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Riverstone helps the network flow...
by Siu-Yee Ng
The Internet has developed into a mass medium for both communication and commerce. According to International Data Corporation, the number of World Wide Web users is expected to increase from 240 million in 1999 to approximately 602 million by the end of 2003.
Remember, the Internet is still in its infancy, and is still evolving. Historically, Internet content and services were centralized, forcing the vast majority of traffic to traverse the Internet backbone. This meant significant delays for the end-user. Today, Internet applications and services are being distributed to sites closer and faster to the end-user. Not surprisingly, these sites are typically located in metropolitan areas where there is a high concentration of businesses and consumers.
But there is a problem with this improved technology. The amount of data that can be transmitted between the network and the end-user — commonly known as the last mile — is limited. In effect, there is an increased use of the metropolitan area network (MAN), which extends from the end-user to the Internet backbone. The increased prominence of the MAN is transforming the Internet into a mesh of interconnected metro networks linked together by the Internet backbone.
The growth in Internet usage and the emergence of the MAN have led to a new generation of sophisticated and data-intensive applications and services. The delivery of these applications and services is evolving due to end-user demands and the need for service providers to develop new sources of revenue. These service providers include traditional telecommunications carriers, Internet service providers (ISPs), content hosting and application service providers (ASPs), building local exchange carriers (BLECs), and metro service providers (MSPs).
Changing times
ISPs have traditionally provided basic Internet connections. But to stay competitive, they will need to expand their services to retain existing customers and take advantage of higher-margin revenue opportunities in new markets.
Content and web hosting service providers offer secure, reliable and managed access to web pages, email services and data storage. ASPs supply their customers with outsourced software applications, ranging from business automation to tools for enhancing productivity. Both content hosters and ASPs house their operations in hosting centers that are typically located in the MAN.
BLECs provide small- and medium-sized businesses with local area network (LAN) services and Internet connections. To increase efficiency, BLECs typically aggregate network traffic from multiple buildings. Commercial real estate owners often give access rights to multiple BLECs, which must then compete based on the price and competitiveness of their service offerings.
MSPs provide metropolitan communication backbones and access over fiber optic cables to connect BLECs, content hosts, ASPs and businesses using high bandwidth connections. To do this, MSPs build their own networks or lease fiber optic cables, where available, allowing them to bypass the local telephone company's last-mile connection to end-users. This allows MSPs to provide end-users with high-capacity, low-cost bandwidth more rapidly than previously possible.
In today's competitive market, service providers must build networks with increasing levels of availability, reliability and security. They need to differentiate their service offerings from their competitors. And they must be able to employ innovative pricing and billing models while maintaining a cost-effective operation.
You've been assimilated
End-users expect mission-critical business services delivered over the Internet to have the same level of availability and reliability as the traditional telephone network. Service providers are demanding that equipment installed in the network meet carrier-class requirements for reliability and interoperability.
New equipment should be easy to integrate into the existing network and should not increase the complexity of the service providers' operational support systems (OSS). Service providers also need to enforce network security measures to prevent unauthorized use of their services or access to their customers' data. To meet this need, the network equipment used by service providers should support industry standards for network and electronic commerce security and provide mechanisms for controlling network access.
Riverstone Networks, Inc. has a solution. Its routers and switches enable service providers to convert optical and electrical bandwidth into differentiated services for their customers. The products contain advanced features such as bandwidth management and provisioning, accounting and billing, quality of service and content delivery capabilities.
Riverstone's combination of custom application-specific integrated circuits (ASICs) with its RapidOS software provides high levels of network availability and reliability, even under heavy network traffic conditions. Its routers and switches are interoperable with a variety of products from other vendors. Its products meet numerous regulatory requirements and its most advanced products are designed to be NEBS compliant. They also incorporate numerous security protocols for supporting virtual private networks and secure network access.
Ante up
Riverstone's switch routers offer many advantages. They feature advanced capabilities to manage bandwidth in real time, without sacrificing network performance. As customer and application bandwidth needs change, commands sent remotely to its products can instantly and inexpensively set up, modify or terminate connections.
Its switch routers support hardware-based accounting, allowing service providers to collect real-time customer billing information. This allows them to create and offer advanced pricing structures tailored to their customers' needs by usage, time-of-day and location.
To increase the speed of content delivery, Riverstone's products offer network-wide capabilities for creating the shortest and most reliable path between the end-user and the content.
Its products easily integrate with customers' bandwidth management, provisioning, accounting and billing, quality of service, and content delivery tools. Its "Intelligent Service Router Architecture" scales with the needs of service providers. Additional line cards can be inserted into its modular chassis to increase bandwidth capacity. If bandwidth is exhausted in one chassis, service providers can link multiple chassis together to obtain additional capacity.
Riverstone's RapidOS operating system can scale in the face of increasing Internet traffic while continuing to manage bandwidth, deliver routing throughput, and provide differentiated services. New technology interfaces and RapidOS upgrades can be added to in-service chassis without disrupting existing operations. The modular design of Riverstone's products enables the rapid and easy addition of new services without requiring redesign of network architecture or replacement of existing infrastructure equipment.
