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3Com warns, discontinues cable, DSL

The network equipment maker issues a revenue warning for its fourth quarter and discontinues its cable and DSL modem business.

3Com issued a profit warning for its fourth quarter Thursday and discontinued its cable and digital subscriber line modem business.

The network equipment maker, which has announced warnings for three straight quarters, said it expects revenue of $450 million to $475 million for the fourth quarter ended June 1. Company executives previously expected revenue of $550 million to $600 million, a 3Com representative said.

The company gave no further details but blamed the poor sales on the U.S. economic slowdown. 3Com will release fourth-quarter results June 26. Before the earnings warning, Wall Street analysts had expected a loss of 45 cents per share, according to a poll of analysts by First Call.

Like Cisco Systems, Lucent Technologies and other networking companies, 3Com has been hit hard by the economic slowdown. Last month, 3Com announced it would lay off 3,000 employees, or 30 percent of its work force. That number includes the 3Com employees who will lose their jobs because the company is killing off its high-speed modem business.

3Com becomes the second networking company on Thursday to exit the high-speed modem business. French network equipment maker Alcatel sold its DSL business to Thomson Multimedia in a stock deal worth $389 million.

"It's a low-margin business," said Jeremy Duke, an analyst at Synergy Research Group. "The industry has a significant buildup of inventory. We saw a 20 percent dip in sales in the (2001) first quarter, and that will continue. The money is to be made in infrastructure equipment, not modems."

3Com executives said the company will honor all existing customer orders and warranties for its broadband modems.

"It will be a soft landing for our customers," a 3Com representative said.

3Com has been reorganizing to try to become profitable, but it has gotten a lot smaller in the past 15 months. The company last year spun off Palm, a maker of popular personal digital assistants, and U.S. Robotics, its analog modem business. As part of its goal to save $1 billion, the company in March discontinued its consumer products, which included the Audrey Web-surfing appliance and the Kerbango Internet radio.

The company last quarter lost $122.8 million, or 36 cents per share, on revenue of $629.6 million.

3Com has been targeting the network equipment market for telecommunications carriers and businesses, focusing on high-growth areas such as Internet telephony and wireless networking. The company continues to sell products in the emerging market for home networking, technology that lets computers connect and communicate with other electronic devices in the home.

"Our strategy is to focus on businesses and service providers?these are areas that play to 3Com's strengths," 3Com Chief Executive Bruce Claflin said in a statement.

Overall, company executives said lower sales led to excess inventories and higher manufacturing costs for some of their products.

"Business conditions worsened in 3Com's fourth quarter," Claflin said. "However, 3Com is taking the steps necessary to achieve future profitability in this unfavorable climate."

Analysts say 3Com still has a strong core business, selling networking hardware to service providers through its CommWorks subsidiary. The company is still selling products to small and midsized businesses, Synergy's Duke said.

"It's not all doom and gloom," Duke added. "Their sparkle of hope is CommWorks and their wireless and (Internet) telephony products for businesses."