FWIW, Lehman's report right after earning dated June 25, 98 :
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Headline: 3Com Corp: 4Q98 A Penny Above Consensus, Ests Trimmed, Stock Buy Back Author: Tim Luke, Mark Sue 1(212)526-4993 Rating: 3 Company:
COMS Country: SEO CUS Industry: TELECM Ticker : COMS
Rank(Old): 3-Neutral
Rank(New): 3-Neutral
Price : $27 1/8 52wk Range: $60-23 Price Target (Old): $N/A Today's Date : 06/25/98 (New): $N/A Fiscal Year : MAY ---------------------------------------------------------------------- --EPS 1997 1998 1999 2000 QTR.
------Actual Old New Old New Old New
1st: 0.30A 0.47A 0.47A - -E 0.22E - -E - -E
2nd: 0.49A 0.01A 0.01A - -E 0.30E - -E - -E
3rd: 0.43A 0.02A 0.02A - -E 0.33E - -E - -E
4th: 0.12A* 0.22E 0.18A - -E 0.40E - -E - -E *restated ------------------------------------------------------------------ Year:$ 1.81A $ 0.72E $ 0.68A $ 1.60E $ 1.25E $ - -E $ - -E
Street Est.: $ 0.69E $ 0.68E $ 1.45E $ 1.43E $ - -E $ - -E ----------------------------------------------------------------- Price (As of 6/23): $27 1/8
Revenue (1999): 6.02 Bil.
Return On Equity (98): 10.6 %
Proj. 5yr EPS Grth: 20.0 %
Shares Outstanding: 368.1 Mil.
Dividend Yield: N/A Mkt
Capitalization: 9.52 Bil.
P/E 1998; 1999 : 36.1 X; 22 X
Current Book Value: $7.12 /sh
Convertible: YES
Debt-to-Capital: 1.8 %
Disclosure(s): C -----------
------------------------------------------------------------------- * Post close yesterday, 3Com reported 4Q98 earnings (ex-one time charges) of $0.18 vs. $0. 12 in 4Q97, coming in a penny above the consensus est. of $0.17 (and below our high end estimate of $0 .22).
* 4Q98 revenues of $1.38 billion grew 10% QoQ, flat YoY (below our high end est of $1.44 b ill).
Encouraged by Systems, 49% of sales (routers, switches, remote access) +22%QoQ, while Clie nt Access(adapters, modems) was only +1% QoQ. Intl strong +15% QoQ.
* Gross margins flattish at 43.5% vs. 43.4% in 3Q98 below our est of 44.0% due to pricing and inventory adjustments BUT good progress on operating expense control: R&D, S&M, G&A, all decline as a % of sales. Tax rate to moves from 35% to 34%.
* In addition, Balance Sheet strengthened with cash increasing over $100 million while rec eivables & inventories declined significantly. Investors also likely to be encouraged by stock buy b ack authorization of 10 million shares.
* Following 4Q98, fine-tuning our high end ests lower from $1.60 to $1.25 & we are current ly maintaining our 3-Neutral rating, however, believe investors will be encouraged by progress made in 4Q 98 in laying groundwork for steadily improving outlook in FY99. ------------------------------------------------------------------------------ Post close yesterday, 3Com reported 4Q98 earnings (excluding one time charges) of $0.18 vs . $0.12 in 4Q97 a penny above the consensus estimate of $0.17 and below our high end estimate of $0.22.
One time charges for the quarter included $8.4 million for the purchased in-process R&D related to the Lanworks Tec hnologies acquisition, and a credit of $4.9 billion for past mergers and real estate disposals. Following the re lease of earnings, management held a conference call with investors. We believe highlights from the quarter include the following:
Revenues; Systems Strong, International +15% QoQ Revenues in 4Q98 of $1.375 billion grew 10% sequentially but were flat YoY and came in som ewhat below our highed end estimate of $1.440 billion. System sales (49% of revenues) grew an impressive 22% to reach $671 million while Client Access sales grew a modest 1% sequentially. The strong System sales were supported by the SuperStack II switch and the CoreBuiler family of layer 3 switches which is now shipping i n volume.
