3Com Reports First Quarter Fiscal Year 2007 Results.MARLBOROUGH Marl·bor·ough or Marl·bo·ro A city of east-central Massachusetts east-northeast of Worcester. Settled in 1657, it was nearly destroyed in 1676 during King Philip's War. Population: 38,100. , Mass. -- Delivers Double Digit Noun 1. double digit - a two-digit integer; from 10 to 99 integer, whole number - any of the natural numbers (positive or negative) or zero; "an integer is a number that is not a fraction" Year-over-Year Revenue Growth; Continues Year-over-Year and Sequential Improvements in Bottom-Line bot·tom-line adj. 1. Concerned exclusively with costs and profits: bottom-line issues. 2. Ruthlessly realistic; pragmatic: a bottom-line political strategy. Performance First Quarter Highlights --GAAP loss per share was $0.04 in the first quarter, improved from an $0.11 loss per share in the prior-year quarter; and --GAAP revenue for the first quarter was $300 million, a 69 percent increase over the prior-year quarter due primarily to the inclusion of Huawei-3Com results in the current period; and a 16 percent increase over the prior year quarter's non-GAAP pro forma As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma revenue, assuming the consolidation of Huawei-3Com from the beginning of the period. 3Com Corporation (NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on : COMS COMS 3Com Corporation (stock symbol) COMS Certified Orientation and Mobility Specialist COMS Continuous Opacity Monitoring Systems COMS City of Manchester Stadium (UK) ) today reported consolidated financial results for its first quarter-ended September September: see month. 1, 2006, including a full three months of results from its majority-owned joint-venture Huawei-3Com (H-3C). This quarter marks the first time 3Com results include the impact of adopting FAS 123 (R). 3Com also reports segment results for two operating segments, Secure, Converged Networking The integration of the telephone system with IP-based data networks. See softswitch. (networking) converged network - A single network that can carry voice, video and data. (SCN SCN Scan SCN Sustainable Communities Network SCN System Change Number (Oracle) SCN Scientology SCN Suprachiasmatic Nucleus SCN Switched Circuit Network SCN Standing Committee on Nutrition (UN) ) and H-3C. Revenue Generally Accepted Accounting Principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting (GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ) revenue for the first quarter of fiscal 2007 was $300 million, a 69 percent increase compared to same period in fiscal 2006. This growth is primarily the result of the inclusion of H-3C revenue in the current period offset, in part, by a decline in revenue from the SCN segment. Compared to non-GAAP pro forma revenue for the prior-year period, which includes the results of H-3C as if consolidated from the beginning of the period, 3Com's revenue grew 16 percent. This increase was principally due to growth in H-3C revenue, offset in part by a decline in the SCN segment. Gross Profit, Operating Expense Operating Expense The essential things that a company must purchase in order to maintain business. Notes: For example, the payment of employees wages are an operating expense. Also known as OPEX. and Operating Loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. - GAAP Basis 3Com's gross profit for the first quarter of fiscal 2007 was $136 million, or 46 percent of revenue, which is a six percentage point improvement compared to the prior-year quarter, driven primarily by the inclusion of H-3C results in the current period results. First quarter fiscal 2007 operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. were $157 million, resulting in an operating loss of $21 million. This compares to a $47 million operating loss in the first quarter of fiscal 2006. The $26 million improvement comprises $14 million due to reduced operating loss in the SCN segment and $12 million of operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. from H-3C's results. Non-GAAP Operating Loss(1) The first quarter fiscal 2007 non-GAAP operating loss was $5 million, a $34 million improvement compared to the prior-year quarter's non-GAAP operating loss of $39 million. GAAP operating loss improved less than non-GAAP operating loss due to the inclusion of increased amortization expenses for the H-3C acquisition which are included in GAAP results. Net Loss and EPS (Encapsulated PostScript) A PostScript file format used to transfer a graphic image between applications and platforms. EPS files contain PostScript code as well as an optional preview image in TIFF, WMF, PICT or EPSI, the latter being an ASCII-only format. - GAAP basis The first quarter fiscal 2007 net loss was $14 million, or $0.04 per share, including restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). , amortization and stock-based compensation expense of $15 million, or $0.04 per share. In the same period of the prior year, the net loss was $42 million, or $0.11 per share, including restructuring, amortization and stock based compensation expense of $8 million, or $0.02 per share(2). Cash and Short-Term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. Securities 3Com ended the quarter with $916 million in cash, cash equivalents and short-term