"Analysts Optimistic 3Com Can Hit Inventory Goals By 3Q End "
Dow Jones Newswires -- February 13, 1998
By Joelle Tessler
NEW YORK (Dow Jones)--Analysts are optimistic that by the end of its
fiscal third quarter, 3Com Corp. (COMS) will be able to bring its
distribution channel inventory levels in line with the lower targets it set for
itself late last year.
They stressed reducing channel inventories is the company's No. 1
commitment right now and that the company is holding off on shipping some
products in order to accomplish this goal.
"Their top priority is to get the channel inventories in line with their stated
targets, even if it is at the expense of near-term revenue and earnings
estimates," said Nutmeg Securities analyst Andy Schopick. "All other
considerations are secondary."
"They can't use stuffing the channel," agreed Erik Suppiger, a research
associate at Deutsche Morgan Grenfell Inc. "3Com will reduce shipping
rather than allow continued excess inventory."
The company's focus on reducing channel inventories has made its revenue
outlook - and, as a result, its earnings outlook - for the third quarter, which
ends in February, somewhat hazy.
Analysts conceded that earnings estimates on the company could continue
to come down since the company would sacrifice sales targets, if necessary,
to meet its new inventory goals.
And since the Santa Clara, Calif., company has not made any public
statement on the progress of its inventory reduction efforts since it released
its fiscal second-quarter results late last year, third-quarter earnings
projections on the company are all over the map. "There is so much
confusion," said Lazard Freres & Co. analyst Michael Duran.
According to First Call Corp., the consensus view on 3Com, based on
estimates from 29 analysts, is for earnings of 14 cents a share. But the
estimates range from a loss of 7 cents a share to earnings of 26 cents a
share.
The consensus view for fiscal 1998, which ends in May, is for earnings of
98 cents a share. But again, the estimates range from earnings of 49 cents a
share to $1.23 a share.
Duran, who has one of the higher estimates on the Street, projects the
company will report 22 cents a share on $1.5 billion in revenue for the fiscal
third quarter and $1.16 a share on $6 billion in revenue for the full fiscal
year.
The company earned 44 cents a share on $1.4 billion in revenue in the
year-ago third quarter and $1.84 a share on $5.7 billion revenue in fiscal
1997, Duran said. Both figures are pro-forma for 3Com's acquisition of
U.S. Robotics Corp.
3Com said it doesn't have much fresh news to report right now and will
provide an update on its progress when it releases its fiscal third-quarter
results in late March.
The company's shares recently were down 1/2, or 1.4%, to 34 3/4 on
Nasdaq volume of 4.6 million, compared with an average daily volume of
8.8 million.
3Com first began to address its inventory problem late last year when it
decided to curb product shipments in order to swallow much of its inflated
inventories. As a result, the company posted net income of 4 cents a share
for its fiscal second quarter, well below the 50-cent profit, excluding
charges, of a year earlier.
3Com also introduced a "new, more economical inventory business model"
calling for lower levels of product in its distribution channel in order "to be
more responsive to technology transitions and rapidly changing business
conditions."
The new model calls for four to six weeks of adapter cards, or NICs; six to
eight weeks of modems and five to seven weeks of systems products,
which include Ethernet switches and modem systems. Under the old model,
the company had six to 10 weeks of NICs, and eight to 12 weeks of both
modems and systems products, in the channel.
Duran of Lazard Freres estimated 3Com started the November quarter
with eight weeks of NICs, 15 weeks of modems and 12 weeks of systems
products in the channel. And the company ended the quarter with five
weeks of NICs, 10 weeks of modems and nine weeks of systems
products.
Duran added that a week of NIC inventory is worth about $35 million to
$40 million; a week of modem inventory is worth about $25 million to $30
million and a week of systems inventory is worth $40 million to $45 million.
Although 3Com's adapter card inventories were in line with its new targets
as of the start of the third quarter, the company still had about $200 million
in modem and systems inventory to be reduced, Duran said. That means
that "they must sell $200 million more out of the channel than they put into
it," he added.
Deutsche Morgan's Suppiger said he believes 3Com will succeed in
bringing its channel inventories in all three product categories in line with its
new targets by the end of the February quarter. "If they don't, investors will
question why not when they made it such a priority," he said.
For his part, Stephen Koffler, an analyst at Donaldson Lufkin & Jenrette
Securities Corp., said the company is "much more likely to hit the systems
targets than the modem targets," although he did add that bringing the
modems inventory levels in line with the new goal is "not out of the
question."
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