3Com ready to rework business focus

The networking firm will announce specific plans to shift resources away from the slow-growing analog modem business to emerging and potentially more lucrative markets like DSL and cable modems.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
5 min read
3Com will soon inject a booster shot into its business in hopes of breaking out of its financial malaise.

The struggling networking firm will announce specific plans to shift resources away from the slow-growing analog modem business to emerging and potentially more lucrative markets, such as digital subscriber line (DSL) and cable modems, home networking, and wireless access products, according to a source within 3Com.

The announcement--expected later this week--will expand upon 3Com's new strategy announced last month following a disappointing fiscal quarter.

3Com executives at the time said they planned to move away from the company's classical strengths in networking cards and analog modems, to focus efforts on nascent but fast-growing markets, including Internet telephony and the company's successful PalmPilot line of handheld devices.

"This week we're talking about how we are re-balancing our investments in the client-access business, away from desktop analog modems, and moving research and development to accelerating broadband access, home networking and wireless," said the 3Com source. "We will give more specifics on what that means to our investors and how that translates to growth in the company."

3Com has been mired in a financial troubles lately as prices and sales of modems and networking cards have dipped, while its stock price has plummeted from the mid-50s in January to the low 20s this month.

In March, 3Com reported weak quarterly results, posting revised earnings of 24 cents a share. Although the numbers beat revised analysts' estimates, they fell below Wall Street's original consensus estimates of 36 cents.

3Com?s struggles are magnified by the continued success of some of its traditional competitors and new rivals, like Cisco Systems and Lucent Technologies--underscoring the notion that finding the right niche can result in high returns in the networking business.

3Com's woes have led some Wall Street analysts to believe that the company needs to make drastic moves to bring new life into its business.

Suggested organizational changes include the possible spin-off of 3Com's most prized asset, the PalmPilot business. Additionally, the company could spin off or sell outright its networking card and modem business, or its high-end carrier class equipment line. Finally, the company could look inward to rework its management structure and possibly cut some employees.

Stay the course?
But the 3Com source said the company isn't planning any drastic changes.

"There's no change in strategy. We plan to carry through our plan? to accelerate from legacy product lines to emerging product lines," the source said.

"The speculation of the Palm business is completely bogus," the source added. "It's more central to our strategy today than it was a year ago. All the rumors of possibly spinning off really come from people who are hoping to bid for this business."

The 3Com source said the company will continue to expand its popular PalmPilot line, which has dominated the handheld market.

A 3Com spokeswoman today declined to comment on future announcements.

But in a recent document filed with the Securities Exchange Commission, 3Com said its new focus on emerging markets could affect how the company deploys its resources, including its "manufacturing capabilities, fixed assets, and the nature and location of its workforce."

Analyst Chris Stix, of SG Cowen, believes 3Com's plan to dive into new markets could help turn the company around.

The only issue is when consumers will truly embrace the new high-speed technologies, such as DSL or cable modems, and help drive 3Com's revenue growth, Stix said. Many analysts hold that faster Internet access will become more available, and more popular, by early next year. That, in turn, will drive the sale of home networking products, which allows consumers to connect their home PCs, printers, and other devices.

"Ultimately, this will re-ignite growth for 3Com. What's not clear to us is how fast revenue will ramp up for the company and make a significant contribution," Stix said.

The company alludes to the risks in the SEC report. "There can be no assurance that these emerging markets will materialize in the timeframes expected by the company," the report said.

Focus, focus, focus
3Com has already made several moves to boost its business. The company added telephony to its family of data networking devices for small and medium-sized businesses. And it partnered with Siemens to build telephony products for local corporate networks.

3Com also dropped out of the emerging storage area network market, after five months of research and development, to focus on their new high-growth strategy.

Analyst William Becklean, of Tucker Anthony, said exiting the storage area networking market was a good start, but the company still needs to do much more.

The root of 3Com's problems is that it isn't focused, Becklean said. "They got themselves into a difficult strategic solution, where they committed to be too many things to too many people."

A year ago, 3Com's goal was to provide networking products to enterprises, as well as corporate and wide area network products to carriers, small and medium-sized businesses, and consumers. Becklean said it was too much to swallow.

"They can't do all that. They have to figure out quickly what they want to do and don't want to do--and get out of what they don't want to do," he said.

Other ideas
Overall, about half of 3Com's revenue comes from consumer-oriented products, such as networking cards for PCs, modems for Internet connections, and the PalmPilot business. Analysts believe the other half stems from 3Com's strength in networking equipment for small and medium-sized businesses and remote access devices.

Punk Zeigel analyst Michael Davies believes the company should maximize shareholder value by spinning off its PalmPilot line.

"I'd take PalmPilot, the remote access business, and wireless strategy. Meshed together, they could have a company close to $1 billion or higher in market capitalization," he said. "The remaining could wallow. Perhaps do a restructuring, leverage a management buyout, and take it private."

Analyst Scott Heritage, of Warburg Dillon Read, agreed, saying 3Com should somehow separate PalmPilot with the modem and networking card business.

"The value of the PalmPilot is not reflected in the stock price and the [networking cards] and modems are dragging down the value of the company," he said.

News.com's Ben Heskett contributed to this report.