A well-known player in the server application and network market, 3Com Corp. (COMS), reported results for the fourth quarter and full year ended May 29, 2009. Revenue for the quarter was in line with management’s guided range of $290.0 million to $300.0 million, but below our estimate of $311.0 million.
The company posted higher net profit year-over-year as a result of cost-cutting efforts. Operating expenses declined 57.5% year-over-year in the quarter. The year-ago quarter was impacted by a goodwill impairment charge of $158 million, related to 3Com’s acquisition of Tipping Point. Excluding this charge, operating expenses in the current quarter declined 24.9% from the year-ago period.
Operating margin improved to a positive 7.3% in the quarter from a negative 9.9% (excluding goodwill impairment charges) in the year-ago quarter. Although revenue for the quarter was $295.1 million, down 8.2% year-over-year and 9.1% sequentially, gross margin rose to 59.7% from 54.1%, largely driven by a favorable mix of product sales.
Revenue in the quarter was strong in China but was impacted by current macroeconomic conditions and impact of the shutdown during the Chinese New Year. In the call, 3Com said that it will focus on growing market share, particularly outside of China. Also, it expects the year 2010 to be a transition year for the company.
3Com also recorded a patent dispute resolution and patent sale charges of $15.2 million in the quarter. GAAP net income for the quarter was $20.2 million, or $0.05 per share, versus net loss of $166.7 million, or $0.41 per share, in the year-ago quarter.
This is the fourth consecutive quarter of profitability achieved by 3Com on a GAAP basis through improved gross margin, along with improved operational efficiency and cost-control initiatives. Excluding one-time charges and stock compensation, net income on a non-GAAP basis rose to $37.2 million, or $0.10 per diluted share compared to a net income of $35.6 million or $0.09 per diluted share in the year-ago period. Non-GAAP EPS topped the company’s expectation of $0.04 – $0.06 range as well as beat our expectation of $0.07 per share.
3Com ended the quarter with $644.2 million in cash and cash equivalents, up $84.2 million from the previous quarter. During the quarter, the company generated $84.1 million in cash from operations.
With strong operational results in 2009, 3Com has outperformed our expectations and given us the confidence that the company will be able to sustain recent improvements. The results of the quarter do point to some resilience despite recession in the overall networking market. The strength of the company’s Tipping Point business and its ability to control expenses during the quarter was impressive.
Although fourth-quarter results exceeded expectations, the fact that management expects first quarter revenue between $270 million and $280 million is of concern. This guidance is much lower than our estimate of $317.8 million during the quarter. Gross margins are expected to be lower sequentially in the first quarter. The company expects non-GAAP EPS to be in the $0.03 – $0.05 range, lower than our previous projection of $0.09. Thus, we have lowered our estimates for the first quarter.
Additionally, cash is expected to decline in the first quarter. We are pleased with the company’s performance in recent quarters, but are concerned about the worsening global economic outlook and a weak IT spending in China. Moreover, the future of its business in China concerns us as the company reduces its dependence on Huawei as a reseller.
Moreover, 3Com faces increased competition in its core SMB market and the server market from Dell (DELL), Cisco (CSCO), Netgear (NTGR) and D-link. We do not believe that 3Com has an edge over competition. As such, we maintain our Hold rating on shares of 3Com.
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