investments, including the consolidated cash, cash equivalents and short-term investments of H-3C, which totaled $197 million. The net increase of $52 million from the balance at the end of the previous quarter is due in large part to the sale of certain non-core assets. "I am pleased with our overall consolidated results for the quarter, particularly the growth of H-3C and the continued improvements in our expense control for our SCN segment," commented Edgar Masri, 3Com's President and Chief Executive Officer. "Our consolidated results for our North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. , EMEA (Europe, Middle East, Africa) Refers to that region of the world. For example, one might see products packaged differently for the UK, EMEA and Asia Pacific markets. and Asia Pacific regions grew sequentially and our networking, security, voice and services businesses all grew year-over-year. We now must bring a level of consistency to all areas of our business so each group increases sales and profitability." Conference Call Management will host a conference call and webcast at 5 p.m. EDT EDT abbr. Eastern Daylight Time EDT Eastern Daylight Time EDT n abbr (US) (= Eastern Daylight Time) → hora de verano de Nueva York EDT today to discuss quarterly highlights, historical financial results and expectations of future performance. To participate on the call, U.S. and international parties may dial (913) 981-4902. Alternatively, interested parties may listen to the live broadcast of the call over the Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the at 3Com's Investor Relations Investor relations The process by which the corporation communicates with its investors. Web site (www.3com.com/IR) in the Earnings webcast section. Safe Harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. This press release contains forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995, including forward-looking statements regarding our goal to increase sales and profitability. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, risks relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc : our ability to return to profitability in light of significant historical net losses; our focus on enterprise networking The networking infrastructure in a large enterprise with multiple computer systems and networks of different types is extraordinarily complex. Due to the myriad of interfaces that are required, much of what goes on has little to do with the real data processing of the payroll and orders. and fluctuating fluc·tu·ate v. fluc·tu·at·ed, fluc·tu·at·ing, fluc·tu·ates v.intr. 1. To vary irregularly. See Synonyms at swing. 2. To rise and fall in or as if in waves; undulate. v. results based on conditions in that market; our ability to respond effectively to increased competition; our ability to compensate for lower sales or cash outlays Outlays Payments on obligations in the form of cash, checks, the issuance of bonds or notes, or the maturing of interest coupons. with cost reductions sufficient to generate positive net income or cash flow; the consequences of expense reduction; our dependence on our joint venture in China (H-3C); H-3C's success; economic, political and social events in China; H-3C's dependence on Huawei Huawei Technologies Co. Ltd. (Chinese: 华为技术有限公司; Pinyin: Huáwei Jíshu Yǒuxiàn Gōngsī ; our ability to evolve our financial and managerial control and systems; our ability to consummate To carry into completion; to fulfill; to accomplish. A Common-Law Marriage is consummated when the parties live in a manner intended to bring about public recognition of their relationship as Husband and Wife. and finance a transaction with Huawei to purchase additional interest in H-3C; the consequences of Huawei winning the bidding process, if commenced; our ability to identify and respond to market trends; our ability to hire and retain qualified personnel; our ability to use strategic alliances; the success of our outsourcing (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management. strategy; the market acceptance of our products and the inclusion of our technology in industry standards; our reliance on a small number of resellers; distributors reducing inventories of our products; our ability to successfully develop relationships with system integrators See systems integrator. , service providers and enterprise VARs; Huawei's minority rights in our H-3C venture; competition with Huawei; the success of acquisitions; our ability to manage our supply chain; the ability of our manufacturing outsourcing strategy to meet cost, quality and performance standards; China's reforms and changing economic environment; uncertainty with respect to China's legal system; possible reduction in Chinese Chinese, subfamily of the Sino-Tibetan family of languages (see Sino-Tibetan languages), which is also sometimes grouped with the Tai, or Thai, languages in a Sinitic subfamily of the Sino-Tibetan language stock. tax benefits; restrictions on H-3C paying dividends; our ability to maintain effective internal controls that include H-3C; currency rate fluctuations; intellectual property rights, enforcement and defense; stock price volatility; and other risks detailed in the Company's filings with the SEC, including those discussed in the Company's annual report filed with the SEC on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the year ended June June: see month. 