Networking equipment maker 3Com (NASDAQ:COMS) added to a string of losses last quarter. Might this quarter be the turnaround? Tune in Thursday afternoon to find out, as the company reports its fiscal Q3 2007 numbers.

What analysts say:

  • Buy, sell, or waffle? 3Com has lost another analyst, it seems. With just seven still following it, the stock now gets one buy rating, five holds, and one sell.
  • Revenues. On average, the analysts expect sales to shoot up 85% to $329 million.
  • Earnings. They think the company will book a profit this quarter: $0.01 per share.

What management says:
When last we checked in on 3Com, right around Q2 earnings time, the company had just reported a pretty strong quarter -- but failed to report how much cash flow it generated (or lost) in that pretty strong quarter. Not only did management decline to provide a cash flow statement with its earnings report; it failed to say anything whatsoever about cash production (or lack thereof). I mentioned at the time that we'd need to check back in on this point once the firm filed its 10-Q. Can't think of a better time to do that than right now, before the facts change again with Thursday's news.

As it turns out, despite the GAAP net profit, the Q2 10-Q showed that free cash flow went missing once again, as the business used up $21.1 million in cash through a combination of negative operating cash flow and hefty capital expenditures. That said, the firm showed real improvement over its performance in fiscal Q2 2006, when free cash flow ran negative to the tune of $90.7 million.

What management does:
While I'd certainly prefer to see the company burning no cash at all (contributes to global warming, don't you know), this was a situation in which less was at least better.

For an example of a situation in which more is better, take a look at the firm's profit performance under GAAP: Gross margins -- more. Operating and net margins -- more progress toward breakeven. We're getting there, folks, slowly but surely.

Margins %

9/05

12/05

3/06

5/06

9/06

12/06

Gross

36.4%

37.7%

39.0%

41.3%

43.0%

44.2%

Op.

(28.2%)

(24.8%)

(21.8%)

(15.4%)

(10.6%)

(6.0%)

Net

(30.3%)

(23.4%)

(20.1%)

(12.7%)

(7.9%)

(6.1%)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Sales at 3Com, as you may recall, have been up 75% year over year on average in the first half of fiscal 2007 -- compliments of the firm's consolidation of the results of its joint venture with Huawei. Moreover, the balance sheet strongly suggests that the company expects its sales to continue rising without any help from the consolidation of formerly-jointly-owned entities.

Comparing inventory levels at the end of Q2 2007 with those of Q2 2006, I was initially concerned to see that they had risen 347% -- far faster than sales growth. However, digging deep into the firm's 10-Qs quickly allayed my concerns. While a 127% rise in inventories of finished goods wasn't exactly encouraging, I discovered that 3Coms' supply of raw materials and works in progress grew 56 times in size. The best explanation I see for such a surge in component supplies is that management expects demand for its products to continue rising rapidly, and is stocking up on the parts it will need to satisfy this demand. Let's hope Thursday's sales number bears out that thesis.

How'd we do at calling 3Com's last quarterly earnings news? You be the judge:

Fool contributor Rich Smith does not own shares of any company named above.