Riverstone's products also support optical and electrical interfaces to ensure that services can be quickly provisioned across a broad range of media types. In other words, service providers using its switch routers can rapidly offer services across almost any infrastructure. This broad range of support is delivered in a single chassis, eliminating the need to purchase multiple solutions or consume limited space.
Ka-Ching!
Riverstone's North American direct sales force is divided into Western and Eastern regional operations. The sales team maintains contact with key individuals who have service planning and infrastructure build-out responsibility within its customers' organizations.
Riverstone's international sales are made through a combination of direct and indirect sales efforts. Its European operation is headquartered in London, with sales offices in Spain, Italy and the Netherlands. Its Asia Pacific operation is headquartered in Singapore with offices in Japan and China. Riverstone also partners with a select group of distributors and resellers both in Europe and Asia.
Riverstone has also established a strategic distribution relationship with Terayon. The agreement allows Terayon to distribute Riverstone's products on a worldwide, nonexclusive basis with discounts tied to contractual minimum volume purchases.
Riverstone recently announced a strategic alliance with Tellabs (TLAB:NASDAQ). This alliance combines Tellabs' flexible broadband access systems, CABLESPAN 2300 and MartisDXX, with Riverstone's RS family of high-speed edge routers.
Customers include BLECs, content hosts, ASPs and MSPs, along with traditional ISPs. Riverstone's top ten customers by revenue for the period March 1, 1999, to September 2, 2000, were British Telecom, CAIS Internet, Earthlink, Intellispace, Metricom, Telecom Italia, Telia, Telseon, Terayon and Vitts Networks.
Up until now, a limited number of customers have accounted for a significant portion of Riverstone's revenue. For fiscal year 1999, Adelphia Communications accounted for 46% of net revenues and Earthlink accounted for 20%. So if any one of them decides to delay, cancel or decrease orders, it would greatly affect Riverstone's bottom line.
But Riverstone has been able to build its customer base in fiscal year 2000. British Telecom accounted for 15% of its net revenues, Earthlink for 14%, Metricom for 12% and Vitts Networks for 11%. It's positive to see a company expand.
Riverstone was created by the combination of two businesses previously acquired by Cabletron. These businesses are Zeitnet, which Cabletron acquired in 1996, and Yago Systems, acquired in 1998.
Riverstone began shipping products outside the United States in fiscal year 2000. These shipments accounted for 23% of net revenues during fiscal
year 2000 and 26% for the six months ended September 2, 2000.
Money talks
Riverstone reported record revenues for the first six months of fiscal year 2001. Revenues increased 583%. The cost of revenues for the first six months of fiscal year 2001 increased 375% compared to the first six months of fiscal year 2000. But as a percentage of net revenues, the cost of revenues actually decreased to 45% from 65% for the same periods.
Riverstone is a wholly-owned subsidiary of Cabletron. Cabletron will own approximately 86% of the outstanding shares of its common stock after the IPO. This means that Cabletron will control many aspects of Riverstone's business. Cabletron plans to distribute all of the shares of Riverstone's common stock owned by Cabletron to the holders of Cabletron's common stock.
Why not invest directly in Cabletron (CS:NYSE)? It's quite simple.
Cabletron split into four companies focused on target markets: Riverstone Networks (service provider/broadband), Enterasys Networks (corporate networks), Global Network Technology Services (professional services) and Aprisma Management Technologies (network software). Cabletron is a holding company, so it depends on all four companies for revenues. Whereas Riverstone is independent of the other three companies. If Global Network Technology Services has a bad year, it will not affect Riverstone's bottom line, but it will affect Cabletron's numbers.
Riverstone is competing with some big dogs. This market has historically been dominated by Cisco Systems (CSCO:NASDAQ). Other competitors include Extreme Networks (EXTR:NASDAQ), Foundry Networks (FDRY:NASDAQ), Juniper Networks (JNPR:NASDAQ), Lucent (LU:NYSE) and Nortel Networks (NT:NYSE). Cisco's market cap is US$368.8 billion, Extreme's is US$8.82 billion, Foundry's is US$6.22 billion, Juniper's is US$52.8 billion, Lucent's is US$51.6 million and Nortel's is US$131.2.
Even after the recent market bloodbath, these companies are still trading at fairly high valuations. After the IPO, if Riverstone prices in the low range at US$12, then the market cap will be US$1.22 billion; if it prices in the high range of US$14, the market cap will be US$1.43 billion. True, its peers have a longer operating history, but don't underestimate Riverstone's market potential.
Morgan Stanley Dean Witter, Chase H&Q, Lehman Brothers and Salomon Smith Barney are the underwriters. Riverstone Networks plans to price 10 million shares between US$12-14 under the symbol RSTN. I don't expect a huge pop, but Riverstone has a lot of room to grow. For more information, contact Riverstone Networks, 5200 Great America Parkway, Santa Clara, CA 95054, phone: 408-878-6500, fax: 408-878-6501, website.
Siu-Yee Ng is the editor of IPO Trader, an IPO alert service that helps readers profit on IPOs and, more importantly, the IPO Aftermarket. Click here to find out how you can put Siu-Yee's expertise and extensive contacts to work for your portfolio.
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