CEO Claflin Credits Channel For 3Com's Strong Quarter

The company posted a lower quarterly loss in the quarter ended May 28 of $18.7 million, or 5 cents a share, compared with a loss of $38.4 million, or 11 cents a share, in the year-earlier quarter. Sales in this quarter increased 5 percent to $183.3 million from $175 million last year. Analysts had expected the sales numbers to be about the same as last year's fourth quarter.

In an interview conducted after the earnings announcement, 3Com CEO Bruce Claflin gave much of the credit for 3Com's rebound to its channel partners.

"It was a very encouraging quarter, and it has been a channel-led recovery," he says. "It wasn't because of some blockbuster new technology we released during the quarter; it was just great execution on our part and on the part of our channel partners."

Claflin says the company has revamped its channel program in the past year, changing from one umbrella program for all partners to a system that takes into account the different needs of different types of partners.

"In contrast to what we did before, when we developed one channel program for everyone, the way we do it now has allowed us and our partners to be more focused on where we want to go," Claflin says.

For the quarter, operating expenses were $100 million, including $13 million on restructuring charges. Revenue consisted of approximately $25 million from desktop, mobile and server-connectivity products, and $158 million from enterprise-networking products. Gross margins were approximately 41 percent, a sequential increase of approximately six points. The operating loss was approximately $24 million. The number of full-time employees at the end of Q4 was about 1,900, down from about 2,100 at the end of the prior quarter. 3Com expects revenue to be unchanged to slightly up from the just-completed fourth quarter.

3Com has shifted its channel focus toward a demand-creation model that invests in things like training and cooperative marketing and advertising for partners.

"I can't overstate how much the increased focus has helped us, and I'm heartened by how well the channel has taken up the new programs," Claflin says.

Claflin says the good news about 3Com's growth is that it has occurred in areas -- including security, VoIP and wireless -- that also are high-growth areas across the industry. For the quarter, worldwide revenue from wireless, voice and security products, along with switches and routers, combined to grow about 90 percent over the same period last year, about 30 percent sequentially.

He says the upturn in these areas is part of the reason the company is moving away from such devices as PC cards and adapters, which are becoming increasingly embedded into desktop and laptop computers. Revenue from these products was down 42 percent year over year.

"We expect these declines to continue; therefore, the future growth of our company depends on our enterprise-networking products," Claflin says.

3Com also is trying to take the lead in Gigabit-to-the-desktop networking speeds, announcing in May a line of stackable Gigabit Ethernet switches that are targeted at SMB and enterprise companies interested in ramping up their desktop speeds.

"The switches are designed for both the SMB and enterprise space, but small companies actually have been moving to them faster because they can change their infrastructure more quickly than most larger companies," Claflin says.