3Com Reports Q1 Fiscal 2006 Results; Strong Financial Improvements Delivered on Continued Revenue Growth.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. -- 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) ): First Quarter Highlights --Revenue totaled $178 million, up 9 percent over the same period a year ago. --Revenue in 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. grew 13 percent sequentially se·quen·tial adj. 1. Forming or characterized by a sequence, as of units or musical notes. 2. Sequent. se·quen , the third consecutive quarter of double-digit dou·ble-dig·it adj. Being between 10 and 99 percent: double-digit inflation. sequential One after the other in some consecutive order such as by name or number. growth; and --Gross profit margin for the quarter was 39 percent, an increase of 4 percentage points sequentially and an increase of 1 percentage point from the same period a year ago. 3Com Corporation (NASDAQ: COMS) today reported financial results for its first quarter of fiscal year 2006 ended September September: see month. 2, 2005. Revenue for the quarter was $178 million. Gross profit was $70 million, or 39 percent of revenue. 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 $117 million, including $3 million in restructuring charges restructuring charge The expense of reorganizing a company's operations. A restructuring charge is an infrequent expense that generally results from asset writedowns or facility closings. and $4 million in amortization. This resulted in a net loss of $42 million, or $0.11 per share. This compares to a net loss of $58 million or $0.15 per share in the fourth quarter of fiscal year 2005 and $36 million, or $0.09 per share, for the first quarter of fiscal year 2005. The company ended the quarter with $782 million in cash, cash equivalents 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. investments. These results are presented on a U.S. GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). (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 ) basis. The net loss per share of $0.11 for the first quarter of fiscal year 2006 is not comparable to First Call 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. estimates. NOTE: Attached is the full text of 3Com's prepared remarks for the Q1 financial results conference call. Additional financial data is also attached. 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 and Mr. Claflin's and Mr. Halsted's remarks on the quarterly results contain 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. within the meaning of the federal securities laws, including statements regarding the following: our future results of operations; expected sales and marketing, research and development, and general and administrative expenses, combined; our upcoming investor's day; expected improvement in the performance of our 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. region and our services organization. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially, including fluctuations in the demand for our products; our ability to successfully manage costs and expenses; possible development or marketing delays relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc our product offerings; our ability to successfully integrate TippingPoint's financial controls, order management, supply chain and other similar operations; and expected changes to our sales channels outside of North America. For a discussion of other risks and uncertainties associated with our business, please refer to our most recent filings with the Securities and Exchange Commission, including our Annual Report 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 fiscal year ended June June: see month. 3, 2005. References to the financial information included in this press release and Mr. Claflin's and Mr. Halsted's remarks reflect rounded numbers and should be considered approximate ap·prox·i·mate v. To bring together, as cut edges of tissue. adj. 1. Relating to the contact surfaces, either proximal or distal, of two adjacent teeth; proximate. 2. Close together. 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 for corporate enterprises, government agencies, service providers and academic institutions. For further information, please visit www.3com.com, or the press site www.3com.com/pressbox. Copyright (C) 2005 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
Comments on the First Quarter of Fiscal 2006
To be delivered during the analyst conference call by
Don Halsted, 3Com executive vice president and chief financial officer
I am pleased to report our first fiscal quarter results, which
demonstrate clear progress on our path to profitability.
This is our first earnings announcement of fiscal year 2006.
Beginning with this quarter's report, I intend to provide additional
disclosures:
-- Revenue by four geographies - North America and Latin/South
America (LAT) replace the previously reported combined
"Americas" region, mirroring our geographic sales structure.
EMEA (Europe, Middle East and Africa) and APR (Asia Pacific
Region) will continue to be reported as standalone regions.
-- Revenue by five product categories - Four strategic components
of our enterprise network business, namely Security, Voice,
Networking and Services, plus Connectivity Products that we
continue to report separately.
Revenue
Revenue for the quarter was $178 million, which represents a small
sequential growth from the fourth quarter of fiscal 2005 revenue of
$177 million, as well as a 9 percent growth relative to the same
period of fiscal 2005.
On a geographic basis, continued strong growth in North America
more than offset expected seasonal weakness in EMEA and LAT, as well
as softness in APR. First fiscal quarter revenue by geography was as
follows:
North America: Revenue was $69 million, a 13 percent sequential
growth.
EMEA: Revenue was $75 million, a 4 percent sequential decline.
LAT: Revenue was $14 million, a 10 percent sequential decline.
APR: Revenue was $20 million, an 11 percent sequential decline.
