By Jo Maitland
The future continued to look bleak for troubled networking vendor 3Com Corp yesterday, as company CFO Chris Paisley chose the firm’s second-quarter results conference call to announce his resignation, ten years after joining the company. Paisley said he will be giving up to pursue other interests. The bad news came as the company reported revenue down 4% at $1.4bn and net income of $177m, or $0.52 a share. In the year-ago quarter, net income was $132m, or $0.37 per share, on revenues of $1.5bn. Excluding one-time items, the company reported a pro forma net income of $0.51 per share, beating the consensus estimate of analysts surveyed by First Call by $0.03.
During the call, 3Com’s CEO Eric Benhamou said the company was continuing to make progress on all three key fiscal 2000 objectives; Refining our strategy, transforming our growth profile and streaming operations. However, analysts said after the call that there is still no clear focus behind the doors at the Santa Clara, California headquarters. Despite strong growth in its Palm handheld PC division, Benhamou confirmed that the business would still be spun off as expected in early 2000. He said he expects 3Com to incur more costs related to the move in the next quarter.
In an interview with ComputerWire just before the release of its second-quarter results, 3Com’s head of corporate communications, Brian Johnson, attempted to shed some light on 3Com’s strategy for next year. He said E-networks, broadband (DSL and cable), and home networking, through its alliance with Microsoft Corp, will all be key areas for growth. Voice over IP and Lan telephony, as well as wireless Ethernet will also be high on the list for 2000, he said. We are currently putting chips on all the squares in this market, so whether it’s Bluetooth, CDMA or the 802.11 protocols that take off, we’ll be ready. The company will also maintain firm ties with the Palm company when it is spun off, he said.
Analysts were not convinced by 3Com’s direction. David Pringle at the Yankee Group said, There is no obvious series of strategies that has led 3Com to where they are this Christmas. Another analyst said the company has taken one step to the right followed by two to the left all year. Tere Bracco, principal analyst of enterprise infrastructure at Current Analysis said, 3Com is casting about for a direction, if there was a clear strategy, it would be articulating it. Bracco said the recent push into the services space, through its E-Networks initiative, follows Cisco’s lead from the summer when it announced a deal with KPMG. Earlier this week, 3Com invested $100m in USWeb/CKS for integrating e-commerce sites with network infrastructure. This type of investment usually signals a clear direction, yet they didn’t say that, said Bracco.
In March, 3Com pinned its colors to the Lan telephony mast with the $90m acquisition of NBX Corp, an Andover, Massachusetts-based voice over IP company. At the time of the deal, 3Com said NBX would speed up its development of LAN telephony products. The NBX 100 Communications System is aimed at small and medium-sized businesses looking to integrate voice and data traffic over their LANs and WANs – an area of the market 3Com itself estimates will be worth $5bn by 2003.
Bracco said: It took 3Com nearly ten months to integrate these products into its own portfolio, and they were only released last month. Meanwhile, Cisco was already selling PBX systems for telephony over IP networks, through its acquisition of Selsius in 1998; and Lucent launched its Lan telephony product, IP ExchangeComm, with a full suite of applications around the same time. 3Com recognized the potential in this market but has so far failed to make any headway in it, Bracco said.
A tight strategic partnership with Siemens to develop Lan telephony products might have pulled them through at one time, but 3Com pulled the plug on that venture in August, less than a year after the project was first announced. 3Com’s Johnson said of
the deal: Joint R&D didn’t work, joint infrastructure didn’t work and joint engineering didn’t work and we couldn’t agree on roadmaps. He added: It is hard enough for one person to make up their mind, never mind a company the size of 3Com or a combined company with 3Com, and the marketplace will not tolerate this. A final blow to 3Com’s relationship with Siemens materialized this week when Siemens announced it would be developing wireless handheld devices with Casio Electronics in Europe. Casio is firmly in the Microsoft camp with its Cassiopeia, Windows CE device and has no plans to bring out a Palm-based unit.
In releasing the disappointing second-quarter revenue figures, 3Com also warned that sales will likely slow next quarter and that pro forma earnings are now expected to come in flat with the year-ago quarter’s $0.24 per share. Analysts surveyed by First Call were expecting $0.32 in earnings for the quarter.
The cloud of uncertainty hanging over the company hasn’t gone unnoticed by investors. 3Com’s shares have languished for the majority of 1999, sinking as low as $20 and only recently climbing back to the $50 level where they began the year. After Tuesday’s disappointing news, the stock, which had closed the regular session up $4.25 at $53.125, fell to $48.9375 in after- hours trading.
