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Riverstone Savaged on Warning

Light Reading
News Analysis
Light Reading
2/28/2002

Wall Street slashed Riverstone Networks Inc. (Nasdaq: RSTN) today after the company warned that fourth-quarter revenues likely won't meet expectations when they're announced March 26.

By early afternoon, Riverstone shares were trading at $3.88, down $3.71 -- a stunning 48.88 percent.

Blaming weakness in February orders from U.S. and European customers, the company announced that revenues for the quarter that ends Saturday will fall between $50 million and $54 million -- considerably below analyst consensus of about $64 million.

Riverstone plans to fight back by cutting its cost structure by 10 percent, resulting in a fourth-quarter charge of $26 million to $30 million related to cuts that include workforce reductions. So far, specific numbers aren't available. But execs insist they won't be cutting R&D, since they want to be ready for the anticipated market resurgence later this year.

"We will not compromise our future... We want to be well positioned later this year," said CFO Robert Stanton in a conference call with analysts this morning. Execs also said they expect RBOC business to pick up in the metro space during the second half of 2002.

Executives said that even as contracts with carriers such as Cox Communications Inc. (NYSE: COX) continue to build up quarterly earnings, other metro customers -- including U.S. prospects and European independents and PTTs -- delayed action on ongoing orders in February and failed to issue new ones.

Despite these woes, Riverstone says business is still strong in the Asia/Pacific region, specifically in Hong Kong, China, and Korea, where the company earned 44 percent of its revenues last year.

The company also insists it's on track for ongoing growth. "Nothing has fundamentally changed in our business; it's just that [carrier] spending patterns have slowed down temporarily," said CEO Romulus Pereira.

Analyst reaction seems to be a mix of dreary resignation in general and concern over Riverstone specifically. Most say carriers involved in the metro space -- including the likes of Qwest Communications International Inc. (NYSE: Q) and smaller players like Telseon Inc. and Yipes Communications Inc. -- continue to be hit hard, despite the uptick in the overall economy.

Evidence that investors think Riverstone's woes emanate from a general slowdown in the metro carrier market was evident, as rival Extreme Networks Inc. (Nasdaq: EXTR) took a hit in its share price today as well, trading at $7.02, down $0.73 (9.42%) early this afternoon.

"Service providers aren't willing to invest in new services at this point," says William Becklean of Commerce Capital Markets, though he acknowledges a general feeling that RBOCs will be investing more in the metro market this year.

But others say Riverstone shouldn't count on the RBOCs: "There will probably be some [RBOC] activity during the second half, but how material it will be appears to be in question," says Erik Suppiger of Pacific Growth Equities.

Some say Riverstone is falling prey to problems common to many new public companies. "About a year after IPO, growth becomes increasingly challenging," says Mark Sue of Frost Securities Inc. Riverstone's performance over the next few quarters will be crucial to its ongoing health, he says, because it will indicate whether the company can sustain solid growth.

The question isn't new: Even in January, when the company announced a big contact win in South Korea, analysts wondered whether Riverstone can get sufficient traction with large U.S. carriers to keep its momentum (see Riverstone Announces Biggest Win Yet). Now, apparently, they're wondering even more.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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docsisdude
docsisdude
12/4/2012 | 10:52:00 PM
re: Riverstone Savaged on Warning
Seems the kmart of nextworking companies is going the way of kmart.

I'm starting to wonder - Is any large systems play start-up still viable given the headcount necessary to get product to market, and even then, will there be enough customers buying to warrant the previously nose-bleed level pe ratios? Does anyone see a technology area that incumbants will really have to buy into?

perhaps i'm just pesimistic as my pocketbook took a serious hit today.
DoTheMath
DoTheMath
12/4/2012 | 10:51:58 PM
re: Riverstone Savaged on Warning
I'm starting to wonder - Is any large systems play start-up still viable given the headcount necessary to get product to market, and even then, will there be enough customers buying to warrant the previously nose-bleed level pe ratios? Does anyone see a technology area that incumbants will really have to buy into?
-------------------------------------------

Consider that the VCs are *still* funding more outfits, and makes you wonder.

Is the US telecom equipment industry showing the dysfunctional signs of Japanese electronics industry (chronic overcapacity, overinvestment, unwilling to rationalize industry structure ...)

It is self-evident that 15 core router (substitute your favorite equipment category) companies cannot survive. Yet, each VC thinks theirs is the "chosen one".

Yeah, I got hit big on Riverstone too. I thought I paid a pretty good price, in the post Sep 11 lows.
blank_reg
blank_reg
12/4/2012 | 10:51:57 PM
re: Riverstone Savaged on Warning
Riverstone, like many niche players are still following the old rules. They have a good product in an area a big player does not compete, but they need to get bought.

They are focused on one type of network, in this case Metro Ethernet. When they do get competition, then they discount like crazy to win maretshare. Once you lower your price, you cannot go back and raise it back up later.

Before a big player would want to buy them in order to grab that marketshare. Today the big players are either walking wounded like Nortel or not making an big plays like Cisco. Riverstone has a good product, but does not make a profit, and will run out of time.

Blank Reg
Deadbeat
Deadbeat
12/4/2012 | 10:51:54 PM
re: Riverstone Savaged on Warning
Rstone w/o an enterprise strategy is like rowing a boat with one oar...
They have decent products and market them well but w/o the push thru that the ILECs expect coupled with the fact that their interest in MAN buildout is purely intellectual at this point dooms Rstone to the networking ashheap...

