PALO ALTO, Calif., Dec 18 (Reuters) - 3Com Corp executives
said the company expects to see short-term pressure on its
gross margins as it moves to eliminate inflated inventory
levels in its distribution channels.
The executives, speaking to analysts in a teleconference
call following release of its second fiscal quarter results,
said Asia was unlikely to return to its historic above-average
industry performance any time soon.
But on the bright side, an expected imminent resolution of
standards for 56-kilobits per second computer modems could help
boost industry growth prospects for 1998, they said.
3Com sales of modems during its second quarter were dented
by a split in the networking industry over standards for the
new higher speed 56-kilobit modems.
3Com has backed one type of high speed modem, the x2
standard promoted by US Robotics, which it acquired earlier
this year, while Rockwell International (NYSE:ROK) has been
promoting a separate standard.
Because the two modem standards do not work together,
customers have been reluctant to buy high speed modems until
the split is mended.
Eric Benhamou, chairman and chief executive of 3Com, said a
recent technical group "breakthrough" compromise in Orlando,
Fla. on the standard could lead to "above 90 percent" chance of
resolving the issue in January.
The executive said the time to migrate to the emerging
standard should be available "within weeks" and that 3Com
expects it should be able to ship new modems using the standard
in the first calendar quarter of 1998.
"These recent developments are likely to benefit the growth
prospects of the modem industry for 1998," he said.
3Com believes its products alone allow for software
upgradability to the new standard for both the modems and the
equipment used by service providers, he said.
Benhamou said another factor dampening fiscal second
quarter results was the economic turmoil in Asia, adding that
"it's unlikely that Asia will return to its above average
industry growth rates any time soon."
Early this month, 3Com set out to slash inventories of
unsold networking products sitting with its distributors. The
company slashed shipments in the second quarter and took a hit
to sales to allow the distributors to clear their shelves.
Benhamou said this remains the first priority, while new
networking products are among its top three priorites, along
with its objective to "improve market share position... while
at the same time keeping a flat level of operating expenses."
Chris Paisley, chief financial officer, said gross margins
declined in the second quarter to 46.6 percent, down 1.4
percent from the previous quarter, primarily due lower sales
but also due to aggressive workgroup products pricing.
Paisley said efforts to reduce inventory further "may well
put some short-term pressure on gross margins."
He also said days of sales outstanding rose to 68 days from
64 days sequentially. Absolute receiveables fell by more than
$200 million while sales dropped by nearly $400 million.
Inventory levels grew by a bit more than $200 million.
Market growth forecast by independent parties for 1998 is
expected to be better than 1997, "perhaps by 5 to 6 percent,
but certainly below the levels of growth enjoyed during the
early to mid 1990s," Paisley said.
"Pricing and average selling prices declines remains a
factor and we expect them to continue to be so," he said. "On
average prices have dropped at a faster pace in 1997 than in
previous years. There's insufficient evidence to conclude that
prices will stabilize in FY98." Service provider business
has been "very lumpy," Benhamou said, adding "the lumpiness has
been exacerbated by the fact there has been massive
consolidation in this area."
He said 3Com expects a strong cycle of upgrades and added
access ports during 1998, but business will come in larger and
larger chunks due to the size of consolidated providers.
Copyright 1997, Reuters News Service |
