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3Com sees promise in its China venture; Financial losses are shrinking.

Byline: Martin Luttrell

MARLBORO - After six years of losses, computer network equipment maker 3Com Corp. sees better times ahead with growth in emerging markets overseas, and its prospects bolstered by full ownership of H3C, a profitable joint venture in China.

The last time the company posted a profit was in 2000, after marketing the Palm Pilot, but that ended after the highly successful pocket computer business was spun off.

But in 2003, 3Com formed a joint venture with Huawei Technologies Ltd. in Shenzhen, China, maker of routers, switches and other computer networking equipment, and tapped a growing market in Asia. With 51 percent ownership, 3Com saw revenue growth and negotiated with Huawei for full ownership of the enterprise, paying $882 million for Huawei's share late last year.

"We think it's a fair price, it's a good price, and I'm very proud of this achievement," said Edgar Masri, president and chief executive officer of 3Com. "By owning 100 percent, we will be in an even stronger position to complement the 3Com offerings."

3Com's computer networking products enable customers to manage voice, video, and data in a secure network. The company's TippingPoint products include security systems, such as intrusion prevention systems and firewalls that keep unwanted visitors out, as well as hackers and viruses.

Since 2000, the company has posted a total of $2.2 billion in losses, but over the last three years the losses have shrunk as operating revenues increased. Revenues for the second quarter ended Dec. 1, 2006, were $333 million, compared to sales of $184.3 million in the three months ended Dec. 2, 2005, an increase of 80.7 percent, mainly because of the inclusion of H3C revenue.

The net loss for the six months ended Dec. 1, 2006, was $17.6 million, compared to a net loss of $52.7 million in the six months ended Dec. 2, 2005.

Mr. Masri credited the performance of H3C for the company's move toward black ink, and pointed out that even though the joint venture is now owned entirely by 3Com, Huawei continues to be a good partner, and has an 18-month no-compete clause in the buyout.

"If we continue to deliver good products to Huawei and the market in general, and if we continue to treat Huawei as an important partner, that will ensure that Huawei is a steady and dependable channel for 3Com," Mr. Masri said.

"At the same time, all along we believed that H3C's success is predicated on a global expansion of the combined H3C and 3Com and 3Com channels to take on more of these H3C products.

"3Com is already beyond China. H3C has been able to reach leading market share in routers. We don't have that market share presence in the Middle East or Europe. I want to achieve comparable numbers and make us a clear No. 2 to (Cisco Systems Inc.). More importantly, I want 3Com to be a clear enterprise player as viewed by customers and partners."

Mr. Masri said he does not want to compete directly against Cisco, but sees growth in emerging markets in Asia and in small- to medium-sized companies.

Manuel J. Recarey, an analyst at Kaufman Bros. in New York, said the outright ownership of H3C will serve the company well in reaching profitability, though the older segments of its business will need improvement.

"I think it is a good move for them," he said. "The joint venture was the crown jewel for the company. That's what is driving their move toward profitability.

"The problem for them is that their heritage businesses, networking equipment and voice, are still weak. They're not doing well. Is (H3C) enough to save the company? I'm not sure. They need to straighten out their heritage business. That's going to take some time."

The products developed with H3C are doing well in China and emerging markets in Asia, but 3Com is not doing as well in more-established markets in the United States and Europe, he said.

While the acquisition of H3C will help revenues, the purchase, while the company continues to operate at a loss, takes valuable cash off the firm's balance sheet, he said.

"I thought it was a fair price. It came in at the high end of my estimate," Mr. Recarey said. "They didn't get it for cheap.

"It certainly weakens the balance sheet. It was a strong balance sheet, but now the company is still struggling. It raises risk for the company and for its stock."

Mr. Recarey said he does not expect 3Com to reach profitability this fiscal year, which ends in May.

"In fiscal 2008 they should be able to reach profitability," he said.

Mr. Recarey rates 3Com stock a "hold." He does not own any company stock, and his company has no banking relationships with 3Com, he said.

Contact business reporter Martin Luttrell by e-mail at mluttrell@telegram.com.

3Com Corp.

Headquarters: Marlboro

Business: Network equipment

Chief executive: Edgar Masri

Founded: 1979

Employees: 6,200

ART: PHOTO

CUTLINE: Edgar Masri, president and chief executive officer of 3Com Corp., at the network equipment company's Marlboro headquarters

PHOTOG: T&G Staff/PAUL KAPTEYN
COPYRIGHT 2007 Worcester Telegram & Gazette
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2007 Gale, Cengage Learning. All rights reserved.

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Title Annotation:BUSINESS REVIEW
Publication:Telegram & Gazette (Worcester, MA)
Date:Feb 23, 2007
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