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Technology Stocks : 3Com Corporation (COMS) -- Ignore unavailable to you. Want to Upgrade?

To: tech who wrote (10604)	11/20/1997 9:51:00 PM
From: jim bender	Respond to of 45548

Some Speculate 3Com Could Miss 2Q To Correct Inventories Dow Jones Newswires No further information is available at this time. By Joelle Tessler NEW YORK (Dow Jones)--Second-quarter earnings estimates for 3Com Corp. (COMS) have come down notably over the last two weeks on concerns that the company has been slowing modem shipments to reduce distributor inventory levels that are too high. But a few analysts are now speculating that the networking equipment maker could substantially miss even the revised projections by significantly curbing modem shipments in the final weeks of the quarter to put the problem behind it. "We believe that 3Com management could elect to substantially miss the November quarter in order to... eliminate the lion's share of modem channel inventory," said NationsBanc Montgomery Securities Inc. analyst Al Tobia. Hambrecht & Quist analyst Farrokh Billimoria said 3Com cannot report earnings that are even with or above first-quarter levels and at the same time meaningfully reduce channel inventory levels this quarter. The analyst said he therefore expects the company to report a sequential revenue and earnings decline for the second quarter ending in November since he believes 3Com is focused on cutting modem as well as adapter card inventories. CIBC Oppenheimer & Co. analyst Randall Yuen pointed out, however, that "no one knows for sure" what the company will do. "Some are hoping the company will just dump the entire November quarter so they can get the inventory issue out of the way," he said. "Some are saying it could take several quarters... It's up to the company." Tobia earlier cut his second-quarter estimate on 3Com to 9 cents a share on revenue of $1.45 billion from 53 cents on revenue of $1.729 billion. He also reduced his full-year estimates to $1.44 a share from $2.40 for fiscal 1998 and $2.20 a share from $3.10 for fiscal 1999. And Billimoria lowered his second-quarter view to 38 cents a share on revenue of $1.553 billion from 52 cents on revenue of $1.716 billion. He cut his fiscal 1998 estimate to $1.74 a share from $2.29. Comparable year-ago results were not available since last year's numbers do not reflect 3Com's acquisition of U.S. Robotics. 3Com reported earnings of 48 cents a share on $1.6 billion in sales for its fiscal first quarter, ended Aug. 31. These results exclude a $426 million pretax charge related to the company's acquisition of U.S. Robotics. Since Nov. 10, 20 out of 34 analysts have lowered their estimates for the second quarter, with "the more recent revisions deeper than the earlier ones," said Chuck Hill, director of research at First Call. The consensus estimate for the quarter has fallen to 44 cents a share from 53 cents as of the start of Nov. 10. Illustrating the drop even more dramatically, the estimate range has widened to between 9 cents and 58 cents a share from between 47 cents and 58 cents on Nov. 10, Hill said. Since Nov. 10, Hill said, full-year consensus estimates have also fallen, to $2.06 a share from $2.30 for fiscal 1998 and to $2.68 a share from $3.02 for fiscal 1999. Officials at 3Com declined to comment. No further information is available at this time. 3Com has been coping with high modem distribution inventory levels since it acquired U.S. Robotics because the modem maker tended to ship a lot of product to distributors. NationsBanc Montgomery analyst Tobia believes modem channel inventories are above 10 weeks, which is well above a targeted range of six to eight weeks. He noted that attempts to remedy the situation have been slowed by weak sales of modem to end-users and said some inventory overhang will likely carry into the third quarter. 3Com has also been facing much more back-end loaded quarters since it acquired U.S. Robotics, according to Billimoria of Hambrecht & Quist. Whereas U.S. Robotics historically generated close to 50% to 60% of its business in the last month of the quarter, 3Com had much more linear quarters - that is, its revenue was distributed much more evenly over the three months of the period - before the acquisition, Billimoria said. "We believe that the last quarter that was reported for the combined companies was back-end loaded to over 50% in the last month, and that this trend has continued into the second quarter," he said. Indeed, Tobia said 3Com would have to bring in $950 million, which would account for more than 50% of total revenue for the quarter, in the final month of the period to hit the consensus revenue estimate of about $1.7 billion. Tobia believes 3Com could therefore "elect to miss" the quarter to bring down channel inventory levels and to spread shipments more evenly over the course of the quarter. To do this, he said, the company would have to reduce November shipments to 40% of total second-quarter revenue - 3Com's target - which would essentially require that the company ship no more product in the second half of the month. Tobia estimates that this would reduce modem channel inventory by $310 million - about a six-week reduction. Such a move would result in a $150 million sequential decline in revenue for the second quarter. It would also drag the company's operating margins down to 3.3% in the second quarter, compared with 16.4% in the first quarter and 19.1% in the year-ago quarter. But Tobia believes the company's operating margins should return to historical levels of about 15% in about six months, reaching 13.4% in the third quarter and 16% in the fourth quarter. And more important, by reducing channel inventories and increasing quarterly linearity, the company would instill more confidence in revenue and earnings projections going forward. Billimoria of Hambrecht & Quist believes 3Com is focused on reducing channel inventories of modems as well as adapter cards. High inventory levels of adapter cards, which are placed inside of PCs to connect computers to networks, have added to the uncertainty surrounding the company's quarterly results. "Due to the lack of visibility concerning inventories in the channel, we believe that 3Com is drawing down inventories to the extent it can to get a better picture of the situation," Billimoria said. The analyst noted that reducing channel inventory should help 3Com manage linearity and end-of-the-quarter discounting. Billimoria is also concerned about how weakness in the Asian economies, which contribute 10% to 15% of 3Com's revenue, will impact the company. Analysts did point to some bright spots in 3Com's outlook, however. For one, Tobia of Nationsbanc Montgomery noted that 3Com's adapter card business is entering a new product cycle. The company will ship a reduced-cost, two-chip, server-oriented adapter next month and a one-chip desktop-oriented adapter in January. 3Com will also begin shipping its CoreBuilder 3500 switch, which has layer 3 routing capabilities, late this month and its CoreBuilder 9000, a high-powered layer 3 switch, in April, according to Tobia.