RBAK Redback Networks

Redback Networks Inc. (NASDAQ:RBAK), a leading provider of next generation broadband networking systems, today announced its third quarter results for the period ending September 30, 2006. Net revenue increased 95 percent to $70.9 million for the third quarter of 2006 compared to $36.4 million for the same quarter last year. Net revenue was up 4 percent for the third quarter of 2006 compared to the second quarter of 2006. Redback Networks generated $4.5 million in cash in the third quarter of 2006, boosting its overall cash total to $176.0 million. Redback Networks also added 18 new customers in the third quarter for its SmartEdge� family of multi-service edge routers, including a top 20 carrier worldwide. In less than two years, Redback has won more than 200 SmartEdge customers worldwide, including 12 of the largest 20 carriers. Redback has more than 500 SmartEdge and SMS customers worldwide, including 15 of the 20 largest carriers. "On a worldwide basis, Redback continues to drive the wire-line carrier market in the deployment of triple-play networks,� said Kevin DeNuccio, president and chief executive officer, Redback Networks. �Broadband networks are becoming more video-centric and we believe Redback and SmartEdge technology are at the center of a paradigm shift in network routing to multi-service broadband networks.� �We believe up to 2 billion wireless and wire-line customers will be upgraded to new broadband networks from 250 million broadband users today,� said DeNuccio. �This network upgrade is up to ten times larger than the last Internet build-out. This trend reinforces our vision that a single broadband network will unify communication and entertainment services over time. In short, the network is shaping up to be the next mass medium.� GAAP net loss for the third quarter of 2006 was $2.4 million or $(0.03) per share attributable to common stockholders compared to a GAAP net loss of $8.4 million or $(0.15) per share in the third quarter of 2005. Non-GAAP net income was $9.1 million or $0.12 per share, compared to a non-GAAP net loss of $4.2 million or $(0.08) per share for the third quarter of 2005. Excluded from the non-GAAP results for the third quarter of 2006 were charges relating to amortization of intangible assets, stock-based compensation, amortization of the fair value of warrants issued in connection with a lease agreement, certain federal and state income taxes, and accretion of a dividend payable to preferred stockholders which was in the second quarter of 2006 and the previous quarters. For comparative purposes, GAAP pre-tax income excluding stock-based compensation for the third quarter of 2006 was $6.4 million, compared with a GAAP pre-tax loss excluding stock-based compensation of $7.3 million for the third quarter of 2005. With the adoption of Statement of Financial Accounting Standards No. 123R (FAS 123R) as of January 1, 2006, Redback Networks is reporting stock-based compensation expense in its generally accepted accounting principles (GAAP) results. See the attached table for a reconciliation of our GAAP results to non-GAAP results. Third Quarter Conference Call, October 19, 2006, 1:45 p.m. Redback Networks will discuss these quarterly results in an investor conference call today at 1:45 p.m. Pacific Time. The conference telephone number is: Domestic Dial-in: 1-800-559-2403 and International Dial-in: 1-847-619-6534. A live web cast is also available from the investor relations portion of the Redback�s web site, http://ir.redback.com. A telephone replay of the conference call will be available later in the day. Replay information will be available at Domestic Dial-in: 1-877-213-9653 and International Dial-in: 1-630-652-3041 Passcode: 15121699. Information on these calls and web cast can also be found on the company�s web site. Twelve of the top 20 carriers worldwide deploy Redback's SmartEdge family of multi-service edge routers to deliver multiple broadband services to tens of millions of business and residential customers worldwide. These customers include British Telecom, Belgacom, BellSouth, China Telecom, China Netcom, Chunghwa Telecom (Korea), France Telecom and Turk Telecom, among others. About Redback Networks Redback Networks Inc. manages 50 million broadband connections (SMS+SmartEdge products) for 15 of the top 20 carriers worldwide. Redback�s multi-service routing platform delivers next generation broadband services such as VoIP, IPTV, Video-on-Demand and on-line gaming. Redback Networks has more than 500 carrier customers worldwide and is based in San Jose, CA. In 2006, Redback marks its 10 year anniversary, celebrating ten years of broadband