Apparently, Riverstone and Extreme are fighting it out for leadership in MAN switching/routing.
An IPO may be downstream for Riverstone Networks
By Stephen Lacey
Redherring.com, January 22, 2001
Riverstone Networks (Nasdaq:
RSTN)'s initial public offering would
appear to be a hard sell by almost any
measure -- competitors in the router
and switching market are cautiously
guiding analyst estimates downward,
leading stocks in the sector are well off
their 52-week highs, and the
underwriting syndicate remains mute
about timing for the company's IPO
road show.
Yet while Riverstone's management concedes that spending is slowing among
its "smaller customers," the company's parent, Cabletron Systems (NYSE:
CS) is ready to green-light a spin-off of this subsidiary at the first sign of a
turn in the market. "Cabletron [management] still wants to get the IPO done
-- they want to be one of the first companies out this year," notes one
investment banker familiar with the deal.
Indeed, there would appear to be evidence to support Riverstone as a
stand-alone entity. Last month, the manufacturer of routers and switches for
metropolitan area networks (MANs) posted fiscal third-quarter revenue of
$26.8 million, or 9.9 percent of the $265 million Cabletron generated during
the period. Of Cabletron's four subsidiaries, Riverstone is the company's
fastest-growing, as third-quarter sales increased 30 percent from
second-quarter revenue of $20.6 million. While Cabletron did not break
down net earnings for the third quarter by individual subsidiary, Riverstone
had a nine-month net loss of $59.2 million on revenue of $63.1 million.
Admittedly, Riverstone has a way to go in order to catch up to MAN
industry leader Extreme Networks (Nasdaq: EXTR), which just reported
better-than-expected fiscal second-quarter revenue of $144.7 million.
Extreme is also profitable, having reported net earnings of $12.6 million, or
11 cents a share, an 83 percent increase from the same period last year.
NETWORKING BABEL
But of course, any hopes for a successful IPO of Riverstone will depend on
the future expectations for the company and its sector. And after talking with
Extreme CEO Gordon Stitt and Riverstone CEO Romulus Pereira, we're
convinced that while overall spending by telecommunications carriers will
slow, carriers will allocate their downsized budgets to companies like
Riverstone and Extreme that can help improve the performance of
metropolitan area networks. "I don't think the word challenging is
appropriate; I prefer the word changing," notes Mr. Stitt. "Anytime there's a
question of budget scrutiny, I actually think it creates a tremendous amount of
opportunity for companies like Extreme."
The opportunities for these companies lie in the transformation of
metropolitan networks from a SONUS-based architecture, built to support
voice traffic, to a more flexible, Ethernet-based network, which is seen as
critical to a carrier's economics. "We think the metropolitan infrastructure is
ready for its next quantum leap," says Mr. Pereira. "Next-generation carriers
need equipment that allows them to provide cost-effective services that are
very differentiated without having to sink a ton of money into new equipment."
In our opinion, Riverstone took a big step toward differentiating its product
offering through the rollout of its RS 38000 optical router last week. The
company's latest router supports Synchronous Optical Network (SONET),
wave division multiplexing (WDM), and asynchronous transfer mode (ATM)
protocols, as well as 10 Gigabit Ethernet, a missing element that cost the
company some business.
Newer features such as built-in hardware support of multi-protocol label
switching (MPLS) and resilient packet rings (RPR) should, however, help
Riverstone gain ground on the competition. MPLS is an industry standard
designed to get carriers speaking the same language regardless of network
architecture, and RPR combines a 50-millisecond fail-over rate of SONET
with the plug-and-play benefits of Ethernet.
"In theory, the 38000 model allows us to accommodate a mixed breed of
protocols, whether it's a TDM infrastructure that we're moving towards or a
leased-fiber architecture that we're employing today," says Carlo Lalomia,
CTO of Intellispace, a New York-based Ethernet IP network.
TAKE ME TO THE RIVERSTONE
MPLS promises to give carriers better control of the IP traffic flowing over
their networks as well as the ability to provide value-added services such as
virtual private networks (VPNs), firewalls, video conferencing, email, and
supply-chain management. IP traffic is currently forwarded based on shortest
or lowest cost path algorithms, regardless of downstream congestion. By way
of contrast, MPLS reserves bandwidth, so that capacity is always available,
and also allows service providers to route traffic around congested points.
"MPLS allows you to take advantage of all the capacity that you have in the
most efficient way," says Mr. Lalomia. Initially, Intellispace will use the
Riverstone router to beef up its VPNs, which have previously been supported
by switches made by Extreme. More efficient, secure networks means that
carriers will be able to offer the quality of service comparable to what they
can achieve through an Ethernet-based local area.
Although Riverstone's high net losses may be hard for investors to stomach, it
is clear to us that the company is Cabletron's fastest-growing and most
attractive IPO candidate. Riverstone, which is looking to a Morgan Stanley
Dean Witter-led syndicate to place 10 million shares, or 9.8 percent of the
company, at a price between $12 and $14 a share, is crucial to Cabletron's
restructuring efforts.
So if buyers balk at that asking price and Cabletron is forced to discount the
offering, we'd be buyers. Simply put, Riverstone is one of the purest plays on
the service provider market and in the development of the more robust,
cost-effective metropolitan area network. Extreme Networks and Riverstone
appear to be well-positioned as carriers funnel expenditures toward their
metropolitan networks.
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