Elroy, I began closely following USR right around the time of the first 56K announcement. At the time, the big $$ question was "will people upgrade to 56K or not?" At the time, I believed people would, for the most part, upgrade to new modems to take advantage of the speed increase. After all, isn't everyone tired of the World-Wide-Wait?
After suffering through an interminable wait for USR to get 56K modems out the door, they finally did it, I think in late March or so. You probably know all this, but I'm just explaining my position. All this time I've been hugely bullish on USR, then COMS after the take-under (oops I mean merger).
Re: >They said after 1Q that lowering inventory levels was a goal in 2Q, but they were unsure of the current level, especially internationally, because controls required to accurately determine channel inventories were not in place.
Craig has listed out the history of COMS earnings in the post linked below. Suffice to say the USR's earnings were very similar in periods prior to the merger: Somehow they always managed to just meet the estimates, even though sometimes (like Qtr ended Sept 96) the estimates had been revised downwards for some reason or other. Below in bold you see where COMS did indeed feel the channel was stuffed, but the 10Q footnote many months later was the only reference to it. So I can say the public was notified when the 10Q was submitted, and I can blame myself for not reading and heeding the footnotes. I don't really blame them for not wanting to make a big deal out of it, but obviously the insiders felt it was a big deal, as the meantime were bailing out, "making hay while the sun shines." I'm not saying they sold all their shares, or even close, but it remains that IMO they were dumping, while they decided what do to about excessive inventory/slow selling modems. I have no idea whether or not COMS insiders broke any laws, but I do feel that Eric B. misled investors at the Sept CC by saying "the merger is on track to our expectations", when things clearly were not.
Craig's post:
techstocks.com
"They chose to mention in a footnote that USRX had only $15.2 million in sales for 2 months and then hid some of the cancelled sales in the charge (of course they didn't specify how much). They elected to take a hit to retained earnings to reconcile the balance sheet. Obviously COMS monkeyed with the books to come out with 48 cents a share. It is no coincidence that they pegged the number right on. They took as big as a charge as they could while still "matching" estimates. They stated in their 10Q "Revenues for the two-month period were below historical revenue trends due primarily to the desire to reduce levels of channel inventory and conform sales return and allowance reserve philosiphies with that of the heritage of the 3Com organization."
It is obvious that COMS used part of the hefty charge they took to reduce channel inventories last Q. THAT STILL WASN'T ENOUGH. They had to warn about a "minimal profit" this Q to reduce the channel some more! To make matters worse they said they are going to need another couple hundred million next quarter to do it again!"
--------- end excerpt from Craig's post ------------
Re >You've gotta realize that it's pretty difficult for a company's management to change estimate guidance in the middle of the quarter. It is safest for the company to not change guidance, and then pre-announce good/bad news after the quarter ends. That way, all investors get the information at the same time.
Often they don't know whether they will get huge orders in the last few weeks which will allow them to make the quarter or not. Given that there is a chance to make the quarter, I'd think most company's do not preannounce, but indicate something like making the quarter could be difficult. 3Com did this.
True, COMS told some analysts that the channel inventories were "a little higher than we would like them to be". I agree with your points above, that oftentimes in high tech the quarter is made or not in the last few weeks of the quarter. In fact I've read that some vendors wait purposely, in order to increase the pressure for a discount.
The bottom line seems to be: modems are not selling very well. Is it because of the non-standard? Some people think so. I'm not so sure. It could be that the people who want the faster speeds have already bought. After all, the upgrade to the new standard is free, so why wait? It is a hassle to have to upgrade a modem, so I'm sure some people are waiting, but how many? All we know now that this inventory issue has been blown wide open, is that modem sales are sluggish. Assuming they will pickup after the much vaunted standard is in place is just that: an assumption.
I'm hugely disappointed with the whole 56K thing, as I though the new modems would sell better. Obviously 3Com is probably hugely disappointed also. But given what we know, and given the fact that for at least through the qtr ending Feb 98 earnings are going to be below expectations, I think the stock is priced very optimistically, for no good reason, other than hope. People are free to hope, but for me, I'm past that, and content to deal with reality.
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