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3Com: 3Q Due To Falling Prices, Rising Competition
By MARK BOSLET
Dow Jones News Services
PALO ALTO, Calif. -- 3Com Corp. (COMS) reported what it said were disappointing third-quarter results as competition in its markets mounted and prices fell for adapter cards, low-end hubs and low-end switches.
The Santa Clara, Calif., networking equipment vendor also said new speedier technologies for transporting computer traffic caused customers to spend additional time assessing how to expand their networkings, creating a pause in buying.
However, the company stood up reasonably well to a double-barrel assault from Intel Corp. (INTC), which slashed prices on fast Ethernet adapter cards, analysts said. 3Com cut its own prices on these 10/100 megabit per second cards, which enable computers to communicate with networks, and saw unit volume increase 64% from the second quarter. While the average selling price of the 10/100 products fell 21%, revenue from the product category slipped only 2% sequentially and 3Com said it believed it gained marketshare.
Meanwhile, the company's networking systems business fell 6% from the second quarter as pricing pressure and competition from Cisco Systems Inc. (CSCO), Bay Networks Inc. (BAY) and Cabletron Systems Inc. (CS) intensified.
Prices for low-end hubs fell 8% while prices for low-end switches declined 9%. Both hubs and switches are devices used to send traffic across a network.
The results met a quarterly forecast the company released in February and because they showed no further worsening of the business, 3Com stock rose solidly in after-hours trading. The shares moved ahead 1 3/8 to 35.
Still, the quarterly numbers were the first in several years not to show a sequential revenue increase and for that reason reinforced concerns of a broad slowdown in an industry used to rampant growth.
Some analysts, however, said they were uplifted by 3Com's positive long-term business outlook. ''Even though it looks like it will take another quarter or two to return to their target growth model, the outlook was pretty positive,'' said Noel P. Lindsay, an analyst at Deutsche Morgan Grenfell.
In particular, 3Com Chief Executive Eric A. Benhamou on a conference call with analysts and investors described December sales as weak, but said January was better and February better still. More so, the company's book-to-bill ratio for the quarter was 1, indicating a strong pace of orders. A book-to-bill of 1 means that for every product shipped an order for another comes in.
Fundamentally the industry remains strong, Benhamou said, with enough demand to fuel an annual growth rate of 30% to 50% for the next few years. He went on to say the company has the potential to return to the middle of the growth range, but not in the fourth quarter.
For its third quarter, 3Com reported sales of $786.8 million, up 30% from $606 million a year ago. Sales in the second quarter were $820.3 million.
Third-quarter earnings were 47 cents a share, up from 42 cents a year ago and ahead of the First Call consensus estimate of 46 cents.
U.S. sales in the third quarter were down 11% from the second quarter and made up 44% of revenue while international sales were up 2%, also from the second quarter, and accounted for 56% of revenue.
Because of the adapter card price cuts, gross margins slipped 2 percentage points from the second quarter to 54.5%. 3Com said gross margins in the fourth quarter may continue to show pressure, falling to the low end of the company's 53% to 55% target range. The lower adapter-card prices were cited.
On a brighter note, 3Com said high-end networking products sold well, particularly ATM, or asynchronous transfer mode, products. The company also doesn't expect similar price cuts in its fourth quarter.
3Com also vowed to take steps to ''stop Intel cold in its tracks.''
Yet it admitted that customers continued to debate product decisions, particularly those involving the use of switches versus routers and hubs, and ATM and Gigabit Ethernet products versus FDDI. 3Com plans to introduce a gigabit Ethernet product in May. |
