Foolish Forecast: 3 for 3Com?

In each of the past two quarters, networking equipment maker 3Com (NASDAQ:COMS) has pleased Wall Street by losing less money than expected. Can the company go three-for-three? We'll find out on Thursday, when it kicks off its fiscal 2007 reporting year with some after-hours news.

What analysts say:

• Buy, sell, or waffle? Nine analysts still follow 3Com, down one from last quarter. Two say buy; seven say hold.
• Revenues. On average, the analysts expect sales to shoot up 77% to $314.8 million.
• Earnings. And the quarterly per-share loss is supposed to narrow to $0.01.

What management says:
As mentioned in last quarter's Foolish Forecast, 3Com recently purchased enough incremental interest in its joint venture with China's Huawei to give it a "controlling interest" in the JV (which goes by the Star Wars-esque name "H-3C"). As a result of that purchase, 3Com now gets to consolidate the JV's results with its own. And as a result of that, you see a 77% jump in sales anticipated above.

And not a moment too soon, because as Stephen Simpson bluntly summed it up last quarter, 3Com "is growing . entirely because of the benefits of the Huawei hookup." And indeed, when you look at the numbers for "pro forma revenue" (which assumes that H-3C was incorporated within 3Com's results for the entire fiscal fourth quarter 2006), you'll see that the 22% improvement in sales versus last year actually broke down as a 90% improvement in the JV's sales -- and a 6% decline in 3Com's own. Then-CEO Scott Murray summarized the dichotomy this way: "H-3C delivered strong results, and we have continued to reduce the operating loss of our SCN business." Enough said.

What management does:
Murray intends to reduce the operating loss of 3Com's SCN -- i.e., non H-3C -- business, by continuing to cut costs. Based on the margin trends we see below, the plan appears to be on track, with gross margins continuing to rise, and operating and net losses continuing to shrink.

One Fool says:
Over the past six months' worth of results (which include just two months' worth of H-3C's contributions to the whole), 3Com has grown its now-consolidated reported revenues by 28%, while keeping operating costs down to just a 10% increase. So far, so good. As for what we should be looking for in Thursday's results, I've got to agree with Murray's sentiments:

• Lower, or at least slower-rising than sales, costs in the SCN segment; and
• Continued sales and margin improvement at H-3C

Even with H-3C now onboard, we still look to be several quarters away from the point where 3Com as a whole shows positive operating and net profit margins on a rolling, full-year basis. But the firm is clearly headed in the right direction, and if it can keep plugging away at hitting these two objectives, it should eventually get where it needs to be.

Competitors:

• Avaya (NYSE:AV)
• Cisco (NASDAQ:CSCO)
• Hewlett-Packard (NYSE:HPQ)
• Internet Security (NASDAQ:ISSX)
• Juniper Networks (NASDAQ:JNPR)
• McAfee (NYSE:MFE)

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

• Foolish Forecast: 3Com
• 3Com's Future Rests With China

McAfee is a former Stock Advisor recommendation. To see what other companies David and Tom Gardner have recommended to investors since 2002, take a 30-day free trial.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.