Motley Fool report :
3Com 2Q Earnings
December 18, 1997
by Randy Befumo (TMFTemplr)
ALEXANDRIA, VA (December 18, 1997) --
In a quarter that just served to prove the
company is having the worst fiscal year of its
existence, Santa Clara, California-based 3Com
(Nasdaq: COMS) reported that it only earned
four cents per share. 3Com hit the low end of the
$1.22 to $1.24 billion revenue range revealed in
its December 2nd press release and delivered on
the "slight" profit that it had promised.
3Com Chief Executive Eric Benhamou continued
to express concern over Asian sales, pointing out
that 25% of all personal computers are sold in
Asia. As network interchange cards (NICs) and
modems are very dependent on overall PC sales,
this creates uncertainty about demand for two of
3Com's main product lines which account for
about 49% of total sales.
Enterprise products like switches, routers and remote access devices
accounted for 51% of 3Com sales in the second quarter. Revenue from
enterprise products relative to client access products (NICs and modems)
flip-flopped from the first to second quarter. In the first quarter, 55% of
revenues came from client access devices, or $886.8 million This quarter
only $598.8 million came from client access devices, a 32.5% sequential
decline.
Higher-margin enterprise products delivered $621.5 million in revenues
compared to $714 million last quarter. This was a 13% sequential decline
but was not off all that much from year ago levels, indicating that this
business was quite a bit stronger for 3Com than its much-maligned
client-access business. Compared to what some of the large networking
systems vendors are seeing, a 13% sequential decline is a lot less serious
than many expected.
Asia overall accounted for 9% of sales in the second fiscal quarter, down
from 10% in the prior quarter. One percent of overall sales is a pretty
substantial figure, but the real problem 3Com faced this quarter was the
fact that they did not make a sale in key products lines from two to ten
weeks in order to clear out an inventory build-up that had been going on
for months. The East Asian economic turmoil is very real, but 3Com's
current turmoil quite obviously goes well beyond this region of the world if
only 10% of its business is occurring there. Clearly the sales channel in the
U.S. for modems and possibly NICs was over-stuffed, confirming months
of short-selling trash talk that U.S. Robotics had too much product in the
channel.
Ultimately, these results simply confirm that it is difficult to draw any
conclusions about what is occuring in the networking industry. Some
believe that the damage seen at Cabletron (reporting its second quarterly
disappointment in the last two quarters), Bay Networks (with conflicting
reports about modem demand) and Cisco Systems (Nasdaq: CSCO)
(with increased levels of finished goods in its inventory) is all the result of a
general slowdown in the industry, stating that there has been no failure on
the part of any of these management teams to execute.
Certainly the problems seem to have far-reaching implications, but many of
these problems -- including the inventory build-up at 3Com -- should be
laid squarely at the feet of management, not a blip in Asian demand that
began mid-way through a lousy quarter. While 3Com has clearly done the
right thing by cleaning out the inventory channel and taking on a lot of
short-term pain to make for solid sales comparisons going forward,
investors should remain cautious about any potential earnings or sales
growth they see from any company in the networking universe until the
company begins to prove it on the bottom line. By tactically investing these
companies when market share is high and valuations are low, you can
minimize the downside while still finding a way to participate in a
fast-growing industry.
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