innovation. For more information, visit Redback Networks at www.redback.com. REDBACK and SmartEdge are trademarks registered at the U.S. Patent and Trademark Office and in other countries. NetOp is a trademark of Redback Networks Inc. All other products or services mentioned are the trademark, service marks, registered trademarks or registered service marks of their respective owners. Note Regarding Forward Looking Statements The statements contained in this press release that are not purely historical are forward-looking statements which are subject to the safe harbor provisions of the Private Litigation reform Act of 1995. These statements include but are not limited to statements regarding our expected financial results, our expectations of continued growth of our SmartEdge product line and our customer base, expectations regarding the trend in growth of upgrades to broadband networks and the expected impact on the growth of the Company as a result of such trends. These statements are only predictions and involve a number of risks and uncertainties, the outcome of which could materially and/or adversely affect Redback�s actual future results. These risks include without limitation the following: final review of quarterly results by the Company�s independent auditors; growth trends in the networking industry and in various geographic regions; variations in customer demand for products and services; the timing of orders and manufacturing lead times; changes in customer order trends or customer or product mix, and other risks relating to Redback�s business as set forth in the Annual Report on Form 10-K for the year ended December 31, 2005, the Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, and Redback�s other most recent reports on Form 10-Q and Form 8-K, and amendments thereto, on file with the Securities and Exchange Commission (SEC), and other reports filed with the SEC from time to time. All forward-looking statements included in this document are based upon information available as of the date hereof, and Redback assumes no obligation to update these statements. Non-GAAP Disclosure To supplement our consolidated financial statements presented in accordance with GAAP, we use non-GAAP financial measures, which are adjusted from results based on GAAP to exclude certain items. These non-GAAP measures are provided to enhance the user�s overall understanding of our current financial performance and our prospects in the future. Specifically, we believe the non-GAAP measures provide useful information to both management and investors by excluding certain items that we believe are not indicative of our core operating results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with United States GAAP. � Redback Networks Inc. Condensed Consolidated Balance Sheets (In thousands) (unaudited) � � � � September 30, 2006 December 31, 2005 Assets � Current assets: Cash and cash equivalents $ 175,999� $ 43,764� Accounts receivable, net 35,551� 32,708� Inventories 9,029� 12,933� Other current assets � 5,825� � 8,204� Total current assets 226,404� 97,609� � Property and equipment, net 21,818� 16,944� Goodwill 142,532� 144,401� Intangibles, net 47,708� 55,669� Other assets � 1,211� � 1,391� Total assets $ 439,673� $ 316,014� � Liabilities, Mandatory Redeemable Convertible Preferred Stock, and Stockholders' Equity � Current liabilities: Accounts payable $ 35,290� $ 28,664� Accrued liabilities 20,884� 14,759� Borrowings and capital lease obligations 317� 372� Deferred revenue � 18,212� � 18,288� Total current liabilities 74,703� 62,083� � Deferred revenue, net of current portion 13,094� 7,036� Long term liabilities � 1,064� � 1,579� Total liabilities 88,861� 70,698� � Mandatory redeemable convertible preferred stock -� 47,897� � Stockholders' equity � 350,812� � 197,419� Total liabilities, mandatory redeemable convertible preferred stock and stockholders' equity $ 439,673� $ 316,014� Redback Networks Inc. Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (unaudited) � Three Months Ended Nine Months Ended September 30, 2006 June 30, 2006 September 30, 2005 September 30, 2006 September 30, 2005 � Net revenue $ 70,910� $ 68,222� $ 36,431� $ 196,991� $ 105,277� � Cost of revenue, excluding amortization 27,368� 27,063� 15,705� 77,037� 42,353� Amortization � 2,706� � 2,709� � 2,726� � 8,122� � 8,170� Total cost of revenue 30,074� 29,772� 18,431� 85,159� 50,523� � � � � � Gross profit � 40,836� � 38,450� � 18,000� � 111,832� � 54,754� � Operating expenses: Research and development 22,694� 20,158� 14,428� 59,985� 44,254� Selling, general and administrative � 22,172� � 19,696� � 11,192� � 59,632� � 32,329� Total operating