Tech flops add to 3Com's woes

The financially-besieged networking company, which announced its latest restructuring Wednesday, had pinned its profit hopes on what it believed to be hot growth areas, such as home networking, high-speed modems, Internet telephony and Web-surfing appliances.

But the markets have not taken off as fast as 3Com has hoped. What's worse: 3Com isn't even the market leader in any of the new technologies, studies show.

The technology industry has been littered with companies that pushed new products only to find that consumers and businesses didn't yet want them, such as Apple Computer with its early Newton handheld device or Oracle with its network computer.

Now 3Com is retreating from the fledgling consumer Internet appliance market by killing off its Audrey Web-surfing appliance and Kerbango Internet radio. Analysts say 3Com is probably just too ahead of its time, selling products people aren't ready for.

"They've been struggling to develop markets where they can gain market share," said J.P. Morgan H&Q analyst Erik Suppiger. "They have not been able to generate any meaningful growth in sectors that were supposed to be high-growth products."

3Com was praised by analysts 18 months ago when company executives announced plans to move away from slow-growing products, such as analog modems and PC networking cards, for nascent markets that included wireless networking, and cable and DSL (digital subscriber line) modems.

That combined with its strong presence in selling equipment to small and medium-sized businesses, along with a growing business that sells networking gear to telecommunications carriers, was supposed to propel 3Com to profits. 3Com executives were confident they could grab market leadership.

But so far, 3Com's fortunes have not changed--as the company's quarterly revenue has plunged for three straight quarters. 3Com on Wednesday reported a third-quarter loss of $122.8 million, or 36 cents a share, on revenue of $629.6 million. The company announced a restructuring plan to save $1 billion. The reorganization includes layoffs, the first of which will be 170 employees from its broadband modem division, the company said Friday.

While the slowing U.S. economy is partly to blame, analysts say 3Com's reliance on still-developing markets is also at fault.

For example, in the high-speed modem market, 3Com's sales fell 14 percent, from $77 million in the second quarter to $65 million this past quarter. In the Internet appliance and home networking markets, revenue reached only $9 million in sales, up $1 million from last quarter.

The company's plans have been foiled, analysts say, because many of the markets are still emerging, and because 3Com faces stiff competition from rivals, such as Cisco Systems, Nortel Networks and others.

In the $1.4 billion cable-modem business last year, 3Com captured 15 percent of the revenue, behind leaders Motorola and Terayon, according to market research firm Cahners In-Stat Group. In the $1.1 billion DSL modem market last year, 3Com garnered an 8 percent market share, behind Efficient Networks, Alcatel, Cisco and others.

3Com executives blamed part of its latest financial problems on less profit from its high-speed modem business because of sharp drops in prices for cable and DSL modems.

"More second-tier manufacturers entered the market with lower costs, and that degraded the average sale price," said Cahners In-Stat analyst Amy Helland.

"3Com is gaining share in commercial and service provider (businesses)," 3Com Chief Executive Bruce Claflin said in a conference call with analysts this week. "But the consumer initiatives have not met expectations."

In the Internet telephony equipment market for businesses and service providers, the market is beginning to take off. But in the 2000 fourth quarter, where sales reached $335 million, Cisco led the pack with 42 percent market share, followed by Clarent with 12 percent and 3Com with 10 percent, according to Synergy Research Group.

3Com also placed third behind Linksys and Intel in the home networking market, with 10 percent market share in 2000, according to NPD Intelect. Home networking allows consumers to link PCs together and share a Net connection.

"There's growth, but no huge uptick in home networking yet. It's not something retailers are focusing on now because it's a difficult category to explain to consumers," said NDP Intelect analyst Steve Baker. "In the kind of soft sales environment we're in, retailers have to find ways to generate revenue, and that means an emphasis on technology that are easy for people to understand, like MP3 players, recordable CD drives."

So, what's next for 3Com?

3Com executives say they expect revenue to be in the $550 million to $600 million range in the fourth-quarter of this year. They expect the company to become profitable by next year in the fourth quarter of fiscal year 2002.

While 3Com's older equipment, such as PC adapter cards, still make up a big chunk of the company's overall revenue, some analysts say they expect the new markets 3Com plays in to eventually take off--and help with the company's turnaround efforts.

"We believe the worst is behind 3Com as the company continues its restructuring and focuses on its new growth markets," said Paul Sagawa, of Sanford C. Bernstein.

In 3Com's carrier business, for example, sales of wireless and Net telephony products grew 9 percent to $42 million, according to a recent research report by Morgan Stanley analyst Chris Stix. Those emerging products now represent 75 percent of 3Com's overall carrier revenue, he said.

"We still believe that over the next several years, 3Com's (Internet telephony) and wireless businesses will emerge and drive company growth," Stix said.