Full Transcript of 3Com’s F2Q06 (Qtr Ending Dec 2, 2005) Conference Call - Q&A (COMS)

Dec.26.05 | About: 3Com Corporation (COMS)

Here’s the entire text of the Q&A from 3Com’s (ticker: COMS) fiscal Q2 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you sir.

Operator Instructions

We will take our first question from Wojtek Uzdelewicz with Bear Stearns.

Q - Wojtek Uzdelewicz

Hi, it’s actually about indiscernible can you hear?

A - Bruce Claflin

Yes, we can but just barely.

Q - Wojtek Uzdelewicz

Okay, I am sorry, is this better?

A - Bruce Claflin

Yeah.

Q - Wojtek Uzdelewicz

Okay. So first of all its time to see the OpEx discipline carried through this quarter. My first question is about your guidance for the JV, what are you saying that gives you confidence to guide for another quarter of strong sequential growth and for the JV to move from GAAP losses to GAAP profits in the current quarter?

A - Bruce Claflin

Let me comment on the top line and I’ll let Don to comment on the bottom line. And keep in mind that as we sit here today the results from the joint ventures fiscal Q4 are largely complete and they have 7 days left, which suggest that we have some visibility to how this quarter is going. And so we have that level of information as we give this forward-looking guidance. The joint venture has continued to enjoy exceptional revenue growth and that is coming from really two major initiatives. First, continued growth in China where we are convinced that we are taking substantial market share but they are also enjoying even faster growth from a smaller base on sales in the international markets, principally to their OEM partners. And we’re pleased with 3Com’s growth, as an OEM partner of the joint venture has supported the overall venture success at a top line basis. So let me turn it over to Don to comment then on the bottom line.

A - Donald Halsted

Yeah well I think, Bruce captured the key part which is that we do have real confidence in their ability to deliver a double-digit growth in their fourth calendar quarter which has been the strong, their strongest quarter. The margin itself still looks very solid and the expenses that they had, the growth in the third quarter really was related to the investments that they needed to continue to grow the business. The other comment I would make is that the amortization charge that we have to take when we look at the books of $7 million becomes a decreasing percentage of the total as we continue to grow the revenues up past $100 million. When you roll all those in, that’s what gives me the confidence that we will actually be seeing a positive net income and therefore have a positive equity share in our next quarter.

Q - Wojtek Uzdelewicz

Great, now turning back to 3Com regarding your operating expenses, previously during your Investor Day, you provided guidance that your Q4 OpEx should decline compared to Q3. Should we continue to expect that, and are you willing at this point to provide Q4 OpEx guidance?

A - Donald Halsted

That I am not going to provide a change in the, the Q4 OpEx at this time. At the Analyst Day we said that the operating expenses were expected to drive down to a $105 million level. And what you are seeing now is you are actually seeing some, traction, sort of I had a time aimed at that goal. But I’m not going to go out beyond the next quarter in terms of the operating expenses.

Q - Wojtek Uzdelewicz

Okay fair enough, now on your revenue guidance, Don. Given that Q3 is a seasonally challenging quarter, how comfortable are you with your revenue guidance for growth. What are you seeing in terms of backlog or are you expecting a rebound in the US.

A - Bruce Claflin

Yeah let me comment on this and Don can add a little bit as well. 3Com if you look historically had weaker Q3 than Q2. And it was based upon the fact that years ago we had a very strong presence in retail oriented and consumer oriented businesses. I am thinking specifically of things like a PC Cards, Modems which were sold through retail and palm. And so that gave us more of a seasonality high in Q2 and down in Q3 which historically was true for the company. However as we have exited those businesses and focuses more on the enterprise, the seasonality that you might have known from studying 3Com over years has not existed to the same degree in recent years and in fact last year Q3 grew as compared to Q2. So we believe that the focus on the enterprise, the addition of products that are not as seasonally oriented as the one that we had in the past give us confidence that we can in fact drive higher growth in Q3. And it is supported by data such as backlogs, frontlogs of activity and so forth.