expenses � 44,866� � 39,854� � 25,620� � 119,617� � 76,583� � Loss from operations (4,030) (1,404) (7,620) (7,785) (21,829) � Other income (loss), net � 2,105� � 953� � (677) � 4,111� � (184) � Loss before income taxes (1,925) (451) (8,297) (3,674) (22,013) � Provision for income taxes � 464� � 1,316� � (52) � 2,915� � 212� � Net loss (2,389) (1,767) (8,245) (6,589) (22,225) � Deemed dividend and accretion on preferred stock � -� � 113� � 155� � 269� � 461� Net loss attributable to common stockholders $ (2,389) $ (1,880) $ (8,400) $ (6,858) $ (22,686) � Net loss attributable to common stockholders per share: Basic $ (0.03) $ (0.03) $ (0.15) $ (0.11) $ (0.42) Diluted $ (0.03) $ (0.03) $ (0.15) $ (0.11) $ (0.42) � Shares used in computing net loss attributable to common stockholders per share: Basic � 69,253� � 61,400� � 54,649� � 62,387� � 54,081� Diluted � 69,253� � 61,400� � 54,649� � 62,387� � 54,081� � � Three Months Ended Nine Months Ended September 30, 2006 June 30, 2006 September 30, 2005 September 30, 2006 September 30, 2005 (1) Includes stock-based compensation expense as follows: Cost of product revenue $ 665� $ 470� $ 87� $ 1,422� $ 265� Research and development 3,036� 1,978� 205� 6,247� 657� Selling, general and administrative � 4,635� � 2,892� � 692� � 9,077� � 2,103� Total stock-based compensation expense $ 8,336� $ 5,340� $ 984� $ 16,746� $ 3,025� Redback Networks Inc. Reconciliation of GAAP to Non-GAAP Measures (In thousands, except per share amounts) (unaudited) � Three Months Ended Nine Months Ended September 30, 2006 June 30, 2006 September 30, 2005 September 30, 2006 September 30, 2005 � GAAP net loss $ (2,389) $ (1,880) $ (8,400) $ (6,858) $ (22,686) Adjustments to reconcile GAAP net loss to non-GAAP net income: Amortization of intangible assets - cost of revenue 2,654� 2,654� 2,654� 7,962� 7,962� Amortization of landlord warrants - cost of revenue 52� 55� 72� 160� 208� Amortization of landlord warrants - R&D expense 291� 289� 327� 868� 1,204� Amortization of landlord warrants - SG&A expense 136� 135� 80� 409� 233� Stock-based compensation - cost of revenue 665� 470� 87� 1,422� 265� Stock-based compensation - R&D expense 3,036� 1,978� 205� 6,247� 657� Stock-based compensation - SG&A expense 4,635� 2,892� 692� 9,077� 2,103� Accretion of preferred stock dividend -� 113� 155� 269� 461� Other income -� -� (43) (619) (140) Income tax effect for Non-GAAP 4� 936� -� 1,790� -� � � � � � Non-GAAP net income (loss) $ 9,084� $ 7,642� $ (4,171) $ 20,727� $ (9,733) Non-GAAP net income (loss) per share: Basic $ 0.13� $ 0.12� $ (0.08) $ 0.33� $ (0.18) Diluted $ 0.12� $ 0.10� $ (0.08) $ 0.27� $ (0.18) � Shares used in computing net income (loss) per share: Basic � 69,253� � 61,400� � 54,649� � 62,387� � 54,081� Diluted � 78,876� � 78,429� � 54,649� � 77,487� � 54,081� � � Use of Non-GAAP financial information � The non-GAAP information provided in this press release is a supplement to, and not a substitute for, our financial results presented in accordance with GAAP. To supplement our condensed consolidated financial statements presented in accordance with GAAP, we use non-GAAP financial measures, which are adjusted from results based on GAAP to exclude certain costs and expenses. These non-GAAP measures are provided to enhance the user's overall understanding of our operating performance and our prospects in the future. Specifically, we believe the non-GAAP measures provide useful information to both management and investors regarding financial and business trends relating to our financial performance by excluding certain costs and expenses that we believe are not indicative of our core operating results. These non-GAAP measures are among budgeting and planning tools that management uses for future forecasting. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with United States GAAP. � Stock-based compensation � Redback has incurred stock-based compensation expense under SFAS 123R for fiscal year 2006, and under APB 25 for earlier comparable periods in its GAAP financial results. We exclude this item for the purpose of calculating non-GAAP operating income, non-GAAP net income and non-GAAP net income per share. The exclusion of stock-based compensation from the non-GAAP measures is done to allow for a consistent comparison of the Company's relative historical financial performance, since the method for accounting for stock-based compensation changed at the beginning of fiscal year 2006. The nature of stock-based compensation expense also makes it very difficult to estimate prospectively, since the expense will vary with changes in the stock price and market conditions at the time of new grants, varying