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2HRS2GO: 3Com call sheds positive light on PCs

COMMENTARY -- Too bad 3Com (Nasdaq: COMS) has been discarded by much of Wall Street, because the company still has plenty of insight into large segments of the technology industry.

A quick look at the number of analysts covering 3Com shows how far the company has fallen below the investing horizon. Twenty-five analysts responded to First Call's survey of earnings estimates in fiscal 1999. Thirteen analysts bothered with 3Com in 2000. Just 11 have churned out COMS estimates for 2001.

Yesterday's analyst discussion provided more evidence of 3Com's loss of status. Conference calls of heavily followed companies typically focus entirely on sell-siders. You don't want to hear mutual fund representatives asking more questions than brokerage analysts.

It's especially bad when a journalist gets to ask a question, which is what happened Monday afternoon with 3Com. But this time, we should be glad New York Times reporter Matt Richtel got in, because otherwise, we might not have uncovered 3Com's gem of hope for PCs.

Wall Street frets about the PC industry. Leave it to 3Com, on an otherwise depressing day for the company, to provide a reasonably upbeat picture during this exchange between Richtel and 3Com President Bruce Claflin:

    Richtel: "Bruce, I wanted to have you reiterate and maybe elaborate on the point you made about PC sales impacting the business. What are you guys seeing in that area? How are you characterizing the slowdown in that area, both relative to your business and then more generally? And what do you see as the outlook there?"

    Claflin: "Let me comment on what sales in the PC business means to us from what a business standpoint, and then I'll elaborate. We view the PC industry trends as important for two reasons.

    "First, we do sell products that directly integrate into PCs, either by customers after they buy the product, or by original equipment manufacutrers as they sell out the door.

    "And therefore if those volumes decline, so do our attach rates and the ability to sell through them. At a broader level, PCs are still a principal source of attachment to network infrastructure, and so a slowdown in PCs could also signify some effect broadly on infrastructure sales, (although) far less than direct than would be the case on integrated technology. So we watch PC sales closely."

In other words, 3Com is exposed because it sells networking cards and broadband access products for PCs. Claflin went on to note that 3Com hasn't been hurt by PCs so far:

    "We have read as have all of you about reported slowdowns in the PC industry. In Q2 they have not affected us. Our businesses for PC-related sales remain consistent with our objectives, and we're very pleased with what we see going forward.

    "However, we run very tight supply lines with the PC manufacturers. We supply them through hubs from which they pull parts to integrate into their products. If they experience a slowdown, the time between their experiencing it and our experiencing it is generally short. There is no buffer.

    "So to date we have not experienced a slowdown, it has not affected our customers that we see. But we watch this very closely because it could have an impact on our business, if the slowdown is in the sales of PCs that use 3Com's technologies. It was a wordy answer, but I hope it answered your questions."

I can't speak for Richtel, but Claflin's response should have satisfied most questions about the PC industry. 3Com's short lead times to its vendors means it would be one of the first companies to notice PC market changes, but Claflin and his team haven't felt any pinch so far.

Earlier in the call, Claflin pointed out that a PC slowdown could affect 3Com's results in the current quarter. That's 3Com being properly cautious, given its messy financial history in recent years.

More important from a broader view is that 3Com hasn't seen any ill effects from PCs, despite reports from Gateway (NYSE: GTW) and Micron Electronics (Nasdaq: MUEI) about weak post-Thanksgiving sales.

Combine 3Com's observations with positive declarations recently from Compaq Computer (NYSE: CPQ), whose CEO told an investment conference audience that Compaq saw "pretty robust sales" during the Thanksgiving weekend. Hewlett-Packard (NYSE: HWP) reported similar results during a quarter update released last week.

Sure, the PC industry has issues: maturing market, commoditization of the core product and a potential shift to non-PC devices. Those challenges don't change the fact that the near-term picture for PC sales doesn't doesn't appear nearly as poor as some folks have would have you believe. 22GO


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