FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Shiva Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SHVA)") else Response.Write("(NASDAQ: SHVA)") end if %>
28 Crosby Drive
Bedford, MA 01730
(617) 270-8300
http://www.shiva.com

UNION CITY, Ca., October 24, 1996/FOOLWIRE/ --- Shiva Corporation announced their third quarter 1996 results late last week. Revenues for the quarter were $57.1 million, up 90% from the $30 million reported last year in Q3. When normalized for the impact of the sale of the old Spider Networks Division to a UK reseller in Q2, Q3 revenue was actually 18% greater than revenue in Q2. Earnings per share is $0.19 per share.

Book to bill is greater than 1.0. Sales of remote access products this quarter were $52.7 million, 21% greater than last quarter and 144% greater than remote access product sales in the same quarter a year ago. Remote access product sales were 92% of total revenue compared to 85% last quarter. Their other non-remote access product business was 5% of revenue and service and other revenue contributed 3% to the total revenue.

On a channel basis, their OEM channel continues to have high growth and made up 28% of revenues, driven principally by the LanRover Access Switch sales. Nortel and IBM continue to be the largest OEM customers. Their premium VAR channel had another good quarter of growth with 37% of total revenue. Two-tier distribution accounted for 25% of revenue in the quarter. Service and other revenue came in at 3% of total revenue, somewhat reduced due to the sale of the Spider Networks Division mentioned earlier. The remaining 7% is split between direct, education channel, client revenues and licenses.

They also saw, in the third quarter, an upturn in their traditional LanRover business from the transition that occurred in Q2 with the introduction of the LanRover Access Switch. Traditional LanRover products grew from Q2 levels with particular strength in non-OEM channels which grew 19% quarter over quarter. They also had a positive reception to their newly introduced AccessPort client ISDN router which began shipping toward the end of the quarter.

International revenue was 30% of total revenue from 36% in Q2. International sales were approximately $3 million lower in the third quarter due to the sale of the Spider Networks division. Additionally, this decline is somewhat exaggerated because the OEM channel had significant growth and all OEM revenue is counted as domestic.

Their gross profit remains stable in Q3 at 58.4% sustaining the Q2 gross margin percentage. Operating expenses improved again this quarter as a percentage of sales. Operating expenses declined to 42.6% from 43.2% in Q2. They are in their model range from 41-44%. Their investment in R&D remained relatively stable at 10.5% from 10.6% in Q2, approaching their target range for R&D spending of 9-10%. Software capitalization this quarter was $252,000 with an amortization of $239,000, essentially a negligible impact on the P&L. Their headcount grew by 37 people in the quarter to 666.

Operating income was $9 million or 15.8% of revenue compared to $7.8 million or 15.2% of revenue last quarter. Net income was $6 million compared to pro forma net income of $7 million last quarter. Q2 benefitted from a one-time tax rate of 25%. If the normalized tax rate of 38% had been applied to the Q2 operating result, their pro forma Q2 net income is $5.4 million or $0.17 per share. Total non-operating income in Q3 was $751,000. Interest income earned reflects their movement to tax exempt securities in Q2. Going forward, they expect their tax rate to approximate 38% for the balance of the year.

On the operating model, they have continued to improve their operating results within the model. They have a further update which reflects continued improvement on the operating profit line as a result of continuing efficiencies in SG&A. Their current model has a gross margin of 57-59%. In this new revised model they maintain that gross margin percentage. R&D also remains constant in this model. The SG&A line they have a change. The current model was 32-34%. Their new model is 31-33%. And on the operating profit line as well ,they have a change from the current 14-16% to 15-17%.

On the balance sheet, days sales outstanding increased to 78 days from 64 days due to higher 3rd-month sales this quarter than last quarter. The shipment pattern was the result of several factors including the Summer effect in Europe coupled with the buying cycle of the VARs and OEM partners who had received their first volume shipments in access switch products in May of last quarter. Given the longer selling cycle of this product, the reorder point occurred in the third month of this quarter. In addition, they also began shipping two products in September, the AccessPort and the Token Ring version of the Access Switch.

Cash balances were $95 million at the end of the quarter, a reduction from Q2 due to cash used by operations of $2.5 million and capital expenditures of $3.1 million. Depreciation was $1.9 million. Inventory turns were 6.7 times from 7.2 times in Q2. Stockholders' equity is now $149 million.

Generally they are very pleased with the business direction. LanRover Access Switch progress is good and progress in the corporate market is excellent. The LanRover stackable line had a very meaningful rebound in the quarter and the main products they feature, LanRover Access Switch, LanRover Line, and their new client router AccessPort all had a very nice quarter.

The Access Switch continued to enjoy good sales growth in all of their accounts. It won Data Communications' "Tester's Choice Award" for best high-end remote networking product for all-around performance, manageability, and security. It is a very difficult thing to test these servers, it is very expensive and the magazine chose to only evaluate against 23 calls and Shiva's product was able to get a distinguished performance advantage in 23 calls. It was Shiva's wish that the test be run against 72 calls or some higher number because they believe their performance advantage in that test would have been outstanding. To their knowledge, this is one of the first serious lab tests of high-end central site access switches and Shiva was identified as the winner with "extensive management tools and the highest aggregate throughput" over the Ascend Max and other competitive products including the USR Total Control Hub. Shiva has reason to believe that the Cisco 5200 was intended to be included in this evaluation but was not ready for comparison purposes. Given the global respect enjoyed by this particular magazine and its test lab, Shiva feels that this is a major achievement for their first release of the Access Switch.

