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3Com beats estimates, announces spinoff

The network equipment maker posts a second-quarter loss that beats revised Wall Street forecasts and announces plans to spin off its high-end carrier gear business.

3Com posted a second-quarter loss Thursday that beat revised Wall Street forecasts, and announced plans to spin off its high-end carrier equipment business.

Excluding one-time costs, 3Com announced a second-quarter loss of 52.4 million, or 15 cents a share, on revenue of $789.5 million. The revenue includes $22.8 million the company earned from businesses it recently exited.

Separately, 3Com announced plans Thursday to spin off its high-end carrier equipment business, which serves customers such as America Online, AT&T and WorldCom. The new wholly owned subsidiary, formerly called the Carrier Network Business, will now be known as CommWorks and will be led by current 3Com executive Irfan Ali, who was named president.

The company, which shrunk in size this year after reorganizations and the spinoffs of Palm and modem maker U.S. Robotics, earned $130.9 million, or 37 cents a share, on revenue of $1.48 billion last year.

The network equipment maker had been expected to lose 8 cents a share before a profit warning Dec. 4. Those forecasts worsened to a 20 cent loss per share after the warning, according to First Call.

In after-hours trading, 3Com's shares jumped $1, from $7.19 to $8.19, according to Island ECN's Web site, which tracks trades on electronic networks.

3Com executives blamed the shortfall on slower sales of networking equipment to telecommunications carriers and Internet service providers. Lucent Technologies and Foundry Networks, which have announced profit warnings for their current quarters, also blame their shortfall on slower equipment sales to telecommunications service providers.

Second-quarter revenue for carrier equipment was $95.4 million, a 43 percent decrease from the previous quarter.

3Com's plans to spin off its high-end service provider equipment business completes its strategy to focus on certain markets. The unit has seen sales slip significantly this quarter.

The network equipment maker expects to take a one-time charge related to the spinoff against earnings of between $40 million and $60 million during the fiscal third quarter, though the company expects that the realignment will result in savings of between $200 million and $250 million per year, which could return 3Com to operating profitability in 2002, the company said.

3Com will seek ways to reduce costs and will consider several options, including cutting jobs or selling off property, 3Com president Bruce Claflin said. The company currently has about 9,200 employees.

Corporate and consumer product sales slightly increased to $671.3 million in the second quarter, a 5 percent increase from the previous quarter, 3Com executives said.

3Com executives have said the drop in sales of carrier equipment ends a streak of seven straight quarters of growth for the unit, which represents about 13 percent of 3Com's overall revenue. 3Com sells networking hardware and software to carriers and Internet service providers.

As a result of the carrier business subsidiary, 3Com will focus on the consumer and small-business markets. Claflin, who will soon ascend to the chief executive post, said 3Com will continue to refine its strategy so it can revitalize its business.

"We intend to be a growth company," Claflin said in a conference call with financial analysts after the release of the earnings news.

Thursday's financial results cap off an eventful year for 3Com. The latest news is a blow to 3Com's turnaround efforts, according to analysts.

Claflin, who had predicted 3Com would be profitable again in the fourth fiscal quarter, said the company now expects to be profitable in the first quarter of fiscal 2002.

During the conference call, 3Com executives said they expect continued slow sales in telecommunications equipment next quarter. The third quarter is also historically the company's weakest quarter for sales to consumers and businesses.

The company expects to post a third-quarter loss of $80 million to $100 million and to see revenues dip slightly to $725 million to $750 million.

3Com executives expect sales of telecommunications, consumer and business products to rebound in the fourth quarter. The company expects revenue to grow to $790 million to $820 million, while posting a loss of $30 million to $40 million.

After a major reorganization earlier this year, when the company spun off Palm and shed its slow-growing businesses, 3Com posted strong earnings last quarter. The company lost $41.3 million, or 12 cents a share, beating analysts' predictions of a 33 cent loss.

In its March reorganization, 3Com exited the high-end corporate networking business to focus on small and medium-sized businesses and consumers, areas the company has historically dominated.

Chase Hambrecht & Quist analyst Erik Suppiger said the spinoff of 3Com's subsidiary is a smart move because it allows the company to focus on businesses and consumers.

"It makes sense, but they should have done it a long time ago," Suppiger said. "It's difficult to run two businesses that have very little synergy between them, and management was being pulled in different directions."'s Corey Grice and Ben Heskett contributed to this report.