Networker Xylan Gets Key Contract With Nortel
Date: 8/4/98
Author: Michele Hostetler
Xylan Corp. is charging deeper into networking by winning a deal to make gear for Canadian
communications titan Northern Telecom Ltd., the companies plan to announce Tuesday.
The agreement is expected to help Xylan grab more sales to telecom firms and network service
providers, and aid in fending off its largest rival, Cisco Systems Inc., says Douglas Hill, Xylan's
co-founder and marketing vice president. The deal could net Xylan ''a couple of million dollars'' in
sales by the end of this quarter alone, Hill says.
Xylan could use another big partner, says Melinda LeBaron, analyst with Stamford, Conn.-based
Gartner Group Inc. Xylan already makes switches for IBM Corp. and Alcatel Alsthom.
''It will be difficult for Xylan to grow significantly for the next five years without another partner,''
she said.
Calabasas, Calif.-based Xylan is battling with Cisco over the fast-growing networking switch
market. Switches speed up networks by adding an extra lane on which information can travel.
Xylan's flagship product is called the OmniSwitch.
The company must move fast this year because the industry is in transition. Voice experts Lucent
Technologies Inc. and Nortel want a piece of data networks. As a midsize company, Xylan is in
danger of being gobbled up by bigger players or getting outmaneuvered by smaller ones.
''We're getting ready for the battle of the behemoths,'' LeBaron said.
Xylan won't be one of those giants duking it out, but it is getting bigger. The company's '97 sales
jumped to $210 million from $29 million in '95. This year, the company could post nearly $350
million
in revenue, according to Van Kasper & Co.
The Xylan agreement might come as a surprise, because Nortel plans to complete its purchase
of
Bay Networks Inc. in September, a stock deal worth roughly $7 billion. Xylan has a different
piece
of the puzzle, though. Its equipment is stronger in carrier requirements, says the company's Hill.
''Bay simply doesn't have specific areas of technology that, in this case, we do,'' Hill said.
Xylan's switches will be used with Nortel's version of digital subscriber line, or DSL, technology.
Phone carriers are the prime customers. Nortel has received $1 billion in orders for one-megabit
modem service, Hill says.
Nortel will be a key piece of Xylan's strategy to gain more business from telecom firms, Hill says.
Telecom sales could reach 20% of revenue in the next year, he says.
''Nortel is a tremendous way for us to get our products out there,'' Hill said. ''It gives us a lot of
credibility. It's a strong stamp of approval.''
Xylan's fortunes also will grow along with the popularity of one-megabit modems or DSL, he
says.
Nortel will give Xylan more stability. Xylan won't be so reliant on the two core partners it has.
Wall
Street has been worried about Xylan's vulnerability on that front. Xylan shares dropped to $24.69
on
July 31 from $31.06 on June 20.
During a call with financial analysts on July 20, Xylan executives said IBM had six to seven
weeks
of inventory. Xylan is holding back products to reach the inventory goal of three to four weeks,
Hill
says.
Unlike its larger competitors, Xylan focuses on just the switch market. This approach has made
the
company a strong force in tech, says Scott Heritage, analyst with Warburg Dillon Read in New
York.
''They can beat Bay, 3Com and Cabletron,'' Heritage said. ''Xylan can do that because they have
better products than those other companies.''
But Xylan will have a hard time prying customers away from Cisco. Still, the quality of Xylan's
products gives it an edge, analysts say. They add Xylan is able to react more quickly to customer
wants than slower-moving larger players.
But Xylan's strength also is its weakness. In the topsy-turvy networking world, customers want to
know their equipment maker is going to be around in a few years.
''They don't have the size of Cisco, Bay, 3Com and Cabletron,'' Heritage said. ''They don't have
the
reach necessarily that those other companies have.''
But Xylan is poised for a breakout, says Marc Woodward, a Van Kaspar analyst.
''Xylan is starting to get out of the start-up stage,'' he said. ''I think they're starting to gain critical
mass.''
Xylan's gigabit technology for company networks, called X-Frame, is expected to give its product
line a boost once it hits the market this month, analysts say. Other networking companies
already
have gigabit products on the market.
''It's critical that they get this out,'' Gartner's LeBaron said. ''I don't think it's too late.''
Xylan's expertise makes it an acquisition target, Woodward adds. Hill wouldn't comment on
acquisition rumors.
Lucent, Nortel, Alcatel and IBM would be logical choices, Woodward says.
''There's a new rumor every month on who's going to buy Xylan and for how much,'' Woodward
said. ''But I don't believe they're actively trying to sell the company.''
(C) Copyright 1998 Investors Business Daily, Inc.
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