Earnings reports

Riverstone Disappoints the Street

Riverstone Networks Inc. (Nasdaq: RSTN) took a hit this morning after reporting its fiscal fourth-quarter earnings today (see Riverstone Reports Q4). While the company saw improvement in revenue, its gross margins were well below expectations, leaving many wondering what happened.

At midday, the company’s stock was trading down $0.14 (9.27%) to $1.37.

The company reported that fourth-quarter revenues increased 9.7 percent to $15.1 million from $13.8 million the prior quarter, in line with most analysts' estimates (see Riverstone Slapped in Face of Good News). A year ago, the company reported $51.3 million for its fourth quarter. According to Generally Accepted Accounting Principles (GAAP), net loss for the quarter was $40.6 million or $0.33 per share, compared to $34.1 million or $0.28 per share in the third quarter. Last year, the fourth-quarter net loss was $28.2 million or $0.23 per share.

The biggest news was the company’s plummeting gross margins, which fell below zero when calculated using GAAP figures. Much of this can be blamed on a slew of non-recurring charges the company took in the fourth quarter, some of which adversely affected its gross margins. These included: a $5.1 million charge for inventory associated with discontinued and excess products; $100,000 related to amortized stock compensation; and about $600,000 for the amortization of intangibles related to the purchase of Pipal Systems Inc. (see Oil Refiner Drills SANs Together).

Because these charges are not expected to reoccur, analysts have taken them out of their investment models. But even with the pro forma numbers, margins still fell about 7.5 percent from the previous quarter. Several analysts following the company calculated that the company’s pro forma gross margins were about 28.5 percent, compared to about 36 percent in the third quarter.

“The initial read on the margins is that they are considerably lower that what we were anticipating,” says Pacific Growth Equities Inc. analyst Erik Suppiger.

During the conference call this morning, Robert Stanton, Riverstone's CFO, said he expects margins to improve to just over 30 percent in the current first quarter of fiscal 2004. This is still much lower than analysts were hoping. It’s this bleak outlook that has some analysts concerned and scrambling to figure out exactly what happened.

Part of the problem is that Riverstone’s revenues are so small. Any sort, of special charge, change in product mix, or a deal that generates lower than expected margins can have a serious impact on the overall gross margin for the quarter.

Riverstone executives claim that the falling margins resulted from a higher percentage of lower-margin product sales in the fourth quarter. While the company doesn't expect that trend to continue, executives say they are being cautious with their guidance.

Whatever the cause, the sagging gross margins spell big trouble for Riverstone, which has seen its annual revenues fall 67 percent from the previous year. In order for the company to even come close to break-even, it will need to generate over $40 million per quarter and raise gross margins above 50 percent, say analysts. This is certainly no easy assignment. Company executives are trying to stay positive. Romulus Pereira, president and CEO of the company, said Riverstone is set to announce several new products this year that should help improve its outlook.

“We will continue to aggressively target new markets including 10-Gbit/s Ethernet,” he said. “We think these new products and our focus on enterprise and service provider customers will position us well for long-term success.”

Even with new products, there's a long road ahead for the company. The service provider market is not expected to improve much this year. Enterprise spending is also expected to be weak through the first half. And while 10-Gbit/s Ethernet will soon become a required product for any company in this market, it is not expected to generate much revenue in 2003.

— Marguerite Reardon, Senior Editor, Light Reading

voip-transport 12/5/2012 | 12:21:28 AM
re: Riverstone Disappoints the Street Yoo, my man, my buddy, BobbyMax

It seems to me that you spent lots of time following the telecom industry. I think we should pair up since I'm quite an expert following the porn industry in the US and japanese models. We can create the superpower model of telecom + porn industry. Actually I prefer if you can also follow up on the news for India, China, and Arabian porn stars. I bet there's lot of unknown beautiful porn stars that I'm not aware of.

