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Revenue concerns rattle 3Com shares

Tech Industry

3Com Corp. (Nasdaq: COMS) shares were pounded Wednesday after the company beat estimates for the fourth quarter, but didn't wow Wall Street with its revenue projections. Gruntal & Co. cut the 3Com to a "hold" from a "buy."

In early trading, 3Com was down 4 5/8 to 26 5/8, or 14 percent.

In a conference call with analysts, 3Com warned that revenue in the next two quarters may fall year-over-year as sales of modems and computer-connector cards weaken. Meanwhile 3Com's sales of $1.41 billion was a bit below the $1.44 billion expected by some analysts.

The company's client access business, which mainly deals in modems and network interface cards, saw sales declines of 11 percent from the previous quarter and 10 percent year-over-year. That will continue in the current quarter, especially with the approach of the summer, which is traditionally a slow season, said Christopher Paisley, 3Com's chief financial officer.

The bottom line, however, looked OK. 3Com surprised Wall Street with fourth quarter earnings of $87.5 million, or 24 cents a share, on sales of $1.41 billion. First Call consensus pegged the Santa Clara, Calif. company for a profit of 23 cents a share in the quarter.

In the year-ago quarter, it made $63.6 million, or 17 cents a share, on sales of $1.37 billion.

Increased systems sales helped drive first quarter gross margin to 46.9 percent, compared to 43.5 percent a year earlier. Systems business rose 11 percent sequentially and 17 percent year-over-year, as it generated 55 percent of 3Com's overall revenue in the first quarter.

One growing segment is 3Com's high-profile Palm computing division. The handheld devices now generate more than 10 percent of 3Com's revenue, Paisley said, although he declined to provide specific figures. Revenue from Palm sales will be broken out in 3Com's 10K annual report, he said.

3Com executives touted continued improvements with supply chain management, including an increase in inventory turns during the quarter to 7.9 from 4.4 a year ago. "Our commitment to operational improvements will not stop," CEO Eric Benhamou said during an afternoon conference call with analysts. "We also know that we can reach a level that far exceeds average industry performance."

However, analysts are far from convinced 3Com can show Wall Street the growth. At issue is the company's hybrid business model that is weighed down by commodity products.

"I'm still not very sanguine about 3Com's prospects," said Kevin Slocum, an analyst at SoundView Financial. "I'm not sure what they can do. "

-- Sergio Non contributed to this report.

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