Q - Wojtek Uzdelewicz

Hello Don, where are you, hey guys? Well, so last question then I’ll seed the floor. Can you provide an update on the Chinese government approval for you to take the 51% share from the JV? To what extent do you have visibility of the timing of the approval or the steps along the way, can you talk a little bit about that?

A - Bruce Claflin

We have very high visibility on the steps along the way, very low visibility on the specific time in which the steps will be accomplished. It does require having approvals at a local level it requires having approval at the, in Beijing and there is inevitably a back and forth between the local level and the Beijing level as you go for approvals. We believe that is progressing well, we know of no reason why it should not be consummated but we cannot predict with any accuracy when it would be accomplished.

Q - Wojtek Uzdelewicz

Okay, thank you very much.

Operator

We’ll take our next question from Jiong Shao with Lehman Brothers.

Q - Jiong Shao

Hi, thank you very much. A few questions, is on the, the first question is on the sort of the looking a year out for the JV, Bruce or Don could you please talk about what are the, the options you have in terms of the ownership of the JV, I know you have, I know there is sort of year timeframe coming out, so you may renegotiate or may not, could you talk about that on that?

A - Bruce Claflin

Yes, let me take that, this is Bruce. At the three years mark there are provisions that would allow either party Huawei or 3Com to buyout the other party and agree to mechanism process. But it is a right that begins at the year 3 and then exist in perpetuity. So there is no deadline, there is no requirement that anyone make a decision, we merely lock the two owners up for at least 3 years. At that time there were wide variety of choices, we could continue to run it as a joint venture with exactly the same ownership. We could continue a joint venture but with different ownership, we could take on in a different investment partners or at the ultimate end we could decide to take it out and run it as a public company. These decisions will be made much closer to the event. And the guiding factors will include how well is the venture doing itself in its outlook for the future. How much is 3Com depended on the venture as a supplier of products and a partner to go to a market. And those will be the two variables we’ll look at as we make decisions about what we might do. But we are a long way from being there and our principle focus now is to get the majority ownership, which provides the benefits I outlined in my prepared remarks.

Q - Jiong Shao

Okay, great. And the, my second question is on the resale revenue for the joint venture. Could you give us a rough mix between US and Europe, how that, I think roughly $26 million revenue, resale revenue from the joint venture products?

A - Bruce Claflin

Yeah, that’s the right number, this is 3Com branded products that were developed and manufactured by the joint venture. But now we don’t have a breakup by geography and we have not given that in the past.

Q - Jiong Shao

Okay, that’s fine. Could you then, could you talk about the, I know you in the past about a year, I think you talked about the, increment of the inventory in the channel was lean, I think it was, I forgot it, the five weeks, maybe I was wrong. Could you talk about that where we are in some of the channel inventory both in the US and in Europe?

A - Donald Halsted

Yeah, we actually have a practice that we end up roughly with inventory that would be over five and half weeks in the channel, we would actually end up differing the revenue on that, so by then claming revenue on that. And right now I don’t know the exact number, but our channel inventory worldwide is still a bit under the five and half week level. So we do not have in my mind an over, an over stock distribution channel.

A - Bruce Claflin

And I might add, at a week on hand measured very consistent with how we’ve ended the last several quarters.

Q - Jiong Shao

Okay, great. And one last question if I may is on the seasonality in the US. I think in the press release you highlighted the, what the seasonality contributor or the educational vertical. Could you talk about how big is that vertical to you as a percentage of revenue?

A - Bruce Claflin

Yeah, we have not disclosed it as a percent, but I would give you some characterizations, in that particular quarter that is Q1 the strong quarter. It is more than three times the size of our next largest vertical in North America. So it is a substantial part of our business on an annual basis but in the Q1 it really dominates our sales. And in Q2 is when it drops off among those precipitous. So again we had anticipated that what we had hope we will get the rest of our vertical focus and the rest of our product expansion would offset this for a largely flat business in North America, instead it was down 10% sequentially but as we set up very dramatic year-over-year.

