3Com sneaks past 4Q estimates

3Com Corp. (Nasdaq: COMS) surprised Wall Street Tuesday when it reported better-than-expected sales and earnings in its fourth quarter. The network-equipment maker earned $87.5 million, or 24 cents a share, on sales of $1.41 billion.

First Call consensus pegged the Santa Clara, Calif. company for a profit of 23 cents a share in the quarter.

Its shares closed up 9/16 to 31 1/2 ahead of the earnings report.

In the year-ago quarter, it made $63.6 million, or 17 cents a share, on sales of $1.37 billion.

Last quarter, 3Com inched past analysts' estimates, earning $89.6 million, or 24 cents a share, on sales of $1.41 billion.

For the year, 3Com pocketed $403.9 million, or $1.09 a share, on sales of $5.8 billion. Last year, it earned only $30.2 million, or 8 cents a share, on sales of $5.4 billion.

Increased systems sales helped drive first quarter gross margin to 46.9 percent, compared to 43.5 percent a year earlier. Systems business rose 11 percent sequentially and 17 percent year-over-year, as it generated 55 percent of 3Com's overall revenue in the first quarter.

The company's client access business, which mainly deals in modems and network interface cards, saw sales declines of 11 percent from the previous quarter and 10 percent year-over-year. That will continue in the current quarter, especially with the approach of the summer, which is traditionally a slow season, said Christopher Paisley, 3Com's chief financial officer.

One growing segment is 3Com's high-profile Palm computing division. The handheld devices now generate more than 10 percent of 3Com's revenue, Paisley said, although he declined to provide specific figures. Revenue from Palm sales will be broken out in 3Com's 10K annual report, he said.

3Com executives touted continued improvements with supply chain management, including an increase in inventory turns during the quarter to 7.9 from 4.4 a year ago. "Our commitment to operational improvements will not stop," CEO Eric Benhamou said during an afternoon conference call with analysts. "We also know that we can reach a level that far exceeds average industry performance."

3Com shares moved up to a 52-week high of 51 1/8 in December before falling to a low of 20 in April.

Its shares picked up ground last month on rumors that it might be a takeover target for either Lucent Technologies Inc. (NYSE: LU) or Ericsson AB (Nasdaq: ERICY).

Company officials also announced that it will repurchase up to 15 million shares of common stock.

"We repurchased 10.6 million shares in our fourth quarter, bringing the total number of shares repurchased since June 1998 to 14.8 million," said CFO Chris Paisley in a prepared release. "We believe this stock buy back program is an important component in our multiple efforts to increase shareholder value for 3Com stakeholders."

Nineteen of the 32 analysts following the stock rate it either a "buy" or "strong buy."

-- Sergio Non contributed to this report.