3Com sneaks past Q2 estimates but revenue slips

Gross margins to fall from second quarter as 3Com increases spending related to Palm Pilot division, ahead of unit's IPO
Written by Larry Barrett, Contributor on

Network-equipment maker 3Com beat analysts' estimates in its second quarter Tuesday but sales declined four percent from the year-ago quarter and the company doesn't expect revenues to improve in the third quarter.

In the fiscal second quarter, 3Com pocketed $130.9m (£81m), or 37 cents a share, on sales of $1.48bn, excluding one-time gains and charges. First Call consensus predicted 3Com would earn 34 cents a share in the quarter. 3Com shares fell 1 3/4 in after-hours trading after closing up 4 1/4, or 9 percent, to a 52-week high of 53 1/8 ahead of the earnings report.

The $1.48bn in sales represents a four percent decline from the year-ago quarter when it earned $133.4m, or 36 cents a share, on sales of $1.54bn.

Don't look for sales improvement in the historically weak fiscal third quarter, 3Com executives said during a conference call with analysts. Although 3Com previously predicted year-over-year improvement to start in the third quarter of fiscal 2000, the company now expects that won't happen until the fourth quarter.

Third quarter sales and pro forma earnings per share are expected to be comparable to the year-earlier period, CFO Chris Paisley said. Gross margins will fall slightly from the second quarter as 3Com increases spending related to its Palm Pilot division, ahead of that unit's initial public offering. 3Com also plans to spend more on overall sales and marketing.

The third quarter could also see lingering effects of corporate spending reluctance because of worries about possible Year 2000 computer problems, executives said.

In the quarter, sales of 3Com's personal connectivity products, which include network interface cards (NICs) and analog, cable and DSL modems, improved 15 percent sequentially to $620.9m. Sales of handheld computing products increased 50 percent from the previous quarter to $260.9m.

But revenue from network systems products -- switches, hubs, remote access concentrators, routers and network management software -- fell to a disappointing $593.2m, a decline of 12 percent sequentially. Some of the shortfall was caused by Y2K-related spending freezes, 3Com executives said.

3Com was very pleased with what it terms high growth businesses, including broadband modems, and products for LAN telephony, wireless access, voice-over-IP and home networking. Those segments collectively saw 50 percent sales growth sequentially, CEO Eric Benhamou said.

Traditionally, 3Com doesn't report revenues from business units until they generate at least 10 percent of the company's overall sales. The high growth divisions should reach a point worth reporting sometime in 2000, Benhamou said.

Especially strong within those newer segments were sales of cable modems and wireless access products, Benhamou said. 3Com is also seeing surging demand for DSL modems, which could surpass cable access products within a year, he added. Last quarter, 3Com hurdled analysts' estimates when it raked in $119m, or 33 cents a share, on sales of $1.38bn.

Separately, 3Com announced Paisley will retire sometime in the summer of 2000. Paisley told analysts he wants to return to teaching.

The stock hit a previous 52-week high of 52 3/16 earlier this week after falling to a low of 20 in April. Sixteen of the 28 analysts tracking the stock maintain a "hold" recommendation.

Sergio G. Non contributed to this report

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