valuation methodologies, subjective assumptions and different award types, making the comparison of current results with forward guidance potentially difficult for investors to interpret. The tax effects of stock-based compensation expenses may also vary significantly from period to period, without any change in underlying performance, thereby obscuring the underlying profitability of operations relative to prior periods (including prior periods following the adoption of SFAS 123R). � Amortization of intangible assets � Amortization of other intangible assets is excluded from the Company�s non-GAAP financial measures because it represents a non-cash expense that has no effect on current or future period cash flows or operations of the Company. The basis for the amortization comes as a result of the Company�s emergence from bankruptcy and the adoption of fresh-start reporting in January 2004, a one-time non-recurring event outside of the course of normal business operations. This isolated event and its related financial reporting impact are not indicative of our ongoing operational performance. � Amortization of fair value of warrants issued in connection with a lease agreement � Amortization of fair value of warrants issued in connection with a lease agreement is excluded from the Company�s non-GAAP financial measures because it represents a non-cash expense that has no effect on current or future period cash flows or operations of the Company. As part of the Company�s bankruptcy plan, the Company rejected all US based operating leases and entered into new agreements effective January 3, 2004. In connection with the lease of its corporate headquarters, the Company issued warrants to the landlord, which were recorded as a deferred charge and are being amortized over the life of the original lease which originally expired on October 31, 2006. This one-time non-recurring event and its related financial reporting impact are not indicative of our ongoing operational performance. � Income Tax Amount represents primarily the federal and state income tax expense from the utilization of pre-bankruptcy tax net operating losses that was recorded as a reduction of goodwill for GAAP purposes, off set by federal and state alternative minimum taxes used for non-GAAP purposes. Redback Networks Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) � Nine months ended Nine months ended September 30, 2006 September 30, 2005 CASH FLOWS FROM OPERATING ACTIVITIES Net loss before deemed dividend and accretion on preferred stock $ (6,589) $ (22,225) Adjustments to reconcile net loss to net cash used in operating activities: � Depreciation and amortization 17,608� 20,029� Stock-based compensation 16,746� 3,025� Gain on sale of investment (619) �� � Changes in assets and liabilities: Accounts receivable, net (2,843) 3,310� Inventories (1,997) (7,433) Other assets 1,290� (2,113) Accounts payable and accrued liabilities 14,620� 4,234� Deferred revenue 5,982� (1,016) Other long-term liabilities � (91) � (267) Net cash provided by (used in) operating activities � 44,107� � (2,456) � CASH FLOWS FROM INVESTING ACTIVITIES � Purchases of property and equipment (7,135) (7,080) Proceeds from sale of equity investments � 619� � �� Net cash used in investing activities � (6,516) � (7,080) � CASH FLOWS FROM FINANCING ACTIVITIES � Proceeds from issuance of stock and exercise of warrants 12,030� 7,663� Proceeds from bank borrowings �� 4,000� Principal payments on capital lease obligations (479) (2,169) Proceeds from issuance of common stock upon offering (net of issuance cost) � 83,093� � �� Net cash provided by financing activities � 94,644� � 9,494� � Net increase (decrease) in cash and cash equivalents 132,235� (42) Cash and cash equivalents at beginning of period � 43,764� � 42,558� Cash and Cash equivalents at end of period $ 175,999� $ 42,516� Redback Networks Inc. (NASDAQ:RBAK), a leading provider of next generation broadband networking systems, today announced its third quarter results for the period ending September 30, 2006. Net revenue increased 95 percent to $70.9 million for the third quarter of 2006 compared to $36.4 million for the same quarter last year. Net revenue was up 4 percent for the third quarter of 2006 compared to the second quarter of 2006. Redback Networks generated $4.5 million in cash in the third quarter of 2006, boosting its overall cash total to $176.0 million. Redback Networks also added 18 new customers in the third quarter for its SmartEdge(R) family of multi-service edge routers, including a top 20 carrier worldwide. In less than two years, Redback has won more than 200 SmartEdge customers worldwide, including 12 of