3Com Exceeds Guidance

| About: 3Com Corporation (COMS)

3Com’s (COMS) first quarter 2010 EPS of 8 cents exceeded the consensus estimate of 5 cents as well as the management guidance range of 3 cents to 5 cents.

Revenue for the first quarter was $290.5 million, a decrease of 15.2% from $342.7 million in the year-ago quarter. This was above the company’s guided range of $270 million to $280 million. The effects of the global economic slowdown were felt in all geographies, along with lower revenues in its China-based business, which was partially offset by the higher revenues from the TippingPoint segment.

By segment – Networking business sales for the quarter were $259.2 million, down 17.9% from $315.7 million in the year-ago quarter. Within the Networking business, the China-based sales segment (89.2% of total revenue) had revenue of $152.0 million, an increase of 13.3% from the year-ago period. This consists of China’s direct touch sales of $118.3 million (77.8% of China-based revenue), which grew 16.2% from the year-ago period. Huawei sales of $28.1 million (18.5% of China based sales and 9.7% of consolidated sales) declined 57.3% from the prior-year period, and other sales of $5.6 million primarily reflected sales in Hong Kong and Japan.

Within rest-of-the-world networking sales, North America had sales of $30.2 million, down 12.0% over the year-ago period. EMEA had sales of $42.1 million, a 32.0% decline over the year-ago period. Latin America had sales of $17.7 million, a year-over-year decline of 24.0%. Asia-Pacific (excluding China) had sales of $17.2 million, reflecting a year-over-year decline of 19.0%. Overall, the rest-of-the-world network segment sales decreased 23.6% year-over-year to $107.2 million. For the quarter, TippingPoint segment had sales of $32.6 million, an increase of 15.6% over the prior-year period.

From a consolidated viewpoint, 3Com's gross margin was 57.3% in the first quarter, a 200 basis point improvement over the corresponding period last year, largely driven by product cost reductions in businesses, a larger shift to enterprise market and the declining sales to Huawei, which carry lower gross margins. On a non-GAAP basis, gross margin came in at 57.5% in the quarter – compared to 55.6% in the year-ago quarter.

Operating expenses in the current quarter declined 40.5% from the year-ago period. 3Com also recorded a patent dispute resolution and patent sale income of $70.0 million in the year ago quarter. Excluding this, total operating expenses declined 12.3% from the year-ago period. Consolidated GAAP operating income decreased 95.6% to $3.24 million from $73.4 million (including patent dispute resolution and patent sale income of $70.0 million) reported in the year-ago quarter. Excluding special items, non-GAAP operating margin came in at 9.0% versus 10.8% in the year-ago quarter. This was above the company’s expectations.

GAAP net income for the quarter was $7.5 million, or 2 cents per share, versus net income of $79.8 million, or 20 cents per share in the year-ago quarter. Excluding one-time charges and stock compensation, net income on a non-GAAP basis was $30.5 million, or 8 cents per diluted share, compared to a net income of $43.4 million or 11 cents per diluted share in the year-ago period.

Headcount at the end of the year was 5,814, a decline of 54 people in the quarter. 3Com ended the quarter with $665.8 million in cash and cash equivalents, compared to $644.2 million in the previous quarter. During the quarter, the company generated $16.9 million in cash from operations, despite a $48.0 million long-term incentive payment to its Chinese employees.

During the quarter, long-term debt (including the current portion) was $200.0 million -- flat sequentially. The company expects to make the next scheduled principal payment of $48 million in September. Days’ sales outstanding (DSO) were 31 days versus 34 days in the previous quarter. The company did not provide any guidance for the coming quarter.