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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