Riverstone shifts R&D to India

Ethernet equipment vendor Riverstone Networks announced plans today to shift a greater portion of its research and development workforce overseas in an effort to reach profitability quicker.

The company plans to “downsize” its office in Santa Clara, Calif. while adding staff in its Bangalore, India, office. Over the next six months, Riverstone will boost its Bangalore engineering team from about 140 engineers to more than 200. The company wouldn’t quantify its U.S. headcount reduction plans.

Riverstone expects the move will lower the amount of quarterly revenue needed to break even from the mid-$40 million it previously targeted to less than $30 million.

“This is not a program to outsource to third parties,” said Oscar Rodriguez, Riverstone's president and chief executive officer on a conference call late Wednesday. “This is an established Riverstone subsidiary in India.”

Riverstone hopes to complete the move by February 2006 at a total cost of about $ 4 million.

During its fiscal second quarter of 2006 (which ended Aug. 27, 2005), the company cut its U.S. workforce by 15% while more than doubling that in India, where more than half of its engineering team is now located. At the end of the quarter, Riverstone employed 412 people, more than half of which were dedicated to R&D.

During Wednesday’s call, the company also provided preliminary results for its fiscal second quarter. Hardware revenue was down 11.5% sequentially to $16.1 million. But revenue for the first half of the fiscal year was up 23%. Analysts listening to Wednesday’s conference call expressed frustration that the company has not been able to grow revenue more quickly.

“Where’s all the cash going?” one analyst asked. Riverstone used nearly $20 million of its cash in the quarter, leaving it with about $120 million.

“I like the spin, but I’m not impressed with the performance,” said another analyst, who said Riverstone was doing the right thing in shifting more of its workforce to India. “Cutting costs is no way to run a business. Growing revenue is the way to run a business.”

In their defense, Riverstone executives pointed out that sales cycles among their target customers (Tier 1 carriers) are extremely long, and large carriers often change their minds after several months of testing Riverstone products.

“Am I happy? No, I’m not happy,” Rodriguez said. “When customers make decisions, they often don’t make them in a time frame that you’d like. I’d like to be able to take more dollars from the marketplace. We’re in a situation where you can’t win ‘em all.”