3Com Reports Q2 Fiscal 2006 Results; Strong Year-over-Year Revenue Growth; Improving Financial 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. -- 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) ): Second Quarter Highlights --Revenue totaled $184 million; --Revenue grew 22 percent over the same period in the prior year with growth in all regions; --Net loss for the quarter was $11 million. This includes a $24 million benefit resulting from a foreign tax settlement; and --Gross profit margins continued to improve. 3Com Corporation (NASDAQ: COMS) today reported financial results for its second quarter of fiscal year 2006 ended December December: see month. 2, 2005. Revenue for the quarter was $184 million. Gross profit was $74 million, or 40 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 expense. This resulted in a net loss of $11 million, or $0.03 per share, including a benefit from a foreign tax settlement and related foreign exchange gains of $0.06 per share. This compares to a net loss of $42 million or $0.11 per share in the first quarter of fiscal year 2006 and $49 million, or $0.13 per share, for the second quarter of fiscal year 2005. The company ended the quarter with $754 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 $0.03 for the second 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 Q2 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 revenues, gross profit margins Gross profit margin Gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold. gross profit margin A measure calculated by dividing gross profit by net sales. , sales and marketing, research and development and general and administrative expenses and our equity share in the results of our Huawei-3Com (H-3C) joint venture, each for our third quarter of fiscal 2006, the sequential One after the other in some consecutive order such as by name or number. growth of H-3C during its fourth calendar quarter, the effect of a tax settlement on our future cash flows and the consummation CONSUMMATION. The completion of a thing; as the consummation of marriage; (q.v.) the consummation of a contract, and the like. 2. A contract is said to be consummated, when everything to be done in relation to it, has been accomplished. of our purchase of an additional 2 percent ownership in H-3C from Huawei Huawei Technologies Co. Ltd. (Chinese: 华为技术有限公司; Pinyin: Huáwei Jíshu Yǒuxiàn Gōngsī and the benefits conferred con·fer v. con·ferred, con·fer·ring, con·fers v.tr. 1. To bestow (an honor, for example): conferred a medal on the hero; conferred an honorary degree on her. by such additional ownership. 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, and 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. 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 Second 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 second fiscal quarter results, which
demonstrate continued clear progress on our path to profitability.
Revenue
Revenue for the quarter was $184 million, which is a 4 percent
sequential growth from the first quarter of fiscal 2006 revenue of
$178 million, and a 22 percent growth compared to the same period of
fiscal 2005.
On a geographic basis, strong sequential growth in our EMEA
(Europe, Middle East and Africa), LAT (Latin / South America) and APR
(Asia Pacific Region) regions more than offset a sequential decline in
North America. Compared to the same period in fiscal 2005, all regions
showed growth. Second fiscal quarter revenue by geography was as
follows:
North America: Revenue was $62 million, a 10 percent
sequential decline, but a 44 percent year-over-year growth.
EMEA: Revenue was $81 million, an 8 percent sequential
increase and an 11 percent year-over-year growth.
LAT: Revenue was $19 million, a 38 percent sequential increase
and a 29 percent year-over-year growth.
APR: Revenue was $22 million, an 11 percent sequential
increase and a 10 percent year-over-year growth.
In the first fiscal quarter we started reporting product and
services revenue in five groups. The following are the worldwide
second fiscal quarter revenue results for these groups:
Security: Revenue was $21 million, a sequential growth of 24
percent, and including the revenues from the TippingPoint
acquisition, a 6 fold increase over the same quarter in the
prior year. This includes strong double-digit percentage
growth for our Embedded Firewall products.
Voice: Revenue was $14 million, a sequential decline of 8
percent, but a year-over-year improvement of 56 percent. Voice
revenue includes our VCX and NBX Voice over IP (VoIP) product
lines. The sequential decline resulted from seasonal declines
in North America offset in part by sequential growth in the
other three geographies. All regions showed at least strong
double-digit percentage growth compared to the same period in
fiscal 2005.
Networking: Revenue was $132 million, which is a 4 percent
increase on a sequential basis, and a 12 percent
year-over-year growth. Networking revenue includes the balance
of our product revenue and includes sales of enterprise
products sourced from Huawei-3Com, 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-sourced products sold by 3Com grew by
37 percent sequentially to more than $20 million. This growth
resulted from continued traction with the 5500 line of Layer 3
switches, particularly the successful introduction of the
Gigabit and Power over Ethernet models. Revenue from the joint
venture-sourced products quadrupled on a year-over-year basis.
Services: Revenue was $9 million, a growth of 12 percent
sequentially and 7 percent year-over-year. Services revenue
includes professional services and maintenance contracts,
excluding TippingPoint maintenance, which is included in
Security.
