THE DAY AHEAD: 3Com''s ''bounce back'' quarter just a start

For 3Com, boring and broadband is beautiful in the post-Palm era. 3Com (Nasdaq: COMS), a broadband equipment provider, posted one of those "steady as she goes" quarters that could be used as a building block for its turnaround.

The first quarter figures can be summed up in one word -- complicated. It's safe to say there were a few moving parts following 3Com's recent restructuring and spin-off of Palm Inc. Excluding a bunch of items, 3Com reported a loss of 12 cents a share.

Just for the record, 3Com's pro forma net loss of 12 cents a share excluded purchased in-process technology charges, business realignment costs, gains on investments, amortization of goodwill and intangibles, merger-related credits, and net income from discontinued operations. Based on continuing operations (what's left after 3Com's mammoth restructuring), the company lost 18 cents a share. Either way, it's a good start, since Wall Street was expecting a loss of 33 cents a share.

As for sales, 3Com reported revenue from continuing operations of $806 million, up 20 percent sequentially. That wasn't too shabby either. Simply put, it was a good "bounce back quarter" for 3Com.

Ho hum

So what may hold 3Com shares back over the next few months? A serious lack of excitement.

On a conference call devoid of personality, officials laid out the guidance for the next few quarters. Revenue will be up 8 percent to 13 percent in the second quarter. Officials told analysts to raise their revenue estimates for fiscal 2001 by $200 million, to a range of $3.5 billion to $3.7 billion from $3.3 billion to $3.5 billion. The company also plans to announce two new Net appliances in the second quarter.

As for the bottom line, officials also didn't stray from prior guidance for the fiscal year even though 3Com creamed estimates. 3Com sees operating profits in the fourth quarter and a possible net profit in the second quarter because of one-time gains.

Judging from the Q&A period on the call, analysts were clearly in wait-and-see mode with 3Com.

Turns out all the excitement about 3Com was spun off with Palm Inc. (Nasdaq: PALM). Palm has some pizzazz. 3Com drones.

Comparing and contrasting the two companies' conference calls makes for an interesting case study. Although Palm may not get the credit it deserves, it is posting profits and delivering the growth. It shows. Wall Street is much more interested in Palm these days. 3Com's conference call may have left some analysts asleep at the phone.

The bright spots

But just because 3Com is a yawner doesn't mean you should ignore it. There are bright spots, but 3Com needs a few more quarters to prove itself.

For starters, it topped estimates. That's no small feat for 3Com. Granted, the company lowballed Wall Street with its guidance, but you gotta start somewhere.

Sales from 3Com's commercial and consumer networks business were up 24 percent. If you listened closely (very closely), 3Com sounded bullish on its broadband business. One interesting thing to note was that CEO Eric Benhamou said he used 3Com products to install his latest home network.

Nevertheless, 3Com has some good territory staked out in the midsized business market. On the inventory front, 3Com also looks solid.

As for the carrier business, 3Com showed some progress with sales growth of 7 percent sequentially, but it's not clear where this business is heading. Can 3Com really compete with the big boys like Cisco, Lucent and Nortel? In a word: doubtful.

Overall, it's a good start for the new 3Com, but the jury is still out. Benhamou said he was pleased with the company's progress so far, but there's a lot of work to do.

Wall Street obviously agrees. Of the analysts covering 3Com, half of them rate it a "hold" as of this morning. TDAIN
• 3Com tops estimates in 1Q, sees 4Q operating profit
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