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Tech Industry

3Com unravels after latest round of bad news

    3Com shares shed $2.06, or 23 percent, to $7.06 Thursday after warning it will post a wider-than-expected loss in its third quarter on disappointing sales, bringing it within just a few pennies of its 52-week low of $6.94.

    After laying off 1,200 workers earlier this week, some analysts believe the network-equipment maker will likely make more staff reductions in the weeks and months to follow in a desperate attempt to cut costs and refocus its business model.

    On Wednesday, 3Com executives told Wall Street to expect a third-quarter loss, excluding one-time charges, of between $135 million to $145 million, or 40 cents to 43 cents a share.

    First Call consensus expected 3Com to lose only 14 cents a share in the quarter.

    Following its dismal second-quarter results, 3Com braced investors for a loss of only $80 million to $100 million in the current quarter.

    The company said third-quarter sales will fall to between $625 million to $640 million, down from the $725 million to $750 million forecast late last year.

    "I think 3Com needs to evaluate what businesses they can generate profits and growth from and get out of the others," said Erik Suppiger, an analyst at J.P. Morgan Hambrecht & Quist. "They're just too diverse right now and have too much exposure to slow-growth markets."

    Suppiger, who rates the stock a "market performer," said he expects the company to reset its sales projections for the fiscal year following the third-quarter earnings report. He also lowered his 2001 sales and earnings estimates from $3.2 billion and a loss of 18 cents a share to $2.3 billion and a loss of $1.04 a share, respectively.

    "I don't know if there are any more layoffs coming," he said. "But those 1,200 it announced this week were primarily related to the shortfall it had in the second quarter. They may have to revisit (more layoffs) again this year."

    Merrill Lynch analyst Michael Ching downgraded 3Com from a "near-term accumulate" rating to a near-term neutral" recommendation Thursday and trimmed its long-term growth rate expectations to 15 percent from 25 percent.

    H&R Block Financial Advisors cut the stock from a "buy" rating to "accumulate, and predicted more cost-cutting measures in addition to the layoffs announced earlier this week.

    "We believe the company's revenues and margins will continue to suffer until we see industry-wide PC and telecom spending improve," the firm said in a research report.

    Network-equipment stocks as a group have been pummeled in recent months.

    Cisco Systems (Nasdaq: CSCO), the undisputed heavyweight champion of the sector, missed analysts' estimates in its latest quarter and scaled back expectations for the next few quarters.

    Cisco's stock fell to $22.63 Thursday afternoon, its lowest level in more than two years.

    Fellow network-equipment makers Lucent Technologies (NYSE: LU) and Nortel Networks (NYSE: NT) have also watched their shares collapse after issuing profit warnings earlier this quarter.

    3Com shares peaked at $119.75 a share last March ahead of the highly anticipated initial public offering of its Palm (Nasdaq: PALM) spin-off.

    Last quarter, it topped analysts' revised estimates when it posted a loss of $52.4 million, or 15 cents a share, on sales of $789.5 million.