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3Com full steam ahead

Analysts anticipate a strong first quarter, excluding merger charges, for the networking hardware maker.

3Com (COMS) today reported a 28 percent jump in first-quarter revenues and met Wall Street's estimates, as it absorbed the benefits of its recent merger with modem maker U.S. Robotics.

"There are three key messages," said Eric Benhamou, 3Com chairman and chief executive officer. "Our merger is on track and off to a great start...the industry's growth is playing out as we anticipated...and we're starting the second half of our fiscal year with an exciting product-cycle."

3Com has jumped several hurdles in bringing about its merger, he said, noting the company has completed its efforts to meld the sales force, branding, manufacturing, office arrangements, and distribution strategies of the two companies.

"We're starting to see the benefits both internally and externally in the marketplace," Benhamou said.

The networking company, which completed its first quarter since it purchased U.S. Robotics, posted a net loss of $146.8 million, or 43 cents a share, compared with net profits of $152 million, or 43 cents a share, 3Com at a glance a year ago--based on the combined operations of the companies, or pro forma performance.

3Com, excluding a $426 million charge relating to its merger, would have posted earnings of $172.2 million, or 48 cents a share. Wall Street was expecting the supplier of local area network (LAN) and wide area network (WAN) systems to report profits of 48 cents a share, according to First Call.

3Com previously had estimated that the merger-related charges could climb up to $375 million. The charge includes severance costs, facilities consolidation, and product-line consolidation.

3Com, which announced its results after the market's close, ended the day at 52, up slightly 1-5/8 over yesterday.

Revenues for the quarter reached $1.6 billion for the period ending August 31, up 28 percent over a year ago.

3Com has endured increased pricing competition at the low end of its hub and interface card product line. But that pressure, put on by the likes of Intel, has not resulted in tangible losses in market share yet. However, analysts expect predict that the heated battle for dominance in Ethernet-based connections will lower the company's margins in some areas.

At the high end, the company continues to roll out new gear to better compete in the popular multi-protocol enterprise switching arena. The company is widely viewed as the most formidable foe for networking king Cisco Systems once it irons out kinks related to its U.S. Robotics merger.

In July, 3Com said it planned to cut 800 jobs as its absorbs its recent acquisition of modem-maker U.S. Robotics. The company planned to trim over the fiscal year 600 permanent jobs and 200 temporary jobs from its combined workforce of 13,500.

Following its merger with U.S. Robotics, 3Com officials said they already are seeing big gains in Europe. See related story.

Earlier this month, 3Com said the combined company, which had revenues of roughly $5 billion when it merged, will be able to achieve sales of between $6 billion and $7 billion during the 1998 fiscal year. 3Com's fiscal year ends in May.

Analysts also are bullish on the networking powerhouse's potential.

"3Com, with its acquisition of U.S. Robotics, is the leader in volume desktop connectivity products, adapter cards, and modems," said Christopher Stix, an analyst with Cowen & Company, in a recent report.

Stix also noted that, with PCs getting less expensive and unit growth ahead of expectations, "[3Com] is poised to exceed expectations in fiscal year 1998."

He added that the company also is the leader in stackable and desktop switches as well as hubs and access concentrators, and is likely to gain market share in those areas. Alliances with Siemens, DIGI, and IBM will fuel that growth, the report said.

"We believe the company is poised to grow its top line 30 to 35 percent in fiscal 1998, and above 20 percent thereafter. We maintain a 'buy' rating on the stock, with a $70 price target," said Stix.

Other analysts have more of a wait-and-see attitude.

Martin Pyykkonen, an analyst with Furman Selz, said calendar 1998 is a "key time period to see whether new products will contribute to revenue and earnings per share upside," and also said to expect a strong product cycle over the next year. He noted that there will be strong price competition, especially in switching. However, USR's product line provides some potential for revenue and earnings, especially from remote access products.

3Com is facing increasing competition from Cisco Systems and Bay Networks. The company's systems business is growing, but at a rate slower than Cisco's, said the analyst. He added, however, that the company's ATM business in the corporate market continues to be strong.