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Xylan may disappoint in Q2

Network gear maker Xylan's stock drops after the company announces that its second-quarter earnings may not be up to snuff.

Xylan (XYLN) today announced that revenue and earnings per share for the second quarter may be lower than expected due to smaller orders from IBM, one of its largest OEM customers.

The company's stock fell over 17 percent in trading today to close at 14-1/4, down 3 from yesterday's close.

Hitting the company's financial performance are fewer orders from a large OEM customer, a temporary shortage of ATM switch products, and fewer shipments of its new Ethernet and Fast Ethernet products.

Although an IBM spokeswoman said the company can not comment on relationships with its vendors, analysts have cited Big Blue as the main company dragging down Xylan's earnings with fewer orders.

Xylan said second-quarter earnings may be lower than last quarter, when its earnings were 13 cents per share. Wall Street analysts are expecting the company to report 14 cents a share, according to First Call.

However, the company expects revenue and earnings for the second quarter to surpass the levels reported in the same time last year, when it posted revenues of $28.2 million and earnings of 6 cents per share. Year-over-year comparisons are a standard way to measure company progress.

Several analysts downgraded their estimates on Xylan.

Morgan Stanley downgraded the stock to "outperform" from "strong buy." Deutsche Morgan Grenfell also downgraded the company to "hold" from "accumulate," and cut fiscal 1997 earnings estimate to 51 cents per share from 71 cents a share.

According to company CFO Dale Bartos, the company was hit with a shortage of ATM switch products during the quarter, which impacted revenue. He added that the shortage is now fixed.

As for Ethernet/Fast Ethernet products, there was demand during the quarter, but delays in shipping impacted revenue for the second quarter.

"Once we leave this quarter we will be shipping some products and this problem should be behind us," added Bartos.

The company said its new products, which incorporate the next generation of Ethernet/Fast Ethernet ASIC technology, will begin shipping this year, helping to bolster revenue in future quarters. ASIC technology will be incorporated in a new line of low-cost switches.

Analysts say that networking companies' abilities to incorporate this technology into their products is crucial to survival in the increasing competitive market place.

A recent Furman Selz report said a company's ability to develop, partner, or acquire advanced silicon/ASIC technology will be critical to competitive position.

"This is most evident in switching, where rapid price erosion is occurring due to more similar and less differentiated products than in other networking products. Silicon/ASIC technology is critical to a vendor's ability to drive or at least ride the downward price curve while sustaining profitability," the report said.

Similar problems are hitting other big network makers as well. The report also noted that Cabletron's lack of a ASIC product contributed to its announcement last week that it would miss expectations.

"Cabletron, like most networking companies, is not particularly a silicon or an ASIC developer, but clearly their results show the dependence which is increasing on silicon/ASIC technology to sustain competitiveness and meet product delivery requirements," said analysts Martin Pyykkonen and Eric Ross in the report.