From a product and services perspective, the following are the
worldwide first fiscal quarter revenue results for the five groups
described above:
Security: Revenue was $17 million, a sequential growth of 13
percent. Security revenue includes our TippingPoint products
and services, as well as other security products such as our
Embedded Firewall. The majority of this revenue comes from
TippingPoint products and services.
Voice: Revenue was $15 million, a sequential growth of 9
percent. Voice revenue includes our VCX and NBX Voice over IP
(VoIP) product lines. VCX installations primarily drove the
sequential growth, however the majority of voice revenue still
comes from our NBX product line.
Networking: Revenue was $127 million which is flat on a
sequential basis. Networking revenue comprises the balance of
our product revenue and includes sales of Huawei 3Com-sourced
enterprise products, our Layer 2 and Layer 3 stackable
10/100/1000 managed switching lines, wireless and our Office
Connect and Baseline branded SMB products.
Revenue from Huawei 3Com (H-3C) sourced products sold by 3Com
grew by 85 percent sequentially. This growth resulted from the
introduction of the 5500 line of Layer 3 switches as well as
sequential growth in the modular core and router products.
Services: Revenue was $8 million, a 6 percent sequential
decline. Services revenue includes professional services and
maintenance contracts, excluding TippingPoint maintenance,
which is included in Security. The decline in Services revenue
is primarily due to the roll-off of maintenance contracts on
older equipment in the installed base.
Connectivity Products: Revenue was $10 million in the first
quarter, a 15 percent sequential decline, which was in line
with expectations.
Gross Profit
Gross profit margin for the quarter was 39 percent, a robust
increase of 4 percentage points sequentially. The increase in margin
was primarily the result of improvements in cost. Compared to the same
period in fiscal 2005, gross profit margins improved 1 percentage
point.
Operating Expenses
Total operating expenses for the current quarter declined $8
million sequentially to $117 million, including restructuring charges
of $3 million and amortization of intangible assets of $4 million.
The first quarter's restructuring charges included costs primarily
related to the continued realization of the restructuring that we
announced in February of this calendar year. In addition, we are
announcing that as part of improving our operating efficiencies, we
are consolidating both our Rolling Meadows location and Taiwan Design
Center into other 3Com locations. This action is expected to result in
future direct operating and restructuring charges of approximately $7
million that will be recorded over the next two fiscal quarters. We
expect these actions to save in excess of $1 million per quarter,
comprised of savings from employee reductions and facility closures.
Sales and marketing, research and development, and general and
administrative expenses totaled $110 million, which is a $3 million
decrease compared to the fourth quarter of fiscal 2005. The sequential
decline was primarily driven by reduced spending in research and
development and the reversal of certain provisions.
Compared to the same period of fiscal 2005, these expenses
increased $16 million or 18 percent. This is primarily driven by the
inclusion of TippingPoint in our current period results.
The number of full-time employees at the end of the quarter was
approximately 1,800, compared to 1,850 at the end of the previous
quarter.
Operating Loss
Our operating loss for the first quarter was $47 million, which
compares to an operating loss of $62 million reported for the previous
quarter. This $16 million improvement resulted from the combination of
increased gross profits and reduced operating expenses on a sequential
basis.
Compared to the same period of fiscal 2005, the operating loss
increased $12 million. This increased loss is driven by increased
investment in TippingPoint, the amortization of intangible assets
resulting from the acquisition of TippingPoint and the lower level of
connectivity product gross profits.
Interest and Other Income
Interest and other income, net, was $6 million, which is
consistent with the prior quarter.
Income Tax Provision
In the first quarter, the income tax provision was $1 million.
Equity Interest in Unconsolidated Huawei-3Com Joint Venture
During its calendar second quarter ended June 30, 2005, the
Huawei-3Com joint venture revenue was $96 million, an increase of 16
percent compared to calendar first quarter of 2005. Compared to the
same period in the prior year, revenue grew 53 percent. Gross margin
for the quarter was 42 percent and the net income was approximately
break-even, including $7 million in amortization of intangible assets.
In the first quarter, we recorded approximately zero as our share
of the financial performance of the unconsolidated Huawei-3Com joint
venture in its calendar second quarter. We have provided, at the end
of the earnings release, a table that summarizes previously disclosed
data for the Huawei-3Com joint venture along with its second quarter
results.
Net Loss, Net Loss per Share, Weighted Average Shares Outstanding
Returning to 3Com's results, the net loss for the first quarter
was $42 million, or approximately $0.11 per share, of which
restructuring and amortization represents about $0.02 per share.
