3Com profits drop 87 percent

3Com (COMS) reported an 87 percent drop today in second-quarter profits, attributed to excess inventory from its modem business and moving to a new product line.

The networking company has faced a bout of problems in the quarter, such as lower earnings from the economic troubles in Asia and a shareholder lawsuit that alleged executives misled investors about the demand for its modem products acquired through a merger with U.S. Robotics.

3Com, which previously issued a preliminary warning on its quarterly results, posted net income of $15.1 million, or 4 cents a share, compared with $115.7 million or 33 cents a share a year ago.

Those results were in line with analysts' revised expectations for the quarter, according to First Call.

Revenues, meanwhile, fell to $1.2 billion, down from $1.4 billion a year ago. Sales of its systems products, which include switches, hubs, and routers, accounted for 51 percent of total sales, or $621.5 million. Client access products, which include network interface cards and modems, represented the remainder of total sales at $598.8 million.

"As we enter the second half of the fiscal year, 3Com continues efforts to improve channel inventory measurement systems, transition our product lines to next generation platforms, and leverage our market strength across enterprise, carrier, small business, and consumer markets," said Eric Benhamou, chairman and chief executive in a statement.

While most industry-watchers believe the networking sector in general will continue to be hot over the next few years, short-term issues are scuttling rosy fiscal forecasts at several of 3Com's competitors, among them Cabletron Systems and Ascend Communications.

Three factors could affect 3Com going forward in the near term, according to analysts--the continued economic troubles in Asia, ongoing market softness in Europe and the United States, and a series of product transitions the company is undergoing.

Martin Pyykkonen, analyst with Furman Selz, said his "neutral" rating for 3Com's stock will remain in place until the company shows it can weather the storm.

He said 3Com needs to show it can grow the enterprise side of its business with recently announced product additions and take some market share away from corporate networking stalwarts Bay Networks and Cisco Systems.