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3Com leads networking charge

The network equipment provider closed nearly 2 percent lower today, one day after the company beat consensus expectations for its fiscal 1999 second quarter.

3Com shares closed nearly 2 percent lower today, one day after the company gave investors an early Christmas present by beating consensus expectations for its fiscal 1999 second quarter.

Shares fell as much as 5 percent in midday trading before finishing at 47.75 after A.G. Edwards analyst Peter Andrew downgraded 3Com to "accumulate" from "buy." Several other investment banks reiterated "buy" ratings on the company today.

"We have pulled our rating down--due only to the material appreciation in the share price over the last few months," Andrew wrote in a report today.

The stock had neared its 52-week high earlier in the week, as much of the data networking sector got a boost on Wall Street. Shares have traded as high as 49.125 and as low as 22.9375 in the past year.

Yesterday, the second-largest provider of data networking equipment continued its comeback, posting earnings of $132.9 million, or 36 cents a share, on revenue of $1.5 billion for its just-completed quarter. That compares with earnings of $4 million, or 1 cent, on revenue of $1.2 billion for the same period a year ago. Pro forma net income, excluding charges related to mergers and other activities, totaled $133.4 million, or 36 cents per share, for the quarter.

Wall Street expected earnings of 31 cents a share, according to consensus estimates compiled by First Call.

A.G. Edwards' Andrew added: "3Com last night announced results that materially beat analysts' expectations. Even more important though, we believe that it materially rebuilt much of the credibility of the management team at 3Com that was destroyed over the last year and a half."

3Com's performance comes amid an upswing in networking stocks on Wall Street, save for competitor Cabletron Systems, which posted disappointing numbers yesterday.

Analysts said they were pleased with the stronger-than-expected showing.

"The one thing I'm excited about is they're increasing their R&D budget. It really looks like they have a plan of action for future growth," said Greg McClenon, an analyst at investment bank Moors & Cabot Dakin.

3Com also had an upside surprise for its fiscal 1999 first quarter, though the company's earnings remain tepid compared with previous high-growth levels.

At that time, chief executive Eric Benhamou said it was "indisputable" that 3Com had turned the corner after a rocky period in the aftermath of its merger with US Robotics, that included product inventory woes.

Company executives insisted they have focused on those inventory issues. "Inventory turns are higher than they've been in years and we've reduced our inventory in absolute dollars by 42 percent in the last nine months," said chief operating officer Bruce Claflin.

Unlike last quarter when much of the company's growth came from the Palm product line, this quarter's growth stemmed from all the major product lines, especially switching products, Benhamou said on a conference call with analysts.

Executives said new products accounted for more than 60 percent of revenue during the quarter ending November 27--an all-time high for the company.

International sales also were solid at $698.7 million, which accounted for 45 percent of revenue, according to chief financial officer Christopher Paisley.

3Com is also expecting a strong future market in wireless modems, digital subscriber line (DSL) modems, and Data Over Cable Service Interface Specification (DOCSIS) cable modems.

"DSL and cable modems will see a very rapid growth rate," Benhamou said. "The family of end-point attachments could see double-digit growth in the next couple years."

3Com began shipping its first DOCSIS-compliant cable modems during the quarter.

In conjunction with the earnings announcement, 3Com revealed it has signed a deal to package its line of networking cards and modems with the entire line of PCs from Hewlett-Packard.

Executives said 3Com's attention to the enterprise business market paid dividends during the quarter, and for the first time, the company closed more than 100 corporate deals each valued at more than $500,000.

"This is entirely attributable to the strength of our new products and our focus on enterprise sales," Benhamou said.