Summary from Financial Times:
Americas March 3 1999
3COM: Earnings slowdown predicted
By Roger Taylor in San Francisco
3Com yesterday fuelled growing fears of a slowdown in the US technology sector when it warned that second-quarter earnings would fall far short of analysts' expectations.
The company blamed a slowdown in demand by US and Latin American businesses for its computer networking products. Eric Benhamou, chairman and chief executive, said it was not yet clear whether weaker demand in the US was a short-term phenomenon, caused by issues such as the millennium bomb, or the start of a longer term decline. However, he said he believed his competitors were experiencing the same thing.
The news, revealed after the stock markets closed yesterday, will further depress technology stocks which have already been weakened by signs of slowing demand from PC manufacturers such as Compaq, the world's largest computer manufacturer.
The Nasdaq Composite index, which largely reflects the performance of the US technology industry, closed down 1.6 per cent yesterday at 2,259 and has now fallen 11 per cent from its high of 2,533 achieved last month.
3Com's shares fell 12 per cent yesterday to $27. Competitors such as Cisco and Lucent were also weak.
The company said sales for the quarter to February 26 would be about $1.41bn and earnings per share would be 23 cents. This is about 30 per cent shy of consensus expectations from Wall Street analysts for earnings of 36 cents.
In addition to the slowdown in demand from corporate customers, 3Com said it had been hit by changes in the market for modems. 3Com is the dominant supplier of traditional analogue PC modems. increasingly these are bought not by consumers but by PC manufacturers who pre-install them. This has put pressure on margins at a time when sales growth is slowing. Mr Benhamou said 3Com would halt all increases in headcount and costs until growth improved and would reduce investment in its traditional business such as analogue PC modems and network interface cards.
Focus would shift on to newer higher growth markets such as internet telephony, wireless networking and 3Com's PalmPilot handheld computing division.
However, these higher growth operations accounted for only 10 per cent of group turnover at present, he said.
3Com's difficulties stem in part from its relative failure to move from the older market of selling networking equipment to business customers into the newer business of supplying telephone companies.
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