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Contributors: Douglas McIntyre Jon C. Ogg

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Tuesday, August 15, 2006

Redback Investors Saying "What Options Probe?"

Redback Networks Inc. (RBAK) did file its Quarterly Report (10-Q) for the quarter ended June 30 with the SEC. In the 10-Q, they corrected the results of operations for the last quarter ended June 30 previously disclosed in its press release from July 25, 2006.

The correction increases stock compensation expenses on a GAAP basis by a total of $0.3 million for the second quarter and first six months of 2006, which is much less than anything dire to the company's status.

$0.2 million was for periods and $0.1 million was for the second quarter of 2006.

GAAP loss for Q2 2006 increased to approximately $0.5 million from $0.2 million and GAAP loss H1 2006 increased to approximately $1.7 million from $1.5 million.

GAAP net loss for Q2 2006 increased to approximately $1.9 million from $1.8 million.

GAAP net loss for the six months ended June 30, 2006 increased to approximately $4.5 million from approximately $4.3 million.

The correction had essentially no real impact on the GAAP net loss per share for Q2 2006, but increased GAAP net loss per share for H1 2006 to -$0.08 from -$0.07.

The review finished out stating that the company found no intentional manipulation or backdating of options.

RBC Capital also independently raised the stock pre-market to an Outperform rating from a Sector Perform. They are saying that the merged AT&T and BellSouth will continue using the original Redback architecture. That would mean the company is on the winning side of our GOOD HITS & BAD MISSES scenario in a decreasing client list of telecom and data carriers that suppliers can win as clients.

What is interesting is that this ran up 8.2% yesterday to $16.38. We asked around and there were discussions that they "may" have been named as a subcontractor for a larger infrastructure upgrades in one of the E.U. nations. There was also some talk about the options issue, but it was vague. Yesterday was the most active trading day in the stock since the day after the July 25 earnings date. Today will be even more active with the shares already having posted 2.3+ million shares and it is up 9.7% again at $17.98.

We'll have to see if the combined stock performance of +18.8% in two days is justified. It seems a sharp rise for a company that is still losing money. According to analyst estimates the company is expected to post $0.10 EPS and almost $70 million in revenues in the current quarter, and the actual estimate for FY Dec-2006 is about $0.38 EPS and just over $272 million. Now that the stock has recovered so much, it trades with a $1.03 Billion market cap.

It looks like sniffing out which companies won't get their hands excessively burned for past option grant practices may be more lucrative than betting on the implosion of companies over this.

Jon C. Ogg
August 15, 2006

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