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3Com profit bump surprises Street

Wrapping up a gift for HP

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Networking equipment maker 3Com beat its guidance for revenues and profits in its fiscal 2010 second quarter, but revenues are still being compressed by the soft global economy.

In the quarter ended November 27, 3Com posted sales of $322.2m, down 9.1 per cent compared to the year-ago period. The company said that it did see sequential revenue growth across all major geographies in the quarter, with a "solid recovery" in Europe and Latin America and "continued strong performance" in China. 3Com is ramping down its sales partnership with Huawei Technologies in China, with sales down 35.3 per cent to $18.2m in the quarter, while direct sales in China rose by 21.9 per cent to $151.1m. (Yes, if you do the math, 52.5 per cent of 3Com's sales come from China.)

Earnings in the quarter were impacted by HP's impending acquisition of 3Com, and the networking company said that it booked $4.6m in charges relating to the $2.7bn cash deal HP put on the table for 3Com shareholders back in early November. However, even with those charges, 3Com had a ruling from the taxman that added $10.8m to the coffers during the quarter and was able to nonetheless push net income up to $20m, a 55 per cent increase over the prior fiscal year's second quarter.

3Com generated $118.2m in cash from operations in the quarter, which HP will be keen on knowing about, and repaid $88m in debts. The company had $704.1m in cash and equivalents in the coffers as the quarter ended, and a mere $112m in debt. This means HP is really only shelling out $2.1bn for 3Com.

Of course, 3Com's sales have been stagnant at around $1.3bn for the past three fiscal years ended in May, and only went into the black in fiscal 2009, with $114.7m in net income against $1.32bn in revenues. The company lost $613.8m over the prior four years, with aggregate sales of just over $4bn during that time. Presumably HP is willing to pay such a high premium for 3Com today because that company has cleaned up its financial act. Plus, buying 3Com allows HP to bolster its share of networking sales, fill in product gaps, and get a solid footing in the Chinese market, where 3Com has a 30 per cent share for network equipment sales.

This isn't just Cisco envy - although that's also a big part of the HP buyout of 3Com, of course. ®

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