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3Com rolls out restructuring plan, tops 3Q forecasts

3Com (Nasdaq: COMS) will ditch analog modems and core systems for corporate networks to focus on IP telephony, broadband, wireless and web-based products.

After market close Monday, the network equipment vendor unveiled its long-awaited restructuring plan even as it reported better-than-expected fiscal third quarter net income. 3Com saw pro forma earnings of $97.4 million, or 27 cents per share, excluding one-time events. First Call's survey of 24 analysts predicted a profit of 25 cents per share for the quarter ended Feb. 25.

Most of the company's attention Monday focused on 3Com's plan to speed up its growth, which has been dragged down by stagnant markets.

Fiscal 2001 will be consumed with 3Com's restructuring moves, 3Com President Bruce Claflin said during an afternoon meeting with analysts. In fiscal 2002, 3Com expects operating margins 12 to 14 percent, with revenue growing more than 20 percent, Claflin said.

That would be much higher than 3Com's current growth rate. In the third quarter of fiscal 2000, 3Com's revenue was virtually flat year-over-year at $1.4 billion.

The company will sell its analog modem business to a joint venture being formed with Taiwan-based Accton Technology and Singapore-based NatSteel Electronics. 3Com will shut down its LAN and WAN core product lines and contract with Extreme Networks to provide support and give customers access to next generation products in those fields.

"We simply cannot afford to have large businesses in this undesirable part of the chart for very long," CEO Eric Benhamou told analysts, referring to a chart that showed the growth of 3Com's business units.

3Com's fourth quarter results will take a hit because of restructuring, Claflin said. The company expects revenue ranging between $675 million and $750 million in the May quarter, with an operating loss of $450 million to $500 million.

That loss includes a portion of $200 million to $300 million in restructuring charges that will be taken over the next two fiscal quarters. Between 2,500 and 3,000 jobs will leave 3Com, with two thirds of being transferred to 3Com's partners and one third to be fired.

During fiscal 2001, Claflin said the first quarter will see 3Com exit its older businesses, reduce its workforce by at least 2,000 full-time employees and roll out a new distribution model that will cut channel inventory to a three to five week range, compared to five and seven weeks currently. The second fiscal quarter should see improved revenue growth, Claflin said. Income growth will accelerate in the third quarter, he added.

"Hot new technologies" will provide 3Com's growth, Claflin said. 3Com will make consumer products for high-speed and wireless Internet access, as well as home networking.

For commercial customers, the company plans network appliances that combine Web access with web caching from Inktomi (Nasdaq: INKT), load balancing from F5 Networks (Nasdaq: FFIV) and firewall security from SonicWall (Nasdaq: SNWL).

Other planned business products include LAN telephony systems with customer service and call center technology from Apropos Technology (Nasdaq: APRS), and an agreement to provide LAN telephony capability for wireless phones from Symbol Technologies (NYSE: SBL). 3Com also unveiled an agreement with CAIS Internet (Nasdaq: CAIS) to create high-speed Internet access systems for hotels.

3Com will continue and expand its offerings for communications service providers, executives said. 3Com on Monday announced the acquisition of closely held Call Technologies, a maker of unified messaging and operational systems and support software products, for about $90 million. It said the deal will add to its Comm Works Total Control platforms, which help service providers offer enhanced services over networks that carry voice, data and video.