UPDATE - 3Com Lowers Expectations for Q2

Monday had some bad news for investors -- a profit warning -- resulting largely from a slowdown in spending on the company's products among telecommunications carriers. [Note to editors: new material appears in bold.] However, 3Com remains confident that the carrier segment of its business will recover and provide it with long-term growth opportunities.

For the company's second quarter of fiscal 2001, which ended Dec. 1, 2000, 3Com predicts both earnings and revenue will be down on its previous forecasts, according to Bruce Claflin, the networking equipment vendor's president and chief operating officer. "3Com sales were dramatically affected by the turmoil in the carrier industry," he said during a Monday afternoon teleconference.

Claflin stressed that the company has yet to close its books for the second quarter, but said 3Com wanted investors to know as soon as possible about the profit warning. The vendor's results are due to be reported Dec. 21 after the U.S. financial markets close.

3Com is likely to report a second-quarter pro-forma net loss per share of between 19 cents and 23 cents, substantially larger than the company's previous estimate of a loss of 7 cents to 9 cents per share. A group of 11 analysts polled by First Call/Thomson Financial had expected 3Com to record a loss of 8 cents per share.

Second-quarter revenue is likely to be in the order of US$785 million to $800 million, 3Com executives said. Subtracting the product lines that the vendor quit earlier this year, the company's ongoing businesses for the second quarter are likely to account for around $765 million to $780 million in sales.

3Com announced in March that it would exit the analog modem and LAN/WAN (local area network/wide area network) equipment markets as those businesses weren't yielding sufficient growth or revenue. [See "3Com Exits Enterprise Network Stage," March 20.]3Com's bottom line was hit primarily by delayed spending among its customers in the U.S. telecom market. Carriers were too embroiled in reorganizing their businesses or merging with other players, so didn't buy as much as expected of the vendor's carrier infrastructure products or CPE (customer premise equipment), Claflin said.

The upheaval is occurring not only among tier 2 and 3 carriers, some of whom closed altogether during the second quarter, but also among tier 1 players, Claflin said. As evidence, he pointed to AT&T Corp.'s recent decision to split itself into four businesses, and the restructuring efforts underway at WorldCom Inc.

Sales in the second quarter for 3Com's CNB (carrier networking business) fell to between $95 million and $100 million, a fall of around 30 percent compared with the same period a year ago. The company's CNB business had previously yielded seven consecutive quarters of year-over-year growth, Claflin said.

The drop-off in sales results from a slowdown in carrier purchases, not a loss of competitive edge on 3Com's part, according to Claflin. 3Com is entering its third quarter with record levels of deferred revenue from the telecom market, he added.

"It's not a change in (carriers') deployment intentions, but a change in the timing of deployment," 3Com Chairman Eric Benhamou said.

Ignoring sales from the businesses 3Com exited in March, second-quarter sales for 3Com's CCB (commercial and consumer networks business) rose 5 percent to 7 percent from a year ago, to between $670 million and $685 million.

Over the last few quarters in its CCB business, 3Com has been plagued by component shortages, Claflin said, although the situation is beginning to improve. The shortages have been across its CCB product line and of all sorts of components.

"They've been periodic and unpredictable," he complained. "The vendor would call the day before to say the parts weren't on the truck." Going forward, however, 3Com is confident the components situation will improve, he said.

Looking ahead to the third quarter, Claflin warned that the financial period is traditionally 3Com's slowest in terms of revenue generation. Although the slowdown in demand for PCs didn't affect 3Com in its second quarter, it may well do so over the next three months, he added. Not only does the company sell products that are integrated into PCs, but "PCs are the principal source of attachment to networking infrastructure," Claflin said.

While 3Com might hope for "modest sequential growth" in the third quarter, it is more likely to experience "a modest seasonal decline," Claflin said.

The company released its profit warning after the financial markets closed. 3Com's shares on the Nasdaq stock exchange ended the regular day's trading at $13.37, up 3.4 percent on Friday's close.

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