We estimate that the TotalControl remote access concentrator was also a strong contributor to the grou p. On the Client Access side of the business sales were relatively flat sequentially, coming in at $704.2 million, below our estimate of $748.6 million. We believe the softness in this division was partially attributable to th e slow adaptation of the V.90 modem standard by Internet Service providers and continued pricing pressures in the m odem market.
We note that in the adapter area 3Com has added several new PC OEM customer partners includin g Hewlett Packard. Looking forward, 3Com is likely to continue add aggressively to an already extensive array of access platforms including xDSL and cable modems.
International sales increased robustly to $660 million or 48% of sales with especially goo d trends in Europe. Sales to the Asian region comprised less than 10% of sales and grew below other regions.
The sharp increase in other income of $10.7 million vs. 3Q98 levels of $(4.4 million) were due to foreign currency gains and a decrease in interest expense due to the early retirement of debt.
Gross Margins Remain Subdued But Progress On Cost Reduction Gross margins in 4Q98 came in at 43.5% vs. 43.4% in the prior quarter. As highlighted abo ve, this reflects the fierce pricing environment in both systems and client access as well as additional invento ry adjustments. During the conference call management reiterated the longer term goal of stabilizing gross margin s between 45.5% and 47.5% as manufacturing efficiencies increase and as price reductions return to the more no rmalized overall rates of 15-20%.
We are especially encouraged by 3Com's progress in reducing its operating costs w ith expenses decreasing sharply in 4Q98 as R&D spending declined from 11.5% of sales to 10.9%, Sales & Marketing declined from 25.2% to 21.2%, and General & Administrative declined from 5.4% to 4.8%.
Headcount d uring 4Q98 decreased from 13,765 to 12,920 or approximately 6% as part the continued organizational c onsolidation. 3Com announced that it had closed a manufacturing plant in Chicago as part of its overall plans to consolidate manufacturing. With the launching of a manufacturing plant in Singapore, the company expe cts its tax rate to decline from 35% to 34% looking ahead.
Balance Sheet Strengthened 3Com closed 4Q98 with cash & equiv. of $1.076 billion an increase from $901 million in 3Q9 8. With the company focusing on improving channel inventory levels and reducing inventories on hand, w e are encouraged that inventory levels have decreased from $770 million to $645 million or 90 days in avera ge to 83 days. 3Com has now targeted channel inventory levels for NICs at 4 to 6 weeks, modems 6-8 weeks, and systems 5 to 7 weeks. Furthermore, improvements in collections have helped receivables to decline from $889 mill
ion in 3Q98 to $850 million in 4Q98 or 66 days to 58 days. We believe management will continue to focus on ma intaining these slim inventory levels, looking ahead.
Stock Buy Back Announced Separately, 3Com announced that it has received an authorization to repurchase up to 10 mi llion shares of the company's common stock in the open market. The company expects to make purchases from tim e to time dependent on the price and market conditions as we believe this is likely to be see as a p ositive signal by investors.
Stock Opinion/Maintain Neutral Rating But Groundwork Laid For Improved FY99 Following theses results, we have lowered our high end sales and earnings expectations for FY99. For 1Q99, we are now looking for earnings of $0.22 with sales expected to be around $1.401 Billion. We note that 3Com is now entering its seasonably slow 1st quarter and that competition remains fierce in the data n etworking arena. In FY99, we expect sales to grow to around $6.03 Billion and our high end earnings estimates move f rom $1.60 to $1.25. At present we are maintaining our 3 neutral rating, since we believe the outlook for revenue growth remains uncertain given ongoing pricing pressure in the lower end of the networking market, as well as in th e modem market, and the fierce overall competitive landscape. We recognize, however, that 3Com has made significant progress in reducing its channel inventories and cutting costs. We also recognize 3Coms's expertise a cross a full portfolio of core networking technologies, its positioning as a large scale low cost producer, and its leadership in channel distribution with truly global reach should position the company as a longer term leader i n the networking arena. We look for positive comments from management during the annual analyst meeting scheduled for June 30, 1998. We are currently maintaining our 3 neutral rating as we look for improved visibility on ma rgin improvement and a return to sequential sales growth in the core domestic market. |