Connectivity Products: Revenue was $9 million, a 16 percent
sequential decline, which was in line with expectations.
Gross Profit
Gross profit margin for the quarter was 40 percent. The net
sequential increase of 1 percentage point in margin was primarily the
result of improvements in cost. Compared to the same period in fiscal
2005, the gross profit margin improved 5 percentage points primarily
due to improvements in product mix and cost.
Operating Expenses
Total operating expenses for the current quarter were about flat
sequentially at $117 million, including restructuring charges of $3
million and amortization of intangible assets of $4 million.
The second quarter's restructuring charges included costs
primarily related to the realization of our restructuring actions
announced in our first fiscal quarter of 2006.
Sales and marketing, research and development, and general and
administrative expenses totaled $109 million, including the expenses
of the brand awareness campaign launched in October, compared to $110
million in the first quarter of fiscal 2006.
Compared to the same period of fiscal 2005, these expenses
increased $13 million primarily due to the inclusion of TippingPoint
expenses post acquisition.
The number of full-time employees at the end of the quarter was
approximately 1,750, compared to 1,800 at the end of the previous
quarter.
Operating Loss
Operating loss for the second quarter of fiscal 2006 was $42
million, which compares to an operating loss of $47 million reported
for the previous quarter. This $5 million improvement resulted
primarily from increased gross profits.
The operating loss in the same period of our prior fiscal year was
$50 million. The second quarter results represent an $8 million
year-over-year improvement, primarily from the increased gross profit
margin on higher revenues, offset in part by the expected increase in
operating expenses resulting from the acquisition of TippingPoint.
Gain on Investments
The net gain on investment was $4 million, resulting primarily
from the sale of certain equity investments.
Interest and Other Income
Interest and other income, net, was $7 million, which is a $1
million increase over the first fiscal quarter. This increase is a
result of a $1 million gain for the foreign exchange impact associated
with the foreign tax settlement in the quarter. The remaining interest
and other income of $6 million is consistent with the prior quarter.
Income Tax Provision
In the second quarter, the income tax provision was a net benefit
of $22 million, made up of a current period provision of $1 million
and a benefit of $23 million resulting from the tax settlement with
foreign tax authorities regarding issues covering multiple years. The
tax benefit results from the release of specific tax provisions based
upon the settlement terms, and interest income of $3 million earned on
outstanding tax refund claims which had been held by the tax
authorities pending this settlement. The provision release is a
non-cash benefit. The actual settlement is not expected to have a cash
impact because it is largely offset by the outstanding tax refund
claims that were also settled as part of this agreement.
Equity Interest in Unconsolidated Huawei-3Com Joint Venture
During its calendar third quarter ended September 30, 2005, the
Huawei-3Com joint venture revenue was $111 million, an increase of 16
percent compared to its calendar second quarter of 2005. Compared to
the same period in the prior year, revenue grew 69 percent. Gross
margin for the quarter was 42 percent and the net loss was $2 million,
after recognizing $7 million in expense for amortization of intangible
assets.
In the second quarter, we recorded a loss of $1 million as our
share of the financial performance of the unconsolidated Huawei-3Com
joint venture in its calendar third 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 third
quarter results.
Net Loss, Net Loss per Share, Weighted Average Shares Outstanding
Returning to 3Com's results, the net loss for the second quarter
was $11 million, or $0.03 per share, of which restructuring and
amortization expense represented about $0.02 per share, and the tax
settlement benefit represented $0.06 per share.
The weighted average number of shares outstanding during the
quarter was approximately 385 million shares. This net increase of 1
million shares from the prior quarter level of 384 million shares
primarily reflects the exercise of stock options.
Stock Options Outstanding
There were 58 million stock options outstanding at the end of the
second quarter of fiscal 2006, compared to 62 million at the end of
the first quarter of fiscal 2006.
Cash and Short-Term Investments
Cash, cash equivalents and short-term investments totaled $754
million, a net decrease of $28 million from the balance at the end of
the previous quarter. The change includes an increase in cash and cash
equivalents of $84 million and a decrease in short-term investments of
$112 million. Key components of the change in cash and cash
equivalents are as follows:
-- Cash provided by the sale of short-term investments totaled
$110 million;
-- Cash used in operations was $27 million, including $4 million
for restructuring-related payments;
-- Cash provided by the issuance of common stock was $5 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 third 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 third quarter of fiscal 2006, we expect total
company revenue to be $190 to $195 million;
-- In the third quarter, we expect the gross profit margin to be
about flat to the second quarter at 40 percent;
-- In the third quarter, we expect sales and marketing, research
and development, and general and administrative expenses to
also be about flat to the second quarter including the ongoing
expenses of the brand awareness campaign; and
-- In its fourth calendar quarter, we expect the joint venture to
deliver double-digit sequential growth. We expect our equity
share of its earnings to be positive in our third fiscal
quarter.
