Redline mulls selling broadband division to save cash

Nortel Networks isn’t the only Canadian telecommunications manufacturer looking to sell a division because the economy is souring.

Redline Communications, a Markham, Ont. maker of fixed and mobile access and backhaul gear, said Thursday that selling its older broadband division to save its new WiMAX-based line is one of the options the board is considering because it is burning through cash.

“We think we are going to be able to come up with something somehow that will allow us to monetize one [business unit] to leave the other alive,” president and CEO Majed Sifri said in an interview.

While the financial situation three months ago caused him to admit that Redline’s goal of finally being profitable in the last quarter won’t be met, despite some $48 million in sales last year, “between the last conference call and today the world has changed.

“The global economic downturn has to be factored into our plans, and as a result we’re currently considering all options, which might include cost cutting and restructuring et cetera.”

Earlier Thursday, in a conference call with financial analysts after releasing third quarter results, Sifri made a vague reference to the company receiving “serious interest from several industry and financial players.”

Those figures showed the company had $8.8 million in cash at the end of the quarter (all figures in U.S. dollars), compared to $15.5 million in the previous quarter and $20.8 million in the first quarter. While sales in Q3 were flat compared to the previous quarter at $9.6 million, Redline’s net loss widened to $6.2 million from $5.3 million in Q2 and $3.8 million.

By comparison, another Canadian WiMAX backhaul and access maker, Ottawa’s DragonWave had a loss of $2.8 million for the quarter ending Aug. 31, but it has $27 million in cash on hand.

In August, Redline chief financial officer Thomas Hearne resigned and was replaced as interim CFO by Nancy Orr, a chartered accountant who only just joined the board.

It’s a bit of a come-down for a company that in September made Deloitte’s list of Canada’s fastest growing technology companies for the third year.

One option is working with Victoria’s Vecima Networks, a customer which makes wireless backhaul radios for cable companies, that earlier this month increased its shareholdings. However, Redline is sending mixed signals on whether it welcomes the move.

Vecima boosted its holdings in Redline to 10.3 per cent, making it the second largest shareholder behind Sifri’s 15 per cent. It also said it was thinking about raising that to just under 20 per cent.

On Wednesday, as he released his company’s latest quarterly results, Vecima’s CEO said the goal isn’t to take control of Redline, but possibly share manufacturing facilities.

However, Redline when Vecima made its move on Nov. 7, Redline replied by immediately creating a shareholder’s rights plan that allows existing shareholders to buy shares at a “significant discount” if a party increases its holdings by more than 15 per cent.

Yesterday, Sifri told analysts that move was taken merely to assure shareholders received the maximum value for their holdings. “There’s no intention here to block anything,” he said. “It gives us time to deal with any event, should any event occur.”

Asked specifically if he’d be willing to partner with Vecima, Sifri replied that “we always entertain strategic partnerships with companies in this space. We have a lot of respect for Vecima, they’ve done incredibly well … There is no reason not to be open to such discussion.”

He wouldn’t comment on what if any strategic discussions are going on between him and Vecima.

However, at least one financial analyst doesn’t want to see Vecima as Redline’s saviour. In a research note on Vencima, Kris Thompson of National Bank Financial – who follows both companies – pointed out the way Redline is burning cash and suggested it needs to be restructured.

“We do not like the prospects of Vecima being a potential white knight,” to Redline, he wrote.

[In its Q1 2009 figures for the period ending Sept. 30, Vecima reported revenue of $36.8 million, about the same as the previous quarter. However, the period included the normal two-week summer shut-down of manufacturing. Some of Vecima’s products are made for other manufacturers such as Cisco Systems and Motorola. However, it just announced a direct sale to a U.S. cable company. ]

Established in 1999, Redline’s first products were its RedCONNEX and RedACCESS proprietary wireless backhaul radios that use unlicenced spectrum. Then it added into fixed WiMAX-based RedMAX products and more recently mobile WiMAX radios using the 802.16e specification.

In an interview Sifri said he still expects sales of the backhaul products to grow at 15 to 20 per cent a year, while the mobile WiMAX lines “could grow very significantly.”

The company focuses on carriers in emerging countries, some of whom, he acknowledged, have been hurt by the plunging world economy. However, he added, carriers that build networks a piece at a time aren’t slowing purchasing. Yesterday he announced the sale of an unspecified number of RedMAX 4C systems to Thailand ISP Milcom Systems to service an industrial park outside Bangkok. Sifri insisted Redline won’t be out of cash the new new year.

“I don’t think we’re in trouble,” he said. “I think we have challenges ahead of us that are very surmountable.” Asked when the company will be profitable, he said “towards the end of next year.”

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