Also watching porn would make you feel like you are at peace and being loved by somebody, isn't it .... ::::-) Come on, BobbyMax, let's make this pact, i think we can pull it off. Plus I'd like to sign up also as one of the first telecom porn stars' customer.
BobbyMax 12/5/2012 | 12:21:28 AM
re: Riverstone Disappoints the Street Riverstone is a reincarnation of a company by the name well fleet. It moved to California to shape itself in the mould of start-ups and presented. Its President and CEO does not any significant experience in business.

I do not think that Riverstone is anywhere regardless of the number of products in introduces. None of its products are either evolutionary or revolutionary. It just follows other companies.

Wheather or not the shareholders benefit from, Riverstones top management is making a lot of money. So who cares.
metroman 12/5/2012 | 12:21:27 AM
re: Riverstone Disappoints the Street BobbyMax

Can you please explain for us RSTN shareholders what weaknesses there are in the business model so that we can take it up at an AGM?

With regard to the rest of your comments; That's capitalism for you! Are you advocating that the workers rise up and take control? I am sure that the company would be much more successful if it were an anarcho-syndicalist commune.

Workers unite!

tiadakola 12/5/2012 | 12:21:26 AM
re: Riverstone Disappoints the Street JFC! Booby, it was Cabletron dimwit...finished the crossword puzzle @ your desk in NJ yet?
kbkirchn 12/5/2012 | 12:21:26 AM
re: Riverstone Disappoints the Street Lower overall pro-forma gross margins indicates that the company is dropping its prices significantly to win business.

While many businesses can survive on low margins (retailers, grocery stores, etc), high tech companies need higher margins to fund the R&D that will produce the next generation of products.
Iipoed 12/5/2012 | 12:21:25 AM
re: Riverstone Disappoints the Street Geez, even I must jump on the berate BMAX bandwagon after reading the below post. First it was Cabletron, wellfleet merged with synoptics became bay and then bought by Nortel

"Riverstone is a reincarnation of a company by the name well fleet. It moved to California to shape itself in the mould of start-ups and presented. Its President and CEO does not any significant experience in business"

Poor riverstoned. No margins, I have said it all along that that is the old cabletron model, buy the business then stick it to the customers with loads of support. Actually most of old C-trons support was pretty darn good. Now however they are pushing rebadged old Ctron technology that has been somewhat upgraded.

Bottom Line-They appear to be making payroll and in this economy that is great. Pink slips have not been rampant as of yet. Unfortunately the majority of their engineering brain trust has more resumes on the street than bombs over bagdad.

EMPLOYEE LOYALTY WILL SEPARATE THE SUCCESSFUL COMPANIES FROM THE DESPARATE DOOMED TO FAIL. There was never much loyalty at Cabletron and it is the same at Riverstoned. IMHO
Hanover_Fist 12/5/2012 | 12:21:22 AM
re: Riverstone Disappoints the Street BobbyMax,
I would have to guess that your motto is "Get the min for the maximum at BobbyMax!"

Really...Riverstone is a reincarnation of Well Fleet? Bobby, you ever heard of a company called YAGO System, as in Yet Another Gigabit Operation?

YAGO, one of the 10 original JAGS (Just Another Gigabit Startup) ventures was a serious contender with 8000 and 8600 switching platforms until they were purchased by Cabletron (who almost singlehandedly killed the product).

The original YAGO folks watch companies like Extreme, Foundry, and Alteon successfully IPO and were very frustrated that their own executive staff didn't have enough confidence in the YAGO boxes to go it alone.

Eventually, the YAGO contingent within Cabletron won out and was able to get spun back out with the provision that that Riverstone concentrate solely on the Service Provider business. Unfortunately, that market is dead and taking down all the companies tied to it.
optical_optimist 12/5/2012 | 12:21:17 AM
re: Riverstone Disappoints the Street BobbyMax:

Do you ever have anything positive to say about
the telecom/datacom industry ??

Rivertone is quite strong in Layer 2 MPLS and has many successes in Asia. Maybe they will or won't survive, but your posting acts as if there a fledgling start-up with no customers. This is far from the case.
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