Riverstone finds niche for growth in networking
BY JENNIFER FILES
Posted at 5:11 a.m. PST Tuesday, Dec. 18, 2001
Mercury News
Most technology companies, start-ups and giants alike, spent 2001 struggling to get back to where they were in 2000. Riverstone Networks more than doubled in size.
The young Santa Clara networking-equipment maker is gaining market share in one of the few growing niches in its industry. And even as the economic downturn drove some of its customers out of business, Riverstone turned its first profit this summer, three months ahead of schedule.
The company Wednesday is expected to report year-over-year revenue growth of more than 100 percent, to about $60 million, and another quarterly profit for the three months ended Dec. 1. Riverstone Chief Executive Officer Romulus Pereira, 35, may stretch the limits of credibility when he says the downturn has been ``absolutely'' good for Riverstone, but he has a better case to make than most CEOs.
``As a company they've been doing fabulously. It's especially striking in light of the economic backdrop,'' said Kevin Mitchell, an analyst who covers service provider networks at Infonetics Research of San Jose. ``They've been growing revenue quarter after quarter and winning customers left and right.''
The reason: Riverstone plays straight into the sweet spot of the telecommunications industry, selling data-routing equipment for metropolitan communications networks. Telephone, cable and Internet companies use the equipment to connect many slow- or medium-speed networks into one high-speed link -- and then provide value-added services over the network. For instance, after the Sept. 11 terrorist attacks destroyed a company's offices in New York, a telecommunications company called IntelliSpace used Riverstone gear to link employees in different locations onto a single, fast network, as if they were all still in the same building.
`Metro market'
Telecommunications carriers neglected the ``metro market'' during the 1990s, focusing instead on connecting cities via long-haul networks. Those cross-country networks have far too much capacity now. But telephone, cable and Internet companies are still investing in gear to clear up bottlenecks and enable new services in metro networks, providing a boost to Riverstone and a handful of rivals.
According to Infonetics, Riverstone ended the third quarter with a 13 percent share of this niche, which it terms the global edge/aggregation router market, behind two much larger Silicon Valley equipment makers, Cisco Systems, with a 64 percent share, and Juniper Networks, with 18 percent. In terms of the number of ports -- a measure of capacity -- shipped, Riverstone ranked second, with a 23 percent share behind Cisco's 66 percent.
Infonetics expects this niche to grow 45 percent to $2.2 billion next year. By comparison, the broader service provider edge and core routing market -- which also includes equipment to route traffic through long-haul networks -- is expected to grow less than half that fast, from $12.7 billion to $15.1 billion.
``It's one of the bright spots within the service provider market,'' said Rob Redford, Cisco's vice president of Internet routing marketing.
Riverstone got off to an early start in the niche. The company is the product of two small acquisitions made in the 1990s by Cabletron and spun off in February through an initial public offering.
``These guys started building the right products 2 1/2 years ago -- at a time when you talked about metro Internetworking -- and people said `huh?' '' said Sam Wilson, networking analyst for Merrill Lynch in San Francisco.
How has the downturn played to Riverstone's advantage?
The products the company and its rivals sell help carriers turn raw bandwidth into services that can bring in new revenue for telecommunications services providers, such as the ability to prioritize network traffic or guarantee minimum speeds, and to bill for those new services. According to Pereira, the downturn made finding new revenue streams even more important for carriers. ``The worse that got, the better that was for us.''
Fewer rivals
Riverstone has expanded to 520 employees from 450 about six months ago, cutting back some back-office functions but growing in other areas. The recession has made it easier to retain employees, and they focus more closely on business fundamentals than getting quick returns from stock options, Pereira says.
The poor economy has squashed some would-be rivals, said Wilson. ``Two years ago I would have said Riverstone would have had 15 competitors. Today they're down to, like, five.''
Riverstone beat out Cisco earlier this month to win a contract with cable television company Cox Communications, which is investing to replace the high-speed Internet network of bankrupt At Home. And it scored a public relations triumph this month, after its giant rival put out a press release stating that IntelliSpace, a traditional Riverstone customer, was using Cisco routers.
IntelliSpace executives called the release ``misleading,'' noting that yes, they had bought Cisco routers -- two of them vs. 1,500 from Riverstone.
Analysts said Cisco's release appeared to indicate that it is taking Riverstone seriously as a competitor -- which is good news and bad news for Riverstone. The company's revenue is only about 1 percent of Cisco's, noted Wilson. ``That's kind of like saying me and a mosquito are head-to-head competitors. I usually win if I really want to.''
According to Wilson, Riverstone's impressive growth so far this year is only a beginning. ``All it is, is another step in a long road of being a going concern in Silicon Valley.
``Every day they just need to come in thinking, `I need to fight for every piece of business today. If I fail to make smart products or I make bad decisions, it'll go away in a heartbeat,' '' he said. |