Next Earnings Call
For planning purposes, our third quarter earnings release is
scheduled for Thursday, March 23, 2006.
Comments on the Second Quarter of Fiscal 2006
To be delivered during the analyst conference call by
Bruce Claflin, 3Com president and chief executive officer
Our fiscal second quarter marked another quarter of solid progress
in the execution of our strategy. We generated our fourth consecutive
quarter of sequential revenue expansion, and our year-over-year
revenue growth of 22 percent is the best the company has reported in
eight fiscal years.
In addition to the continued success we've experienced with
TippingPoint products, this quarter demonstrated that we are gaining
revenue traction across all of our products. For example, "heritage"
3Com enterprise products; that is excluding TippingPoint and
connectivity products, were the primary driver of our year-over-year
top-line improvement, delivering growth in the mid-teens. Also of note
is that this growth was in each of our geographic regions.
With that as a backdrop, I want to comment on our North American
performance. Last year, after a very strong fiscal first quarter, we
experienced a substantial revenue decline in the second quarter. The
primary reason is that our fiscal first quarter is a seasonally strong
quarter for education, our largest vertical, while our second quarter
is seasonally the slowest quarter for that vertical. We knew that the
same dynamics would be at work again this year, but we believed our
stronger portfolio of enterprise products and partnerships would
offset this historic seasonality. They did, but not to the degree we
had anticipated. Specifically, last year our sequential North American
decline in our second fiscal quarter was 30 percent while this year it
was only 10 percent. Perhaps the best way to think about our progress
in North America is on a year-over-year basis as we achieved a 44
percent growth, the best of any geography.
As Don mentioned, our EMEA and Latin American regions demonstrated
strong year-over-year and sequential improvements this past quarter.
Raul Ros who was named as Vice President and General Manager for our
EMEA region three months ago has restructured his operation to put
more focus on high-growth products such as security and VOIP, while
continuing to drive our volume-oriented, SMB business through a
dedicated organization. In addition, he is lowering the overall cost
to serve this market. The vacancy his promotion created in Latin
America was filled by Robert Ruiz and with 38 percent sequential
performance, it's clear we did not miss a beat in the transition.
Let me turn to Huawei-3Com, the joint venture we formed two years
ago with Huawei. Revenue for the joint venture's most recent quarter
was $111 million, a year-over-year improvement of 69 percent. Gross
Margins were 42 percent and as a result, its operating performance was
a modest loss of $2 million, which includes $7 million of amortization
charges. Huawei-3Com now has more than 3,400 employees, 1,700 of whom
are engineers. With this growth in engineering talent, the joint
venture has taken increased responsibility to develop infrastructure
products for 3Com. For example, the recently announced Switch 4500 is
targeted to the SMB market and sold through 3Com's historically strong
two tier distribution system. This is the first volume-oriented switch
developed by the H-3C and is indicative of the increasing mission we
have given them.
As a result of the success of Huawei-3Com, we successfully
concluded negotiations with Huawei to acquire an additional 2 percent
ownership, which upon completion would give 3Com majority control. We
are in the process of obtaining government approvals and upon
receiving them, we will consummate the transaction shortly thereafter.
Being majority owner gives us several benefits: it provides stronger
governance rights, it's reassuring to our customers, which supports
our sales efforts, and it will allow us to consolidate the joint
venture's financial results.
Let me close by commenting on our overall performance. We are very
encouraged by revenue trends as we have experienced two quarters of
year-over-year growth and four consecutive quarters of sequential
growth. For some time now we have said that improving revenue
performance would result in improving financial returns. With the
completion of the first half of our fiscal year, that has proven to be
the case. Our gross margins this quarter are up 5 percentage points
from where we ended last fiscal year, our operating expenses are down
$8 million and our net loss before taxes has improved by over $20
million. We accomplished this while integrating the TippingPoint
acquisition and negotiating rights to have majority ownership in
Huawei-3Com.
Having said that, we are a long way from being satisfied. Our
intent is to continue to show progress on all three key
measurements--top line growth, gross margin expansion and expense
control, as we execute our strategy and drive to profitability in the
coming fiscal year.
Don and I would be pleased to take your questions.
