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Nimble Xylan Dances on Giants' Turf


A challenge hangs in the boardroom of Calabasas-based Xylan Corp.: A framed caricature depicts company founders trooping across a rickety wooden bridge as a muscled horde of networking giants--Cisco Systems, Bay Networks, 3Com--fire flaming arrows from below.

But two years after the start-up went public, the incredible hulks don't seem quite as menacing. Admittedly a mite compared to the leviathan Cisco, which sells more than half of all the switches that link computers in corporate networks, Xylan has captured a thin slice of the $5.7-billion pie. It has carved its niche selling pizza-box-size switches that direct the flow of information over data transmission lines.

"When Xylan launched [its] product, there were a lot of little start-ups and the behemoths," said Tam Dell'Oro, of research house Dell'Oro Group in Portola Valley. "Xylan was still a little fly, but they survived because they had good technology."

And while the major players have been battered by Asia's turmoil and a consolidation trend in the industry, Xylan has benefited from the changes in the marketplace as more corporate customers replace older equipment with high-speed networks. Being a niche company has allowed Xylan to quickly refocus its research and sales effort on new technologies.

"Their cutting-edge research sets them apart," said Rohit Shukla, executive director of the Los Angeles Regional Technology Alliance. "They're not just content in tweaking current stuff, they're pushing ahead, betting on new technology."

Xylan has recently expanded its product line, releasing the low-end OmniStack switch in March and next month plans to launch X-Frame, which it touts as a next-generation, high-bandwidth switch, 23 times faster than its top-of-the-line product, called OmniSwitch.

Company founder Steve Kim says Xylan's revenue is on track for $350 million in 1998, after racking up $83.7 million in sales in the most recent quarter. The company also posted better-than-expected quarterly profit, earning $9.6 million, or 20 cents a diluted share, compared with $3.1 million, or 7 cents, before a one-time gain, a year earlier.

Xylan has set an ambitious goal of $1 billion in revenue by the millennium, but analysts warn that the rapidly growing company must be wary of relying too heavily on any one sales channel.

And while other start-ups have been snapped up recently--Cisco alone has made five acquisitions so far in 1998, including Summa Four Inc. in July for about $115 million--Xylan officials say they aren't interested.

"We built all our technology, versus buying it," said Kim, adding that a merger might cause the company to lose its focus and sense of entrepreneurship should it become just another body part in a Frankenstein's monster of a mega-company.

"It's like your body. If you try to buy pieces, it's impossible to fit together," he said.

When it was still a relative unknown in the fast-growing networking market, Xylan sold its switches at a discount to major original equipment manufacturers such as IBM and France's Alcatel Alsthom, who resold the equipment under their own names.

Sales to these partners initially accounted for more than 60% of revenue but dropped to 40% last year. Company officials want to reduce that proportion even more by next year, to 30% to 35% of revenue.

That big-brother dependency came at a price, leaving Xylan vulnerable to hiccups in the market. Its stock plunged from a high of $76 in May 1996 down to the mid-teens a year ago. On Monday, its shares rose 31 cents to close at $23.44 in Nasdaq trading.

At the same time, Xylan has nearly doubled its work force, growing to 970 employees during the last year. The company has outgrown its current Calabasas facility--where bicycles are parked near cubicles and the chirping of crickets fills the hallways--and will relocate most of its headquarters to more spacious digs in Lost Hills next year.

Pumping up its sales strategy, the company has embarked on a program to diversify its channels, attempting to sell more products directly to corporate customers. It also has signed deals with additional resellers, including Canada's Northern Telecom, North America's No. 2 telephone equipment maker, to sell its switches directly to Nortel customers.

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