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3Com to ditch products and up to 3000 jobs

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3Com is bailing out of the high-end router and the low-end modem markets in a reorganisation aimed at trading jobs for profits. Not that the company is doing too badly. Alongside the restructure announcement, 3Com posted Q3 profits and revenues up just a little on the same period last year. The reorganisation is a straightforward move to ditch 3Com's less profitable business in order to focus on what it reckons will be the key comms technologies over the coming years. So, out goes its analogue modem business, to be sold to Far Eastern operations Accton Technology from Taiwan and Singapore's NatSteel Electronics. The buyers will form a new company - it's not clear whether they will retain the US Robotics name - and bring over some 1600-2000 3Com employees. Also for chop is 3Com's high-end LAN and WAN business, which will result in the loss of 800-1000 jobs at the cost of $200-300 million, the company said. Both operations have contributed less and less to 3Com's bottom line over the last couple of years, thanks to tough competition from the likes of Cisco at the high-end and a slowdown in sales at the low-end, itself the result of the inherent limits in analogue modem technology. In short, analogue modems can go no faster, which is why 3Com's shift to digital versions, such as DSL and cable modems, makes plenty of sense, and it's been moving its focus toward these next-generation comms products for some time. Equally sensible is its plan to target the service provider market, offering products designed to help ISPs themselves supply a wider range of services, such as audio and video as well as data. 3Com is driving its push into this market with the acquisition of unified messaging specialist Call Technologies and partnerships with Copper Mountain Networks and Extreme Networks, and we can expect more acquisitions and alliances here over time. 3Com's third strand is SME-oriented LAN products, which sounds a curious move given the increasingly commodity nature of the business. So we'd guess that the focus here will be on wireless technologies of the kind that 3Com has already partnered with Microsoft to develop and promote. The financial impact of the restructure will be significant. The job cuts, the $90 million Call takeover and other charges will drive 3Com's net income for the next quarter into the red to the tune of $450-500 million. The charges themselves will be spread over Q4 and the following fiscal year's first quarter. The closure of the various high-end and low-end product lines will hit sales, pushing them down to around $675-750 million over the next quarter. That compares with Q3 sales of $1.42 billion, up from $1.41 billion this time last year. 3Com made a base profit of $97.4 million over the quarter, an increase of 8.6 per cent on last year's $89.7 million. Once charges and gains - primarily the result of last month's Palm flotation - net income for the quarter reached $506.3 million. 3Com won't return to profitability until Q3 2000 as sales rise during Q2 to counter charges and to cover 3Com's lost business. And speaking of the Palm IPO, 3Com said it would begin offering its stake in the mobile computing specialist to 3Com shareholders during Q1 2000, due to commence 1 June. ®

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