3Com Corp.'s (Nasdaq: COMS) second quarter results offer a glimpse into the company's future, which includes little or no growth. And it only gets worse once 3Com spins off its Palm Computing unit in an IPO. That giant sucking sound you'll hear early in 2000 will be 3Com's market cap going down the tubes.
When you take out the Palm unit, 3Com looks like a struggling company. Execs said the company's third quarter will be comparable to last year's results when the company earned 24 cents a share. First Call was expecting 32 cents a share. That outlook will taint 3Com's upside surprise in the quarter.
3Com: Nothing without Palm?
The best way to look at the future of 3Com is to leave the Palm unit out of the equation. When Palm goes public, 3Com will be left with two businesses -- client access and networking gear.
Its client access business, including network interface cards and modems, is on the decline, but did come in with better-than-expected sales of $620.9 million. Client access sales were still down 15 percent from a year ago, however.
Wall Street knew about the client access decline so no surprises there. But alarm bells are ringing this morning over 3Com's network equipment sales. The networking business is the future of 3Com and it's on the ropes.
Ahead of the results, analysts were optimistic on 3Com's networking sales because Cabletron (NYSE: CS) delivered a decent quarter on Monday, but 3Com dropped a bomb with weak sales of switches, hubs, routers and other networking gear. Networking sales came in at $593.2 million, down 12 percent from a year ago.
It's not a good sign when a company's strong side of the business trails the side that's dying. The weak networking sales imply that competitors such as Cisco Systems (Nasdaq: CSCO) are hitting 3Com on its home turf.
And now the good news (sort of) -- Palm will prop up 3Com shares.
Aside from today's hiccup, shares of 3Com should stay hot -- at least for a couple months until the Palm spin-off. 3Com's handheld device sales (Palm) came in at $260.9 million, up 50 percent from the prior quarter. Nice growth -- shame its being spun off.
Enthusiasm about Palm has boosted 3Com more than $20 since Sept. 21 as investors buy into 3Com for a piece of Palm. Wall Street has a short memory and investors will buy into 3Com based on Palm euphoria.
After the Palm IPO, scheduled for early 2000, it's "look out below" time for 3Com.
3Com is following a pattern we've seen many times with companies that are spinning off a fast growing unit. Shares of the parent run up ahead of the IPO, but sink as soon as the spin-off hits the market. One recent example would be IDT Corp. (Nasdaq: IDTC), which spun off Net2Phone (Nasdaq: NTOP). IDT ran up before Net2Phone went public and came back to earth as soon as the IPO was launched.
"The value of 3Com will go with the growth," said Michael Cristinziano, an analyst at Gerard Klauer Mattison. "The reason to own 3Com shares is Palm. After that's over you have to ask whether you want to own 3Com shares."
Cristinziano reckons current 3Com shareholders will do fine because they'll get Palm shares. Holding 3Com shares is the price of admission.
Unless 3Com shows some growth -- and it won't in the next quarter -- look for investors to drop the stock after the Palm IPO. Cristinziano said 3Com is well positioned in cable modems, wireless and home networking, but those businesses won't show a real payoff until this time next year.
In the meantime, 3Com's core business will remain so-so at best. Look out below.