The 3Com Shuffle

Networking company 3Com (Nasdaq: COMS  ) managed to cut its net losses in half in the fourth quarter. It lost $19 million, or $0.05 per share, compared with $38 million, or $0.11 a share, a year earlier. Revenue increased 5% to $183 million. It's nice to see the reduction in losses, but the company's outlook didn't indicate that the trend would continue into the first quarter of fiscal 2005, with revenue expected to be flat or only slightly improved.

The gross margin came in at 41%, much better than the 36% in last year's fourth quarter. But the company expects that to fall back slightly in the first quarter. Operating expenses totaled close to $100 million, including $13 million in restructuring charges, which mostly consisted of severance expenses due to 200 employees being cut during the quarter. Research and development, sales and marketing, and administrative expenses were reduced by $18 million from the third quarter to $85 million but are expected climb to $90 million in the first quarter.

Investors will take profits however they can get them, but they should much prefer profits resulting from growing sales as opposed to cutting expenses (though 3Com seems incapable of producing profits, period). In a story earlier this year, it was pointed out that the company has been counting on strong results from the Huawei-3Com joint venture. However, the company reported that revenue in the Asia-Pacific region declined 12% from the third quarter. Not a good sign.

The modest increase in total revenue was in fact dependent on a 35% increase from the previous quarter in the sale of voice, fixed-configuration switching and connectivity products in the Americas. That would be all well and good if the company were turning those sales into profits, which hasn't been a problem recently for competitors Cisco Systems (Nasdaq: CSCO  ) , Nortel Networks (NYSE: NT  ) , or even Lucent (NYSE: LU  ) .

Another issue is the departure later this year of the chief financial officer and the executive vice president of worldwide operations, supposedly because they aren't willing to relocate to Massachusetts from California. That seems unusual at a corporate level where such sacrifices are the norm. In fact, both of them moved from Texas in 2002 and have had an agreement for more than a year compensating them for commuting expenses. Is there more to that story than we're being told? You know the old saying about rats fleeing a sinking ship.

OK, maybe this isn't a sinking ship, but it's leaky. The "rats" are looking for a new ship at first port. Perhaps investors should find another ship too.

Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.


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