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3Com beats estimates
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December 21, 2000: 6:17 p.m. ET
Networking company's loss is a nickel less than reduced forecast
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NEW YORK (CNNfn) - 3Com Corp. on Thursday reported a fiscal second-quarter operating loss that was narrower than Wall Street's recently lowered expectations.
Separately, the Santa Clara, Calif.-based company said it is spinning off its Carrier Network Business, through which it sells products to telecommunications and Internet service providers, into a separate company called CommWorks Corp.
3Com (COMS: Research, Estimates), a leading supplier of hardware that lets computers communicate with each other across networks, reported a loss of $52.4 million, or 15 cents per share, excluding one-time charges. Analysts surveyed by earnings tracker First Call had generally expected 3Com to lose 20 cents per share during the quarter. During the same period last year, the company posted an operating profit of 34 cents per share.
At $789.5 million, including $22.8 million for sales of exited businesses, 3Com's total sales for the quarter fell 5 percent from $806.3 million during the prior quarter, and were at the low end of the company's recently reduced sales forecast.
Earlier this month, 3Com told analysts to lower their revenue and earnings expectations, blaming a general slowdown in the telecommunications sector. At that time, executives said they expected to log total sales between $785 million and $800 million.
A slowdown in capital spending among its telecom and Internet-service provider customers resulted in a 43 percent decline in the company's carrier network business revenue, which totaled $95.4 million, compared with sales of $167.2 million in the prior quarter.
 "This represents a significant shortfall to expectations," 3Com Chief Financial Officer Mike Rescoe told analysts in a teleconference Thursday evening.
3Com's Carrier Network division represents a lower volume, higher margin business for 3Com, which sells to roughly 100 telecom and Internet services providers worldwide. Meanwhile, the remainder of the company, which it refers to as the Commercial and Consumer Networking Business, is a higher-volume business selling products used for high-speed home networking as well as wireless and Internet telephony.
After spinning off Palm, its former handheld computing division, 3Com last March restructured to focus its operations on those higher growth areas. It also got out of the high-end corporate networking business, in which it was facing stiff competition from companies such as Cisco Systems (CSCO: Research, Estimates) and Lucent Technologies (LU: Research, Estimates), and now concentrates its sales on small and medium businesses.
3Com President and Chief Operating Officer Bruce Claflin said there is very little synergy between the company's two major businesses, which is why it decided to create CommWorks. He said the move will enable 3Com to cut as much as $250 million in annual costs and should result in the company turning an operating profit by the first quarter of its next fiscal year.
The company also will take a one-time charge of between $40 million and $60 million related to the spin-off of CommWorks, which will operate as a wholly owned subsidiary of 3Com, Claflin said.
During the most recent quarter, sales in 3Com's commercial and consumer networking business rose 5 percent to $671.3 million in the most recent quarter, compared with $639.1 million in the prior quarter. While sales in the commercial portion of that business were in line with expectations, the consumer segment was more sluggish than expected, the company said.
The weakness was in broadband networking equipment for the home, such as digital subscriber line DSL and cable modems, 3Com said. The company blamed that weakness on its service-provider customers. During the quarter, several of its large customers announced reorganizations, which 3Com said created disruptions in their buying patterns.
Meanwhile, financial constraints and consolidation among several of its smaller customers resulted in deferrals of equipment purchases, 3Com said.
Shares of 3Com fell 59 cents to $7.19 in regular trading ahead of the earnings news, which was released after the closing bell. They gained 94 cents to $8.12 in after-hours trade. The stock had fallen about 46 percent since the company issued its earnings warning.
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Looking ahead, Rescoe told analysts to expect 3Com's fiscal third-quarter revenue to decline to between $725 million and $750 million during what he called a seasonally weaker period for the company. Meanwhile, he said the company's operating loss will widen to between $80 million and $100 million.
In the fourth quarter, he said 3Com is expecting the service provider business to start showing signs of improvement, which will contribute to a rise in revenue to between $790 million and $820 million. The fourth-quarter operating loss will be between $40 million and $60 million, Rescoe said. 
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