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3Com Reports Strong Quarter

Posted on Tuesday, Sep 23rd 2008

Yesterday, 3Com Corporation (NASDAQ: COMS) reported strong first quarter results that not only beat all estimates but were a sign of significant turnaround progress. It was the first time since 2000 that 3Com has reported quarterly GAAP profit. 3Com attributed the profit to higher sales, lower costs, and a patent dispute settlement.

Just last week, I placed 3Com on my list of Top 10 Networking Stocks. I have always believed that 3Com’s low-cost strategy is its major asset, and new CEO Bob Mao has executed on the objectives he had set out in the last quarter: increase top line revenue, accelerate worldwide operational integration, and generate more cash. Many in the industry had worries that 3Com would screw up the H3C acquisition integration. With so much of its future resting on H3C, it is good to see the move working.

Q1 revenue grew 7% y-o-y and q-o-q to $342.7 million beating its revised forecast of $335 to $340 million. Net income was $79.8 million, or $0.20 per diluted share, versus net loss of $18.7 million, or $0.05 per share, in Q108. Net income includes a $70 million, or $0.17 per diluted share, benefit from a patent dispute with RealTek. Non-GAAP net income was $43.4 million, or $0.11 per diluted share versus analyst estimates of $0.06 per share.

Expenses declined a significant 33% to $116.2 million. Through R&D rationalization and efficiencies in supply chain organization, 3Com has saved about $40 million annually. It generated $39.3 million in cash from operations. Cash and cash equivalents were $541.4 million at the end of the quarter. 3Com’s gross profit was $189.6 million in Q1, or 55.3% of sales, a 9-point improvement over Q108.

3Com has reorganized its business into two new segments: Networking and TippingPoint. Networking business sales were $315.7 million, up 7% y-o-y and 8% q-o-q while TippingPoint segment revenue grew 11% but declined 4% q-o-q to $28.2 million. 3Com has talked about spinning TippingPoint out before, but so far, it remains unclear what exactly they are planning to do and in what timeframe.

By region, China revenue was $167.5 million, up 14% y-o-y and 12%q-o-q. Rest-of-world segment sales were up 2% to $140.3 million. Within the rest-of-world segment, revenue from North America declined 22% y-o-y and rose 12% q-o-q to $34.3 million. EMEA sales were $61.5 million, flat y-o-y and down 4% q-o-q, but here the company had two major wins: SwissCom and SNCF, France’s national railway. Latin America sales grew 26% y-o-y and 16% q-o-q and Asia-Pacific sales grew 50% y-o-y and 2% q-o-q to $21.1 million.

For Q2, 3Com expects revenues to be in the $345 to $350 million range versus analyst estimates of $321 million. Non-GAAP EPS is expected between $0.10 and $0.11. With its low-cost strategy and cheaper value products, 3Com looks as though it will perform well in the current economic situation. Shares rose about 12% on the strong results after losing more than half their value this year after the Bain transaction fell through. The stock is currently trading around $2.3 with a market cap of about $850 million.

Chart for 3Com Corporation (COMS)

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