Not sure if it's posted. From WSJ, analyst seems to like the announcement. It's a strong dose of 'short term pain, long term gain' that I talked about a while back (not to claim that I still have any credibility, I'm totally shot, finito, absolutely dead - at least for the next six months :-( !!)
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Dow Jones Newswires -- December 2, 1997
3Com Has More Inventory To Cut But Analysts Are Supportive
By Mark Boslet
PALO ALTO, Calif. (Dow Jones)--3Com Corp. (COMS) bit the bullet by
sharply cutting swollen inventories at distributors and allowing
second-quarter results to fall far short of Wall Street's expectations.
The Santa Clara, Calif., company said more inventory cuts would follow in
the third quarter, placing pressures on that period as well.
Making the inventory correction all the more difficult was a weak Southeast
Asian market and slow second-quarter sales of fast 56 kilobit-per-second
modems, the company said. The slowness in the modem market was the
result of the lack of a standard enabling 3Com's x2 modem and its
competitor, the K56flex from Rockwell International Corp. (ROK), to
interoperate.
3Com's after-market news became the latest in a string of announcements to
roil the networking industry. Early today Cabletron Systems Inc. (CS)
warned that its third quarter would be weak as the expected late-quarter
spurt of orders didn't materialize. Also, networking industry supplier Altera
Corp. (ALTR) said it experienced a weak November when customers
pushed out orders for its programmable chips.
Analysts have also warned of a slow November at Atmel Corp. (ATML),
also a supplier to the industry.
For the most part, Wall Street had been anticipating 3Com's inventory
problem, and many top analysts had sliced their estimates for the quarter in
recent weeks. Even still, the size of the shortfall surprised some who follow
the stock.
In a press release, 3Com said it expected to make a "slight profit" for the
quarter, which analysts projected after a conference call with the company
to be about 5 cents a share. The consensus estimate prior to Tuesday's
announcement was 44 cents a share.
Also in the release, 3Com said it expected revenue for the quarter to be
between $1.22 billion and $1.24 billion. Expectations on Wall Street were
for about $1.6 billion.
Many analysts trace the swollen inventories to 3Com's acquisition of
modem-maker U.S. Robotics Corp. Anticipating rapidly expanding sales of
its x2, U.S. Robotics earlier this year filled the distribution channel with
modems and x2 versions of its Total Control remote-access product.
Product shipments to distributors exceeded sales to consumers, and
inventories built to a level much greater than 3Com anticipated at the time of
the merger.
However, other analysts point out that U.S. Robotics shouldn't receive all
the blame. 3Com also used the second quarter to cut inventories of its own
network-access cards and system products, such as hubs and switches.
Analysts were largely complementary of the strong medicine 3Com
swallowed. The company made "absolutely the right decision," said
PaineWebber analyst Paul J. Weinstein. As a result, the second quarter
"should be the low point for earnings" with growth to follow.
"The thing that will add jitters" to tomorrow's trading is "this is not over," said
Eric Blachno, an analyst at Bear Stearns. But "I view the 3Com
announcement as good in the long term."
Experts estimated that 3Com reduced inventories during the second quarter
by $350 million to $440 million, or three to five weeks of sales. On a
conference call, the company said it had to reduce inventories in modems
and systems products by another $200 million.
More specifically, the company said that at the end of the second quarter it
had five weeks of network adapter card inventory and a long-term goal of
maintaining four to six weeks of inventory.
Modem inventories were 10 weeks and long term, the company wants
inventories of six to eight weeks. In the systems products business, including
the Total Control hub, inventories were 9 weeks. The company's goal is five
to seven weeks.
3Com hopes to reduce its inventories the targets by the end of the third
quarter. Aiding that effort, the company expects third quarter sales to
increase from the second quarter.
On its conference call, 3Com said Southeast Asian sales - which made up a
"low double-digit" percentage of 3Com's first-quarter business - were flat or
fell in the second quarter.
With the slowness in Asia and in the modem market, 3Com was unable to
fully adjust its inventories in one quarter, said NationsBanc Montgomery
Securities Inc. analyst Al V. Tobia Jr. Still, "I think the company is the
dominant vendor of low-end switches and modems."
-Mark Boslet; 415 496-1366 |
