Internet connection that uses regular telephone lines. Larger ISPs and telephone carriers used products like the Subscriber Management System 1000, which consolidated high volumes of data traffic and lessened the load on backbone routers, the computers responsible for relaying data to the appropriate location on the Internet.

Redback ended the decade with several key developments, starting with an initial public offering (IPO) on May 18, 1999. The small IPO, involving only 2.5 million shares, was a huge success. Share prices rose from $23 to more than $84 by the day's end, and exceeded $90 a week later. After two months passed, the company announced a two-for-one stock split. By this time, Redback had shipped about 400 Subscriber Management Systems to some 80 customers, including the likes of Ameritech, Bell Atlantic, EarthLink, GTE, Qwest, SBC/Pacific Bell, and UUNet.

An authorized reseller program named PowerPartners was introduced in July, providing value-added resellers (VARs) with sales and technical tools for marketing Redback products to ISPs. Participating VARs were grouped into either Solutions Partner or Expert Partner status, based on their ability to meet certain technical and service-related criteria.

On November 29, Redback agreed to acquire California-based Siara Systems, an optical networking company, in a $4.3 billion stock deal. Although Siara had not yet introduced actual products to the marketplace, the firm offered complementary technology that allowed Redback to offer a more comprehensive range of products and services. The deal increased the size of Redback's market by a factor of ten, and added 170 engineers to its workforce.

Redback began the 21st century in rapid growth mode. The company quickly outgrew its 45,000-square-foot facilities in Sunnyvale, despite an additional 95,000 square feet of leased space in San Jose. This led Redback to relocate its headquarters to a 96,710-square-foot building in San Jose's Corporate Technology Centre. By mid-2000, the company had announced plans to occupy a second 99,870-square-foot building, as well as a third 76,410-square-foot building.

A major leadership change occurred in 2000 when President and Chief Operating Officer Vivek Ragavan, who previously served as president and CEO of Siara Systems, succeeded Dennis Barsema as CEO. Barsema remained with Redback as vice chairman. Ragavan was at the helm when Redback announced the acquisition of Vancouver, British Columbia-based Abatis Systems in a $636 million stock deal. Abatis continued operations as a subsidiary of Redback.

At this time Redback was generating about 30 percent of its revenues from international operations, with Asia and Europe as especially strong markets. The company's Siara Systems acquisition bore fruit in the fourth quarter when it rolled out its SmartEdge optical product.

Hard Times: 2001-03

In June 2001, Redback announced plans to acquire the Fremont, California-based optical networking firm Merlin Systems, Inc., in a $57 million stock deal. Beyond that, the year was filled with numerous difficulties. A sluggish economy, which prompted capital spending cuts at many technology firms and telecommunications providers, put a clamp on Redback's growth.

Plans to hire up to 400 employees early in the year were replaced with a substantial workforce reduction. These challenges were exacerbated by the departure of CEO Vivek Ragavan to start-up competitor Atrica in May. Other challenges included a class-action lawsuit filed by Lucent employees who claimed they were misled by Redback's management to invest in the firm when they knew it was sailing in troubled waters. The company also faced a $54 million breach of contract lawsuit filed by Arrow Electronics.

From April to August 2001, Redback eliminated 17 percent of its workforce. In an effort to keep its best employees and reduce expenses, the firm offered a salary-for-stock plan that was expected to save $400,000 per quarter. Kevin DeNuccio, an executive from Cisco Systems, was hired as Redback's new president and CEO in August. As he took the helm, the road ahead was paved with more difficulties. In October, Redback's stock price dipped to $1.20 per share, down more than 99 percent from $169.81 only 13 months before, and from $190 in March 2000.

Redback suffered a loss of $187 million in 2002, on revenues of $125 million. At this time the company's workforce totaled approximately 600. While times were tough, Redback had developed a solid customer base that included all of the regional Bell operating companies (regional phone companies formed to provide local service when the federal government broke up AT&T's monopoly in 1983), as well as 17 of the leading 20 DSL networks. One positive development occurred when Nokia began working with Redback to help increase the company's sales and make inroads to more key customers. In May, Nokia acquired a 10 percent share of Redback, with an option to increase its stake to 20 percent.

Nevertheless, by 2003 Redback was saddled with a mountain of debt. The company proposed a plan to provide bondholders with 95 percent of its common stock, in an effort to wipe out some $467 million of debt. A day later, Redback lost Chief Information Officer Lars Rabbe, when he accepted the same position at Yahoo! Inc. When shareholders rejected the plan in October, Redback filed for Chapter 11 bankruptcy, and the company's stock fell below 30 cents a share.

