3Com Beats Estimates

On June 24, 3Com Corporation (NASDAQ: COMS) reported its financial results for Q4 and FY 2008, beating analyst estimates. The vision of new CEO Robert Mao, who has been around for just two months, seems to be driving this welcome change in 3Com’s fortunes. He has three simple objectives: more top line revenue, better worldwide operational integration and more cash.

In China, 3Com has as much market share in data networking equipment as Cisco. With China as the home market, 3Com now plans to increase its top line, with more focus on gaining market share in other countries via go-to-market focus and the innovation, value and breadth of its product line. An earlier post on 3Com as an online video beneficiary in which I suggest 3Com is going after Cisco is available here.

Things have changed with the Bain-3Com deal withdrawn, but the focus is the same.

Q4 revenue was up 3% to $321.3 million; most of this growth came from China and EMEA. Including a $158 million non-cash impairment charge for the company’s 2005 acquisition of TippingPoint, net loss was $166.7 million, or $0.41 per share, versus $66.2 million, or $0.17 per share last year. Non-GAAP net income was $35.6 million, or $0.09 per diluted share. 3Com has been profitable on a non-GAAP basis for seven straight quarters. Analysts had expected earnings of $0.05 per diluted share on revenue of $315.3 million.

For the full year, revenue was up 2% to $1.29 billion and net loss was $228.8 million, versus $88.6 million in 2007. Gross margin was 54% while cash balance was $504 million and $63.3 million in Q4.

By segment, H3C had revenue of $772.3 million, up 6% from FY 2007. Q4 sales in H3C were up 8% y-o-y and down 11% q-o-q to $190.0 million. H3C is 3Com’s China arm.

The TippingPoint segment annual revenue was $104.1 million, up 15% while Q4 revenue was $29.2 million, up 24% q-o-q. TippingPoint is still under consideration to be spun off.

Data and Voice Business Unit (DVBU) revenue for the full year was unchanged over 2007 at $551.0 million. Q4 revenue was $137.0 million, down 1% y-o-y and up 2% q-o-q.

By region, Latin America, Asia Pacific Rim (APR) and Europe, the Middle East and Africa (EMEA) had double-digit y-o-y growth. However, this growth was offset by double-digit decline in North America. China revenue was $149.8 million, up 5% y-o-y and 47% of total revenue versus 46% last year. EMEA revenue was $74.2 million, up 11% y-o-y and 23% of total revenue, up from 21% last year. North America revenue was $46.7 million, down 24% y-o-y and 5% of total revenue, down from 20% last year. APR revenue excluding China was $30.5 million, up 28% y-o-y and 9% of total versus 8% last year. Latin American revenue was $20.1 million, up 20% y-o-y and 6% of total revenue versus 5% last year. 3Com’s worldwide growth plans are very much based on its growth in EMEA, APR and Latin America.

A big hole in 3Com’s strategy, however, is India. With its H3C cost structure, 3Com is ideally positioned to tackle India, but so far, Bob Mao has shown no inclination to address that geography.

For Q1 FY 09, 3Com expects revenues in the range of $325 to $330 million. Non-GAAP earnings per share are expected between $0.03 and $0.05.

3Com is currently trading around $2 with a market cap of about $770 million.