3Com Partner Program Changes Contribute To 2Q Shortfall

"The programs as initially rolled out were disruptive to some channel partners," Claflin said during a conference call Thursday to discuss results for the quarter ended Nov. 26. "They were modified during the course of the quarter to accommodate concerns, while still keeping the thrust of the realignment intact, but the disruption that occurred during this time impacted our Q2 revenues," Claflin said.

3Com surprised and distressed many partners in September by dramatically raising volume requirements of its Focus Partner Program. As a result, the company's ranks of Gold and Silver partners were cut in half.

The company said it would give fallen Gold partners the opportunity to regain their status if they met 75 percent of the new $250,000 quarterly revenue requirement during the second quarter.

Claflin also cited increased competitive pricing pressure in the North American 10/100 switch market for the company's slumping sales, which came in below original expectations issued in September by the Marlborough, Mass.-based company. 3Com lowered its guidance for the quarter earlier this month.

For the quarter, 3Com reported an earnings loss of $48.8 million, or 13 cents per share, compared to a loss of $139 million, or 37 cents per share, the same quarter a year ago.

Revenue for the second quarter declined to $151.1 million, down from $181.9 million during the year-ago quarter. In September the company projected revenue for the quarter between $170 million and $180 million but later revised guidance for revenue between $149 million and $153 million.

3Com also postponed its objective to achieve profitability by the first quarter of fiscal 2006.

"Based on our results in the second quarter, it is unlikely we that will reach the goal in the first quarter of 2006," said Don Halsted, 3Com'svice president and CFO. "Getting 3Com to profitability obviously is a key goal, but I'm not going to give timing estimates," he said.

On the positive side, Claflin said sales of 3Com's SMB data product lines increased sequentially for the quarter and that the company's newly announced NBX V3000 VoIP solution, an SMB-focused IP-PBX, has had strong initial demand.

In addition, the company announced a new modular enterprise switching family, the 8800, which features a terabit-capacity backplane. It is the first jointly-designed product to come out of 3Com's venture with Chinese networking vendor Huawei Technologies.

3Com this week said it plans to acquire security vendor TippingPoint for approximately $430 million.

The cash deal, expected to close by the end of February, will add TippingPoint's lineup of UnityOne intrusion prevention solutions to 3Com's security portfolio.

For the third quarter, 3Com expects revenue to be approximately flat compared to the second quarter.

Shares of 3Com closed up 6 cents at $3.98 Thursday.