Templates in XenServer are either the included pre-configured empty virtual machines which require an OS install (a shell with appropriate settings for the guest OS) or you can convert an installed (and e.g. sysprep-ed) vm into a custom template.
There is no integrated customization of the guest available, i.e. you need to sysprep manually.
You can NOT convert a template back into a vm for easy updates. You deploy a vm from template using a full copy or a fast clone using copy on write.