Q - Jiong Shao

Sorry, Bruce you say, if you exclude that it’s flat in North America, if you exclude educational verticals?

A - Bruce Claflin

No, no, no. No, no, what I would say was we have done our estimates for the year, this quarter, a quarter ago, we believe North America would be largely flat down substantial in education, up in enterprise products, all those trends happened but not enough to compensate against the 10% decline sequentially.

Q - Jiong Shao

But if you exclude education, would North America be up or flat or stay down a little bit?

A - Bruce Claflin

No, it would be down, I am sorry.

A - Donald Halsted

If you excluded it from both Q1 and Q2, I did…

Q - Jiong Shao

Right.

A - Bruce Claflin

No idea.

A - Donald Halsted

I haven’t done that analysis so I don’t know.

Q - Jiong Shao

Okay, thanks.

Operator

We go next to Christin Armacost of SG Cowen.

Q - Christin Armacost

Thank you. First I want to talk about the VCX products. Can you talk about the traction that you’re getting there and also with respect to the TippingPoint, are you, when do you expect to have the blade, I think you talked about this 70 gigabit of capacity, security product out in a modular form?

A - Bruce Claflin

Yes, a couple of things on VCX, actually VCX enjoyed very strong growth in percentage terms but keep in mind its from a smaller base in revenue. And we did secure several orders including one that was over a $1 million of chip this past quarter. And so VCX as a platform is actually enjoying very nice growth but I just caution as it is from a small base. Your other question, I believe is on the TippingPoint. Yeah, in fact it’s a 60 gig performance, I don’t want to split hairs, but that’s the target and the idea is to take essentially the 8800 Chassis which is been developed by the joint venture and then have blades that could be inserted in it, developed by our TippingPoint division. And these blades in aggregate could be up to 60 gig of throughput and the target is to have this product out in the summer timeframe.

Q - Christin Armacost

Okay. And then just lastly on the Huawei joint venture, any ideas on how long it will take to get the government approval before are you to close on the 2%?

A - Bruce Claflin

I don’t have great confidence today but I think it’s highly, likely will happen some time in this fiscal quarter that we are in. Looking on that I just can’t predict that, the day or week.

Operator

And we will take our next question from Jeff Evanson at Sanford Bernstein.

Q - Jeff Evanson

Hi, you mentioned that you saw some softness in North America relative to your expectations in segments other than education. Could you tell us a little bit about some other challenges you are seeing in getting traction in those segments?

A - Bruce Claflin

Yeah, actually I would word it differently, we enjoyed success of those segments and they grew but not at the rates we had wanted. So I maybe splitting hairs but we did have growth in these segments. Federal was very good for us in the past quarter, we had put a dedicated team in place about a year ago and they are enjoying exceptional growth. And we are constantly refining our product offerings to be compliant and competitive with requirements for this marketplace. And so we do expect that federal will be an ever increasing part of our business and help offset some of the seasonality of education. We also do well in larger enterprise in particularly financial services with our TippingPoint product and again we; we had very strong growth with TippingPoint mostly in larger enterprises. So those are two real initiatives, one is a vertical initiative which has all of our products, one is more product oriented that it did enjoy very good growth last quarter, but not enough to offset the education decline.

Q - Jeff Evanson

And as you are pursuing the branding campaign, where are we in that process, and are you seeing any early signs of benefits from it?

