IBM brings windfall to Xylan.

CALABASAS - Xylan Corp. officials said last week they expect a huge boost in revenues from the company's new alliance with powerhouse IBM.

The immediate impact of the agreement is that Big Blue will buy $30 million of Xylan's computer network switching systems over the next eight months.

But even more promising for Xylan are the product development aspects of the agreement, which will likely bring the company "significant" additional revenues beyond the $30 million, said John Mazzaferro, Xylan's director of marketing.

For the first six months of the year, Xylan, which makes computer network switching systems, generated $51 million in revenues.

In the two days following initial published reports about the deal, Xylan's stock went up about 15 percent, as the rest of Nasdaq fell. Xylan's stock closed at $40 a share on July 24, up $3.75 from the previous day and up $5.25 from when the deal first became publicly known.

Under the five-year agreement, Xylan and IBM will co-develop computer network switching systems. Big Blue will then buy the systems for the company's own use or for resale.

To get the project off the ground and provide seed money for the alliance, IBM agreed to buy $30 million worth of existing Xylan switching systems over the next eight months, said Mazzaferro.

In return, IBM was granted the right to buy an equity stake in Xylan of up to 5 percent.

The switching systems will be developed by two teams of employees from both companies. As many as 30 Xylan employees will be relocated to Raleigh, N.C., to work at an IBM research facility there, and 30 IBM engineers and technicians will work out of the Xylan headquarters in Calabasas.

In addition to selling the jointly developed switching systems to IBM, Xylan will retain the rights to sell the switching systems to other customers, said Mazzaferro. "The switching market is a several-billion-dollar-a-year market that is growing rapidly. We don't anticipate any conflict in the distribution systems we have and those of IBM," he said.

Network switching systems are a fast-growing part of the computer hardware industry. The function of such systems is to route data, graphics and video between big computer networks, as well as feed the information to personal computers.

Mazzaferro said IBM ran a year-long competition among six switching-system makers across the country before deciding on Xylan. "They took everybody's switching products and tested them and compared them," he said.

Xylan, a 3-year-old business, this spring issued one of the biggest initial public offerings ever undertaken by a Los Angeles County-based company.

Xylan's stock went public at $23 a share in March and peaked at $76 a share in May.

For the second quarter ended June 30, Xylan reported revenues of $28.2 million and pretax income of $4.7 million, or 6 cents a share. Comparative figures were unavailable because Xylan was not a public company in the year-earlier period.