The real victim is the consumer in that the LECs don't really give a s..t about providing ethernet based services as that cannibalizes their hugely profitable circuit business.

Plus, the products from RS and their competitors are not really 'carrier ready' the way their existing SONET products are so SBC, Verizon, Qwest et al will just sit on their respective behinds for at least another 18 months before they do jack...any startup aimed at the MAN business better have a boatload of cash and lots of patience...existing outfits better retool and look for other paying customers...
Metadata123
Metadata123
12/4/2012 | 10:51:51 PM
re: Riverstone Savaged on Warning
Even after I left this message on Feb 6, the execs in the know at RSTN, have been bailing out.
http://www.lightreading.com/bo...

If this is not insider trading, I don't know what is.
dietaryfiber
dietaryfiber
12/4/2012 | 10:51:50 PM
re: Riverstone Savaged on Warning
Deadbeat,

I find that your message reminds me of many who try to sell to the RBOCs. Their is a presumption of a good product and that the RBOCs either 1) don't care about that technology, 2) are too stupid to deploy these wonderful products, and 3) want something (say OSIMINE as an example) that is looked on as a legacy requirement. I find this usually comes from people who are shocked that the RBOCs technologists and people have opinions of their own. In addition, they have needs that span many organizations within their company from Ops to Planning to the Field. When these requirements are laid down (and this is one of the things that takes time) people find that they are going to have to do custom development to win the business. Suddenly, they walk away and claim that the RBOCs are filled with dinosaurs.

People that regularly sell products to these companies face the same obstacles. However, they face them differently. They recognize that the RBOC is looking to do business on a scale that is significantly different than an Enterprise. They recognize that it takes time and money for the RBOC to certify and deploy new technology. They recognize going in that there is over a year and millions of dollars they need to commit to turn an RBOC up on a new product.

So companies have a couple of choices. First, they can evaluate if they want to be in the RBOC business. If they answer yes, then they must sign themselves up for an arduous process of getting the product approved. They can expect to be hammered on price and they can expect a second vendor. This is the deal. It doesn't change and stamping your feet (even if you are Cisco) can't make the RBOC (a company many times your size) change.

dietary fiber
optical_man
optical_man
12/4/2012 | 10:51:50 PM
re: Riverstone Savaged on Warning
Author: Metadata123 Number: 5
Subject: Insider Trading Date: 3/1/2002 8:11:02 AM
Even after I left this message on Feb 6, the execs in the know at RSTN, have been bailing out.
http://www.lightreading.com/bo...
If this is not insider trading, I don't know what is.

Meta,
Yes this is 'insider trading'. It is legal.
I believe you are referring to trading on 'insider information' which is not.
However, if you noticed this pattern back in January (like your message suggests), with all we've learned about Enron, I'm assuming you liquidated your riverstone holdings, correct?
It is not wise to notice a pattern in a stock and hold it, while sending out anonymous emails warning others of the practice.
Good luck and go back to Yahoo with this crucial information. Everyone here wants the industry players to survive.

rjmcmahon
rjmcmahon
12/4/2012 | 10:51:49 PM
re: Riverstone Savaged on Warning
Is the US telecom equipment industry showing the dysfunctional signs of Japanese electronics industry (chronic overcapacity, overinvestment, unwilling to rationalize industry structure ...)
____________________

The latest indications suggests to me that the programming won't be made available any time soon. And most folks in the midwest will likely pass on always-on.

Its going to take awhile unless somebody else shows up who likes polka festivals.

PS. By 2007, AMAT says to expect 1B transistors running at 20GHz. (Today its 42M at 2GHz).

Those controlling the intellectual property to drive the advances in the underlying technology will be the ones to watch, in my opinion.
ajo2
ajo2
12/4/2012 | 10:51:45 PM
re: Riverstone Savaged on Warning
I agree with the ideas in your message, but I think you let the RBOC's off the hook just a bit too easily.

Yes they are slow to adopt new technology due to qualification timing, followed by network planning and rollout - but are those the only reasons they are slow? The good CLEC's go through much of the same processes, let can move to deployment in 6 months rather than the RBOC's ~18 months. This pretty much insures that the RBOC's are using something that is at one or two generations old. Do they have to have the latest stuff? Probably not. But my point is that they are inefficient.

And then we have the OSMINE ripoff. It's like a cover charge at an auction... a million dollar cover charge. I'm not saying the end result is not needed (a unified management interface to equipment), but requiring companies to pay someone else to make it standardized seems vaguely illegal.

To summarize, you are right that the RBOC's are unfairly picked on, but they aren't as blameless as you make them sound.
dietaryfiber
dietaryfiber
12/4/2012 | 10:51:43 PM
re: Riverstone Savaged on Warning
ajo2,

I guess my point would be that even when the CLECs existed, they were not deploying on the same scale as the RBOCs and could live with different requirements. Now that they are dead, its hard to hold them up as a model of how to run a business.

The RBOCs want to make sure that products really work and that often means letting other people work out the kinks a bit (today that might be the IOCs). Why should they put their network at risk for a brand new platform of unknown product quality. You must admit that "startup" quality can be an oxymoron.

I think the RBOCs find their own processes onerous and would like to work to streamline them. As for OSMINE, I think that one should assume that this will be their FOREVER and put it in your business plans to spend several million dollars (paid to Telcordia by the way - not the RBOCs). Why should they deploy a product that is not modelled in their OSS systems? What is the gain on that for the RBOC?

dietary fiber


dietaryfiber
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