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THE DAY AHEAD: Turnstone Systems&#039 IPO could turn some heads

The IPO season reportedly kicks off in earnest this week with a lot of "me too" offerings. The strategy is simple: Find a buzzword and run with it. But there are some solid companies going public. Turnstone Systems (Proposed ticker: TSTN) could be one of this week's IPO head turners.

Turnstone Systems has a few things working in its favor. For starters, the company has a big-time underwriter in Goldman Sachs. The company is also offering a small amount of shares (3 million), which always helps first day gains. And Turnstone has two magic buzzwords backing it -- broadband and DSL (digital subscriber line) technology. Shares are expected to price this week between $15 and $17.

What Turnstone does isn't glamorous -- it sells equipment that enables local exchange carriers to easily deploy and maintain DSL services. And there's a lot of competition from recent IPOs Tollgrade Communications (Nasdaq: TLGD) and Copper Mountain (Nasdaq: CMTN) to established players such as Lucent Technologies (NYSE: LU) and Nortel Networks (NYSE: NT).

But Tollgrade and Copper Mountain are trading near 52-week highs and investors are likely to cheer Turnstone.

As for the financial picture, Turnstone, which actually has reported a profit, looks solid. For the year ended Dec. 31, 1999, the company shipped more than 2,500 of its flagship system and reported $27.2 million in revenue with a slight loss of $183,000. In 1998, the company reported no revenue.

Turnstone also has some solid partners. The company has an original equipment manufacturer agreement with Lucent, which accounts for 15 percent of sales.

Like most young companies, the customer list is short. Rhythms NetConnections (Nasdaq: RTHM) accounted for 41 percent of Turnstone's sales for the year, followed by Network Access Solutions (Nasdaq: NASC) with 19 percent of sales and Covad Communications (Nasdaq: CVAD) with 11 percent.

There are risks with Turnstone, however. The company relies on only one product and sees more competition on the horizon. "Our future growth and a significant portion of our future revenue depend on the success of our CX100, which is the only volume product that we currently offer," the company said. Turnstone shipped the CX100 in the first quarter of 1999.

And as more players enter the market, Turnstone said it could see pricing pressure that could hurt margins. Meanwhile, the company said expenses are likely to rise as it boosts sales, marketing and infrastructure, develops new technology, expands its product lines and hires additional management.

But those risks will be overshadowed by rapid revenue growth and profits, yes profits. In its first full year of operation, it only took Turnstone two quarters to turn a profit. In the third quarter, Turnstone reported a profit of $988,000 on sales of $9 million. In the fourth quarter, Turnstone had a profit of $1.07 million on sales of $12.5 million.

Profit and IPOs are two words that usually don't go together. Now that'll turn some heads. TDAIN