3Com warns of bigger-than-expected loss

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Networking equipment vendor 3Com Corp. yesterday warned that the expected loss for its second fiscal quarter will likely be larger than originally predicted, due primarily to a slowdown in sales to telecommunications carriers.

The struggling Santa Clara, Calif.-based company had estimated that it would lose up to 9 cents per share in the quarter that ended last Friday. But it now expects the second-quarter loss to be more than twice that amount, with revenue from ongoing businesses coming in at about $780 million -- roughly $100 million below the level 3Com predicted in September.

Bruce Claflin, 3Com's president and chief operating officer, said during a teleconference late yesterday afternoon that second-quarter sales "were dramatically affected by the turmoil in the [telecommunications] industry." Claflin is scheduled to become the company's CEO in January under a plan announced in September.

Telecommunications carriers such as AT&T Corp., WorldCom Inc. and Sprint Corp. recently announced restructuring plans aimed at increasing their focus on business- related data services. As a result, Claflin said, those companies were embroiled in internal issues and didn't buy as much equipment as 3Com thought they would.

Sales in the second quarter for 3Com's carrier networking business fell to between $95 million and $100 million, down about 30% from the same period a year ago, Claflin said. That breaks a string of seven consecutive quarters of year-to-year revenue growth for that business unit, he added.

However, 3Com said it views the sales drop-off as a slowdown in purchases, not lost business altogether. Officials noted that the company is entering its third fiscal quarter with record levels of deferred revenue from customers in the telecommunications market. "It's not a change in deployment intentions [by the carriers] but a change in the timing of deployment," said outgoing 3Com CEO Eric Benhamou, who will remain as chairman after Claflin takes over.

The second-quarter results are due to be reported on Dec. 21. Looking ahead, Claflin warned that the third quarter is traditionally 3Com's slowest in terms of revenue generation and said that the company is likely to experience "a modest seasonal decline" in sales, although it's hoping to at least show sequential growth compared with the second quarter.

Ignoring sales from enterprise-level networking products that 3Com announced it was dropping last March, second-quarter sales for the company's commercial and consumer networks business are now expected to rise about 5% from last year's level to roughly $670 million.

According to Claflin, that business unit has been plagued in recent quarters by a series of component shortages affecting its full product line. The shortages "have been periodic and unpredictable," Claflin said. "The vendor would call the day before to say the parts weren't on the truck." But the situation is beginning to improve, he added.

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