It appears a new day has dawned at 3Com
For three quarters in a row, the networking equipment maker has managed to avoid losing money. What's more, for two quarters in a row, it's actually earned a profit! But can 3Com keep this good news coming when fiscal Q4 and full-year 2007 earnings come out on Thursday?
What analysts say:
- Buy, sell, or waffle? Seven analysts still follow 3Com, and even their ratings are the same as last quarter: one buy rating, five holds, and one sell.
- Revenues. On average, the analysts expect quarterly sales to rise 24% to $316.4 million.
- Earnings. They predict $0.02 per share in profits, a reversal of last year's Q4 loss. (Note, however, that these earnings appear to be of the "pro forma" variety. Last quarter's "profit," for example, was actually a loss of a penny a share under GAAP.)
What management says:
Plumbing the depths of corporate PR-speak, in March CEO Edgar Masri described last quarter's profit as: "delivering non-GAAP operating profitability for the second consecutive quarter." That said, while the statement has all the feel of a corporate kissing-of-the-cousin, a kiss is still a kiss. And I suppose a "non-GAAP operating kiss" is better than no kiss at all.
One week after earnings were released, 3Com announced the long-anticipated closing of its deal to acquire the whole of Chinese subsidiary H3C. Total cost: $470 million cash, plus $430 million debt. Among other benefits, bringing H3C fully in-house makes 3Com, in Masri's words, "the clear number two vendor in the market for secure, converged networking solutions." (Presumably, he's ceding the pole position spot in this market to Cisco
What management does:
Reviewing the table below, you can almost forgive Masri for his verbal overreaching on the profitability question -- actual GAAP profitability is so tantalizingly close, yet still just beyond reach. 3Com's gross margins have been helping out mightily, rising on a rolling basis in every quarter for the last year and a half. Meanwhile, operating and net profitability continue to elude the firm.
|
Margins % |
12/05 |
2/06 |
5/06 |
9/06 |
12/06 |
2/07 |
|---|---|---|---|---|---|---|
|
Gross |
37.7% |
39% |
41.3% |
43% |
44.2% |
45.6% |
|
Op. |
(24.8%) |
(22.7%) |
(15.4%) |
(10.6%) |
(6%) |
(2.7%) |
|
Net |
(23.4%) |
(20.1%) |
(12.7%) |
(7.9%) |
(6.1%) |
(3.1%) |
One Fool says:
In the event 3Com again fails to achieve real, live GAAP profitability on Thursday, I'd like to propose a compromise solution to avoid any further mangling of the English language in the interests of claiming to be "in the black." Reviewing the firm's most recent 10-Q, which shows its cash flows for the first three quarters of the year, it appears that 3Com is in fact profitable year-to-date -- cash-profitable.
Free cash flow for the first nine months of the year amounted to $70.7 million -- a striking reversal from the $112.3 million in cash burnt in the first three quarters of last fiscal year. So 3Com can clearly and in good faith advise investors that whatever the rules of GAAP accounting make it report on the "bottom line," the line that really counts -- the credit (as opposed to debit) line on its bank account -- shows honest-to-goodness cash profits are finally rolling in.
Of course, for such an assertion to make any sense to investors, the firm would have to give them some context. It would have to deign to include a cash flow statement in its actual earnings release, rather than making investors wait two weeks to see it in the 10-Q. Hey, now there's an idea ...
How'd we do at calling 3Com's last quarterly earnings news? You be the judge:
Have an opinion about 3Com? Bring it to Motley Fool CAPS, the Fool's free, completely spiffy stock-rating service.
Fool contributor Rich Smith does not own shares of any company named above.