A - Bruce Claflin

Yes, we are in early days, again to make sure everyone is on the page, it was a set of advertising and web enhancements all designed to promote 3Com’s capabilities as an enterprise provider and it focused exclusively on North America. The campaign began over the last quarter it will run through this quarter and perhaps into the quarter beyond, it has its principle elements, print campaigns. The early data that I stress early is very encouraging, we can see a substantial increase in the number of hits to our website overall and specifically to this site we direct people to which is 3com.com Advance the Network. We are also seeing anecdotal kind of information where our partners and customers respond very favorably about it, and in some that you can see in writing. For example the Tolly Group is an independent group, it does testing of equipment and it also comments on major industry trends. And they wrote a very favorable report about the campaign itself and what it says about 3Com and so it’s way too early days to tell of a branding campaign as the desired effect, but the early information suggested it is having an effect in the marketplace.

Q - Jeff Evanson

Last from me, a quick question on the balance sheet, it looks like accounts receivable were up above 25% in dollars and 21% using DSOs, what were the sources of the increase?

A - Donald Halsted

The primary source of the, of the increase was driven by first higher sales in the third quarter. Normally you get the question about the revenues skew, when we were a little heavier skewed to the third month of the quarter this quarter, although it was still less than half of our revenues in the third quarter. There also has been some slight lengthening of the terms as we have an increase in amount of enterprise and project business. One of the points it’s very important to note is that over 90% of our accounts receivable are current and that really has not changed from quarter-to-quarter. So there is not, I do not have any concern about the quality of the accounts receivable, it really is the underline mechanics that has driven that number.

Q - Jeff Evanson

Thank you.

Operator

We will go next to William Becklean at Oppenheimer

Q - William Becklean

Yeah thanks I got a couple of questions first, it’s under on the JV, you talk a little bit what kind of market share do you think you have in China? And number two, just an observation if you assume this things doing, that for a $500 million of your run rate, 3500 people that’s about a $143,000 per head, which sounds half a load, do you have a target for, revenue per head for that operation? And then you talked a little bit about faster growth in international markets through OEM relationships, can you talk about who is those, who are those are with, are they branded products that are outside of the 3Com channel, that is separate from the China marketing?

A - Bruce Claflin

Yeah, Bill can you just repeat the first one, I have the revenue for headcount question, and international relations what was the other? Oh Share?

Q - William Becklean

Yeah, market share in China.

A - Bruce Claflin

Getting very good market share data in China is extremely hard to do. But the data we saw at our last Board meeting suggested that in the enterprise we have something in the 20 plus or minus percent market share. And then I would end that by saying that it is very difficulty of accurate data, but even if it’s off by 2 to 3, 4, 5, 6 points it clearly is greater market penetration than 3Com has in any other geography of the world. And we know that our revenue growth in China has been at an extraordinary rate as compared to the overall market. So we have high confidence at the aggregate level we’re taking share. Let me comment on revenue headcount, you are absolutely right, but what you are not factoring in is cost per headcount, the cost per headcount is about 1/5th the United States. And so you are looking at cost per headcount in relation to revenue, you would find it’s very competitive. In addition we are consciously hiring and investing to build out the portfolio of this business, and consciously trying to leverage the very low cost talent pool that exist there. So you do have the combination of a classic startup environment over building resources, but I would caution anyone doing a revenue per headcount analysis to look the cost per headcount, because it dramatically changes your assumptions on the productivity, excuse me, in expense productivity.

Q - William Becklean

Okay.

A - Bruce Claflin

And last is international relationships, the joint venture itself sells not only in China but it has the rights to sell in Hong Kong and in Japan. And it will do so under its own brand Huawei-3Com, it will also use the 3Com brand in those markets, and it will also sells through Huawei, if Huawei has markets that the joint-venture can’t penetrate on its own. In addition it relies on 3Com to sell its products everywhere else in the world, it also has a similar relationship with Huawei and lastly it has a relationship with Siemens in Europe where Siemens is selling Huawei branded products but developed and sourced and managed directly by our joint-venture. These are the principle ways in which the venture goes to market internationally, there is a small relationship with any siege in Japan, which is not huge but I would just highlight that for purpose of completeness. So the short answer is in this three markets, China, Hong Kong and Japan, the venture has the freedom to go to market on their own or through any partners they want, outside of those markets its all through OEM and the two biggest in order of priority or 3Com as their largest, then Huawei and then Siemens.

