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3Com to shed modem, corporate network businesses

The network equipment maker announces a broad restructuring plan to resuscitate a networking business that's been plagued by stagnant revenue growth.

Struggling network equipment maker 3Com today announced a broad restructuring plan to resuscitate a networking business that's been plagued by more than a year of stagnant revenue growth.

3Com said it will exit the slow-growing portions of its networking business and focus on emerging technologies, such as wireless networking, Internet telephony, and high-speed Internet access through cable and digital subscriber line (DSL) modems, as previously reported.

In a concession to its bigger rivals Cisco Systems and Nortel Networks, among others, 3Com will bow out of the high-end networking business. The beleaguered networking firm will sell some high-end equipment to Motorola and kill off its family of CoreBuilder high-end switching products, turning to former competitor Extreme Networks for that type of technology, as previously reported.

"This is not a massive restructuring, but they are going to focus their resources in areas of greatest market opportunity," Dataquest analyst John Armstrong said. "The Street will welcome this restructuring in that 3Com is evolving as the market has evolved."

The company's woes are rooted in a networking industry that's rapidly changing. 3Com has been slow to react as sales of corporate networking equipment--once the lifeblood of the networking industry--dragged. In its place, many of the fastest-growing companies have targeted their technology at ISPs and telecommunications companies, taking advantage of the Internet's growth.

Today's moves come as 3Com attempts to regain a solid footing in the lucrative networking business, where large and small rivals, such as Foundry Networks and Juniper Networks, among others, have seen their profits and stock prices soar.

3Com also plans to shed its slow-growing analog modem business. The company will create a joint venture with networking firm Accton Technology and manufacturing company NatSteel Electronics, which will build and sell analog modems that use the U.S. Robotics name. 3Com will own a minority share of the joint venture, company executives said.

The firm will retain its networking gear to consumers and small and medium-sized businesses, as well as much of its Internet-based networking equipment and software aimed at Internet service providers (ISP) and telecommunications carriers.

As a result of the moves, 3Com will end up a smaller firm, focused on a series of emerging markets that as yet do not offer the large revenue streams that some of its slower-growing businesses do.

Having already spun off its prized and profitable Palm handheld unit, analysts say 3Com needed to restructure its business to focus on faster growing markets.

Without the revenue from analog modem and high-end networking products, as well as sales from its spun-off Palm Computing unit, 3Com will see its yearly revenue cut in half, according to executives, from its current $6 billion to about $3 billion, based on revenue estimates for coming quarters.

3Com executives said the company's revenue will drop by half to about $675 million to $750 million next quarter. President and chief operating officer Bruce Claflin said he expects positive revenue growth by the second quarter of the 2001 fiscal year, and the company to make a profit by the third quarter.

But company executives believe the firm will more than make up for that by focusing on the nascent, but emerging markets, such as home networking.

"3Com has a bright future as a networking company," Eric Benhamou, 3Com's chief executive, said today. "We need to complete our transformation and the time is now."

The firm will cut about 3,000 jobs, said 3Com executives. About two-thirds of the employees will move to its jettisoned businesses, while the remaining third--about 1,000 employees--will be laid off, said Claflin.

The company will also take an operating loss of $450 million to $500 million in the next quarter, which includes one-time restructuring charges of $200 million to $300 million.

Amid the turmoil, 3Com today announced it managed to eke out a $97.4 million third-quarter profit and beat Wall Street analysts' estimates by 2 cents.

3Com has suffered from a series of financial disappointments over the past year as company executives have struggled to define its business strategy.

Excluding one-time charges, 3Com today reported a third-quarter profit of $97.4 million, or 27 cents a share, compared to a profit of $89.6 million, or 24 cents a share during the same quarter last year. A consensus of financial analysts expected earnings of 25 cents per share, according to First Call.

Third-quarter revenue remained flat as company sales reached $1.415 billion, up about $4 million from the previous year.

In the third quarter, Palm sales jumped to $272.3 million, a 116 percent increase from a year ago. Revenue from personal connectivity products, including network adapter cards, modems and home networking products, fell to $551.9 million, a 15 percent drop from last year. Third-quarter sales of network systems products, which include switches and Internet-based phone systems, fell to $591 million, a 7 percent decrease.

To tackle the lucrative service provider market, 3Com today spent about $90 million to acquire software maker Call Technologies, a unified messaging software provider that offers the ability to check email, voice mail and faxes on a single device, such as a PC. The company today also invested $20 million into CAIS Internet, which provides high-speed Internet access to airports and hotels, as well as in homes.

Separately, 3Com inked deals to incorporate Internet security software from SonicWall, Web caching software from Inktomi, and intelligent switching technology from F5 Networks. Caching is a technology that positions copies of online content as close as possible to Web surfers, so they can access information faster.

3Com plans to integrate its telecommunications software with DSL equipment from Copper Mountain Networks and resell that company's gear.

The company will also create a new start-up called Atrica focused on metropolitan networks, a hot area of the industry.

In after-hours trading, 3Com's shares inched up $1.38 to $69.94.