3Com to rely less on NICs, modems

SANTA CLARA, CALIF. - On the heels of a better-than-expected fourth quarter, 3Com's stock price dropped almost 14% Wednesday after the company said that it will de-emphasize sales of low-margin, price-sensitive network interface cards and modems.

During a conference call with Wall Street analysts, 3Com said that it expects 20% of its fiscal 2000 revenue to shift away from NICs and modems to switches, remote access gear and handheld devices. NICs and modems, which 3Com calls client-access products, accounted for 45% of the company's $1.42 billion in fiscal 1999 fourth-quarter revenue.

But 3Com wants to rely even less on these products for future growth and will aim to derive 75% of its revenue from other products.

"As we enter fiscal 2000, rapid growth of emerging new businesses such as handheld computers, IP telephony and broadband access, coupled with success of our systems solutions, are transforming the growth profile of the company," Eric Benhamou, 3Com chairman and CEO, said in a statement.

3Com's fourth-quarter earnings were slightly better than analysts expected. The company recorded earnings of $88 million, up 38% from last year's fourth-quarter earnings. But revenue of $1.42 billion represented just a 3% rise from revenue in the fourth quarter of 1998. Analysts say revenue growth will be even tougher in the next four or five quarters as sales of NICs and modems taper off.

"Technology transitions are difficult enough without being forced into it," says David Takata, an analyst at Gruntal & Co. in Beverly Hills, Calif. "This is really being forced upon them by a changing market - the sub-$1,000 PC, extreme price pressures and slowing growth in some of [their] business units. The company has a fairly aggressive plan, and it's going to be pretty difficult to manage its expense-to-revenue ratios during that period of time."

Gruntal has downgraded its recommendation on 3Com stock from "strong buy" to "hold."

Another brokerage firm, Warburg Dillon Read (WDR) in New York, is reiterating its "hold" recommendation on 3Com stock despite the network equipment maker's fourth-quarter results.

WDR says that 3Com is in "desperate need of some other 'hot' products" to sustain growth for several quarters and offset the decline in NIC and modem sales.

Some of those "hot" product areas 3Com is focusing on include voice over IP, home networking and broadband access, which includes cable modems, digital subscriber line and wireless technologies. But WDR notes that: "We do not have enough confidence that any of the product areas can be substantial and consistent contributors to growth over the next several quarters."

3Com, like fellow net equipment maker Cabletron, has struggled to retrench and stimulate growth by entering new markets.

This is in contrast to Cisco, which continues to post healthy revenue and earnings numbers, steal enterprise market share from 3Com and Cabletron, and win new business from service providers.