3Com: Huawei Sales Down, But Major Wins Outside China

Yesterday in its fourth quarter results, 3Com (NASDAQ:COMS), a top networking player, reported that it swung to profit and beat estimates, but with the continued decline in sales to its former partner Huawei, the company’s first quarter forecast missed estimates. Let’s take a closer look.

Q4 revenue decreased 8.2% to $295.1 million while net income was $20.2 million, or $0.05 per share versus net loss of $166.7 million, or $0.41 per share last year and net income of $1.9 million or $0.0 per share last quarter. Excluding charges, earnings were $0.10 per share, beating analyst estimate of $0.05 per share on revenue of $294.8 million. Q3 coverage is available here.

For full fiscal year 2009, revenue increased 1.7% to $1.317 billion. Net income was $114.7 million or $0.29 per share versus net loss of $228.8 million, or $0.57 per share. Headcount at the end of the year was 5,868, up by 20 in the quarter but down 235 over the year.

3Com generated $84.1 million in cash from operations in the fourth quarter and $280.5 million for the year. It ended the quarter with a short-term investment balance of $644.2 million.

By segment, TippingPoint revenue was $32.4 million, up 10.8% y-o-y but down 2.8% q-o-q. Networking business revenue declined 9% y-o-y and 9.8% q-o-q to $264.6 million.

Within networking, China-based revenue was $162.4 million including China Direct Touch sales of $113.5 million (up 12.8%) and Huawei sales of $44.5 million. Huawei sales accounted for about 15.1% of 3Com’s total revenue and 27.4% of China-based revenue. Direct Touch sales accounted for 70% of China-based revenue, up from 64% last year.

Rest-of-world network segment revenue was $102.2 million, down 25%, with revenue from North America down 9% y-o-y and up 16.6% q-o-q to $28.0 million; EMEA down 34% y-o-y and 3% q-o-q to $42.4 million; Latin America down 15% y-o-y and 14% q-o-q to $17.1 million; and Asia/Pacific down 39% y-o-y and 4% q-o-q to $14.7 million.

Since Bob Mao took over as the CEO, 3Com has steadily worked on its three goals of revenue growth, operating margin improvement, and positive cash generation. Despite the tough economic environment, it has delivered, and that is no mean achievement! This has been possible largely because of its low-cost structure in China.

But now, 3Com is increasing its focus on developing its enterprise networking market outside China. During the quarter, it announced several major contract wins in North America and Brazil. With more and more companies looking to cut costs, 3Com has emerged as a strong low-cost alternative. It expects this change in strategy, along with increased Direct Touch sales, to help offset lower Huawei sales, which declined 9.6% y-o-y and 20.3% q-o-q. 3Com further expects sales to Huawei to fall from $229 million in 2009 to $50 to $100 million in fiscal 2010.

For Q1, 3Com expects non-GAAP EPS between $0.03 and $0.05 and revenue in the range of $270 million to $280 million with China-based sales expected to decline 5% q-o-q. The company expects Direct Touch sales to increase slightly and sales to Huawei to between $25 million and $30 million. Analysts expect earnings of $0.07 per share on revenue of $301 million.

The stock is currently trading around $4 with market cap at about $1.7 billion. It hit a 52-week high of $5.22 on June 10, and its 52-week low was $1.43 on November 21.