Q - William Becklean

Okay thanks Bruce. And can I follow-up with a question about the competitive environment in the small and medium business market. One thing is pretty clear and that is that your largest competitor Cisco has clearly put its sights on trying to gain share in the small and medium business market, I am interested in what you see happening on the ground there. And what’s your assessment of this new service oriented product that they recently announced called Linksys One.

A - Bruce Claflin

Yeah a couple of things about this Bill, what we think about that low end of our market, remember that we think of the SMB and not consumer. So I do want to draw that distinction because much of what Cisco does with Linksys is a consumer play, we just don’t play there. In the SMB space, they clearly have announced, their intent to do more work there, but frankly to-date we cannot see much in way of inroads. And in fact one of the things we get back through our channels with some confusion over, well which brand do they sell in the SMB market, is it Cisco or is it Linksys, what’s the difference between the two? So its early days we just haven’t seen much impact yet. Frankly the competitors that we see more capability from in that space or companies like DLink and Netgear as examples. They have a model, it is focused exclusively, almost exclusively on these markets. And frankly I view them at this moment time as better competitors than what we are seeing with Cisco-Linksys but we watch them obviously with great care.

A - Donald Halsted

One of the thing I would add to that is when we report now the networking revenues which does include the enterprise networking but also the products we sell into the, through the SMB channels for the office connecting baseline. And that in aggregate as a group, that showed a 12% year-on-year growth. You could not have posted that if we were not actually seeing, recently healthy participation in all areas of that product line and that would include our competition in the SMB portion.

A - Bruce Claflin

I guess one other observation now Bill is that, we do continue to see very heavy price pressure on what I call Standard 10/100 Layer 2 Managed Switch. And that is a product that is rapidly moving toward commoditization, but we do not see it in Layer 3 and we certainly see much better growth in ASP, in gigabit and Power over Ethernet, which is why we, the bulk of our announcement from the joint venture in that space.

Q - William Becklean

Okay, any comment on the, your reaction to this bundled service, Linksys One?

A - Bruce Claflin

Not really, I guess I would just say we well wait and see what the real impact would be, and there is a value to what I’ll call a bundled service offering, it done properly for the carriers and service providers to sell. And as an example in the ISR space where I think CISCO has enjoyed good success, I think it’s because the value proposition appeals to the channel, in this case the service provider. And to me that is the thing to watch more than the end user, its more of, does anything that our competition do give them any kind of leg up on channel partners and that remains to be seen.

Q - William Becklean

Okay thanks Bruce.

Operator

We’ll go next to Long Jiang at UBS

Q - Long Jiang

Yes hi. Yeah, I have a question about inventory turns, I mean that the ratio remains low for two quarters on the row compared to about 17 times average last year. And do you have any inventory that speaks on the balance sheet for two quarters and are tied to specific customer and, or do you have any inventory that you have shipped why you could not recognize revenues on?

A - Donald Halsted

Let me answer that Long. Different question, there is some inventory that we have shipped that we are, we currently have deferred revenue on but that would not, that would no longer show up an inventory, that actually be cleared out an inventory, because it would be in cost of goods sold but you then would have a deferred revenue. And in principle, some of that is the, is some of the product that we have shipped to Edward Jones which has not yet reflected into deferred revenues. But the primary reason why you see it increase in the inventory has more to do with the nature of the relationship with the joint venture and the products we’re doing as we are bringing on the rapid growth in the products in the joint venture. The buying model on that, it has actually holding a little more inventory on those products then you would for a comparable product that we are buying from one of our other contract manufacturers. So some of that is just mix, we do have an approach, we do go look at anything that we’d had for over 6 months and if we do, we take basically the E&O reserves on that. And we always watch that in our profile of over 6 months, all the inventory had not been changing significantly. So you are actually getting a turn in the higher inventories.