A New Beginning: 2004-07

A new beginning occurred at Redback in January 2004, when the company emerged from bankruptcy after eliminating its debt and cutting annual expenses by $44 million. The company moved forward into the middle of the decade with $30 million in funding from Technology Crossover Ventures.

Redback soon began pursuing opportunities for growth in rural U.S. markets. In 2005, the company began focusing on helping rural telecommunications providers offer integrated voice, data, and video service to their customers. Redback's rural strategy received a major boost when its subscriber management system was approved by the U.S. Department of Agriculture's Rural Utilities Service (RUS), which made it eligible for inclusion in projects funded by the RUS.

In the April 11, 2005, issue of Telephony, Redback Chief Marketing Officer Marco Wanders explained: "The smaller and the rural carriers are starting to deploy new services because Internet access alone had limited revenue and opportunities for them. Expanding their service portfolio gives them a chance to get new customers on the network and also a chance to get more out of each customer. It makes the business more interesting."

In the fourth quarter of 2005, Redback recorded its first profit in five years, earning $300,000 on revenues of $48 million. Brighter times arrived as the company headed into 2006. Although it lost $2.6 million in the first quarter, the shortfall was 63 percent less than for the same period in 2005. Revenues increased to almost $58 million in the first quarter, an increase of 69 percent from the year before.

As conditions improved, Redback began to hire more engineering and sales personnel. A vote of confidence in the company was made when TCV Funds agreed to acquire 1.93 million shares of Redback's common stock for $42 million. TCV Funds was established by Technology Crossover Ventures, which had provided Redback with equity funding following its emergence from bankruptcy.

Improvement continued throughout the year. In the third quarter, sales reached $70.9 million, up 95 percent from the third quarter of 2005, and net income reached $9.1 million, as opposed to a $4.2 million loss the previous year. In an effort to cut costs, Redback announced plans to shift manufacturing from San Jose to Mexico. In addition, plans were also formed to relocate manufacturing for Asia, where the company was in heated competition with domestic players like Huawei, to a site in Malaysia.

A major development occurred in December 2006, when telecommunications equipment firm Ericsson announced plans to acquire Redback. Following the conclusion of the $1.9 billion deal in 2007, Redback became a subsidiary of Ericsson. The deal gave Redback capital to expand into areas like Internet protocol television (IPTV), the delivery of TV programming via the Internet.

Commenting on the acquisition in the December 20, 2006, issue of Telephony, Redback CEO Kevin DeNuccio explained: "This agreement is about accelerating market growth, integrating IP routing and mobility expertise and shaping the future of next generation networks. Video changes everything about networks today. We believe Redback now will have the global reach and financial resources to accelerate its own routing technology innovation and grow market share faster than our traditional routing competitors."

Consistent with DeNuccio's vision, in mid-2007 Redback unveiled the new SmartEdge 1200, which one analyst called the largest broadband remote-access server on the market. In the June 5, 2007, issue of Network World, DeNuccio said: "The primary [goal] was scale. We were trying to scale in two dimensions: We can deliver huge amounts of bandwidth for IPTV; the other dimension was to prepare for this broadband mobility where we have scaled the control plane eight times. You can put a half-million subscribers on this platform."

Heading into 2008, Redback enjoyed a customer base that included 15 of the world's leading telecommunications companies, which used its SmartEdge platform to serve approximately 50 million subscribers. With support from parent Ericsson and product offerings needed to serve a burgeoning broadband market, Redback appeared to be in an excellent position for continued growth.

Principal Competitors

Alcatel-Lucent; Cisco Systems, Inc.; Juniper Networks, Inc.; Nortel Networks Corp.

Further Reading

Duffy, Jim, "Redback Looks to Redefine Edge Routing: Analyst Says Company's Device Largest Broadband Remote-Access Server on Market," Network World, June 5, 2007.

Mardesich, Jodi, "Redback Climbs Up on a Broadband Box: Ahead of Cisco," Fortune, July 19, 1999.

Medford, Cassimir, "How Leaders Lead; From Militaristic to Laissez Faire, Top Network Executives Favor Different Styles for Keeping Their Companies Operating Smoothly," Network World, April 24, 2000.

Nerney, Chris, "Network Supernovas Light Up the IPO Sky," Network World, July 12, 1999.

"Offline," Telecommunications, November 2000.

O'Shea, Dan, "Ericsson to Acquire Redback," Telephony, December 20, 2006.

Wilson, Carol, "Redback Launches Rural Initiative," Telephony, April 11, 2005.

— Paul R. Greenland