3Com warns of sluggish sales

The network equipment maker issues a profit warning for its third quarter, citing the slowing U.S. economy and sluggish sales to telecommunications carriers.

2 min read
3Com issued a profit warning for its third quarter Wednesday, citing the slowing U.S. economy and sluggish sales to telecommunications carriers.

Excluding one-time costs, the network equipment maker expects to post a third-quarter loss of $135 million to $145 million. The company had previously predicted a loss of $80 million to $100 million.

3Com executives said revenue will be in the range of $625 million to $640 million, down from the company's previous projection of $725 million to $750 million.

In after hours trading, 3Com's shares fell $1.23 at $7.90, according to the Island ECN Web site.

3Com is afflicted by the same malaise that has hurt Cisco Systems, Nortel Networks, Lucent Technologies and others in the network equipment market.

Nortel and Lucent have issued profit warnings, while Cisco has announced flat sequential revenue growth for the next two quarters. They all blame the U.S. economy and slower sales of networking hardware to telecommunications service providers. Many emerging carriers, such as DSL service providers, have struggled financially, which have slowed down their spending for networking equipment.

3Com executives Wednesday said other culprits for the profit warning include less profit from its high-speed modem business because of sharp drops in prices for cable and digital subscriber line (DSL) modems. The company also blamed lower profits from its products aimed at businesses, but declined to be specific.

Analysts weren't surprised by 3Com's earnings warning, in light of similar announcements by other networking companies.

"They expected higher growth in the DSL and cable modems business and that margins would be sustained, but that hasn't happened," said analyst Martin Pyykkonen of C.E. Unterberg Towbin. "The erosion on prices happened faster than expected."

The slowdown comes at a bad time for 3Com, which is in the midst of its latest turnaround effort. 3Com, which laid off 1,200 employees this week, has now issued an earnings warning for two straight quarters.

3Com has gotten smaller over the past year, as it spun off Palm last spring, shed its slow-growing analog modem business and peeled away its network equipment arm for larger businesses. The company recently announced plans to spin off its carrier equipment business and is now catering to small and mid-sized businesses and consumers.

Pykkonnen said a big chunk of 3Com's revenue is still networking cards used to connect PCs together in businesses. Because PC makers are suffering from slower sales, 3Com's networking card business probably stagnated as well, he said.

3Com has focused on growing markets, such as Internet telephony and wireless and home networking, but those markets are not growing fast enough yet, making up only about 18 percent of the company's overall revenue, Pykkonen said.

Excluding one-time costs, 3Com last quarter announced a loss of 52.4 million, or 15 cents a share, on revenue of $789.5 million.