They continued in the quarter to successfully sell principally in corporate markets. Some companies that purchased in the quarter include Dial Corp, 3M, Houston Power and Light, JC Penney, Home Savings, Walgreens, and two very well-known mutual fund companies. They also are seeing good standardizations in the corporate market including Deluxe Checks, Amgen (a direct win over the Cisco 5200), and Philip Morris.

Shiva's internal sales force automation system indicates that worldwide, more than 150 customers have purchased the Access Switch. 250 additional corporations are in active evaluation and many more are in the pipeline. During the quarter they continued to sell to regional ISPs either through evaluation or production units. These initial sales typically lead to regular and recurring purchases. It is Shiva's belief that they are now one of the best contenders in this ISP market against Ascend and Livingston. They have a pipeline of 55 regional ISPs for the fourth quarter in North America alone. In the last 60 days they have moved about 35 Access Switches into European ISPs and carriers in their direct channel as well.

They had a transitional quarter in Q2 for the LanRover product as the Access Switch entered the business and became a popular product among their OEM partners and the high end of the VAR market who are targeting the same kind of high-end corporate accounts who have a natural affinity with the Access Switch. They took some action and saw a meaningful increase in sales of these products in Q3, especially through their non-OEM channels where they enjoyed 19% growth quarter over quarter. Their focus on these products, LanRover and LanRover Plus, includes various sales programs and the Shiva Advantage Partner Program which was introduced in Q3. This program has been very exciting for them. They attracted 600 resellers into the Advantage program which is being conducted in conjunction with Ingram and Tech Data and which offers to focused resellers things such as access to Shiva leads. Of those 600 resellers, 300 are actually new resellers to Shiva. And, they are backing up this action with good lead flow which supports the market research data from IDC and others that shows that this part of the marketplace will continue to grow very nicely. They think their competitive position in this stackable segment is very strong. They see the LanRover being deployed in two major ways. One is to the edges of the network. As enterprises install LanRover Access which is in the central site, they are literally boxing up their LanRovers and sending them out to the secondary markets. The second place they are seeing LanRover penetrate very successfully is in small to medium size companies and educational institutions.

The AccessPort is a small office/home office client router -- a competitor to products like the Combinet box from Cisco and the Pipeline from Ascend. Shiva shipped the product in September. It is the first in a family of routers targeted to this market and it has excellent performance characteristics when connected to the Access Switch but also interoperates very well with other central site boxes such as the Ascend Max. The product had a very warm reception in the marketplace both in the corporate market and a lot of interest from service provider partners as well.

The Airsoft acquisition continues to be integrated and to progress according to Shiva's expectations. Development efforts to integrate the Powerburst software into their client/server are going well.

There has been a lot of discussion in the market around 56kbps modems. Shiva, like everyone else, announced that they will support the 56k technology. Both Rockwell and USR formally announced their plans in this area. Rockwell has been Shiva's long-time supplier of modem technology. Shiva has been tracking the USR claims and, based upon what they know about both offerings, they are very comfortable that the Rockwell offering will be competitive in terms of functionality, features, availability, and price and will have some significant advantages in Shiva's opinion. First, it will benefit from the specific nature of the Rockwell DSP which is to be focused completely on the communications application as opposed to the more generic nature of the PI-DSP. Second, Shiva believes there are benefits that accrue from the fact that Rockwell enjoys much larger market share in terms of the overall world of modems deployed. This technology must go through a standards process to really have impact in the market. That has not happened yet.

PARTNERSHIPS. Northern Telecom's Internet Thruway has a lot of visibility and the major US trial is going very well. They have two of their major ISP customers up online and expansion is being aggressively planned for now into four additional major markets. Contract negotiation is well-advanced. They believe that interest in the Internet Thruway will yield additional trial activity in Q4. There has been a lot of talk in the market by competitors despite unannounced or unshipped products. Shiva wants to remind people that they do have an actual lead here. They have a shipping product and there is recognition growing in the market. There is one shipping mega-POP system today that offers in one rack 600 lines with increasing densities to come and the opportunity to switch using Sonnet, FDDI, ATM, or frame relay in the same rack. They think that is starting to get the notice it deserves.

They are in the final stages of lab evaluation in one of the largest US ISPs as a second-source supplier. This should yield business in Q4 and in 1997.

Nortel has announced that GST, a Hawaiian ISP, was planning to expand widely into California, has awarded Nortel a $5.1 million Rapport contract for deployment in up to 52 POPs. TPSA European PTT has installed more than 20 units. A major Japanese service provider has provided Shiva with an initial order with additional units planned in 1996 and in 1997. They have had some success in the corporate market. Georgia Pacific is one customer who signed on to Rapport and they have reached the second milestone with Wiltel who has signed on as a major enterprise channel with a 15 city rollout and 200-300 sales people being trained on the resale of the Rapport product line including not only the high end Access Switch products, but also the lower end Rapport 8s.

IBM has conducted a 32-city remote access road show last quarter across the US and customers, resellers, IBM sales and SE personnel showcased the A235-I40 model, which is Shiva's access switch based system. A total of over 300 sales reps and partners were trained and it yielded great interest on the road and qualified leads in major IBM accounts. Shiva completed the Token Ring version of the Access Switch which represents the only Token Ring access concentrator product.

Motorola has integrated Shiva's remote access technology into their 925 hub. This solution has been selling nicely. Shiva has launched an enterprise partner program for systems integrators with global or multinational service coverage capability.

Looking forward, the company is comfortable with current earnings estimates. Shiva will make continued investment in technical and customer contact personnel, technology, and systems.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.