One man's trash is another man's treasure. From Net World...
3Com stock slides on move away from
NICs and modems
By JIM DUFFY
Network World Fusion, 06/25/99
On the heels of a better than
expected fourth quarter, shares
of 3Com dropped almost 14% on Wednesday after
the company said it would attempt to transition
much of its business away from low-margin,
price-sensitive network interface cards (NIC) and
modems.
During a conference call with Wall Street analysts
this week, 3Com said it would begin to cut about
20% of its revenue mix away from NICs and modems
in fiscal 2000. NICs and modems have been 3Com
strongholds, accounting for 45% of the company
fiscal 1999 fourth-quarter revenue of $1.4 billion.
However, 3Com wants to rely less on these
products for future growth. The company instead
hopes to derive 75% of its revenue from other
areas - switches, routers, remote access
concentrators and hand held devices such as its
PalmPilot - while drawing 25% of sales from NICs
and modems.
"As we enter fiscal 2000, rapid growth of emerging
new businesses such as handheld computers, IP
telephony and broadband access, coupled with
success of our systems solutions, are transforming
the growth profile of the company," Eric Benhamou,
3Com chairman and CEO, said in a statement.
3Com's fourth-quarter earnings came in 1 cent per
share better than analysts expected. The company
recorded net income of $88 million, or 24 cents per
share, which is 38% better than fourth-quarter 1998
earnings of $63.6 million, or 17 cents per share.
Sales were up only 3%, though, from the fourth
quarter of fiscal 1998 - $1.42 billion, compared to
$1.38 billion for the year ago period. Analysts say
revenue growth will be even tougher in the next four
or five quarters as 3Com relies less on sales of
NICs and modems.
"My concern is that technology transitions are
difficult enough without being forced into it," says
David Takata, an analyst at Gruntal & Co. in
Beverly Hills, Calif.
"This is really being forced upon them by a
changing market - the sub-$1,000 PC, extreme
price pressures and slowing growth in some of
those business units," Takata says. "The company
has a fairly aggressive plan, and I think it's going to
be pretty difficult to manage their
expense-to-revenue ratios during that period of
time."
Gruntal has downgraded its recommendation on
3Com from "strong buy" to "hold."
Similarly, Warburg Dillon Read (WDR) in New York
is reiterating its "hold" recommendation on 3Com
despite the company's 38% increase in net income
from the fourth quarter of a year ago, and a 3%
increase in revenue.
"We believe that the company will face several
tough quarters ahead as sales in the client access
area continue to be a struggle due to the declining
revenue outlook in the NIC and modem
businesses," WDR said in a research letter. "While
the PalmPilot has a been a terrific product for the
company we believe that 3Com is in desperate
need of some other 'hot' products where growth can
be sustained for several quarters that can help
offset the expected decline in the client access
area."
Some of those 'hot' product areas 3Com is focusing
on include voice over IP, broadband access - cable
modems, xDSL and wireless - LAN telephony and
home networking. However, "we do not have
enough confidence that any of the product areas
can be substantial and consistent contributors to
growth over the next several quarters," WDR says.
For fiscal year 1999, 3Com posted sales of $5.8
billion compared to $5.4 billion in fiscal 1998. Net
income was $403.9 million, or $1.09 per share,
compared to $30.2 million, or 8 cents per share in
fiscal 1998. |
