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3Com beats revised earnings estimates

The computer networking company's fiscal third-quarter profit rises tenfold, in line with forecasts that were slashed this month when it warned that sales had slowed.

3Com's fiscal third quarter profit rose tenfold, in line with forecasts that were slashed this month when the computer networking company warned that sales had slowed.

Net income for the quarter ended February 26 was $89.6 million, or 24 cents a share, compared with operating profit of $7.41 million, or 2 cents a share, a year ago. The company had been expected to earn 36 cents a share before a profit warning on March 2. Those forecasts dropped to 23 cents a share after the warning, according to First Call.

3Com sold fewer of its low-cost modems and connector cards used to link personal computers to corporate networks and the Internet. The products contribute about half of 3Com's revenue, and analysts expect 3Com to cut prices even further to spur sales.

Overall, the company said its quarterly performance was a disappointment relative to expectations. But executives were careful to indicate the company has still made improvements, with revenue up 13 percent to $1.41 billion.

"The question is not whether we're improving. But are we improving at the rate that was expected?" said Bruce Claflin, 3Com's operating chief, in an interview.

During a conference call with analysts today, 3Com executives said the fourth quarter has historically been a strong quarter for the company and they expect that trend to continue. But given market forecasts, sales growth for the quarter should slow.

"Q4 is a historically strong quarter for 3Com. We expect that to be the case again this year," said Christopher Paisley, chief financial officer. However, given the slower third quarter and the market forecasts "sequential sales growth in Q4 will be modest this year," Paisley said.

The company also said its board authorized the repurchase of up to 10 million of its shares, bringing the total number of shares authorized for repurchase to 12 million.

3Com has struggled because it lags behind rivals Cisco Systems, Nortel Networks, and Lucent Technologies in selling high-end networking products to phone carriers and service providers, an area where most of the profits in networking is made.

Many analysts believe the networking company is too customer-focused, where margins are low. But 3Com executives say they have no plans to jump into the high-end networking market.

In an attempt to combat its post-holiday doldrums, executives said they would move away from slow-growth areas, such as analog modems and networking cards, and focus their efforts on the company's successful PalmPilot line of handheld computers, along with IP telephony, wireless and home networking products, cable and DSL modems, and storage area networks.

3Com executives believe the new focus will complement the company's push into corporate networking.

"It's a good start. The fact that they're trying to get more into the enterprise businesses and de-emphasize the retail business," said analyst Steven Frenkel of Joseph Stevens.

The company expects to reduce its R&D spending on 56 Kbps (kilobits per second) modems and pour much of that money into higher growth digital modems.

"We believe this is the last turn of the crank for analog modems," Claflin said, noting sales and marketing budgets for V.90 modems are likely to be trimmed too.

Sales of 3Com's PalmPilot 3x and 5 models, which began shipping at the end of the second quarter, "continue to be strong," Claflin said.

Palm sales were down sequentially, as planned, due to the strong Christmas quarter enjoyed by 3Com's hand-held computing unit.

Despite speculation that 3Com might spin off its Palm unit "we continue to see Palm as a core part of our business," Claflin said. The company expects to see the Palm market breaking into three business opportunities including sales of the actual device, licensing of the operating system, and eventually an emerging industry surrounding Palm-based services.

3Com's troubles have prompted rumors that Siemens might acquire all or part of the networking company. Last week, Siemens and 3Com partnered on a $100 million joint venture to create telephony products to send voice and data calls over local networks, or LANs.

Claflin said the company is not in merger negotiations with Siemens and said the rumors have not affected the company's plans. "We intend to run our business the way we set out to," he said.

Bloomberg contributed to this report.