Xylan Corp., a Calabasas-based maker of computer switching technology, became the hottest initial public offering of the year Tuesday when its stock price more than doubled in its first day of trading, reflecting investors' voracious appetite for some high-tech issues.
Xylan's stock soared from the initial offering price of $26 a share to its close at $58.375 on the Nasdaq market. The company's shares were the biggest percentage gainer for the day in U.S. markets. A total of 5.47 million shares changed hands.
The 3-year-old company is riding high on the booming market for computer network switches, which are supplanting older, slower networking technologies. Xylan's local-area and asynchronous transfer mode, or ATM switches, allow computers to "talk" to each other whenever they need to, as opposed to waiting in line, as they must do with older technologies.
Demand for switching products is intense, as a wide range of concerns--from universities to hospitals to telecommunications companies--seek more efficient means of having their computers to communicate.
International Data Corp., a Framingham, Mass., research firm, estimates that the market for local-area network switches will grow from $1.25 billion in 1995 to $3.9 billion in 1999.
But some observers believe that Xylan's stock, like many red-hot IPOs before it, is destined to cool off. The company lost $9.44 million on $29.7 million in revenue in 1995, although it managed a $437,000 profit--its first ever--in the fourth quarter.
"They must have pulled in their horns, pinched their pennies and made the buffalos squeak" to make a profit in the fourth quarter, said George Shirk, a research analyst at the Institute for Econometric Research, a Deerfield Beach, Fla., firm that tracks IPOs.
Shirk recommended Xylan stock for "flipping"--in other words, to be bought and sold quickly. Although the company's products are well-regarded, he believes it's far too risky for a long-term investment. "What's hot today may not be the latest and greatest six to nine months from now."
But Douglas Hill, Xylan's vice president of marketing, said high-end networking products don't change that quickly because of the high cost of research and development. He noted that much bigger and more established competitors such as Cisco Systems and Bay Networks have developed state-of-the-art networking products but also still sell the older technology.
"We are building a very comprehensive line of products to do this stuff, very high-end switching products," Hill said. "We've managed to come into the market basically at a point where it's still early in terms of very rapid growth."
Xylan was founded in July, 1993, by Steve Kim, 46, now chief executive, and Yuri Pikover, 34, vice president of business development. The two were partners in another company, Fibermux, which they sold in 1993 for $54 million. They used the proceeds to start Xylan.
The company, which sold 3.2 million shares at $26 each for a total of $83.2 million, said it will use the proceeds for working capital and for research and development of networking technology.
One million more shares of Xylan stock were sold by Alcatel Data Networks, a Reston, Va., subsidiary of the French telecommunications giant. It is retaining about 2.9 million Xylan shares.
The lead underwriter for the stock offering was Morgan Stanley & Co.
The Xylan IPO surpassed other recent stock offerings, such as that of Data Processing Resources Corp., an Irvine supplier of high-tech temporary workers, whose stock jumped 51% in its first day of trading last Wednesday.