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Technology Stocks : Excel Switching Corporation (XLSW)
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To: alan laValley who wrote (30)2/26/1998 9:30:00 AM
From: Bobo  Read Replies (1) of 222
 
Alan,

I spent some time looking at this technology at the Wireless 98 show in Atlanta. I think it's best to look at the Excel switch as core technology that allows telecomm applications to be built around it in a distributed fashion. The switch enables vendors of voice messaging and other enhanced service applications to focus on software rather than hardware, providing time to market and flexibility advantages. I do not think it would be appropriate to view the technology as a competitor to a CO switch from Lucent or Nortel although and OEM could build this functionality. From the limited discussions I have thus far, the technology seems to have a good reputation among OEM's. My casual observations also seem to validate the scalability of the technology, Excel's leadership position and a low-cost of entry for end users.

There are a couple of risks to consider from an investment standpoint the the company IMO. Excel is dependent on the success of a limited number of OEM's rather than the success of directly selling to end users. This means that the company is susceptible to inventory adjustments by OEM's and their potential failings. The other concern I have is that Excel's operating margins seemed to maxed out, meaning that the bottom line will grow only as fast as the top line and that it will be difficult for the company to blow away earnings estimates.

All this being said, I still find the company attractive from a growth and technological leadership perspective. The stock trades at 35 times 98 earnings which is a discount to its current growth rate of 45%. Also, the estimates look a bit modest for the year. The company is in a great market with the explosion of telecomm deregulation. I quite frankly need to do a bit more homework before taking a big position but would consider this a reasonable entry point.
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