3Com Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
----------------------------- -------------------
December September November December November
2, 2, 26, 2, 26,
2005 2005 2004 2005 2004
--------- --------- --------- --------- ---------
Sales $184,332 $177,636 $151,068 $361,968 $313,417
Cost of sales 110,017 107,570 98,377 217,587 198,631
--------- --------- --------- --------- ---------
Gross profit 74,315 70,066 52,691 144,381 114,786
Operating expenses:
Sales and
marketing 67,694 70,118 59,394 137,812 114,493
Research and
development 23,225 21,197 22,164 44,422 44,599
General and
administrative 18,292 18,213 14,385 36,505 30,057
Amortization of
intangibles 3,862 3,862 2,175 7,724 3,189
Restructuring
charges 3,468 3,361 4,497 6,829 7,281
--------- --------- --------- --------- ---------
Total
operating
expenses 116,541 116,751 102,615 233,292 199,619
--------- --------- --------- --------- ---------
Operating loss (42,226) (46,685) (49,924) (88,911) (84,833)
Gain (loss) on
investments, net 3,511 (414) (351) 3,097 82
Interest and other
income, net 7,117 5,989 4,781 13,106 5,814
--------- --------- --------- --------- ---------
Loss from operations
before income taxes
and equity interest
in unconsolidated
Huawei - 3Com
joint venture (31,598) (41,110) (45,494) (72,708) (78,937)
Income tax benefit
(provision) 21,893 (915) (1,008) 20,978 (543)
Equity interest in
loss of
unconsolidated
Huawei - 3Com joint
venture (995) (16) (2,309) (1,011) (4,876)
--------- --------- --------- --------- ---------
Net loss $(10,700) $(42,041) $(48,811) $(52,741) $(84,356)
========= ========= ========= ========= =========
Basic and diluted
loss per share: $(0.03) $(0.11) $(0.13) $(0.14) $(0.22)
========= ========= ========= ========= =========
Shares used in
computing basic and
diluted per share
amounts 385,442 383,760 378,694 384,601 383,140
3Com Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
December 2, June 3,
2005 2005
----------- -----------
ASSETS
Current assets:
Cash and short-term investments $753,934 $844,104
Accounts receivable, net 93,030 61,664
Inventories, net 31,884 29,311
Other current assets 35,559 42,430
----------- -----------
Total current assets 914,407 977,509
Property & equipment, net 71,324 69,535
Investment in joint venture 134,958 135,969
Other assets 38,442 33,705
Goodwill 309,121 310,367
Intangibles, net 58,157 65,882
----------- -----------
Total assets $1,526,409 $1,592,967
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $97,529 $99,632
Accrued liabilities and other 189,462 209,928
----------- -----------
Total current liabilities 286,991 309,560
Deferred revenue and long-term obligations 6,648 8,484
Stockholders' equity 1,232,770 1,274,923
----------- -----------
Total liabilities and stockholders'
equity $1,526,409 $1,592,967
=========== ===========
Additional Financial Data
(in thousands, except percentages and per share amounts)
(unaudited)
Sales by Geography
Three Months Ended
-------------------
December September
2, 2, $ %
2005 2005 Change Change
--------- --------- -------- ------
North America $61,521 $68,624 $(7,103) -10%
Latin and South America 19,487 14,117 $5,370 38%
Europe, Middle East and Africa 81,196 74,908 $6,288 8%
Asia Pacific Rim 22,128 19,987 $2,141 11%
--------- --------- --------
Total Sales $184,332 $177,636 $6,696 4%
========= ========= ========
Stock Options
Outstanding Options
as of December 2, 2005
----------------------
Weighted
average
Range of Number exercise
exercise price of shares price
---------------------------------- --------- ---------
$0.00 - 4.00 17,729 $2.78
4.01 - 5.00 11,535 4.59
5.01 - 6.00 13,758 5.59
6.01 - 7.00 2,828 6.23
7.01 - 8.00 1,908 7.61
$8.01 - 22.00 10,717 11.48
---------
Total 58,475 $5.72
=========
Additional Financial Data
Huawei-3Com Joint Venture
(in thousands)
(unaudited)
CY 2005 (a)
---------------------------------------
Quarter Ended YTD
-----------------------------
03/31/05 06/30/05 09/30/05 09/30/05
--------- --------- --------- ---------
Sales $82,281 $95,772 $111,177 $289,230
Gross profit 36,013 40,450 47,187 $123,650
-- As a % of sales 43.8% 42.2% 42.4% 42.8%
Net profit (loss) (b) 415 (33) (2,030) $(1,648)
3Com equity in earnings (loss) $203 $(16) $(995) $(808)
Notes:
(a) The Huawei-3Com Joint Venture (H-3C) reports on a calendar year
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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