Some like to start the new fiscal year bright and early -- like networking expert 3Com
What analysts say:
- Buy, sell, or waffle? Eight Wall Street analysts follow 3Com today. Their reviews are mixed: one buy rating, two sells, and five holds. Our Motley Fool CAPS database is less ambivalent with an unwavering two-star rating based on 194 user votes.
- Revenues. The average estimate points to about $318.3 million, which would be 6% above last year's $300.1 million.
- Earnings. $0.02 of pro forma profit per share would satisfy the average analyst, up from essentially breakeven a year ago.
What management says:
CEO Edgar Masri called in from China on the last earnings call to comment on two important areas of focus for fiscal '08. First, the global mishmash of sales and marketing operations will be consolidated into one cohesive force, which should simplify operations and bring efficiencies and cost savings to the table. Second, 3Com needs some profitable revenue growth and expects each segment to show some positive results for this quarter to kick things off.
What management does:
Margins have started looking healthier over the past year or so, but you need to leave the world of GAAP to find profitability. Or, you can look at cash flow, where the company broke on through to the other side recently.
The revenue growth may look good, but it's hardly organic. In November last year, 3Com paid $882 million to Chinese networker Huawei to buy out its 49% stake in H3C, a joint venture between the two companies. The acquisition closed in March this year.
To put the impact of this move into perspective, consider this: The H3C segment provided for $176 million in sales last quarter, or about 57% of 3Com's total revenues. Had H3C been a 3Com segment a year earlier, the total revenue growth for the quarter would have been a measly 4%.
|
2/2006 |
6/2006 |
9/2006 |
12/2006 |
2/2007 |
6/2007 |
|
|---|---|---|---|---|---|---|
|
Gross |
39.0% |
41.3% |
43.0% |
44.1% |
45.5% |
45.6% |
|
Operating |
(24.9%) |
(16.8%) |
(12.1%) |
(7.6%) |
(3.5%) |
(7.4%) |
|
Net |
(20.1%) |
(12.7%) |
(7.9%) |
(6.1%) |
(3.1%) |
(7.0%) |
|
FCF/Revenue |
(18.4%) |
(18.3%) |
(10.9%) |
(8.9%) |
(0.2%) |
8.6% |
|
Y-O-Y |
2/2006 |
6/2006 |
9/2006 |
12/2006 |
2/2007 |
6/2007 |
|---|---|---|---|---|---|---|
|
Revenue |
8.8% |
22.0% |
37.6% |
52.3% |
69.2% |
59.5% |
One Fool says:
While organic growth generally feels better, the H3C buyout was a really shrewd move. That division gives 3Com broad access to the booming Chinese market, and the part-native heritage from Huawei helps 3Com do business in Mandarin and Cantonese. H3C's distribution network is a valuable asset other American competitors like Cisco Systems
And that's not all: H3C is actually profitable for the most part, unlike Secure, Converged Networking which is 3Com's only other segment. Now it's more a trickle than a flood of profits, and it will take many years to recoup the purchase price of H3C. But I like to see companies planning for the far future whenever possible, and this is a great example of that mind-set.
For this quarter, we'll see some of the aftershocks of that acquisition in the form of R&D write-offs and other acquisition costs. The non-GAAP predictions above do away with those effects, though, and for once, I suppose a non-GAAP mind-set could be useful. The H3C deal's effects are just too massive to ignore, and some accounting trickery to compare the post-acquisition 3Com to the largely separate year-ago operations is in order.
One last question: Given that almost half of 3Com sales come from China, and it is the healthiest part of the business, how come there's only one Chinese businessperson on the board of directors, and no Chinese representation in upper management except for H3C top dog Shusheng Zeng?
