Xylan stands on its own

What's a niche data networking company to do?

In the face of multibillion mergers, pie-in-the-sky promises of next-generation technology for a converged voice and data world, and increased commoditization within some segments of the network switching device market, Calabasas, California-based Xylan rolls on, treading lightly between titans such as Cisco Systems and emerging data threats such as Lucent Technologies.

After beating street estimates for its second quarter and tripling income from the same period the previous year, Xylan--which expects to amass $350 million in revenue by the end of its fiscal 1998--will make several key strategic moves over the next few months that could determine whether the small networking player can remain independent or will succumb to the acquisition appetites of larger firms in the networking industry.

Xylan was a pioneer in the switching market when it first delivered product to market in January of 1995, coming out with switching technology that offered support for a wide array of network types within a single switching chassis.

It built a fast-growing business through a combination of typical direct and reseller sales channels and added a strong technology licensing, or OEM, component. Third parties selling Xylan-based equipment include IBM, Alcatel Alsthom, and most recently Northern Telecom.

But in the rapidly evolving world of data networking, Xylan remains a small player, especially amid continued consolidation best exemplified by the recent megamerger between Nortel and Bay Networks. The coming months may go a long way toward proving whether Xylan--and other potential small networking firms--can show continued staying power.

On the technology front, the fruits of Xylan's deal with IBM will continue this quarter with new 16- and 32-port cards supporting token ring connections, a local area alternative that remains a dominant technology in Big Blue-based networks.

Those cards will fit into upcoming X-Frame devices, due to ship in volume by September, that will support gigabit-speed Ethernet, the latest version of the classic technology for connecting PCs and server computers together on a network. The new X-Frame equipment will support 32 Gigabit Ethernet ports as well as Fast Ethernet and asynchronous transfer mode uplinks.

These key strategic moves will be followed by updates to the low-end OmniStack line called the 6000, scheduled to be released in the first quarter of next year, that can be stacked on top of each other and will support both 10 and 100 megabits per second Ethernet speeds.

That will be followed by Xylan's play for back-end service provider dollars with the planned introduction of the OmniCore switching device in the second quarter of next year that will speed packets at rates of up to 160 gigabits per second. The next-generation switch will support both packet and cell-based networks.

As a report from BancAmerica Robertson Stephens analyst Paul Johnson points out: "Although Xylan has emerged as a serious vendor within the market for advanced switching equipment, it is a tiny company when compared with the giants in the industry--Cisco, Bay Networks, 3Com, and Cabletron Systems. As such, one of the primary challenges facing the company is the need to reach critical mass rapidly in terms of distribution, service, and support."

All this adds up to a key moment in the company's history, admits company executives, who remain undaunted by the size of their rivals. "There's this mythology going around right now that only the large will survive," said Douglas Hill, vice president of marketing for Xylan. "It doesn't fit with historical reality and it doesn't fit with common sense."

Yet of the numerous players that became public in the early and mid-1990's, only ATM expert Fore Systems stands out as a significant independent player in the networking sector. Most have been gobbled up by larger entities.

But Xylan is playing in a large market: market researcher International Data Corporation pegged the high-end modular switching equipment at $3.8 billion for 1997. Cisco leads the field with 44 percent of that revenue, with Cabletron Systems a distant second at 20 percent of the market, and 3Com in third place with a 9 percent share.

Xylan is the fifth largest player in this niche--following Bay Networks--with 5 percent of the market for 1997.

"Overall, I think the company has surprised people," said Esmerelda Silva, analyst with IDC.

But others remain skeptical of Xylan's continued viability. "They've maintained their position as a niche player, but companies like Xylan are going to be swimming upstream," said Jeremy Duke, analyst with industry researcher Cahners In-Stat Group. "They're going to have a real tough time going it alone."

Potential suitors could include telecom-oriented firms such as Alcatel or Ericsson who increasingly need data-based equipment to augment voice technologies.

Xylan executives said they would have a duty to look at any potential merger offer, but they don't fear remaining a David in an industry of Goliaths. "We can do really well as an independent company but we would always look at [a merger] possibility," Hill said.

With promises to the investment community of continued double digit quarterly revenue growth, Xylan's maverick streak may just pay off.