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3Com lowers revenue forecast

One analyst complains that the gear maker is in a "perpetual state of transition, constantly trying to identify where it can execute."

Networking gear maker 3Com announced on Friday that it's reducing its revenue estimate and gross margin forecast for the first quarter of its fiscal 2005, which ended Aug. 27.

The company said it now expects revenue of $160 million to $164 million, instead of the $183 million the company forecast during a conference call in June.

The company estimates that gross margin for its products will be between 38 percent and 39 percent, slightly below its prior forecast of about 40 percent.

3Com will officially report earnings Sept. 16.

Investors reacted negatively to the news; the company's stock dropped about 9 percent in the first hour of trading Friday. 3Com did not provide details surrounding the reduced forecast, but analysts said they believe that it's likely caused by a culmination of several factors.

Erik Suppiger, an analyst at Pacific Growth Equities, has rated the stock an "underweight" for nearly two years. He said the company continues to struggle to compete against market leader Cisco Systems in the high-end enterprise switching market. 3Com abandoned this market in 2000 but has been aggressively attempting to revive the business over the past year.

3Com is also facing stiff competition in low-end Ethernet switching, where it has been steadily losing market share since the fourth quarter of 2002. At that time, the company had 11 percent of the fixed-configuration Ethernet switch market, and in the most recent quarter, it had only 5.6 percent, according to Synergy Research Group. Meanwhile, players such as Cisco, Hewlett-Packard and Nortel Networks have gained market share during this period.

"3Com still seems to be struggling to re-establish itself at the high end of the enterprise switching market," Suppiger said. "And it's facing a lot of competition at the low end. The company is in a perpetual state of transition, constantly trying to identify where it can execute."

The company has also steadily been losing market share in its network interface card business. Companies such as D-Link, along with several smaller players based in Asia, have emerged as stiff competitors in a business that has been largely commoditized. For the fourth quarter of its fiscal 2004, the company's NIC business made up about $25 million of its revenue, a 42 percent decline from the same period a year earlier, according to Joshua Johnson, an analyst at Synergy.