Q - Jiong Shao

So these lower inventory turn is more of the factor of our buying patent between you and the joint venture, instead of the tie-up with the Edward Jones.

A - Donald Halsted

Right, it is mostly that way and it is something that we obviously watch very closely.

Q - Jiong Shao

Okay.

A - Donald Halsted

Primarily because of the change in the patents.

A - Bruce Claflin

With Edward Jones, that would have no impact because that would not be in inventory.

A - Donald Halsted

It would no longer be an inventory, would be in deferred revenue.

Q - Jiong Shao

Okay.

A - Bruce Claflin

And our deferred revenue account is, it’s frankly, fairly minor it’s not large.

Q - Jiong Shao

Okay well my second question is about foreign exchange impact, I mean you are low on revenues relative to the expectation but you also do better than expected on the expense. I mean can you talk about foreign exchange impact on both lines?

A - Donald Halsted

Yeah, I don’t think the foreign exchange has had a large impact on our revenues because we are, it heavily Dollar denominated in this industry. So I have not seen a lot of movement on that. And it has not been a significant enough move for our expenses outside of the US because of majority of our expenses are actually US located, that it really has not had a large impact on the P&L. There is been some impact in the different areas in Latin America and in Europe but it is not been a major impact.

Q - Jiong Shao

Okay.

A - Donald Halsted

That’s one of the reason we have not called that out as being a major impact or a major benefit really at any time in the last, in the 18 months that I’ve been here.

Q - Jiong Shao

Okay, thanks Don and Bruce.

Operator

We’ll take our next question from Alex Henderson at Citigroup.

Q - Nigel Frankson

Hi this is Nigel Frankson calling in for Alex Henderson. Couple of quick questions and to ask, one that’s already been asked in different way. How would you characterize your H-3C source sale in the United States relative to internal expectations?

A - Bruce Claflin

Well I am not going to do a breakup by geography of subset of our product line from one vendor, I am sure you can understand. But I will characterize at the aggregate level. I am satisfied and encouraged because those of you who followed us, know that for the first probably a year, year and a half of the relationship with the joint venture we were flat lined at about $5 million to $6 million per quarter, resale of JV products. And starting I believe it was three quarters ago we began to see sequential growth and that growth has stayed very strong. So it’s clear that we are on a different trajectory with our joint venture sales that we have been on before. And to me that is the very encouraging sign at here, relative to EMEA versus the US, we does not even track at that way but there is, I would say that there is not particular advantage one geography over the other as it relates to that growth.

Q - Nigel Frankson

Okay.

A - Donald Halsted

One thing that I add, that is the improved traction really has come and we started dealing with products that have been developed by the teams after the formation of the venture, when we were somewhat flat lined at around five, that was having to do with the adapted products, and then we start to see the increase, several quarters ago we saw doubling in a quarter and it coincided with the introduction of the 7700 and 8800 which was really a design from the ground up. We now at the entire line of 5500 switches that have been designed with them from the ground up and now the introduction of the 4500. So it expanded up the portfolio as well. And outside the revenue now is running at basically from those source products at four times but it was running a year ago.

Q - Nigel Frankson

Okay. On your Analyst Day, you in a roundabout way pretty much guided the streets, for within six quarters for the revenues to get to about $230 million per quarter, unfortunately we fell a little short on revenue this quarter. It just that the top line, assumptions that you would estimate going forward, modeling wise just looked a little aggressive. Can you speak to, I guess what gives you the confidence of getting to 230 million per quarter in the next five quarters at this point given that we are now starting at a lower starting point and we would hope for?

