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3Com posts narrower-than-predicted losses

The network equipment maker says it won't become profitable again until the fourth quarter of the 2001 fiscal year.

3Com has posted narrower-than-expected losses for its most recent quarter, but the company says it won't be profitable again for another year.

3Com announced yesterday a fourth-quarter loss of $146.8 million, or 42 cents per share, compared with a profit of $87.5 million, or 24 cents a share, during the same period last year.

A consensus of analysts had predicted a loss of 44 cents per share this quarter, according to First Call. In midmorning trading today, 3Com was down $2, or 4 percent, to $46.69.

Fourth-quarter revenue fell to $763.7 million, a 38 percent drop from last year's fourth-quarter sales of $1.2 billion. But the drop in revenue was expected after 3Com's restructuring in March, when the Santa Clara, Calif.-based company exited the analog modem and high-end corporate networking markets.

The company no longer includes revenue from Palm, which was recently spun off. Palm handheld sales accounted for more than 10 percent of 3Com's revenue in the same period the previous year.

3Com chief executive Eric Benhamou said in a conference call with analysts that the networking company will start seeing revenue growth next quarter, one quarter faster than planned. Revenue for next quarter, which was expected to remain flat at between $675 million to $750 million, is now expected to reach $775 million to $825 million.

But Benhamou added that the company's next profitable quarter, originally planned for the third quarter of the 2001 fiscal year, has been pushed back to the fourth quarter.

Benhamou said 3Com is on track with its recent reorganization. Most of the restructuring work is done; in the next quarter, the company will distribute the rest of the Palm shares to 3Com shareholders July 27 and officially spin off its analog modem business.

"Given the magnitude of the changes we had in Q4, the bulk of the difficult transitions are behind us," Benhamou said. "We are no longer in the planning stages. We have taken the required actions. We are completely focused in high-quality execution."

Analyst Erik Suppiger, of Chase Hambrecht & Quist, gave 3Com's earnings mixed reviews, though the company beat his estimates of $700 million in revenue and a loss of 55 cents a share.

"The results are mixed. I'm concerned about their earnings losses, but I'm encouraged by their (impending) revenue growth," said Suppiger, who rates 3Com's stock a "market perform."

The company's new strategy is to focus on emerging markets, such as high-speed modems, wireless and home networking, and Internet telephony. It is catering to small and midsized businesses and consumers in those markets, two areas the company has historically dominated. Benhamou said fourth-quarter revenue from the emerging markets grew 27 percent from the previous quarter, and that revenue from the products will grow more than 100 percent next year.

The products in the emerging areas account for about 13 percent of 3Com's overall revenue and will help turn the company's fortunes around, Benhamou said. "It will be the growth leaders in the company. We expected to see this pay dividends, and it's starting to pay off."

As part of its consumer and home networking strategy, the company yesterday acquired Internet radio company Kerbango for $80 million. The company this year also plans to release a separate Internet appliance for the home for checking email, Web surfing and other services.

While company executives say 3Com is on track with its restructuring plans, analysts were lukewarm about the company's prospects.

"There's an opportunity for 3Com to be a leading vendor at the edge of the network," Suppiger said in reference to the consumer and small-business focus. "But it's going to be difficult to get attractive profit margins."

The $763.7 million in fourth-quarter sales exceeded 3Com's projections of $675 million to $750 million for the quarter, 3Com executives said.

Sales of Personal Connectivity Products, which include networking cards, modems and home-networking kits, decreased 26 percent to $410 million. Sales of Network Systems Products, including networking equipment and telephony products, dropped 48 percent to $353.7 million.

For the fiscal year, the company earned net income of $674.3 million, or $1.88 per share, a 67 percent increase from last year's net income of $403.9 million, or $1.09 per share. Yearly revenue fell from $5.2 billion to $4.3 billion.

The fiscal year profits include several one-time gains, including $838.8 million from investments and $25.5 million from selling land in Utah.