With the second quarter of fiscal 2007's earnings news come and gone, we look at 3Com (NASDAQ:COMS) and ask: Is the company a better business today than it was one year ago?
From my perspective, the answer is "yes." Thanks to the consolidation of its H3C joint venture with China's Huawei, the new and improved 3Com now boasts 81% greater annual revenues than it did one year ago. It's grossing 480 basis points more on those sales (45.1%). And it's spending only 14.5% more on selling, general, and administrative costs.
Granted, the firm still isn't making even an operating profit -- but guess what? That's an intentional choice on 3Com's part. The company more than doubled its research & development expenditures over the past year. Had it just held R&D spending constant, the firm would be generating a $15.6 million operating profit, which would equate to a 4.7% operating margin. With its hefty cash cushion, 3Com apparently feels safe to continue investing in R&D, and no need to rush to profitability for appearances sake. If it's to continue competing on the same field with the likes of Avaya (NYSE:AV), Cisco (NASDAQ:CSCO), and Juniper (NASDAQ:JNPR), that's the right choice to make.
Then again&
Then again, as I mentioned in the pre-earnings Foolish Forecast, I'm less interested in 3Com as a business at this point, and focused instead on 3Com the "bank." In that regard, 3Com now reports that its cash hoard declined to $869 million by the end of last quarter.
As we all know, the firm has agreed to spend $882 million to acquire the 49% of H3C that it does not yet own from joint-venture partner Huawei. Thanks to a special $41 million "capital distribution from H3C to its shareholders," 3Com no longer has the funds to carry out this purchase with cash on hand (even if it wished to.) Instead, 3Com will be keeping much of the cash in reserve, and drawing on "secured committed financing from its international banking partner for up to $500 million" of the purchase price. Regardless of how much debt it takes out, however, once the Chinese authorities approve the transaction and payment is made, 3Com will have essentially no "net cash" (cash minus long-term debt) remaining on its balance sheet.
This makes it more important than ever to monitor 3Com's free cash flow. Unfortunately, since the firm did not provide a cash flow statement in its earnings release, we're not yet able to do that. Make sure to keep an eye on the firm's SEC filings, however. As soon as the 10-Q shows up (including a cash flow statement), all will be revealed.
How'd we do at calling 3Com's last quarterly earnings news? You be the judge:
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Fool contributor Rich Smith does not own shares of any company named above.
