Looking Good: Post-Palm, 3Com Turns in Quality Numbers - TheStreet

Nobody said that reinventing

3Com

(COMS)

after the spin off of its

Palm Computing

(PALM)

division would be pretty. But the company's earnings report Tuesday night suggests the process is coming along better than many had expected.

3Com posted a loss from continuing operations of 18 cents a share in its fiscal first quarter, which ended Sept. 1. The loss was significantly narrower than the 33 cents-per-share consensus of analysts polled by

First Call/Thomson Financial

.

The earnings release itself rivaled the human genome in complexity. The company also reported a $99 million pro forma operating loss for the period, excluding amortization of goodwill and intangibles of $7.5 million, a $29.4 million charge for purchased in-process technology related to the acquisition of Internet radio firm

Kerbango

, a merger-related credit of $200,000 and a $9.9 million charge related to business realignment. In all, the company's sales totaled $933.8 million, compared with $1.21 billion a year earlier.

The $933.8 million figure included a surprisingly large chunk of revenue from sales of analog modems and high-end routers -- two markets 3Com has gotten out of. Excluding that $127.5 million of nonrecurring revenue, 3Com's sales totaled $806.3 million. But even that number surpassed most analysts' expectations.

"No matter how you slice it, it looked good," says

Gerard Klauer Mattison

analyst Michael Cristinziano, who rates 3Com a buy. "It was a very solid quarter for a company in the midst of a turnaround." (GKM has no underwriting relationship with 3Com.)

One measure of 3Com's turnaround was extremely strong growth in some of the company's newer wireless and broadband communications product lines. Those "emerging products," which accounted for 18% of total sales, grew 70% from the prior quarter. Growth like that is important for a company trying to reduce its still-heavy exposure to sales of network interface cards, or NICs, which allow personal computers to connect to the Internet and other networks. The market for NICs has become a tough one, with eroding prices and stiff competition from

Intel

(INTC) - Get Report

.

Asked about the outlook for sales of the company's PC adapter cards, CEO Eric Benhamou became the latest technology executive to contest Intel's claims that business is tough in Europe. "We have not seen any decline in PC sales across all geographies," he said on the company's conference call. "Our view of the market does not reflect what was reported, or what was assumed to be reported, by Intel."

Gross margins increased nearly 4 percentage points from the prior quarter, to 36.5% from 32.6%. More importantly, CFO Michael Rescoe said that investors could expect margins to be even higher next quarter, and told analysts to raise their revenue estimates for fiscal 2001 by $200 million, to a range of $3.5 billion to $3.7 billion from $3.3 billion to $3.5 billion.

3Com moved higher in the after-hours market, recently trading at $16, up from a New York close of $13.94.