3Com shares sink lower after profit warning

Shares in the networking gear maker hit a 52-week low following a warning from the company that profits and revenues would fall short of expectations.

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Shares in networking gear maker 3Com hit a 52-week low Tuesday following a warning from the company that profits and revenues would fall short of expectations because of lower-than-expected sales.

3Com shares dropped $3.34, or 25 percent, to $10.03 by market close Tuesday. Earlier, shares hit a 52-week low of $8.75.

On Monday, 3Com executives blamed the shortfall on slower sales of networking equipment to telecommunications carriers and Internet service providers. For the second quarter ended Dec. 1, Santa Clara, Calif.-based 3Com said it expects to report revenue of $785 million to $800 million, down from a previous forecast of $870 million to $910 million.

Several Wall Streen analysts, including Goldman Sachs and Lehman Brothers, issued downgrades on the stock this morning. Goldman cut 3Com to "market performer" from "market outperformer." Lehman Brothers dropped 3Com to "neutral" from "outperform."

The per-share net loss should be in the range of 19 cents to 23 cents, compared with the previous forecast of a loss of 7 cents to 9 cents.

After closing at $13.38 in regular trading Monday, 3Com shares plunged 27 percent to $9.75 in after-hours trading, according to Island ECN, which tracks late trades on electronic networks.

Gartner analyst Marina Mayes says 3Com is blaming its troubles on structural changes in the worldwide telecommunications sector that are adversely affecting all networking products makers.

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3Com's earnings warning is a blow to its latest turnaround efforts. 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.

Analyst Christin Armacost of SG Cowen Securities said she was not surprised by 3Com's profit warning, given its rocky financial history the past few years.

"This is a company that's tried to reposition itself the last several years and has a history of disappointing Wall Street," Armacost said. "For the last few years, we've seen them go a couple of quarters (with no problems) then have an earnings warning."

3Com blamed its revenue shortfall on restructurings and consolidation in the telecommunications industry, as well as on belt-tightening by midsized Internet service providers.

3Com executives said the drop in sales of carrier equipment ends a streak of seven straight quarters of growth in that unit. 3Com sells networking hardware and software to carriers and Internet service providers.

Bruce Claflin "The telecom sector is undergoing great change. It has forced tier 2 and tier 3 (service providers) to scale back on investments," 3Com president Bruce Claflin said in a conference call with analysts and reporters. "Some have closed or are being consolidated. Tier 1 (carriers) are not exempt and are scaling back on investments, undergoing spinoffs or restructuring, and it negatively affected our sales" for the second quarter.

Second-quarter revenue for carrier equipment was approximately $95 million to $100 million, a 40 percent decrease from the previous quarter ended Sept. 1 and a decline of approximately 30 percent from the second fiscal quarter a year ago.

Corporate and consumer product sales will slightly increase to $670 million to $685 million in the second quarter, a 5 percent to 7 percent increase from the previous quarter, 3Com executives said.

3Com's struggles
Stock price from December 1999 to present.  
 Source: Prophet Finance
Claflin said carrier sales in the third quarter aren't likely to rebound in the third quarter, which is historically the company's worst quarter. He added that it's too soon to know whether 3Com will see a small increase or small decrease in sequential revenue growth.

Besides the telecommunications slowdown, Claflin said two other issues could affect the company's bottom line next quarter. Slower PC sales growth could reduce revenue the company garners from PC cards and network adapter cards. But the component shortages that affected the company's ability to ship corporate and consumer networking products the first two quarters of the year has been alleviated, which could help overall revenue, he said.

Some Wall Street analysts have predicted slower sales of telecommunications equipment. With Monday's announcement, 3Com joins several of its peers, which have seen slower sales of telecommunications equipment in certain markets.

Last quarter Nortel Networks beat earnings but announced sales growth of 90 percent in its optical network equipment unit, 30 percent to 35 percent less than some analysts had expected. Lucent also announced slower optical networking sales when it reported fourth-quarter profits down 22 percent from the year-earlier period. 3Com, however, plays in a different portion of service provider networks.

3Com's problems don't necessarily spell doom and gloom for the rest of the telecommunications industry. Cisco Systems chief executive John Chambers on Monday reiterated that the company expects continued strong financial results. And Nortel recently reiterated that it expects to have strong financial results next quarter.

3Com's carrier business doesn't play in three of the hottest networking markets that Cisco, Nortel, Lucent Technologies and others are fighting for: the "core" of the telecommunications carrier network, through which most Net traffic travels; metropolitan networks, or the building of fiber-optic networks within big cities; and Web switches, networking equipment that speeds Net content to Web surfers.

3Com will give further details on its second quarter when it officially announces results Dec. 21. Before Monday's announcement, company executives predicted 3Com would be profitable again in its fourth quarter.