WS WSJ: 3Com Reports 1Q Profit Topping Estimates
By Jim Carlton
Staff Reporter of The Wall Street Journal
3Com Corp., powered by strong sales of new products and reduced costs,
topped expectations with first-quarter profit that suggests the networking company is pulling out of a long slump. The Santa Clara, Calif., maker of computer-networking gear reported net income for the first period ended Aug. 28 of $93.7 million, or 26 cents a diluted share, compared with a year-earlier loss of $51.2 million, or 15
cents a share, including charges for 3Com's acquisition of U.S. Robotics Inc. Stripping out a one-time credit stemming from that transaction in the latest quarter, 3Com's earnings per share came to 24 cents, well above analysts' consensus of 20 cents.
3Com reported sales of $1.41 billion, off 12% from the $1.6 billion a year earlier. But they were up 2% from the fourth period, and surpassed analysts' predictions for revenue of $1.39 billion.
The results were issued after the close of financial markets yesterday.
After gaining 31.25 cents to close at $32.375 on the Nasdaq Stock Market, 3Com shares rose another $1.27 in after-hours trading, according to Instinet Inc.
"For the first time in a long time, the news about 3Com is positive in
almost all respects," said Michael Cristinziano, analyst at Gerard Klauer Mattison & Co. in New York. Company executives said the quarter benefited from high demand for new products recently released across all its markets, including large corporations, small-to medium-size businesses and the home. In a conference call with analysts, they said a slowdown in sales to Asia was offset in the quarter by growth in the U.S. and Europe. In addition, 3Com's costs were down 36% from the same period a year ago. "We feel that all the hard work we have
done is beginning to pay off," Eric Benhamou, chairman and chief executive officer, said in an interview. "We feel optimistic about our prospects for the rest of the year." 3Com's resurgence comes after its difficult acquisition of U.S. Robotics in June 1997, which the company had hoped would give it a broader base of revenue, in part to battle Cisco Systems Inc., the networking-gear leader.
While 3Com specialized in network hubs, routers and management circuitry, the U.S. Robotics product line included primarily modems and a handheld computer called the Palm Pilot. But after the transaction was consummated, 3Com found itself awash in as much
as three months of unsold modems, amid a slowdown in sales that analysts attributed to high prices in that product line. At the same time, 3Com was suffering pricing pressure across most other parts of its networking product line, due to competition from rivals including Intel Corp. As a result, revenue growth stalled and then fell. After posting an annual growth rate of as much as 72%, the company's fiscal 1998 sales dipped to $5.42 billion in the period ended May 31 from $5.6 billion in the previous year. The stock price tumbled, too, diving to a low of $23 early this month from $77 last year.
In recent weeks, however, 3Com's shares have rebounded. The resurgence, analysts say, is partly due to an industry rumor that Intel wants to buy the company. The companies have declined comment, but most analysts don't believe that will happen, given the antitrust scrutiny that chip-giant Intel would likely face.
There are other reasons to become more bullish on 3Com, analysts say. The excess inventory of modems, for example, finally has been liquidated, and the company's business of selling networking gear into the fast-growing market of small- and medium-size businesses is also accelerating. 3Com is a leader in this market, while Cisco dominates the big corporate market. "We will ride this wave in the next few years as more of these businesses get networked," Mr. Benhamou said.
What's more, analysts note, the company's Palm Pilot sales are expected to jump to about $600 million this year from between $200 million and $250 million last year.
"There's no reason why we won't see 3Com enjoy a material acceleration in sequential growth rates," said Al Tobia, analyst at NationsBanc Montgomery Securities. "They should go back to the double-digit range."
(END) DOW JONES NEWS 09-22-98
10:20 PM |