the largest 20 carriers. Redback has more than 500 SmartEdge and SMS customers worldwide, including 15 of the 20 largest carriers. "On a worldwide basis, Redback continues to drive the wire-line carrier market in the deployment of triple-play networks," said Kevin DeNuccio, president and chief executive officer, Redback Networks. "Broadband networks are becoming more video-centric and we believe Redback and SmartEdge technology are at the center of a paradigm shift in network routing to multi-service broadband networks." "We believe up to 2 billion wireless and wire-line customers will be upgraded to new broadband networks from 250 million broadband users today," said DeNuccio. "This network upgrade is up to ten times larger than the last Internet build-out. This trend reinforces our vision that a single broadband network will unify communication and entertainment services over time. In short, the network is shaping up to be the next mass medium." GAAP net loss for the third quarter of 2006 was $2.4 million or $(0.03) per share attributable to common stockholders compared to a GAAP net loss of $8.4 million or $(0.15) per share in the third quarter of 2005. Non-GAAP net income was $9.1 million or $0.12 per share, compared to a non-GAAP net loss of $4.2 million or $(0.08) per share for the third quarter of 2005. Excluded from the non-GAAP results for the third quarter of 2006 were charges relating to amortization of intangible assets, stock-based compensation, amortization of the fair value of warrants issued in connection with a lease agreement, certain federal and state income taxes, and accretion of a dividend payable to preferred stockholders which was in the second quarter of 2006 and the previous quarters. For comparative purposes, GAAP pre-tax income excluding stock-based compensation for the third quarter of 2006 was $6.4 million, compared with a GAAP pre-tax loss excluding stock-based compensation of $7.3 million for the third quarter of 2005. With the adoption of Statement of Financial Accounting Standards No. 123R (FAS 123R) as of January 1, 2006, Redback Networks is reporting stock-based compensation expense in its generally accepted accounting principles (GAAP) results. See the attached table for a reconciliation of our GAAP results to non-GAAP results. Third Quarter Conference Call, October 19, 2006, 1:45 p.m. Redback Networks will discuss these quarterly results in an investor conference call today at 1:45 p.m. Pacific Time. The conference telephone number is: Domestic Dial-in: 1-800-559-2403 and International Dial-in: 1-847-619-6534. A live web cast is also available from the investor relations portion of the Redback's web site, http://ir.redback.com. A telephone replay of the conference call will be available later in the day. Replay information will be available at Domestic Dial-in: 1-877-213-9653 and International Dial-in: 1-630-652-3041 Passcode: 15121699. Information on these calls and web cast can also be found on the company's web site. Twelve of the top 20 carriers worldwide deploy Redback's SmartEdge family of multi-service edge routers to deliver multiple broadband services to tens of millions of business and residential customers worldwide. These customers include British Telecom, Belgacom, BellSouth, China Telecom, China Netcom, Chunghwa Telecom (Korea), France Telecom and Turk Telecom, among others. About Redback Networks Redback Networks Inc. manages 50 million broadband connections (SMS+SmartEdge products) for 15 of the top 20 carriers worldwide. Redback's multi-service routing platform delivers next generation broadband services such as VoIP, IPTV, Video-on-Demand and on-line gaming. Redback Networks has more than 500 carrier customers worldwide and is based in San Jose, CA. In 2006, Redback marks its 10 year anniversary, celebrating ten years of broadband innovation. For more information, visit Redback Networks at www.redback.com. REDBACK and SmartEdge are trademarks registered at the U.S. Patent and Trademark Office and in other countries. NetOp is a trademark of Redback Networks Inc. All other products or services mentioned are the trademark, service marks, registered trademarks or registered service marks of their respective owners. Note Regarding Forward Looking Statements The statements contained in this press release that are not purely historical are forward-looking statements which are subject to the safe harbor provisions of the Private Litigation reform Act of 1995. These statements include but are not limited to statements regarding our expected financial results, our expectations of continued growth of our SmartEdge product line and our customer base, expectations