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Technology Stocks : COMS & the Ghost of USRX w/ other STUFF -- Ignore unavailable to you. Want to Upgrade?

To: Scrapps who wrote (14232)	3/25/1998 11:20:00 AM
From: jim bender	Read Replies (1) \| Respond to of 22053

BEAR, STEARNS & CO. INC. EQUITY RESEARCH 3COM Corp. * (COMS-37 1/4) - BUY HI Worst Is Over; Achieved Channel Inventory Goal In Q3; Lowering Estimates but Maintaining Buy Rating ----------------------------------------------------------------- *While we are lowering our estimates on 3Com, we believe the worst is behind us for the company after it achieved its channel inventory goal in Q3. We think over the next 12-18 months, 3Com can leverage its strength in the edge of the network and should rebound handsomely from the challenges it has faced over the past year. We are maintaining our BUY rating on 3Com and recommend long-term investors to start accumulating COMS shares. 3Com reported Q3FY98 EPS of $0.02 vs. $0.50, on revenues of $1.25 billion vs. $1.46 billion, below our estimates of $0.21 on $1.39 billion revenues. As we stated before, we believe Q3 EPS and reported revenues were not as relevant as other measures such as channel inventory level and expense control, both of which the company had achieved its own target, and the revenue run rate. However, the revenue run rate (sell-out) at $1.37 - $1.40 billion (as estimated by the company) was lower than our expectation of $1.50 - 1.60 billion largely due to more than expected price cuts in modems and weakness in remote access concentrators, both of which we attribute to customers' delaying purchases until 56KB standard-based products are available, but also because of seasonal weakness in the systems business. We estimate that sell- out decreased 8-10% sequentially from Q2. Mostly due to aggressive pricing actions in modems, and increasing OEM revenues, gross margin decreased to 43.4% from 46.1% in Q2, much worse than our estimate of 47.3%. Operating expenses as a percentage of sales decreased to 42.2% from 46.2% in Q2 while operating expenses in absolute terms decreased by $23 million from Q2. We expect both gross margin and operating margin to improve over the next several quarters and the company will achieve its long-term financial goal exiting Q4FY99 (May). Geographically, domestic business accounted for 54% of revenues and declined 3% sequentially and 15% year over year. International sales (46% of revenues) increased 14% sequentially but declined 14% year over year. Europe (circa 30% of revenues) was very strong and has more than offset weakness in Asia (8-9%). Among major product segments, systems business (switches, hubs, routers, and remote access concentrators - 44% of revenues) decreased 8% sequentially and 13% year over year due to lower than expected demand for Total Control remote access concentrators and competitive pricing environment. Client Access business (modems and adapter cards - 56% of revenues) increased 17% sequentially but declined 16% year over year with strength from adapter cards somewhat offset by weakness in modems. Cash position was down $235 million to $900 million after the company paid off the $110 million convertible debenture. However, DSO improved to 65 days from 69 days in a historically back-end loaded Q3. We believe the worst is behind us for 3Com. The company is in the midst of a strong product cycle with volume shipments of new products over the next several quarters - Corebuilder 3500 and 9000 Layer 3 switches, high-density 10/100 workgroup switches, SuperStack 9000 gigabit Ethernet switch, V.90 56 K modems, and single-chip adapter cards - which should generate solid revenue growth in fiscal 1999. With significant operating leverage, 3Com should also enjoy strong year over year EPS growth in fiscal 1999. *We are lowering our Q4 EPS estimate to $0.20 from $0.40 and our Q4 revenue projection to $1.42 billion from $1.6 billion. For fiscal 1999, our new estimates are: EPS of $1.50 on revenues of $6.5 billion, down from our old estimates of $2.15 in EPS and $7.3 billion in revenues.