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Cabletron spinoffs having tough time

News from Riverstone Networks of a profit warning and impending layoffs surprises Wall Street, and comes just a day after Enterasys fired three employees for accounting irregularities.

!- eds 2:30 pm: updates stock --> Riverstone Networks said Thursday that it would cut staff and miss fourth-quarter estimates, joining Enterasys Networks as the latest Cabletron Systems offspring to struggle.

Riverstone's news comes a day after Enterasys fired three employees from its Asia-Pacific unit for accounting irregularities. Enterasys had said on Feb. 4 that it had uncovered accounting irregularities in its Asian operations.

Enterasys was spun off from networking company Cabletron last year along with Riverstone Networks.

Enterasys, which specializes in routers and switching products for networks, recently delayed the spinoff of its Aprisma subsidiary amid a Securities and Exchange Commission probe into its accounting practices.

Last year, Cabletron launched plans to break itself up and cease operations to boost returns to shareholders. Riverstone went public last February and Enterasys went public in August. Shares of both companies trade well below their highs for the year. Shares of Riverstone fell $3.77, or about 50 percent, to close at $3.82 on Thursday, and Enterasys lost 8 cents to $3.55.

In an interview Feb. 12, Riverstone, a maker of networking equipment for telecommunications service providers, was upbeat about its prospects. Chief Executive Romulus Pereira said the company has been able to navigate through the turmoil hitting the telecommunications equipment industry.

Nevertheless, Riverstone said revenue for its fourth quarter is now expected to be between $50 million and $54 million, and pro forma earnings are expected to be breakeven or come in at a slight loss. Those predictions are much lower than Wall Street estimates. Analysts expected the company to have sales of $64.7 million and a profit of 4 cents a share, according to First Call.

Riverstone said it would cut costs by about 10 percent in the first quarter through a series of measures that include layoffs. The company wouldn't disclose how many employees would be affected. Riverstone said it would take charges of between $26 million and $30 million in its fourth quarter as a result of costs associated with the layoffs.

On a conference call, Pereira said Riverstone expected first quarter revenue to be "flat to slightly down." He said telecommunications carriers aren't buying equipment.

"We are observing that carriers are increasingly more cautious with their spending as they continue to assess their business models," he said. The trend is affecting small, mid-sized and even larger carriers, he said.

Analysts expressed concern over the magnitude of Riverstone's expected shortfall.

"Fifteen million seems to be a large miss--and you're announcing this in the last two days in the quarter," said Mark Sue, of Frost Securities, who asked on the conference call if Riverstone has been losing business to competitors.

The company said it is still winning business, but customers just aren't spending.

The news surprised Wall Street as analysts had been optimistic about Riverstone and had been working to distance the company from the problems at Enterasys. U.S. Bancorp Piper Jaffray analyst Edward Jackson reiterated his "outfperform" rating on the stock Feb. 2, telling investors to buy Riverstone shares if they fell because of Enterasys' troubles.

Riverstone has been completely independent from Enterasys since the companies were both spun off from Cabletron. But Riverstone's shares have fallen from about $17 a share to $7 a share as Enterasys has run into trouble with the SEC. In early February, Enterasys said revenue would be lower than expected and said it was under investigation by the SEC. It then cancelled the spinoff of its subsidiary, Aprisma, in mid-February, pending the outcome of the probe. On Wednesday the company fired three senior employees in its Asia-Pacific unit related to accounting irregularities.

Riverstone may not have the same problems as Enterasys, but Wall Street was quick to downgrade shares following the profit warning. Wachovia Securities analyst Richard Church cut his rating on the stock to "market perform" from "buy," adding that he expects it "will continue to be a tough spending environment for Riverstone's products."

Riverstone will announce earnings March 26.