2, 2006. 3Com Corporation does not intend, and disclaims any obligation, to update any forward-looking for·ward-look·ing adj. Concerned with or making provision for the future: forward-looking educators; a forward-looking corporate plan. Adj. 1. information contained in this release or with respect to the announcements described herein. References to the financial information included in this press release and the related conference call reflect rounded numbers and should be considered approximate values. About 3Com Corporation 3Com Corporation is a leading provider of secure, converged voice and data networking solutions for enterprises of all sizes. 3Com offers a broad line of innovative products backed by world class sales, service and support, which excel at Verb 1. excel at - be good at; "She shines at math" shine at excel, surpass, stand out - distinguish oneself; "She excelled in math" delivering business value for its customers. Through its TippingPoint Acquired by 3Com in 2005, TippingPoint sells Intrustion Prevention Systems (IPS). History Early 1999: Founded as Shbang! TippingPoint was originally founded in 1999, selling internet appliances under the name Shbang!. division, 3Com is the leading provider of network-based intrusion prevention See IPS and IDS. systems that deliver in-depth in-depth adj. Detailed; thorough: an in-depth study. in-depth Adjective detailed or thorough: an in-depth analysis application protection, infrastructure protection, and performance protection. 3Com also is the majority owner of Huawei-3Com Co., Ltd. (H-3C), a China-based joint venture formed by 3Com and Huawei in November 2003. H-3C brings innovative and cost-effective cost-effective, n the minimal expenditure of dollars, time, and other elements necessary to achieve the health care result deemed necessary and appropriate. product development and manufacturing and a strong footprint The amount of geographic space covered by an object. A computer footprint is the desk or floor surface it occupies. A satellite's footprint is the earth area covered by its downlink. See form factor. 1. in one of the world's most dynamic markets. For further information, please visit www.3com.com, or the press site www.3com.com/pressbox. Copyright (C) 2006 3Com Corporation. 3Com and the 3Com logo are registered trademarks and TippingPoint is a trademark of 3Com Corporation. All other company and product names may be trademarks of their respective holders. (1) The non-GAAP operating loss measure used by the company excludes restructuring, amortization, in-process research and development, stock-based compensation expense and, if applicable in the relevant period, unusual items. The required reconciliations and other disclosures are set forth later in this press release in Table D and in the Current Report on Form 8-K Form 8-K The form required by the SEC when a publicly held company incurs any event that might affect its financial situation or the share value of its stock. Form 8-K See 8-K. furnished fur·nish tr.v. fur·nished, fur·nish·ing, fur·nish·es 1. To equip with what is needed, especially to provide furniture for. 2. to the SEC on the date hereof here·of adv. Of this. hereof Adverb Formal or law of or concerning this Adv. 1. hereof - of or concerning this; "the twigs hereof are physic" . (2) Our results for periods prior to the current period, in which we adopted FAS 123 (R), included stock based compensation expense primarily related to restricted stock amortization and stock-based compensation costs associated with acquisitions.
3Com Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
TABLE A
Three Months Ended
------------------------------------
September 1, June 2, September 2,
2006 2006 2005
------------ --------- -----------
Sales $ 300,144 $ 255,276 $ 177,636
Cost of sales 163,715 143,999 107,570
----------- --------- -----------
Gross profit 136,429 111,277 70,066
Operating expenses:
Sales and marketing 77,122 69,860 70,118
Research and development 47,793 32,373 21,197
General and administrative 20,276 16,571 18,213
Amortization of intangibles 12,181 9,317 3,862
In-process research and
development - 650 -
Restructuring charges (75) 3,426 3,361
----------- --------- -----------
Total operating expenses 157,297 132,197 116,751
----------- --------- -----------
Operating loss (20,868) (20,920) (46,685)
Gain (loss) on investments, net 2,292 1,063 (414)
Interest and other income, net 14,808 17,621 5,989
----------- --------- -----------
Loss from operations before
income taxes, equity interest
in unconsolidated Huawei - 3Com
joint venture, and minority
interest of consolidated joint
venture (3,768) (2,236) (41,110)
Income tax provision (1,358) (5,115) (915)
Equity interest of 3Com in the
income (loss) of unconsolidated
Huawei - 3Com joint venture (1) - 3,251 (16)
Minority Interest of Huawei in
the income of consolidated
Huawei - 3Com joint venture (2) (8,942) (11,074) -
----------- --------- -----------
Net loss $ (14,068) $ (15,174) $ (42,041)
=========== ========= ===========
Basic and diluted net loss per
share: $ (0.04) $ (0.04) $ (0.11)
=========== ========= ===========
Shares used in computing basic
