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Technology Stocks : Xylan -- Ignore unavailable to you. Want to Upgrade?

To: Keith Sprague who wrote (2742)	10/14/1998 5:12:00 PM
From: Gary Korn	Read Replies (1) \| Respond to of 4135

Xylan conf. call (post 1) Dale Bartos, CFO: Kim and Doug Hill VP Mktg with him. Steve Kim: Briefly summarize numbers, and offer insights on business. Then, detailed financials, Hill will follow with customer wins, etc. Very delighted with Sept. quarter. Another excellent quarter. Increased revs. to 91.1MM, sequential 9%, 70& y-t-y. Outgrowing rest of indus. Strong growth in NA, 26% seq. Europe down 16% seq. due to ALA and seasonality. Latin Am. down seq. due to lower revs. from OEMs. Strong growth in direct and VAR revs, 25% seq. now represent 68% of overall sales. Strong growth in Omnistack, 100% sequentially. 56.7% margin, similar to last quarter. Expenses flat, at 40.7% of revs. Operating profit 16.1%, compared to 16.3% prior quarter. As a result, EPS were 22, compared to 20 in June. Business in NA is most critical component, as xylan makes transit to major company. Let me emph. this number. NA business grew 26% seq.

To: Keith Sprague who wrote (2742)	10/14/1998 5:15:00 PM
From: Gary Korn	Read Replies (3) \| Respond to of 4135

Xylan conf. call (post 2) Kim: Expect Omni SR to contrib. substant. this quarter. Re. ALA purch. of PAC ENgines: 1. Bulk of our sales to ALA is ATM related. PACENG. is giga. So impact is small. 2. PacEng. is expensive stuff, designed for high end. 3. 80-90% of price of enterprise network is in wiring closet, vs. backbone. ALA clearly says that they think our products COMPLIMENT those of PacEngines. 4. ALA has made it clear that they are moving into a competitor position against CSCO. This may create addit. opportunities with ALA. 5. Recently signed extension of ALA contract with broader opps. So, our relat. with ALA continues to be good. But, our other direct, VAR sales are growing much faster. 68% vs. 59% prior quarter. This is an essential issue to us. We belive that volume direct business will grow fast, while IBM, ALA is modest growth. So, well on our way to diversified customer base. This direct, VAR growth will produce growth rate greater than our competitors, due to strnegh of our product.

To: Keith Sprague who wrote (2742)	10/14/1998 5:22:00 PM
From: Gary Korn	Read Replies (1) \| Respond to of 4135

Xylan conf. call (post 3) We have a balanced product line, strong ATM, gig, etc. switching. Complete end to end switching company. Unlike CSCO, etc., our switching system is completely integrated. Over our history, we have delivered our vast capabilities at a premium price. That has changed. Omni stuff is lowest prices in the industry. Same with upcoming giga switches. This is due to our ASIC design capacity. We continue to focus on high end switching with our ASICS creating a barrier to entry to others. CFO: Book to bill was 1. Quarter revs. up 70% y-t-y, 9% seq. 16.1% op. profit margin, down slightly from June (16.3 then). EPS 22, compared to 20 in June. 127% increase over year ago. Purch. 1.5MM shares in quarter. Total repurch. of 2.2MM this year. Cash was 123MM, down 10MM from prior quarter, due to share repurch. DSO stable at 61 days. Geog. sales: NA increased 26% for 54% of total revs. Strong growth in VAR and direct business. Expect strong sales into December quarter. EUro decreased 6% sequent. Due to ALA and normal seasonality. Project increase in Euro sales in 4Q. Asia flat at 13% of total revs. Expect to see same dollar vols. in next quarter. Lat. Am was 3%, compared to 5% Q2, due to soft OEM bus. Direct and Var revs were 68%, compared to 59% in June. 25% seq. growth. 1 year ago, we were expected to be hurt by Asia. Instead, we grew overall revs. while shrinking dep. on Asia. Recently, some expected us to hurt due to IBM/ALA. Instead, Var and direct work paid off. This is best news of a very good quarter. OEM revs declined 16%. IBM was 15MM, decline of 10%. IBM 16% of total revs., vs. 20% in June. Orders in December same level.

