3Com rides earnings surprise to nice gain

3Com Corp. (Nasdaq: COMS) shares moved up 2 3/16, or 8 percent, to 29 1/2 Wednesday, one day after it easily hurdled analysts' estimates in its first quarter.

In the quarter, 3Com earned $119.3 million, or 33 cents a share, on sales of $1.38 billion.

First Call consensus expected the network-equipment maker to earn 24 cents a share.

On Wednesday, BancBoston Robertson Stephens analyst Paul Johnson reiterated his "buy" rating on the stock and bumped its fiscal 2000 and 2001 earnings estimates to $1.37 and $1.55 a share, respectively.

Most analysts expected 3Com to report sales in the neighborhood of $1.34 billion. In the year-ago quarter, it made $93.7 million, or 26 cents a share, on sales of $1.4 billion.

Including a $23.6 million gain from stock sales and another $2.1 million credit related to its merger with U.S. Robotics, 3Com reported net income of $137.5 million, or 38 cents a share.

"Strong first quarter earnings represent another milestone in the company's transformation," said CEO Eric Benhamou, in a prepared release. "We are pleased that our emphasis on operational improvements is having a substantial positive impact on our profitability, particularly in our systems business."

In the quarter, 3Com's network systems products improved 9 percent from the $674.2 million it posted in the year-ago period. Network systems generated 48 percent of 3Com's business. "We are quite pleased to measure the progress made from a year ago," Benhamou said, during a conference call with analysts.

Prsonal connectivity products, which include network interface cards and modems, fell to $539 million, a 19 percent decline from the same period last year. 3Com for the last several quarters has seen downward price spirals in those fields. The company also reduced channel inventories in the third quarter.

Sales of its handheld computing products shot up 50 percent to $174.2 million. ast week, 3Com announced it would spin off its Palm Computing subsidiary next year.

3Com wants to separate Palm to focus exclusively on network equipment. The company expects future growth to come from network systems, home networking products, and broadband connectivity products such as modems for cable and DSL access. 3Com expects to announce DSL deals with two regional Bell operating companies before month's end.

But don't look for growth from 3Com in the immediate future. Company executives on the conference call said they expect fiscal second quarter sales will be lower from a year ago, and won't see the 10 percent sequential increase seen last in the second quarter of last year. Third and fourth quarter results should be higher, executives said.

Separately, 3Com announced 12 new OfficeConnect networking products that have been redesigned for a more ergonomic and contemporary look.

Last quarter, 3Com topped
analysts' estimates, earning $87.5 million, or 24 cents a share, on sales of $1.41 billion.

The stock peaked at 51 1/8 in December before falling to a 52-week low of 20 in April.

Seventeen of the 32 analysts following the stock maintain a "hold" rating.

First Call consensus expects it to earn $1.16 a share in fiscal 2000.