and diluted per share amounts 391,885 390,245 383,760
(1) Represents 3Com's interest in the Huawei-3Com joint venture for
the period on and prior to February 1, 2006
(2) Represents Huawei's interest in the Huawei-3Com joint venture for
the period subsequent to February 1, 2006
3Com Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
TABLE B
September 1, June 2,
2006 2006
-------------- ----------
ASSETS
Current assets:
Cash and cash equivalent $ 554,169 $ 501,097
Short-term investments 361,490 363,250
Notes Receivable 50,935 63,224
Accounts receivable, net 120,848 115,120
Inventories, net 171,366 148,819
Other current assets 56,970 57,835
-------------- ----------
Total current assets 1,315,778 1,249,345
Property & equipment, net 80,309 89,109
Other assets 28,929 56,803
Goodwill 354,259 354,259
Intangibles, net 99,614 111,845
-------------- ----------
Total assets $ 1,878,889 $1,861,361
============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 148,326 $ 153,245
Accrued liabilities and other 338,342 318,036
-------------- ----------
Total current liabilities 486,668 471,281
Deferred revenue and long-term obligations 13,299 13,788
Minority Interest of Huawei (a) 182,872 173,930
Stockholders' equity 1,196,050 1,202,362
-------------- ----------
Total liabilities and stockholders'
equity $ 1,878,889 $1,861,361
============== ==========
(a) Represents Huawei's 49 percent ownership in the H-3C joint-venture
Additional Financial Data
(in thousands)
(unaudited)
TABLE C
Sales by Geography (a)
Three Months Ended
--------------------------------------
September 1, June 2, September 2,
2006 2006 2005
North America $ 58,423 $ 57,513 $ 68,624
Latin and South America 15,319 18,778 14,117
Europe, Middle East and Africa 69,534 67,485 74,908
Asia Pacific Rim 156,868 111,500 19,987
------------- --------- -----------
Total Sales $ 300,144 $ 255,276 $ 177,636
============= ========= ===========
(a) SCN segment sales are included in geographic categories based on
the location of the end customer. H-3C segment sales included in
the geographic categories are based upon the hub locations of OEM
partners in the case of OEM sales and the location of
end-customers in the case of direct customer sales
Sales by Product Category
Three Months Ended
--------------------------------------
September 1, June 2, September 2,
2006 2006 2005
------------- --------- -----------
Networking $ 244,033 $ 198,838 $ 127,054
Security 25,462 24,681 16,876
Voice 15,949 14,532 15,408
Services 8,351 8,757 7,835
Connectivity Products 6,349 8,468 10,463
------------- --------- -----------
Total Sales $ 300,144 $ 255,276 $ 177,636
============= ========= ===========
3Com Corporation
Reconciliation of Non-GAAP Operating Loss
(in thousands)
(unaudited)
TABLE D
Three Months Ended
----------------------------------
September 1, June 2, September 2,
2006 2006 2005
----------- -------- -----------
GAAP operating loss $ (20,868) $(20,920) $ (46,685)
Restructuring (75) 3,426 3,361
Amortization of intangible
assets 12,181 9,317 3,862
Stock-based compensation expense
(a) 3,287 1,686 635
In-process research and
development (b) - 650 -
----------- -------- -----------
Non-GAAP operating loss $ (5,475) $ (5,841) $ (38,827)
=========== ======== ===========
(a) Stock-based compensation expense is included in the following cost
and expense categories by period (dollars in millions):
Cost of sales $ 0.3 $ - $ -
Sales and marketing 1.2 0.3 0.1
Research and development 1.2 1.1 -
General and administrative 0.6 0.3 0.5
(b) This charge is the recognition of the estimated value of in-
process R&D recognized from the H-3C 2 percent majority ownership
acquisition
3Com Corporation
Segment Reporting
(in thousands)
(unaudited)
TABLE E
Operating Segments
---------------------------------------
SCN H-3C
------------------- -------------------
For the
Three Three Three Period
Months Months Months February
Ended Ended Ended 2, 2006
September June 2, June 30, - March
1, 2006 2006 2006 31, 2006
--------- --------- --------- ---------
Revenue $155,823 $165,808 $169,968 $108,290
Gross profit 56,345 59,840 80,084 51,437
Total sales and marketing,
research and development, and
general and administrative
expenses 85,403 88,601 59,788 30,203
Other operating expenses (2) 3,516 7,016 8,590 6,377
Operating income (loss) (32,574) (35,777) 11,706 14,857
Net income (loss) (23,375) (28,919) 18,249 21,568
-------------------------------------
Eliminations
-------------------------------------
Three Months Three Months
Ended Ended
September 1, 2006 June 2, 2006
----------------- ----------------
Revenue $(25,647)(1) $(18,822)(1)
Gross profit
Total sales and marketing,
research and development,
and general and
administrative expenses
Other operating expenses (2)
Operating income (loss)
Net income (loss) (8,942)(3) (7,823)(3)
(1) Represents eliminations for inter-company revenue during the
respective periods
(2) Represents restructuring and amortization in all periods presented
plus in-process research and development included in the H-3C
operating segment of $650 thousand in the two month period
presented
(3) Represents minority interest of Huawei in the income of H-3C for
April, May and June of 2006 for the period ended September 1,
2006 and February and March 2006 for the period ended June 2,
2006
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