A - Donald Halsted

Nigel the, we start with sort of two end points, the end of the first quarter and we projected out at the third quarter of fiscal ’07 at 203, I think one other ways that I characterize, it is that represented a compound sequential quarterly growth rate of a little over 4%, I think its 4.4% is the mathematical answer. And in fact this quarter we ended up delivering basically a 4% growth. So while we did not say that the growth is going to be and though is going to be a, a perfect curve through there in fact the growth actually delivered is not really inconsistent with the overall line, but is different, is that, that we came in a little bit below where we had originally guided to for the quarter and that is really for the reasons that we’ve already described. As I look at, I look at the margin, I look at where we ended up on revenue and in fact the track we are in expense. I really, I don’t see anything that’s says in my mind that we are off the track that we laid out in October. I think we are still running consistent in that track.

Q - Nigel Frankson

Okay. All right, thank you, that’s it.

A - Donald Halsted

Thank you Nigel.

Operator

We’ll take our next question from Manuel Recarey at Kaufman Brothers.

Q - Manuel Recarey

Good evening guys, two questions. One, can you give your view on the US enterprise spending in the quarter it was, that was a area that didn’t meet expectations, was that due to kind of the market line meeting your expectations? And then, give an update on kind of your goal to move up market in indiscernible and security, now the Siemens partnership is moving along. Thanks.

A - Bruce Claflin

Yeah, its impossible to conclude at this point whether the macro trends for spending in the enterprise are any different in North America, I would really have to see what our competitors announced. My sense is that there is really no change and remember the amounts we are talking here are probably $3 million or $4 million for the quarter and so well I never like to miss any projection that, I think we need to keep in mind the amounts we are talking here. We had certain very large transactions that were differed into this quarter that we are in now, and so timing could play an element here, I do believe that getting large projects approved, paid, funded and implemented continues to be a challenge as the CFO is clearly watching the pastures, but I can’t see any material change in the market, nor do I believe we can read anything of great note by falling a few million dollar short on the enterprise size of our business in North America for the quarter, particularly given the year-over-year performance.

Q - Manuel Recarey

Okay. Can you give me an update on the Siemens partnership that you announced at the Analyst Meeting, anything new there?

A - Bruce Claflin

Yeah, I’m very encouraged we are called, well it’s a worldwide agreement. The principle focus initially is in North America. And we did enjoy really quite some good success here. We did just under $2 million of business with Siemens, reselling 3Com products as part of their solutions in the quarter. And so from our Analyst Call where we are basically just getting started in any material way, I am encouraged by that. And so we’ll see the very good start for the first quarter of full implementation.

Q - Manuel Recarey

Okay thanks.

Operator

For our next question we’ll go back to Jiong Shao at Lehman Brothers.

Q - Jiong Shao

Thanks. Hi, I have a few follow-up questions, great job on the European sales. Could you talk about sort of where you saw strength, I mean which countries and if you can talk about overall demand picture in Europe, that would be great, that’s my first question.

A - Bruce Claflin

Let me comment a little bit on this, we did have real good success in Italy and Southern Europe with some fairly sizeable enterprise oriented deals and much of that was selling products developed by the joint venture, so real strength in that region, the southern region. Overall for Europe, we too were encouraged by the result as you know we have not been happy with our performance and we put into leadership and the worry you always have with new leadership is in their zeal to put their mark on an organization to the great disruption, and at least for the first quarter that has not been the case in Europe. And as I said in my prepared comments, we’ve implemented and approached to the market there, we think was more focus on high growth areas and it lowers the overall close cost that we had supporting the EMEA market. So I am not sure beyond that I can really comment anymore, does that generally answer your question?

Q - Jiong Shao

Could you comment on U.K, France, Germany for example?

A - Bruce Claflin

I am looking at Don because frankly I just don’t have the numbers in the front of me and there is nothing that jumps out of me, as they are particularly noteworthy in terms of the differences one to the next.

A - Donald Halsted

The only thing that, that I recollect from my work is that the, Germany is continue to be a bit weaker or bit slower in the growth but I think that’s as much the economy and it is the actual like as it is 3Com. And then in France we’ve actually been seeing some decent growth particularly in some of the enterprise areas. And I think that the, the UK and I honestly I can’t remember on the UK that was basically kind of flat. So if you really think about the strongest story, the farther south you go in Europe the stronger the story was.

