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December 22, 1998
Dow Jones Newswires
3Com Exploits Improving Mkts To Post Upside 2Q Earnings
BUENA PARK, Calif. -- Operational discipline and improving trends in all of its major markets led 3Com Corp. (COMS) to report better-than-expected earnings for the second fiscal quarter ended Nov. 27.
Net income rose to $132.9 million, or 36 cents a diluted share, from $4 million, or 1 cent a share, a year earlier. Revenue of $1.54 billion increased 10% sequentially and 19% from $1.2 billion a year earlier.
The First Call consensus estimate was for earnings of 31 cents a share.
Robust demand for new products in the Corebuilder and Pathbuilder enterprise networking families led to the first quarter ever in which 3Com closed more than 100 deals worth $500,000 or more, Chief Executive Eric Benhamou said on a conference call.
In addition, price stability led to a modest recovery in the modem market, and revenue for the Palm handheld computing device continues to grow rapidly - though it doesn't yet account for 10% of 3Com's revenue, Benhamou said.
"I think the quarter itself was pretty good," said Al Tobia, an analyst with NationsBanc Montgomery Securities. He said he expects Wall Street to raise its estimates for coming quarters.
3Com's success can also be attributed to better cost management and efforts to organize its business around end-markets rather than products, Chief Operating Officer Bruce Claflin told Dow Jones.
For example, Palm is a popular retail item, but it is also seeing strong demand from enterprise customers.
Better management of the supply chain has given rise to faster inventory turns, with the result being higher gross margins, Claflin said. The measures were required to unify operation of a hodgepodge of companies 3Com has acquired over the past two years, he said.
Now that 3Com's business is under reasonably good control, 3Com is planning to begin investing in new markets, Claflin said.
Those include the handheld category, where Palm is doing so well, storage area networking, and also emerging voice-over-IP and LAN telephony, wireless access and broadband access.
"It looks like they're going in the right direction," said David Takata, an analyst with Gruntal & Co. "It looks like they've decided they don't want to run into Cisco (Systems Inc. - CSCO) on every deal."
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And from WSJ Online:
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December 22, 1998
3Com Tops Analysts' Estimates,
Helped by Sales of Palm Pilot
An INTERACTIVE JOURNAL News Roundup
3Com Corp. reported net income for its latest period late Tuesday that topped analysts' estimates.
For the second fiscal quarter ended Nov. 27, the Santa Clara, Calif., network-equipment maker reported net income of $132.9 million, or 36 cents a diluted share, compared with $4 million, or one cent a share, in the year-ago quarter.
Both quarters included pretax charges. The latest period included a $638,000 pretax charge for merger and other expenses, while the year-ago period included a $268.9 million pretax charge.
The latest results topped the consensus estimate of analysts surveyed by First Call for net income of 31 cents a share.
Revenue, meanwhile, climbed 29% to $1.54 billion from $1.12 billion in the year-ago period.
3Com has spent much of the past year coping with bloated inventories -- particularly in the modem business it acquired with the purchase of U.S. Robotics -- but is now on a recovery track, analysts said.
The company restated its results in March to better reflect poor business conditions from U.S. Robotics; analysts said 3Com should benefit in the quarters ahead from favorable year-over-year comparisons.
"People are going to love the comparisons for the next few quarters," said Nutmeg Securities analyst Andy Schopick.
It isn't a networking product that is driving much of 3Com's growth right now, according to Sanford Bernstein & Co. analyst Paul Sagawa. He says 3Com's hand-held PalmPilot is selling well this Christmas season and will account for nearly 10% of 3Com's revenue.
Meanwhile, a rebound in PC demand has helped 3Com by driving sales of network-access cards and modems. While modem sales weren't as strong as expected earlier in the year after the adoption of the 56K modem standard in February, Mr. Sagawa said that most modems being sold these days are 56K modems.
3Com also has been benefiting from an improvement in gross margins in recent quarters, analysts said, as it increases manufacturing operations after slowing production earlier in the year to cut inventory levels.
3Com is roughly a third the size of market leader Cisco Systems Inc. in sales, and at roughly $16 billion, less then a fifth in terms of market capitalization. 3Com has been the subject of rumors that semiconductor giant Intel Corp. might be interested in a takeover, but analysts have expressed doubts, saying a deal is unlikely and questioning whether the firms would make a good fit. Intel's core business is chips, though it also sells networking gear.
Separately Tuesday, 3Com agreed to provide its network interface cards and modem products across Hewlett-Packard Co.'s PC line. Terms weren't disclosed.
In a press release Tuesday, 3Com said the agreement include initiatives to increase desktop/network management while lowering cost of ownership for business, small office, workstation, consumer and mobile personal computer systems.
Hewlett-Packard also has joined the 3Com Connected program, a branding and channel-development program that teams 3Com with PC manufacturers, national resellers and distributors.
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