The weighted average number of shares outstanding during the
quarter was approximately 384 million shares. This net increase of 1
million shares from the prior quarter level of 383 million shares
primarily reflects the exercise of stock options.
Stock Options Outstanding
There were 62 million stock options outstanding at the end of
first quarter of fiscal 2006, compared to 63 million at the end of the
fourth quarter of fiscal 2005.
Cash and Short-Term Investments
Cash, cash equivalents and short-term investments totaled $782
million, a net decrease of $62 million from the balance at the end of
the previous quarter. The change comprises a decrease in cash and cash
equivalents of $100 million and an increase in short-term investments
of $38 million. Key components of the change in cash and cash
equivalents are as follows:
-- Cash used in operations was $56 million, including $12 million
for payments of royalties to certain suppliers, which
represent the final payments under those agreements, and
approximately $6 million for restructuring-related payments;
-- Cash used in the acquisition of short-term investments totaled
$41 million; and
-- Cash used for capital expenditures amounted to $4 million.
Forward-Looking Guidance
My remaining comments include forward-looking statements about
various matters pertaining to the second fiscal quarter of 2006.
Please refer to the safe harbor language in the earnings release and
available on our Web site, for factors that could cause actual results
to vary.
-- Overall in the second quarter of fiscal 2006, we expect total
company revenue to be approximately $190 million resulting
from continued strong growth in North America along with
seasonally improving performance in EMEA and LAT. Our guidance
assumes that connectivity product revenue continues to
decline.
-- In the second quarter, we expect gross profit margins to
improve to about 40 percent.
-- In the second quarter, we expect sales and marketing, research
and development, and general and administrative expenses to be
about $113 million. This sequential increase reflects the
underlying expense run rate and the branding campaign that
will be launched this quarter in the United States partially
offset by operational reductions in non-customer facing
expenses.
Next Earnings Call
For planning purposes, our second quarter earnings release is
scheduled for Wednesday, December 21, 2005.
Comments on the First Quarter of Fiscal 2006
To be delivered during the analyst conference call by
Bruce Claflin, 3Com president and chief executive officer
Since Don has provided expanded information on 3Com's performance
in our first fiscal quarter of 2006, and given that we will deliver an
in-depth review of our business at our Investor's Day in less than two
weeks on October 5 in New York City, I will limit my prepared remarks
for this call to a few key trends.
I am encouraged by our fiscal first quarter performance as it
demonstrates that we continue to make progress in the execution of our
strategy. We delivered our third consecutive quarter of sequential
growth, a comparison that is particularly encouraging given that the
prior quarter was one week longer and this quarter was seasonally down
in our largest geography--EMEA. North America, a once troubled
geography for 3Com, delivered its third consecutive quarter of strong
sequential revenue growth. Led by North America's strength, 3Com
achieved year-over-year growth of 9 percent, inclusive of revenue from
our TippingPoint products, which represents our best performance in 26
quarters.
Another important indicator of progress is the fact that all three
of our strategically important product lines experienced strong
sequential growth, including Voice, Security and networking products
sourced from our joint venture, Huawei-3Com (H-3C). In particular
sales of products sourced from H-3C experienced a strong sequential
improvement, delivering 85 percent growth. From its inception until
this past June, 3Com's sales of H-3C-developed products were in
product lines we did not previously sell. However, with the launch of
our 5500 line of Layer 3 edge switches, we have moved missions
previously performed within 3Com or with other ODM partners to H-3C.
This is one reason that we have been able to reduce and focus our
research and development spending over the past year and it
demonstrates continued confidence in the capabilities of our joint
venture.
Let me end my prepared comments by discussing two significant
personnel announcements. On Tuesday, we announced Raul Ros as our vice
president and general manager for EMEA. Raul has been with 3Com for
almost two years following a distinguished career at companies such as
Redback Networks, Lucent, GE Capital and IBM. He most recently ran our
Latin America operations which, during his tenure, was a leading
growth geography for 3Com. EMEA is our largest geography, but its
performance has been lagging over the past several quarters. We fully
expect that this leadership change will drive improvements in
performance, just as leadership changes made in North America three
quarters ago have directly led to a rebound in our performance there.
Also in the first quarter, we brought on Bob Riazzi as the head of
our services organization. This is an area within 3Com that has
potential to deliver strong growth. Bob has extensive experience in
services with companies like Dell and NCR, which he will bring to bear
in improving 3Com's offerings. As we focus on enterprise customers, it
is critical that we have broad and deep services offerings to meet
their needs and generate this additional source of profitable growth.
Recruiting an executive of Bob's credentials is an important step in
the development of our services business.