To: Keith Sprague who wrote (2742)	10/14/1998 5:27:00 PM
From: Gary Korn	Read Replies (1) \| Respond to of 4135

Xylan conf. call (post 4) CFO: IBM inv. position too high in summer. Pleased to note that inv. has dropped to 5 weeks. ALA revs were 13.2, down from 15 in Q2. 15% of total revs, vs. 18% in 3Q. Recently signed new extension to ALA contract that gives them favorable sales terms on full range of our products. So, only slight increase in revs next quarter. ALA inventory levels have now dropped from 5.5 weeks to 4 weeks. Overall small switches acct. for 22% of revs, vs. 14% in June quarter. Strong market accept. of new small switches. Gradual ramp in OmniSR thru 1999. Held Omni out of 3Q revs because in test labs. Gross margins were 56.7, vs. 56.8 in 2Q. Doubled small switch revs. and yet still maintained margins. Expect to be able to maintain margins in 4Q. Operating expenses stable at 40.7%. Operating income was 16.1, vs 16.3 in June. Net profit was 10.4MM, increase of 8.7% seq. EPS is based on 47MM shares. Headcount increased to 1,000 vs. 938, 613 one year ago.

To: Keith Sprague who wrote (2742)	10/14/1998 5:32:00 PM
From: Gary Korn	Respond to of 4135

Xylan conf. call (post 5) Doug Hill: Won about 250 new accounts. Xerox, Mercedes Benz, etc. XYlan competes with Csco, etc., yet growing faster than competitors. We beat Csco in most of deals we win. Why? Strong technology. 4 major tech. drivers: 1. Asics (one dozen shipping today), 2. Value added s/w (like any-to-any switching), 3. most integrated switching platforms in the networking industry (no one else has this. 4. Single, network wide Xylan operating system. Every xylan switch runs the same body of s/w, so identical services across the network. Guidance on upcoming tech: New Omni SR will ship in volume in 4Q. Others are shipping with limited support. Ours ships with full supported switching. Integrates ATM, FR, ISDN, etc. Best high speed lan switch in networking industry. Less expensive than a low end CSCO switch, but with more capacity than a high end CSCO switch.

To: Keith Sprague who wrote (2742)	10/14/1998 5:34:00 PM
From: Gary Korn	Read Replies (2) \| Respond to of 4135

Xylan conf. call (post 6) Steve Kim: We will continue doing well in Dec. quarter. Will continue to outgrow our competitors. We are encouraged by strong growth of Omnistack. Plus small switch source of revenue. We expect strong continuing growth from direct and VAR business. Expect total OEM revs. to show modest growth. This will again reduce OEM revs. as a percent of our total business. Well on our way to a diversified channel structure which minimizes dependency on any one customer. Top line growth primarily from direct and VAR business in NA and Euro, allowing us to show seq. revenue growth greater than industry. In closing, make one thing clear, xylan committed to maximizing value for shareholders in every possible way. Q&A next.

To: Keith Sprague who wrote (2742)	10/14/1998 5:43:00 PM
From: Gary Korn	Respond to of 4135

Xylan conf. call (post 7) Q&A 1. Tobia, Montgom Secy: Re. Dec., you say growth in excess of networking indus. In earlier call, you said double digit seq. rest of year. What is indus growth in Dec? What about ALA? Dale: D'Orio est. 24%, or 5-6% seq., so we believe we can outdo that in quarter. As far as new ALA terms, it is built into our model. In 1999, will increase faster than 24% in 1999. Range will be closer to $450-460MM for 1999. A lower level of revenue than the range. We believe we can still have income and margins same as before, 16% op. income for 1999. 2. Johnson, Robertson Steph: Next year tax rate? Dale: 34% tax in 1999. Share count growth in 1999, 51.8MM, i.e., up 1M per quarter. 3. Kaufler, DLJ: Gross margins? Dale: Hold model the same. We've been working closely with Azlan in euro. Solid relate. with various VARs. All channel partners are kicking in and working well at this point. Kim: Making sure channel partners are more effective. 4. Shopac, Nutmeg: Buying stock since end of quarter? Dale: Blackout since 9/15 through 3 days after this conf. call. Have authorization to buyback more, so we believe we will buy back more shares given current share price.

