3Com sees slow recovery from 2Q letdown

Telecom industry spending cutbacks and widely-reported PC slowdown could affect 3Com in Q3

3Com warned of a wider-than-expected loss in its second quarter and told analysts not to expect an improvement in the third.

The network equipment maker Monday said it now expects to lose between 19 cents to 23 cents a share, much worse than the First Call consensus estimate of 8 cents a share.

Shares of 3Com fell to 9.75 in afterhours activity on the Island electronic communications network, following the warning. 3Com closed up 44 cents to $13.38 ahead of Monday's preannouncement.

It now sees sales coming in between $785m to $800m, also below its own guidance of between $870m to $910m.

Most of 3Com's problems lay with the carrier field, executives said. Commercial consumer business grew 5 to 7 percent in the second quarter, 3Com president Claflin said, during a conference call with analysts.

The third quarter, historically 3Com's weakest, won't be much better, Claflin told analysts. "Disruptions in the telecom sector are unlikely to be solved in the coming quarter," he said.

Total revenue in the third quarter could be slightly higher on a sequential basis, but more likely will be a bit lower, executives said.

In addition to the telecom industry's spending cutbacks, the widely-reported PC slowdown could affect 3Com's business in the third quarter, Claflin said. The company hasn't seen any PC-related negative effects yet, he added.

The news from 3Com comes on the heels of similar warnings from the likes of Gateway and Micron Electronics. 3Com sells network interface cards and other products for PCs.

3Com is the latest company to blame its woes on a slowdown in telecom spending. Revenue from communications carriers fell 30 percent year-over-year and 40 percent sequentially, as major telecom customers cut back orders and smaller customers either went broke or merged with other firms, 3Com executives said.

"We believe this performance is the result of these industry trends and not a loss of competitiveness," said Claflin, who is slated to replace Eric Benhamou as chief executive at the end of the year.

3Com's rate of contract wins remains the same as in previous quarters, Claflin said. The company will enter the fiscal third quarter with a record combined total of backlog and deferred revenue, he added.

"We're confident in the long term prospects of sales to and through carriers," Claflin said.

3Com's cash declined in the second quarter by a figure "approaching" $400m, chief financial officer Michael Rescoe told analysts. 3Com ended the September quarter with $2.7bn in cash and short-term investments.

The company will step up its cost-cutting efforts, Rescoe said. Although 3Com originally expected second quarter expenses to be comparable with the first quarter, "I think we're being more aggressive than that," Rescoe said Monday. "I think they're coming down."

Claflin, who currently holds the title of chief operating officer, will take the chief executive post at year's end when Eric Benhamou steps down.

3Com shares have collapsed since the March initial public offering of its spin-off Palm. After peaking at $119.75 in March, the stock dropped to a 52-week low of $11.50 last month.

In September, Benhamou announced he would turn over the chief executivve post to Claflin. Benhamou will stay on as chairman of both 3Com and Palm along with joining the board of directors at Atrica, another 3Com start-up.

Following its first-quarter results, 3Com predicted it would post sequential revenue growth of between 8 percent to 13 percent this quarter.

Last quarter, it lost $41.3m, or 12 cents a share, on sales of $933.8m, beating the consensus estimate by 21 cents a share.

Eleven of the 19 analysts following the stock rate it either a "buy" or "strong buy".

Analysts were expecting a loss of 16 cents a share in the fiscal year.

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