3Com stock hit on revenue concerns

Shares in the networking firms plunge in heavy trading after the networking firm warned that revenue next quarter will likely fall.

4 min read
3Com's shares plunged in heavy trading today after the networking firm warned that revenue next quarter will likely fall.

Despite posting strong fourth-quarter earnings yesterday, 3Com's stock dropped 14 percent, or 4.375, to 27.125 on 18.3 million shares today.

Several analyst firms downgraded 3Com's stock after executives yesterday warned revenue may decline sequentially in the next quarter on continued slow sales of analog modems and network interface cards--products that make up about half the company's revenue.

"The summer and winter quarters will be challenging and revenue may decline in both quarters, but the second and the fourth quarters are typically growth quarters, and we expect that to be the case," said Christopher Paisley, 3Com's chief financial officer.

Today analyst firm 3Com stock chart Gruntal downgraded shares of 3Com from a "buy" to a "hold," while Needham downgraded 3Com from a "strong buy" to a "buy."

Overall, 3Com executives said they expect revenue from the second half of next year to increase from the first half as sales from Palm devices, home networking, Internet telephony, and wireless technologies grow.

Boosted by strong growth in its PalmPilot and networking hardware businesses, 3Com yesterday rebounded from a dismal third quarter by posting a fourth-quarter profit of 24 cents a share, beating analysts' estimates by a penny.

3Com's fourth-quarter earnings rose 38 percent to $88 million or 24 cents per share, compared to $65.9 million or 18 cents per share,in the same period a year ago. The company was expected to earn 23 cents per share, according to a consensus of analysts polled by First Call.

3Com executives said fourth-quarter sales of systems products--routers, hubs, and switches in the carrier, small-business, and enterprise market--grew 11 percent from the third quarter. Revenue from such products as analog modems and network interface cards (NICs) declined 11 percent in the same period, however.

3Com executives said PalmPilots are one of the company's fastest-selling products, and for the first time, sales of the Palm devices have increased to more than 10 percent of the company's overall revenue.

3Com chief executive Eric Benhamou said 4 million Palm devices have already been sold. "We're encouraged by our early success," he said.

The fourth-quarter results show that 3Com's strategy--moving from its traditional, slow-growth markets to emerging, potentially more lucrative businesses, such as the PalmPilot--is beginning to work, said Bruce Claflin, 3Com's president and chief operating officer.

Fourth-quarter sales rose slightly to $1.42 billion from $1.38 billion last year. Earnings include a one-time $5.6 million charge for the purchase of NBX and a pre-tax credit of $4.9 million for past merger activity.

The company said its board authorized the repurchase of 15 million shares of stock.

Analysts yesterday had predicted that 3Com's shares would likely fall.

SG Cowen analyst Chris Stix said that 3Com had a solid fourth quarter and that slow sales in the summer are normal. The company's stock has risen from the low 20s to the low 30s in recent months as investors speculated that part of the company might be sold, Stix said.

"I wouldn't be surprised if the stock trades down a little because people speculated they might announce a restructuring or might beat the numbers substantially, and neither of those occurred. They certainly didn't give any credence to the rumors," he said.

Analyst Craig Johnson, of the Pita Group, was less impressed, saying revenue grew only about $5 million between the third and fourth quarters.

"It sounds like they managed [costs] well internally, but they didn't grow from a revenue perspective," he said.

For the fiscal year ending May 28, the networking company earned $397.7 million, or $1.08 a share, on sales of $5.8 billion. In the year-ago period, 3Com reported a profit of $246.1 million, or 67 cents a share.

3Com had reorganized its business structure over the past few months in response to a lackluster third quarter.

In March, the struggling networking firm beat Wall Street's revised estimates, reporting a profit of 24 cents, though the company was originally expected to earn 36 cents per share.

After sales for its analog modems and NIC cards slowed, the company announced it would move its business into more profitable areas.

Two months ago, 3Com slashed 150 positions, dropped out the storage area network market, and created a new personal connectivity business unit. With the new unit, 3Com streamlined its NIC and analog modem products to concentrate on emerging, higher growth markets, such as cable and digital subscriber line (DSL) modems and wireless technologies.

At the time, the company also said it would place more emphasis in itsPalm devices. To help sell more PalmPilots, 3Com last week said it would create a new firm, called OpenSky, that will offer wireless Internet service for Palms, cell phones, and other handheld devices.