3Com Says Profit Margin Crimped by U.S. Robotics Acquisition
Santa Clara, California, July 30 (Bloomberg) -- 3Com Corp.
said weak demand in Europe and the integration of recently
acquired U.S. Robotics Corp. will crimp profit margins in the
current quarter, according to analysts and investors who attended
a briefing at the Network Connections conference.
The Santa Clara, California-based maker of computer
networking equipment reportedly said that profit margins, and
sales, will pick up later in the year. 3Com barred the press from
its investor presentation.
The picture painted by 3Com of forces weighing on its profit
margins prompted some analysts to say afterward its stock price
could fall today.
``I'm not enamored with a lower margin business at a stock
price which is fully valued,'' said Martin Pyykkonen, an analyst
at Furman Selz.
3Com said its operating margin will be close to 16 percent
for its fiscal first quarter, which ends in August, Pyykkonen
said. Previously, some analysts were expecting a figure as high
as 20 percent.
Operating margin, defined as profit before interest, taxes
and depreciation as a percentage of revenue, is a key measure of
how profitable a company is after manufacturing costs and
overheads are taken into account.
Thinner Margins
A lower operating margin is due partly to the ``inherently''
lower margins of U.S. Robotics' business, which includes the
highly-competitive modem business, said Christine Chien,
networking analyst for Zurich Kemper, which owned 1.47 million
3Com shares at end-March.
U.S. Robotics' margins are declining from unusually high
levels earlier this year when the company was meeting pent-up
demand for its new 56 kilobit-per-second modems. ``Those margins
were not sustainable in the long run,'' Chien said.
Revenue and profit is also being hit by weak summer demand
in Europe, analysts said.
3Com stock may fall because investors expecting some
positive new information from the investor briefing were
disappointed, said Paul Krieger, networking analyst at Seligman &
Co., which owns 1.2 million 3Com shares. ``Some people bought the
stock ahead of the meeting, they didn't hear anything new, so now
they'll sell,'' Krieger said.
3Com shares rose 3 yesterday to 58. The investor
presentation began after the close of trading.
New Products in the Pipeline
Cowen & Co. analyst Chris Stix said that 3Com will begin to
show stronger revenue growth later in the fiscal year as new
products reach the market, including more powerful networking
switches and new adapter cards. These devices are used to link
personal computers into networks.
``But there's not a lot of upside this quarter, '' Stix
said. He's forecasting 47 cents for 3Com's per-share earnings in
the first quarter.
Investor Krieger said he's holding onto his $70 million
stake in the company.
``There's growing corporate demand for networked PCs,''
Krieger said. |
