3Com Narrows 3Q Loss, Unveils Joint Venture With Huawei


3Com Wednesday reported a substantially narrowed fiscal third-quarter loss as revenue dropped 31 percent.

The vendor also unveiled a joint venture with Huawei Technologies, the Chinese telecommunications and networking equipment vendor currently embroiled in a patent and copyright-infringement lawsuit brought by Cisco Systems.

In an agreement 3Com President and CEO Bruce Claflin dubbed "perhaps our boldest move yet," 3Com is contributing $160 million in cash, its enterprise products and intellectual property and its enterprise sales and service operations in China and Japan to the joint venture, in which it holds a 49 percent stake. Huawei, which holds the other 51 percent stake in the venture, is contributing its entire enterprise business.

3Com will brand and sell products from the joint venture outside of China and Japan, including Huawei's full line of enterprise routers and high-end switches, Claflin said during a conference call.

The two companies will collaborate to enhance existing products and develop new ones, he said.

"We will begin developing what I'll call the road map to be able to take to our partners and customers so they can understand the long-term plans, and then as we get closer to closing, we will begin the internal training of ourselves and our channel so that when the joint venture is launched we can aggressively be marketing and be prepared," Claflin said.

The joint venture must receive regulatory approval in both the United States and China and is expected to close during the first quarter of 3Com's fiscal 2004, which begins in June.

By expanding its product line, 3Com should now become a more attractive partner to high value-add solution providers like EDS and IBM Global Services, Claflin said.

"Many have approached us over the last year suggesting that they would like to work with us but pointing out that our product line is too limited to meet their needs," Claflin said.

Claflin repeatedly declined to comment on the lawsuit Cisco has brought against Huawei but said he is "confident that products shipped from the joint venture will be unique, compelling and designed with complete respect for all companies' intellectual property."

For the quarter ended Feb. 28, 3Com reported a loss of $79.2 million, or 22 cents per share, down from a loss of $236.1 million, or 67 cents per share, the same quarter a year ago.

Revenue for the quarter dipped to $244.9 million, down from $356 million a year ago.

The results were in line with lowered guidance provided by 3Com earlier this month.

3Com said its enterprise networking business contributed $166 million in revenue, a 13 percent sequential decline that fell below the company's expectations. Sales of all enterprise product categories fell in the Americas except 3Com's stackable core product line, which grew 17 percent sequentially.

With the sale of its CommWorks telecommunications equipment business earlier this month, the vendor said it has increased its focus on enterprise products. 3Com intends to use intellectual property from CommWorks to develop a high-end addition to its NBX IP-PBX product line for enterprise customers, Claflin said.

"It has the reliability and feature sets that exist in the PSTN [public switched telephone network]. In other words, we have duplicated in three years all the functionality that the PSTN developed over the last 70, and we're bringing that functionality to the enterprise," Claflin said.

The new NBX product will support both IP and traditional handsets, giving customers flexibility as they migrate from legacy to IP telephony systems, Claflin said.

3Com Executive Vice President and CFO Mark Slaven did not provide guidance for the fourth quarter, citing market uncertainty and the threat of war.

Shares of 3Com closed down 5 cents at $4.22 Wednesday prior to the announcement.