Optical/IP Networks

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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hiddentiger 12/4/2012 | 9:53:12 PM
re: Riverstone Stock Sinks, Company Shifts Like they say... Shift Happens!
Iipoed 12/4/2012 | 9:53:11 PM
re: Riverstone Stock Sinks, Company Shifts Get ready for pick your price for riverstoned equipment. Just like cabletron when they dumped their margins to below cost and attempted to make it up on service and support. Merely painting old cabletron equipment a different color did not bring about success nor will going after the enterprise market segment. They bring nothing new to the table other than to waste customer's time with incessent cold calling of promises of best price out there. You might just as well go to ebay and buy equipment.

Let CABLETRON/RIVERSTONED/ENTERSYS die. Enough new spins and marketing propaganda already.
lilgatsby 12/4/2012 | 9:53:11 PM
re: Riverstone Stock Sinks, Company Shifts Maybe Riverstone should dig around for some old MMAC-8's...I'm sure Levine has a few hidden in some dark closets in NH.

[email protected] 12/4/2012 | 9:53:07 PM
re: Riverstone Stock Sinks, Company Shifts Good to see another company clearing out the deadwood and firing all of the unworthy do nothings that have been bringing one company after another company down, all of it resulting from the immoral excesses of the Clinton era. Now that Nortel has gotten rid of 60,000, Lucent 60,000, Alcatel 45,000, and with the smaller companies like Riverstone following their lead, we will see a solid Republican economy take shape.
enigmata9 12/4/2012 | 9:53:07 PM
re: Riverstone Stock Sinks, Company Shifts >> Now that Nortel has gotten rid of 60,000, Lucent 60,000, Alcatel 45,000, and with the smaller companies like Riverstone following their lead, we will see a solid Republican economy take shape. <<

Are you kidding me? The Republican economy is in full swing already. That's why we're in a full-tilt economic nosedive!! Bush is clueless, with a clueless Treasury Sec'y. No one is at the helm.
metroshark 12/4/2012 | 9:53:02 PM
re: Riverstone Stock Sinks, Company Shifts Maybe Uncle Bush is planning to outsource the entire Telco equipment manufacturing industry to China ...

chitgo 12/4/2012 | 9:53:00 PM
re: Riverstone Stock Sinks, Company Shifts With Aprisma gone, both Riverstone and Enterasys should think of merging to stay stable. No point in both of them competing in the same market place (mostly the Enterprise) with different brand names, while the technology inside their respective boxes being almost (close to 98%) the same.
Iipoed 12/4/2012 | 9:53:00 PM
re: Riverstone Stock Sinks, Company Shifts ENTER-STONED.
BobbyMax 12/4/2012 | 9:52:58 PM
re: Riverstone Stock Sinks, Company Shifts First of all, RiverStone would have terrible time in selling to the RBOCs. Riverstone touted itself as a start-up company and the result was that any Telco was not interested in buying products from RiverStone. It had a nominal success in selling its Metro Ethernet Switches to Korean Telecom. The company dwelling too much on this fact.

RiverStone is very different from most of the companies. It moved from Massachusetts to the Bay Area in California. The cost of development went up considerably and the company lost its engineers. It primarily relies on Engineers from third countries.

The company does not have a clear cut product/market strategy. There is a little product differentiation from that of the other vendors.

Since the share is trading below a dollar, it would be very difficult for the company to sell its products.
PacketProtector 12/4/2012 | 9:52:54 PM
re: Riverstone Stock Sinks, Company Shifts That was a joke, right? A pretty good one if so, but you forgot the ;-)
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