regarding the trend in growth of upgrades to broadband networks and the expected impact on the growth of the Company as a result of such trends. These statements are only predictions and involve a number of risks and uncertainties, the outcome of which could materially and/or adversely affect Redback's actual future results. These risks include without limitation the following: final review of quarterly results by the Company's independent auditors; growth trends in the networking industry and in various geographic regions; variations in customer demand for products and services; the timing of orders and manufacturing lead times; changes in customer order trends or customer or product mix, and other risks relating to Redback's business as set forth in the Annual Report on Form 10-K for the year ended December 31, 2005, the Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, and Redback's other most recent reports on Form 10-Q and Form 8-K, and amendments thereto, on file with the Securities and Exchange Commission (SEC), and other reports filed with the SEC from time to time. All forward-looking statements included in this document are based upon information available as of the date hereof, and Redback assumes no obligation to update these statements. Non-GAAP Disclosure To supplement our consolidated financial statements presented in accordance with GAAP, we use non-GAAP financial measures, which are adjusted from results based on GAAP to exclude certain items. These non-GAAP measures are provided to enhance the user's overall understanding of our current financial performance and our prospects in the future. Specifically, we believe the non-GAAP measures provide useful information to both management and investors by excluding certain items that we believe are not indicative of our core operating results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with United States GAAP. -0- *T Redback Networks Inc. Condensed Consolidated Balance Sheets (In thousands) (unaudited) ------------------------------------ September 30, 2006 December 31, 2005 ------------------ ----------------- Assets Current assets: Cash and cash equivalents $ 175,999 $ 43,764 Accounts receivable, net 35,551 32,708 Inventories 9,029 12,933 Other current assets 5,825 8,204 ------------------ ----------------- Total current assets 226,404 97,609 Property and equipment, net 21,818 16,944 Goodwill 142,532 144,401 Intangibles, net 47,708 55,669 Other assets 1,211 1,391 ------------------ ----------------- Total assets $ 439,673 $ 316,014 ================== ================= Liabilities, Mandatory Redeemable Convertible Preferred Stock, and Stockholders' Equity Current liabilities: Accounts payable $ 35,290 $ 28,664 Accrued liabilities 20,884 14,759 Borrowings and capital lease obligations 317 372 Deferred revenue 18,212 18,288 ------------------ ----------------- Total current liabilities 74,703 62,083 Deferred revenue, net of current portion 13,094 7,036 Long term liabilities 1,064 1,579 ------------------ ----------------- Total liabilities 88,861 70,698 Mandatory redeemable convertible preferred stock - 47,897 Stockholders' equity 350,812 197,419 ------------------ ----------------- Total liabilities, mandatory redeemable convertible preferred stock and stockholders' equity $ 439,673 $ 316,014 ================== ================= *T -0- *T Redback Networks Inc. Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (unaudited) Three Months Ended Nine Months Ended ---------------------------- ------------------- September June 30, September September September 30, 2006 2006 30, 2005 30, 2006 30, 2005 --------- -------- --------- --------- --------- Net revenue $ 70,910 $68,222 $ 36,431 $196,991 $105,277 Cost of revenue, excluding amortization 27,368 27,063 15,705 77,037 42,353 Amortization 2,706 2,709 2,726 8,122 8,170 --------- -------- --------- --------- --------- Total cost of revenue 30,074 29,772 18,431 85,159 50,523 --------- -------- --------- --------- --------- Gross profit 40,836 38,450 18,000 111,832 54,754 --------- -------- --------- --------- --------- Operating expenses: Research and development 22,694 20,158 14,428 59,985 44,254 Selling, general and administrative 22,172 19,696 11,192 59,632 32,329 --------- -------- --------- --------- --------- Total operating expenses 44,866 39,854 25,620 119,617 76,583 --------- -------- --------- --------- --------- Loss from operations (4,030) (1,404) (7,620) (7,785) (21,829) Other income (loss), net 2,105 953 (677) 4,111 (184) --------- -------- --------- --------- --------- Loss before income taxes (1,925) (451) (8,297) (3,674) (22,013) Provision for income taxes 464 1,316 (52) 2,915 212 --------- -------- --------- --------- --------- Net loss (2,389) (1,767) (8,245) (6,589) (22,225) Deemed dividend and accretion on preferred stock - 113 155 269 461 --------- -------- --------- --------- --------- Net loss attributable to common stockholders $ (2,389) $(1,880) $ (8,400) $ (6,858) $(22,686) ========= ======== ========= ========= ========= Net loss attributable to common stockholders per share: Basic $ (0.03) $ (0.03) $ (0.15) $ (0.11) $ (0.42) ========= ======== ========= ========= ========= Diluted $ (0.03) $ (0.03) $ (0.15) $ (0.11) $ (0.42) ========= ======== ========= ========= ========= Shares used in computing net loss attributable to common stockholders per share: Basic 69,253 61,400 54,649 62,387 54,081 ========= ======== ========= ========= ========= Diluted 69,253 61,400 54,649 62,387 54,081 ========= ======== ========= ========= ========= Three Months Ended Nine Months Ended ---------------------------- ------------------- September June 30, September September September 30, 2006 2006 30, 2005 30, 2006 30, 2005 --------- -------- --------- --------- --------- (1) Includes stock- based compensation expense as follows: Cost of product revenue $ 665 $ 470 $ 87 $ 1,422 $ 265 Research and development 3,036 1,978 205 6,247 657 Selling, general and administrative 4,635 2,892 692 9,077 2,103 --------- -------- --------- --------- --------- Total stock-based compensation expense $ 8,336 $ 5,340 $ 984 $ 16,746 $ 3,025 ========= ======== ========= ========= ========= *T -0- *T Redback Networks Inc. Reconciliation of GAAP to Non-GAAP Measures (In thousands, except per share amounts) (unaudited) Three Months Ended Nine Months Ended ---------------------------- ------------------- September June 30, September September September 30, 2006 2006 30, 2005 30, 2006 30, 2005 --------- -------- --------- --------- --------- GAAP net loss $ (2,389) $(1,880) $ (8,400) $ (6,858) $(22,686) Adjustments to reconcile GAAP net loss to non-GAAP net income: Amortization of intangible assets - cost of revenue 2,654 2,654 2,654 7,962 7,962 Amortization of landlord warrants - cost of revenue 52 55 72 160 208 Amortization of landlord warrants - R&D expense 291 289 327 868 1,204 Amortization of landlord warrants - SG&A expense 136 135 80 409 233 Stock-based compensation - cost of revenue 665 470 87 1,422 265 Stock-based compensation - R&D expense 3,036 1,978 205 6,247 657 Stock-based compensation - SG&A expense 4,635 2,892 692 9,077 2,103 Accretion of preferred stock dividend - 113 155 269 461 Other income - - (43) (619) (140) Income tax effect for Non-GAAP 4 936 - 1,790 - --------- -------- --------- --------- --------- Non-GAAP net income (loss) $ 9,084 $ 7,642 $ (4,171) $ 20,727 $ (9,733) ========= ======== ========= ========= ========= Non-GAAP net income (loss) per share: Basic $ 0.13 $ 0.12 $ (0.08) $ 0.33 $ (0.18) ========= ======== ========= ========= ========= Diluted $ 0.12 $ 0.10 $ (0.08) $ 0.27 $ (0.18) ========= ======== ========= ========= ========= Shares used in computing net income (loss) per share: Basic 69,253 61,400 54,649 62,387 54,081 ========= ======== ========= ========= ========= Diluted 78,876 78,429 54,649 77,487 54,081 ========= ======== ========= ========= ========= Use of Non-GAAP financial information The non-GAAP information provided in this press release is a supplement to, and not a substitute for, our financial results presented in accordance with GAAP. To supplement our condensed consolidated financial statements presented in accordance with GAAP, we use non-GAAP financial measures, which are adjusted from results based on GAAP to exclude certain costs and expenses. These non-GAAP measures are provided to enhance the user's overall understanding of our operating performance and our prospects in the future. Specifically, we believe the non-GAAP measures provide useful information to both management and investors regarding financial and business trends relating to our financial performance by excluding certain costs and expenses that we believe are not indicative of our core operating results. These non-GAAP measures are among budgeting and planning tools that management uses for future forecasting. