3Com sees the light

When networking giant 3Com reported better-than-expected first-quarter earnings last month, executives cast the results as a sign that the company had turned the corner financially.

Now the company is saying strong second-quarter sales could be on the horizon.

"We expect to see some solid growth in our second fiscal quarter as we find significant sales uptake in the quarter ? and as we see a strong uptake in the Asian marketplace," 3Com senior vice president Douglas Spreng told Bloomberg today.

3Com admits that historically the second quarter has been seasonally strong. And while analysts point to signs that the company is recovering, they say it merely has stabilized after a woeful 1998 that threatened the entire networking equipment market, as sluggish global sales and maturing markets dampened expectations.

Still, the No. 2 data networking company's profit margins are on the rise, after bottoming out about two quarters ago. Analysts are looking for strong sales of a newly released high-end switching family.

The company also expects an uptick in modem sales due to the back-to-school season. On the local area network, or LAN, side of the business, 3Com is looking for increased global sales due to typical summer slowness in Europe and Latin America, a spokesman said.

"The sales rate clearly has clearly improved," said Paul Weinstein, director at Credit Suisse First Boston.

On the client side the company's modems and adapters are selling better and 3Com has introduced new products that have helped the sales rates, Weinstein said. "They saw a big growth rate last quarter because there was a lot of pent up demand," he said.

Weinstein said he predicts profit margins to increase the next six quarters.

"Expense ratios are starting to normalize [following the company's June 1997 acquisition of U.S. Robotics] and gross margins continue to climb," he said. "They've stopped 'stuffing the channel' and got rid of some of the inventory problems."

Financial analysts see some positive signs from the company. But they aren't ready to declare a complete return to its previous successes.

"I met with the company last week and it sounds like business is doing fine," said Stephen Koffler, an analyst at Donaldson Lufkin & Jenrette.

Koffler said he is looking for strong sales of the company's new high-end switching family. 3Com recently released the new CoreBuilder 9000 line aimed at high-end corporate networks, a market in which 3Com has lagged behind rivals.

3Com, which lives largely at the so-called edge of the network by making products to facilitate desktop and system connections for small and medium-sized corporate layouts, has been criticized in some corners for having trouble tapping into the lucrative high-end corporate market.

Coupled with some fiscal 1998 oversupply problems and shackled by the company's merger with U.S. Robotics--which drew fire for the way 3Com integrated the modem maker--profits have beaten expectations but are far below previous levels.

At the same time, Cisco Systems, the leader in the data networking equipment arena, has made a killing in the heavy-duty corporate and service provider markets with its high-end routers and other networking products. Cisco, 3Com's networking rival, said today its revenues could top $10 billion for the current fiscal year.

Despite some signs that 3Com has stabilized, the company is still plagued by rumors that it is an acquisition target. Typical suitors include Intel, which has expressed an interest in expanding its presence in the networking market, and Lucent Technologies, the voice equipment giant that has made no secret of its desire to get into data.

Meanwhile, 3Com will open a new factory in Singapore this week where the company will make modems and network connections, according to spokesman Brian Johnson. "We needed that additional capacity due to demand for our products," Johnson said. "[This plant] puts that capacity in a high-growth region for us."

3Com will report its second-quarter financial results in mid- to late December. Wall Street is looking for a profit of 31 cents per share from the company, compared with earnings of one penny per share for the same period a year ago, according to First Call.

Stock in the company closed up about 1.5 percent today at 34.3125. Shares have traded as high as 46.5 and as low as 22.9375 in the past 52 weeks.

Reuters contributed to this report.