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6/30/2005
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3Com Still Struggling Despite Improved Sales

Despite its feverish efforts to regain the confidence of its investors, customers and partners, 3Com's latest financial numbers indicate that a turnaround is still far from complete.

Despite its feverish efforts to regain the confidence of its investors, customers and partners, 3Com's latest financial numbers indicate that a turnaround is still far from complete.

On Wednesday, the company reported financial results for the fourth quarter of fiscal year 2005 ended June 3, showing drastically widening losses compared with the same period last year. The company's revenue for the quarter was $177 million, gross profit was $62 million and operating expenses were $125 million, including $8 million in restructuring charges -- resulting from 3Com's acquisition earlier this year of security vendor TippingPoint -- and $4 million in amortization. This resulted in a net loss of $58 million, or 15 cents per share. 3Com lost $53 million (14 cents per share) in the third quarter of fiscal 2005 and $19 million (5 cents per share) for the fourth quarter of fiscal 2004. The news caused the company's stock price to fall about 4.5 percent in after-hours trading, to $3.62.

In a conference call with analysts and the media, Don Halsted, 3Com executive vice president and CFO, cited increased operating costs as the primary culprit for the ballooning losses.

"The sequential increase was primarily driven by the inclusion of a full quarter of TippingPoint expenses, the additional week in the fourth fiscal quarter and the further redirection of channel-program investment from rebate programs to demand-generation activities," he says. "Compared to the same period of fiscal 2004, these expenses increased $27 million, or 32 percent."

Bruce Claflin, 3Com president and CEO, tried to paint the numbers in a positive light. He noted that the company did achieve 10 percent sequential revenue growth and overall sequential revenue growth across all regions, highlighted by almost 30 percent growth in 3Com's Voice over IP product lines.

"We continued to see encouraging signs in the business during this past quarter," he says. "North America had been a troubled geography for us. However, beginning in the fiscal third quarter and accelerating in the fourth quarter, we have seen substantial growth."

Claflin credits his new sales team and improvements to the company's channel program for the increased revenue.

"The [channel enhancements] were initially disruptive and caused us to have a temporary slowdown in our channel-related sales. However, these were the right actions to take and now, six months later, we are seeing the benefits," he says, adding that more channel enhancements will roll out over the next six months, primarily affecting the EMEA market.

He also expressed satisfaction with the integration of Tipping Point.

"We are pleased with the progress we have made in the first full quarter since the acquisition. We see effective traction in the integration of customer-facing activities, back-office integration and the expansion of TippingPoint's mission," Claflin says. "The new Huawei-3Com developed switches not only fill out our enterprise-class, edge-to-core switching line, but coupled with [Tipping Point's] Quarantine Protection, deliver the first in a series of solutions that will leverage best-in-class security from TippingPoint across our network infrastructure products."

For the coming first quarter of fiscal 2006, 3Com expects total company revenue to be between $170 million and $175 million, which is in line with Wall Street expectations, and gross profit margins to improve to about 37 percent, with the increase primarily due to a full quarter of TippingPoint without any cost impact from purchase accounting.

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