Crashing to earth.

Xylan stock takes a tumble, but some say it still a good buy

Talk about your nosedives.

After its stock soared last spring and early summer, Xylan Corp., the Calabasas-based maker of computer networking switches, has come crashing back to earth in the last three months.

Xylan

Internally, Xylan has been dogged by being without a chief financial officer. The former CFO, Steve Cordial, left the company in mid-August, citing differing management styles.

"Investors never like to see a senior manager resign shortly after an offering," said Erik Suppiger, an associate analyst with securities brokerage DMG Technology Group in San Francisco.

"That resignation wasn't handled too well - it raised some questions about the management there," he added.

Xylan has yet to find a new CFO, though the company has stepped up its search and hopes to have a new person on board within the next six months, according to Xylan spokesman Douglas Hill.

Apart from the CFO issue, Xylan also faces questions concerning its product line.

The firm currently manufactures Local Area Network (LAN) switches - one of the two kinds of switch needed to create campus-wide computer networks, such as ones used at major corporations or universities. However, Xylan does not make the second kind of switch required for such networks, called a backbone switch.

In order to stay competitive, Xylan needs the flexibility to provide customers with both kinds of switches, making it a one-stop shop for those interested in setting up computer networks, according to Suppiger.

The lack of strong sales due to Xylan's incomplete technology package was a major factor in DMG's decision earlier this month to downgrade its fourth-quarter earnings forecast, to $41.5 million from $43.1 million. Xylan shares lost 14 percent of their value in the trading day after the announcement.

To make up for the technological shortfall, Xylan has developed its own backbone switch, and expects to make its first shipments sometime next month.

Hill said "we'll move back into a very strong position" after the roll-out.

Xylan's in-house affairs have been a major force behind the its slide, but two outside factors have also hurt.

The biggest is that the number of shares publicly traded has tripled from about 5 million at the time of the March IPO to about 15 million at present, according to Hill.

The majority of new shares didn't begin flooding the market until after Sept. 9. It was on that day when venture capitalists and their backers, who had invested in Xylan from its start-up stages, began selling their shares on the open market.

In fact, an early September sell-off of venture capital shares probably touched off Xylan's current slide on Wall Street.

Suppiger said that the sell-off of so many venture capital-held shares should not have come as a surprise, because such selling is standard and the volume of venture capital shares was spelled out in the company's prospectus.

Still, he said "This is the first company where I've seen this kind of impact."

The addition of so many new shares in September led several market watchers to speculate that short traders were betting heavily that Xylan's stock would fall from the highs it attained in spring and summer months this year.

"Shorts (i.e. short traders) have been a major driver in sending this thing down. They've been relentless about sending out negative rumors," he said.

Despite all the negative movement. Xylan's share price has sunk so low that the company, given its moves to address internal problems and no prospects for the introduction of more publicly-traded shares, may be a good buy at current prices, according to Suppiger.

"The company is still growing very rapidly and still has good fundamentals," he said. "We believe the current price offers investors a (good) opportunity."