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with United States GAAP. Stock-based compensation ---------------------------------------------------------------------- Redback has incurred stock-based compensation expense under SFAS 123R for fiscal year 2006, and under APB 25 for earlier comparable periods in its GAAP financial results. We exclude this item for the purpose of calculating non-GAAP operating income, non-GAAP net income and non-GAAP net income per share. The exclusion of stock-based compensation from the non-GAAP measures is done to allow for a consistent comparison of the Company's relative historical financial performance, since the method for accounting for stock-based compensation changed at the beginning of fiscal year 2006. The nature of stock-based compensation expense also makes it very difficult to estimate prospectively, since the expense will vary with changes in the stock price and market conditions at the time of new grants, varying valuation methodologies, subjective assumptions and different award types, making the comparison of current results with forward guidance potentially difficult for investors to interpret. The tax effects of stock-based compensation expenses may also vary significantly from period to period, without any change in underlying performance, thereby obscuring the underlying profitability of operations relative to prior periods (including prior periods following the adoption of SFAS 123R). Amortization of intangible assets ---------------------------------------------------------------------- Amortization of other intangible assets is excluded from the Company's non-GAAP financial measures because it represents a non-cash expense that has no effect on current or future period cash flows or operations of the Company. The basis for the amortization comes as a result of the Company's emergence from bankruptcy and the adoption of fresh-start reporting in January 2004, a one-time non-recurring event outside of the course of normal business operations. This isolated event and its related financial reporting impact are not indicative of our ongoing operational performance. Amortization of fair value of warrants issued in connection with a lease agreement ---------------------------------------------------------------------- Amortization of fair value of warrants issued in connection with a lease agreement is excluded from the Company's non-GAAP financial measures because it represents a non-cash expense that has no effect on current or future period cash flows or operations of the Company. As part of the Company's bankruptcy plan, the Company rejected all US based operating leases and entered into new agreements effective January 3, 2004. In connection with the lease of its corporate headquarters, the Company issued warrants to the landlord, which were recorded as a deferred charge and are being amortized over the life of the original lease which originally expired on October 31, 2006. This one-time non-recurring event and its related financial reporting impact are not indicative of our ongoing operational performance. Income Tax ---------------------------------------------------------------------- Amount represents primarily the federal and state income tax expense from the utilization of pre-bankruptcy tax net operating losses that was recorded as a reduction of goodwill for GAAP purposes, off set by federal and state alternative minimum taxes used for non-GAAP purposes. *T -0- *T Redback Networks Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine months ended Nine months ended September 30, 2006 September 30, 2005 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss before deemed dividend and accretion on preferred stock $ (6,589) $ (22,225) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 17,608 20,029 Stock-based compensation 16,746 3,025 Gain on sale of investment (619) -- Changes in assets and liabilities: Accounts receivable, net (2,843) 3,310 Inventories (1,997) (7,433) Other assets 1,290 (2,113) Accounts payable and accrued liabilities 14,620 4,234 Deferred revenue 5,982 (1,016) Other long-term liabilities (91) (267) ------------------ ------------------ Net cash provided by (used in) operating activities 44,107 (2,456) ------------------ ------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (7,135) (7,080) Proceeds from sale of equity investments 619 -- ------------------ ------------------ Net cash used in investing activities (6,516) (7,080) ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of stock and exercise of warrants 12,030 7,663 Proceeds from bank borrowings -- 4,000 Principal payments on capital lease obligations (479) (2,169) Proceeds from issuance of common stock upon offering (net of issuance cost) 83,093 -- ------------------ ------------------ Net cash provided by financing activities 94,644 9,494 ------------------ ------------------ Net increase (decrease) in cash and cash equivalents 132,235 (42) Cash and cash equivalents at beginning of period 43,764 42,558 ------------------ ------------------ Cash and Cash equivalents at end of period $ 175,999 $ 42,516 ================== ================== *T