Dow Jones Newswires -- September 17, 1999
DJ Cabletron, 3Com Seen Posting Flat Profits For Quarter
By Peter Loftus
NEW YORK (Dow Jones)--3Com Corp.'s (COMS) earnings for the quarter ended Aug. 31 are expected to be flat compared with a year ago. Meanwhile, its data networking rival Cabletron Systems Inc. (CS) should also report quarterly earnings flat with, or slightly below, last year's figure.
Analysts expect revenue for both companies to fall from a year ago as they face increasing competition from their larger and more successful rival Cisco Systems Inc. (CSCO).
Cabletron, Rochester, N.H., is set to report its second-quarter earnings Monday after the market closes; 3Com, Santa Clara, Calif., will release its first-quarter results late Tuesday. Cisco reported results for its fourth quarter in August, including earnings of $635 million or 21 cents per share, beating analysts' estimates.
As two of the few remaining stand-alone data networking firms, 3Com and Cabletron have struggled to hang on to market share in their respective niches of the industry, analysts said. The companies also experienced a seasonal slowdown in the summer months.
William Becklean, analyst with SunTrust Equitable Securities Inc., expects 3Com to report fiscal first-quarter income of $89 million, or 24 cents a share, excluding one-time items, which matches the First Call/Thomson Financial consensus of 26 analysts' estimates. The company reported income of $86.7 million, or 24 cents a share, in the year-ago period, excluding items. Becklean estimates first-quarter revenue was $1.39 billion, down from $1.41 billion.
Analysts aren't surprised by 3Com's expected flat performance. After 3Com reported fourth-quarter results in June, its executives warned that sales of modems and network adapter cards, which comprise the company's largest business, would continue to slip. Sales of these products accounted for about 53% of 3Com's revenue in mid-1998, but fell to 45% in the fourth quarter quarter ended May 31.
Earlier this week, Chief Executive Eric Benhamou reiterated his June comments that sales in this segment could slip to 25% by mid-2000.
Sales of 3Com's network adapter cards, which connect PCs to networks, have been hurt by an aggressive push by Intel Corp. (INTC) to grab a share of this market, Becklean said. Intel has slashed prices for these products, putting pricing pressure on 3Com.
3Com's analog modem sales, which experienced cyclical downturns in the past, have been hurt more recently by the emergence of other types of Internet connections, including high-speed digital subscriber lines, or DSL, and high-speed cable modems. 3Com may, however, benefit from a recent upturn in PC sales, said Credit Suisse First Boston Corp. analyst Paul Weinstein.
Becklean also cited seasonality, as 3Com's sales force typically boosts sales in the fourth quarter to meet quotas, leaving fewer opportunities early in the first quarter. Also, 3Com's business in Europe usually slows down in the summer as Europeans vacation for the bulk of August.
3Com has tried to go up against Cisco in the high-end systems market, providing routers and switches for large corporate networks, but hasn't made much of a dent, Becklean said. Cisco has also chipped away at 3Com's strength in its production distribution channel through resellers.
"They just have competitive pressures in all of the businesses they're in," Becklean said.
3Com is actually getting out of one of its fastest-growing businesses. It announced earlier this week it would spin off its Palm Computing division, which makes the pioneering Palm Pilot handheld computer device. Palm sales accounted for 10% of 3Com's revenue in the fourth quarter, and was expected to rise to 25% of revenue with in a year. 3Com said it will sell up to 20% of the shares of Palm Computing in an initial public offering early next year, then distribute the remaining stake to 3Com shareholders.
3Com Under Investor Pressure
3Com had been under investor pressure to spin off one or more of its disparate units, including Palm. Now, analysts expect additional restructuring as 3Com focuses on its core networking operations. Prudential Securities Inc. analyst Luke T. Szymczak thinks the Palm spinoff raises the possibility 3Com will sell or spin off additional units, including its cable modem and DSL modem unit.
Cabletron is still in turnaround mode as it emerges from a restructuring announced in December 1997, prompted by a loss of market share to 3Com and Cisco and a change in management in June.
Weinstein, the Credit Suisse First Boston analyst, expects Cabletron to report earnings of 6 cents a share on revenue of $355 million for its second quarter ended Aug. 31, down from earnings of 7 cents a share on revenue of $370.6 million a year ago, excluding items in both periods. Weinstein's earnings estimate for the latest quarter matches the First Call consensus.
"Cabletron's switching business came on pretty strong this quarter, so I expect them to be able to beat" his earnings estimate, Weinstein said. He also thinks sales of the company's DSL platforms were strong.
But Weinstein said Cabletron is still losing market share to Cisco, and he is concerned that it hasn't been as acquisitive as other networking firms. Cisco, for example, announced earlier this month it would buy optical networking firms Cerent Corp. and Monterey Networks Inc. for a combined $7.4 billion in stock.
At the start of the quarter, some analysts downgraded Cabletron stock on expectations of lower revenue in the second quarter. Cabletron said in June that its first-quarter results included $20 million in revenue from sales of products to Compaq Computer Corp. (CPQ), but analysts had expected that revenue to be included in the second quarter.
Andy Schopick, an analyst with Nutmeg Securities, thinks Cabletron's strength is its local-area-network switching product. Its revenue in this area rose about 30% between November 1998 and last May, and Shopick expects continued growth. The company has gained some market share and improved marketing in LAN switching, but it still faces tough competition from Cisco and Extreme Networks Inc. (EXTR), he said.
Cabletron shares recently traded at 19 3/8, up 1 3/8 or 7.6%, on volume of 2 million, compared with the daily average of 2.3 million. 3Com shares were off 1/16 or 0.2%, at 27 5/8, on volume of 4.2 million, compared with the daily average of 5.4 million.
-By Peter Loftus; 201-938-5267; peter.loftus@dowjones.com
Cabletron is still in turnaround mode as it emerges from a management change in June and a restructuring announced in December 1997, which was prompted by a loss of market share to 3Com and Cisco.
(An article published at 1:24 p.m. EDT may have incorrectly implied that the 1997 restructuring was prompted by a management change.)
interactive.wsj.com |