We are looking forward to sharing with you more in-depth
information on 3Com at our Investor Day on October 5 in New York City.
Registration for the event is via our Web page.
3Com Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended
--------------------------------------
September 2, June 3, August 27,
2005 2005 2004
------------ ------------ ------------
Sales $177,636 $176,642 $162,349
Cost of sales 107,570 114,460 100,254
------------ ------------ ------------
Gross profit 70,066 62,182 62,095
Operating expenses:
Sales and marketing 70,118 69,849 55,099
Research and development 21,197 27,215 22,435
General and administrative 18,213 15,817 15,672
Amortization of intangibles 3,862 4,084 1,014
Restructuring charges 3,361 7,548 2,784
------------ ------------ ------------
Total operating expenses 116,751 124,513 97,004
------------ ------------ ------------
Operating loss (46,685) (62,331) (34,909)
Gains (losses) on investments,
net (414) (163) 433
Interest and other income, net 5,989 5,954 1,033
------------ ------------ ------------
Loss from operations before
income taxes and equity
interest in unconsolidated
Huawei - 3Com joint venture (41,110) (56,540) (33,443)
Income tax (provision) benefit (915) (1,988) 465
Equity interest in (loss)
earnings of unconsolidated
Huawei - 3Com joint venture (16) 203 (2,567)
------------ ------------ ------------
Net loss $(42,041) $(58,325) $(35,545)
============ ============ ============
Basic and diluted loss per
share: $(0.11) $(0.15) $(0.09)
============ ============ ============
Shares used in computing basic
and diluted per share amounts 383,760 383,009 387,585
3Com Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
September 2, June 3,
2005 2005
------------ ------------
ASSETS
Current assets:
Cash and short-term investments $781,741 $844,104
Accounts receivable, net 74,359 61,664
Inventories, net 34,673 29,311
Other current assets 44,518 42,430
------------ ------------
Total current assets 935,291 977,509
Property & equipment, net 69,711 69,535
Investment in joint venture 135,953 135,969
Other assets 33,246 33,705
Goodwill 309,121 310,367
Intangibles, net 62,020 65,882
------------ ------------
Total assets $1,545,342 $1,592,967
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $92,086 $99,632
Accrued liabilities and other 210,866 209,928
------------ ------------
Total current liabilities 302,952 309,560
Deferred revenue and long-term obligations 7,552 8,484
Stockholders' equity 1,234,838 1,274,923
------------ ------------
Total liabilities and stockholders'
equity $1,545,342 $1,592,967
============ ============
Additional Financial Data
(in thousands, except percentages and per share amounts)
(unaudited)
Sales by Geography
Three Months Ended
--------------------
September June
2, 3, $ %
2005 2005 Change Change
--------- --------- --------- ------
North America $68,624 $60,588 $8,036 13%
Latin and South America 14,117 15,672 $(1,555) -10%
Europe, Middle East and Africa 74,908 78,041 $(3,133) -4%
Asia Pacific Rim 19,987 22,341 $(2,354) -11%
--------- --------- ---------
Total Sales $177,636 $176,642 $994 1%
========= ========= =========
Stock Options
Outstanding Options
as of September 2,
2005
-----------------------
Weighted
average
Range of Number exercise
exercise price of shares price
------------------------------ --------- ---------
$0.00 - 4.00 18,205 $2.43
4.01 - 5.00 12,839 4.61
5.01 - 6.00 14,702 5.58
6.01 - 7.00 3,287 6.23
7.01 - 8.00 2,006 7.61
$8.01 - 22.00 11,416 11.50
---------
Total 62,455 $5.64
=========
Additional Financial Data
Huawei-3Com Joint Venture
(in thousands)
(unaudited)
CY 2005 (a)
----------------------------------
Quarter Ended YTD
----------------------
03/31/05 06/30/05 06/30/05
---------- ---------- ----------
Sales $82,281 $95,772 $178,053
Gross profit 36,013 40,450 $76,463
-- As a % of sales 43.8% 42.2% 42.9%
Net profit (loss) (b) 415 (33) $382
3Com equity in earnings (loss) $203 $(16) $187
Notes:
(a) The Huawei-3Com Joint Venture (H-3C) reports on a calendar
years basis. H-3C was formed and commenced operations in November
2003.
(b) In determining 3Com's share of H-3C's net earnings or loss,
certain adjustments to H-3C's reported results are required. Such
adjustments are made primarily to defer H-3C's sales and gross
profit related to products sold to 3Com that remained in 3Com's
inventory at the end of the accounting period, and to recognize
amortization expense associated with Huawei's contributed
intangible assets.
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