Stock hammered to under $1 after the company announces a 30% layoff and shifts focus to enterprise networks

August 23, 2002

4 Min Read
Riverstone Stock Sinks, Company Shifts

Riverstone Networks Inc. (Nasdaq: RSTN) shares were hammered today after the company announced last night that it won't meet quarterly earnings expectations (see Riverstone Warns, Lays Off). The company also announced it would be cutting 30 percent of its staff, reducing its headcount by 130-140, down from 475.

Back in February the company warned it wouldn’t meet 4Q01 expectations, and in June it warned it wouldn’t meet 1Q02 earnings (see Riverstone Savaged on Warning and Riverstone's Sinking Shares). The newly announced cuts will help it save about $7 million per quarter, starting in the third quarter of this year. The company will likely take a $5 million charge on restructuring.

Revenue for the quarter is expected to be between $10 million and $15 million, down from the company’s projected $30 million target. Losses are expected to be between $0.18 and $0.24 per share, off from the expected $0.11 per share loss anticipated by analysts, according to First Call.

In late afternoon trading, news of the shortfall had sent Riverstone’s shares into penny-stock territory, down $0.27 (-20.51%), to $0.90. But the real twist to the story might be a shift in its sales and marketing efforts away from telecom carriers and toward corporate, or enterprise, customers.

On its call with investors and analysts yesterday, the company said it has already been shipping its ES200 Ethernet switch/router for two months. This new router, which is only about one rack unit high and supports 24 10/100-Mbit/s Ethernet ports and two Gigabit Ethernet uplinks, has been sold to enterprise customers through service providers as a CPE (customer premise device). But the company says it now sees potential to sell the box directly to enterprise customers through its equipment resellers.

"In total, I would not say this is a massive change in strategy," said Andrew Feldman, vice president of corporate marketing for Riverstone in an email today. "Rather, it is a recognition that there is a dramatic slow down in 'traditional carrier' spending and part of an active search to find applications for carrier grade products outside of traditional carrier networks."

The company said it would also continue to focus on the cable industry. It has already seen some success with cable operators such as Cox Communications Inc. (NYSE: COX) (see Riverstone Edges Out Cisco at Cox). It is also starting to target sales to the U.S. government, a strategy that has worked well for Cisco Systems Inc. (Nasdaq: CSCO) (see Cisco's Rich Uncle).

When Cabletron Systems Inc. (NYSE: CS) was split up in 2000, the plan was that Riverstone would target the service provider industry while Enterasys Networks Inc. (NYSE: ETS) would focus on the enterprise (see Cabletron Floats Riverstone ). At the time Riverstone seemed to be getting the better half of the deal. Metro Ethernet deployments seemed be to where the money was.

All the Ethernet switching players, including Cisco Systems Inc. (Nasdaq: CSCO), Extreme Networks Inc. (Nasdaq: EXTR), and Foundry Networks Inc. (Nasdaq: FDRY), launched their attacks. While these companies still generated the bulk of their revenue from the enterprise market, Riverstone came out of the gates touting its exclusive focus on service providers as its key benefit over the competition.

But even as Riverstone was going public, the telecom industry was melting down. In fact, the day of Riverstone’s initial public offering back in February of 2001, telecom stocks were reeling from an earnings warning the night before from Nortel Networks Corp. (NYSE/Toronto: NT) (see Riverstone IPO Toughs It Out and Nortel's Nasty Surprise).

Many experts say that from a technological perspective, Riverstone’s equipment is on par with any other Ethernet switch provider.

“In general we are impressed by Riverstone's technology leadership in the metro Ethernet arena and we are also encouraged by its increasingly diverse customer base,” said Tim Luke, an analyst with Lehman Brothers. “However, we believe that the carrier spending environment remains very challenging and demand may have softened further over the last several months.”

Moving forward, Riverstone’s biggest battle could be fighting its own marketing message. The company has spent the past two years trying to convince the industry that its products are carrier-class. Now it will have to turn that message around and convince investors that it will be able to target both carriers and enterprise customers effectively.

Some analysts are skeptical. In a note to investors this morning, David Jackson of Morgan Stanley Dean Witter & Co. said he remained cautious about Riverstone’s outlook.

“Given that this is a new market for Riverstone, with a new channel and intense competition, we will wait for tangible results before projecting sales for this segment.”

— Marguerite Reardon, Senior Editor, Light Reading

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