To: Keith Sprague who wrote (2742)	10/14/1998 5:51:00 PM
From: Gary Korn	Read Replies (2) \| Respond to of 4135

Xylan conf. call (post 8) Lee, Sutro: WRT to OmniSR, when 5% of revs? Kim: Higher than 10% in Q4. Have built a backlog. Most would be shipments to end users. We have very few channels stocking our products. We sell to end users and VARS, after they have P.O. from users. We normally ship direct to end users. Dale: ALA moves a little more quickly than IBM. Expect, on OmniSR, to see something from ALA in Q4. On IBM, will see it in Q1. Lavoy, MS: What % of revs. to carriers? Dale: Double digit business. Growing faster than the corporate average. Nortel revs. were under $1M in quarter. Because of major ASIC developments, our price per port will come down significantly. Kim: On Q4, flat Asia revenues. May see some opp. in 1999 for growth. Euro. is seasonal and ALA (this quarter). In 4Q, expect some good growth. Ericson, Dain: Ethernet, ATM mix? Book to bill ratio, yet 1 to 1 ratio? Dale: Majority of deals have involved ATM. As the world is starting to accept gigabit, may see some shift. Even recent experience is that majority of deals have involved ATM, particularly true in Euro. Majority of our deals in Euro are ATM. Significant majority are ATM. Quite a diff't mix than P.E. Book to bill does include Omni SR bookings. Kelly, MS: You only mentioned CSCO. What about compet. environment as to others? Dale: CS has been a weaker competitor in past year, enter some of their installed base. Some weakening from BAY. 3COM not in our space, except Texas A&M deal. Reality in this business: CSCO is the clear leader in networking. They are the folks that we have to beat and that we do beat.

To: Keith Sprague who wrote (2742)	10/14/1998 6:00:00 PM
From: Gary Korn	Read Replies (2) \| Respond to of 4135

Xylan conf. call (post 9) Johnson, Robertson: Why VAR so strong? Appears something dramatic happened this quarter. Why? Kim: We focused on VARS. Dale: Our sales guys more productive with wider range of products, and we got recognized better and better. We are going out there and creating this business. Xylan has built one of the best sales orgs. in NA. NYU Med. is a good example. Beat out a lot of competition. Past effort pays off this quarter. Why dramatic? We kicked their butts and our guys worked harder. Closed a lot of big accts. this quarter. Didn't experience much seasonality this quarter. Shopec, Nutmeg: Existing relat. of 3COM/IBM? Corebuilder product line competition? Kim: OmniSwitch sales at IBM exceeded their own internally developed stuff. They have not added much to their own product for a long time. Dale: A year ago, jockeying for position. At this point, 3COM has provided functionality into the IBM product. But IBM clearly sells our product under their label as a significant product. Kim: IBM is going to launch OmniSR as the gigabit backbone. Also, OmniSR has an ATM interface. They are aggressively pushing our fast ethernet product. So, the relationship is very good. Our emphasis is to increase our own direct, VAR business. Tobia, Nationsbanc: You bought back 1.5M? Dale: Avg. price was just under $20. Cash decrease is offset by buyback. Current liabilities up due to material flow, nothing unusual. Weinstein, First Bost: Next year tax rate 34%. New ALA contract? Dale: Coming down due to good tax planning. No min. vol. on ALA contract. Arms length. We passed on some favorable terms due to their volume with us. Unit vols. will increase significantly, with a modest increase in revenue stream.

To: Keith Sprague who wrote (2742)	10/14/1998 6:10:00 PM
From: Gary Korn	Respond to of 4135

Xylan conf. call (post 10) Q: Where will OEM business be next year? Dale: Expect them to be up slightly next year. ALA is having a lot of success in Euro. with our products. Q3 is always a seasonally down quarter, but reality is that ALA is having a lot of success with our products in Euro. P.E. stuff is different than our stuff. That is what ALA said in their cc. yesterday. Might be some upside for us in our relat. between ALA given CSCO issues. Still, our focus is on direct, VAR. Heritage, Warbug: Omniswitch revs. down? NT expectations? Dale: Didn't have Omnistack before. Now it is helping enormously. As move forward, OmniSR will come in and increase modular revs. for Q4. NT anticipates that we will see reasonable and steady growth in our business to them, Q after Q, for the next 5 quarters. In a sense, Xylan sells software. Put the software into switches. OmniSwitch is a platform for selling s/w value-add. That is really what our business is, selling s/w in these various platforms. Q: Depreciation, raw material? A: Don't carry much raw material. Kim: Expect to see big growth out of carrier next year. So, products are NEB compliant. Q: Average deal size? Up or down recently? Fore competition? A: Avg. sale size clearly has been going up, worldwide. 6 figure deals are typical now. Extremely typical that, when we close a deal, the revenues we get are small up front, larger later in time. As for FORE, it is very focused on ATM space in NA. We are in a number of areas and in countries. So, we do compete with FORE, and if all ATM network to the desk, FORE is strong. But most networks combine more than ATM to the desktop. That is where we start to have a lot of advantages. As for CSCO, we watch closely deals we win and lose. We put talented and correct resources in front of the big deals. No more questions. I've Got To Go! Good luck All! Gary Korn