Riverstone cuts staff by 30%, reorganizes around new markets

Metropolitan area network equipment provider Riverstone Networks announced yesterday that it is cutting 30% of its workforce and realigning its business to focus on the cable industry and federal government contracts.

The company also said it expects revenues for the quarter ending August 31 to be $10 million to $15 million, with a pro forma loss of between 18 and 24 cents, far steeper than the consensus 11-cent loss predicted by analysts polled by First Call.

The layoffs, most of which will occur over the next month, will bring Riverstone’s headcount down to about 350 and will be spread across all geographies and company divisions.

According to Romulus Pereira, Riverstone’s president and CEO, the cuts and the change in focus are being made in response to a worsening marketplace for communications gear.

“The telecommunications equipment market has continued to become increasingly challenging as service providers around the world delay new service and infrastructure projects. Previously robust regional markets have softened in recent months,” he said.

In response, he said, the company is changing its short-term focus to cable and the federal government.

“While we continue to believe that the telecommunications market offers the best long-term opportunity, we recognize that it is still in a state of protracted recovery.”

While Riverstone plans to approach these markets with its entire RS metro router product line, its ES 500 metro router, a stripped-down version of the RS, is its best play in government markets, according to Ryan Molloy, senior analyst at SoundView Technology Group.

For MSOs, Riverstone has already done some work rolling modular switches into a cable modem termination system platform, he said.

According to Molloy, the change in focus makes sense when comparing telecom to Riverstone’s new target markets.

“In the federal market, you’re seeing healthy spending patterns out of the Department of Defense and other federal verticals,” Molloy said. “The MSO is okay relative to the traditional wireline telecom market, but I think you’re eventually going to see some issues there.”

While cutting headcount is necessary if Riverstone hopes to ride out the downturn, being a smaller company will make it difficult for the company to thrive in the long run, Molloy said.

Service providers “are not going to make serious infrastructure investment with vendors of a smallish nature. They’re going to go with larger players with better service offerings and broader portfolios,” he said.

A spokesman for Riverstone, however, disputed that contention. “I think the cuts will still preserve a critical mass necessary to provide critical R&D functions, service functions and sales functions.”

With a solid cash reserve, Molloy thinks the company probably will be able to survive the downturn if it focuses on managing expenses. At that point, it would be a likely target for acquisition, even though management in the past has expressed hesitancy towards being bought out.

“Someone looking to beef-up their switching portfolio would look at Riverstone,” said Molloy. “It’s a question of whether [Riverstone] would be willing.”