A - Bruce Claflin

And related to that, we tend to think of Europe but in the Middle East and in Eastern Europe actually are very good geographies as per rates of growth.

Q - Jiong Shao

Yeah.

A - Bruce Claflin

They are not large yet but in terms of rates have changed they are doing quite well.

Q - Jiong Shao

Okay, great. My second question is on your guidance, you are looking for growth obviously for the total top line, could you talk about the regional expectations and also could you talk about whether or not you expect the strong growth for that JV resale revenue to continue to year end?

A - Donald Halsted

I think, I think I am going to stay away from finally get into specific guidance of the individual products areas. The only comment I would say relative to the joint venture is we have some recent launches of our products and therefore you expect to see some good revenue from the launches. And on the country, the region breakdown, I think at this point I want to, I am going to back off of giving a particular region work. We are doing a lot of work in all the regions and it really becomes a portfolio as you get into the, more into the projects and more into the enterprise area.

Q - Jiong Shao

But maybe Don you can or Bruce you can comment just about seasonality, typical in this quarter, how that’s play out, like you, like you mentioned that for the November quarter, how that played out, and just typical seasonality how that’s going to play out in the second quarter?

A - Bruce Claflin

Well I think it was match-your-mouth question I’ll sort of restate a short version, if you look at 3Com over a long period of time, Q3 is seasonally slower than Q2. But we do believe as our mix of business as a little more than the enterprise, that seasonality is less of a factor for example we believe…

Q - Jiong Shao

Sorry, Bruce, sorry Bruce.

A - Bruce Claflin

TippingPoint typically would have a stronger quarter and what is now or Q3 as an example.

Q - Jiong Shao

You are right, now sorry Bruce, I meant seasonality along regions?

A - Bruce Claflin

Oh, oh I am sorry well, again I am going to use Don’s answer, which is we’re really reluctant to do forecast or, observations by geography there. Having said that, there really is no major difference other than you factored in Chinese New Year, especially when it’s early, that does affect us in our Q3 in our Asian operations. Beyond that nothing of note.

Q - Jiong Shao

And seasonally Europe should not be down and US should be up, is that just historically, I am not asking for forecast, just historically.

A - Donald Halsted

Let me try this, one of the, when we think about the third quarter and we say what are the historical reasons for softness is primarily holiday shutdowns in education softness, and in Asia you pickup the Chinese New Year. As I look at this third quarter though, what I have is being offsetting factors and one of the things we saw last year is that the particular three months that comprise our third quarter, sort of as emerging as the seasonally strong quarter for TippingPoint that has to do with pioneering the very end of peoples fiscal years as of enterprises and the start of the fiscal years for them, so you capture both of those. And the fact that we actually had a stronger backlog entering our third quarter than we had entering at second quarter is one of the supporting results. So I got two things are very much of related to enterprising projects, that gives me some confidence, so that we can offset the items that would be the traditional softness and those may play up differently in the different regions, that’s why I don’t like go directly to the regions but those are kind of the, the cheap pieces.

Q - Jiong Shao

Okay thanks guys.

Operator

That does conclude our Question & Answer session, Mr. Claflin I will turn the conference back to you for any additional or closing remarks.

Bruce Claflin, Chief Executive Officer

Well, I think we’ve covered quite a bit of ground, as I said we are encouraged by the progress but a long way to go. We continue to focus on the three major trends we believe we can drive top line growth, we believe we can do gross margin expansion and we believe we can do it while taking expenses down, our performance over the last few quarters has supported that, and that’s our intension to continue it going forward. Thanks very much, I hope all of you the good holiday we will talk to you in New Year.

Operator

Again this does conclude today’s conference. We thank you for your participation you may disconnect at this time.

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