"3Com Pres Sees 20% Rev Growth From FY02"
By RICK JURGENS
PALO ALTO, Calif. -- 3Com Inc. (COMS) should start posting revenue growth of 20% or more
and an operating margin of 12% to 14% during the fiscal year which begins June 2001, according to
Bruce Claflin, president and chief operating officer.
The Santa Clara, Calif., maker of computer network equipment has a lot that should interest
investors, he said.
"You have an established company (which) is profitable and has lots of cash and a great brand," he
said. "It's targeted at the highest-growth segments of the highest-growth technology industry, which is
networking."
3Com's short-term prospects aren't as rosy. Twelve analysts surveyed by First Call/Thomson
Financial expect 3Com to lose 44 cents a share for the fourth quarter ended this week.
"The expectations that we've created as a result of restructuring we see no reason to change," Claflin
said, referring to analysts' fourth-quarter estimate.
He declined to comment on 11 analysts' estimate that 3Com will earn 8 cents a share for its current
fiscal year, which just began.
Restructuring moved to the top of 3Com's agenda about a year ago. "The company in aggregate had
not been growing with the market (and) the returns for shareholders had not been good," Claflin said.
First, 3Com decided to spin off its Palm Computing Inc. (PALM) unit. On the surface, that seemed
like a step in the wrong direction, since Palm's handheld computers have been a big success and
captured 80% of the market. But 3Com executives concluded that two pure plays - 3Com in
network equipment and Palm in handheld computing - could be managed better and would be better
received by investors than the combined company, Claflin said.
On March 20, 3Com announced that it would leave several other businesses, including analog
desktop and personal computer modems and large-enterprise wide-area and local-area network
equipment.
That will whittle down 3Com's revenue base, making its growth-rate targets more attainable. The
company, which had $1.4 billion in revenue in the third quarter, expects to post revenue of $675
million to $750 million for the fourth quarter, and about the same in the current quarter, Claflin said.
3Com expects revenue growth in the second and third quarters of fiscal 2001 and profitable
operations in the third quarter, he said.
Investors are taking a wait-and-see attitude. 3Com's stock was recently traded up 2 1/2, or 6%, at
44 5/16, far below its 52-week high of 119 3/4, reached March 1, but up from a 52-week low of 22
5/8 on Aug. 5. Included in the current price are the roughly 1.5 shares of Palm that will be issued as a
dividend for each 3Com share on July 27. Since Palm's stock recently traded at 25, that means
investors now value the 3Com that will remain after the Palm spinoff is completed next month at
around 7.
Claflin said the restructured 3Com will be a network equipment company focused on three markets
where it expects strong growth: small and medium-sized businesses; consumers; and carriers - the
roughly 100 companies that run networks that carry calls or data for others.
3Com's efforts in those markets are being driven by its spending on research and development of
four technologies: Web-enabled networks, broadband cable and DSL modems, Internet protocol
telephony for local-area networks, and wireless access to networks. Products based on those
technologies currently account for only 10% of 3Com's revenue but receive 50% of its R&D
spending, Claflin said.
That focus will help the company break with its past, he said. "The old 3Com played more broadly in
more markets," he said. "We were in segments of the industry where our market share was single
digits and was not growing. Meanwhile, there were other segments of the industry where we had
strong positions but were underinvested because we had spent so much money in segments that
weren't attractive."
3Com's also hopes to develop new appliances that will emulate the Palm success, Claflin said.
"We're not going to try and shrink a (personal computer) and make it easier," he said. "We're going
to say, 'What are the kinds of things a consumer would want to get information on (and) how do they
want to get it...We're going to try to create a new category."
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