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3Com Feeling Cisco's Heat

For its next tradeshow, maybe 3Com Corp.'s (Nasdaq: COMS) polo shirts should have big targets painted on the front.

The company has landed in Cisco Systems Inc.'s (Nasdaq: CSCO) sights now that its joint venture with Huawei Technologies Co. Ltd. is shipping product. Cisco has amped up its sales efforts against 3Com/Huawei, possibly contributing to a disappointing start for the joint venture and, in turn, to a disappointing earnings call from 3Com yesterday.

The Evil Eye from Cisco is no surprise, "given 3Com's association with Huawei and 3Com's effort to move into Cisco's space," says analyst Erik Suppiger of Pacific Growth Equities Inc. In a note published today, Suppiger ties Cisco's stance to 3Com's earnings: "[We] believe at least one of the external reasons for [3Com]’s earnings inconsistencies is the aggressive competitive strategy that Cisco has employed."

On yesterday's earnings call, 3Com officials acknowledged that competition has gotten rough. "What I've been hearing from the field is on any big deals where we're going up against Cisco, they're determined to not lose, so they're being aggressive," said 3Com chief financial officer Mark Slaven.

For its third quarter, which ended Feb. 27, 3Com reported revenues of $172 million, falling short of Suppiger's estimate of $176 million. Losses on the quarter were $86 million, or 22 cents per share (see 3Com Reports Fiscal Q3). 3Com stock was down $0.37 (5.24%) to $6.69, in trading late today.

Huawei, meanwhile, is sailing smoothly, reporting record annual revenues exceeding $3 billion (see Huawei Reports Record Revenues). Then again, with numbers like that, Huawei doesn't have as much pressure on it as 3Com does.

It's widely believed that Cisco has it in for Huawei, a rivalry that manifested itself in a lawsuit, currently suspended, that claimed Huawei copied Cisco code (see Cisco/Huawei Lawsuit on Hold). Cisco officials declined to comment on 3Com's remarks or on competition with Huawei.

Whether competition from Cisco is the cause or not, the 3Com/Huawei joint venture, which began shipping products in October, is off to a slow start. For the quarter ended December 31, the venture collected revenues of $15 million and showed a net loss of $8 million, 3Com officials said. About $5.5 million of those revenues went to 3Com, up only slightly from $5 million last quarter.

— Craig Matsumoto, Senior Editor, Light Reading

Sisyphus 12/5/2012 | 2:12:24 AM
re: 3Com Feeling Cisco's Heat The article is a little confusing inasmuch as it's not clear to me why the joint venture affects 3Com's results. I thought that other than having put in $160M, the join venture is an independent entity and thus its not really part of 3Com;s results unless it pays out profits or claims further investments from the parent companies?

What I seem to discern is that 3Com's results are somewhat disapppointing on its own, Huawei's seem impressive, and the join venture also seems to be doing OK, but as of now there's no 100% visibility into it?
Pete Baldwin 12/5/2012 | 2:11:55 AM
re: 3Com Feeling Cisco's Heat The article is a little confusing inasmuch as it's not clear to me why the joint venture affects 3Com's results. I thought that other than having put in $160M, the join venture is an independent entity and thus its not really part of 3Com;s results unless it pays out profits or claims further investments from the parent companies?

Good point, Sisyphus. I should have spelled this out a little better ... basically, the JV is not independent.

3Com gets revenues from reselling JV products. 3Com got $5.5M in revenues from JV product sales last quarter, but analysts were expecting more like $8M or $10M. So -- the JV had a mediocre quarter, leading to disappointing revenues for 3Com.

3Com also records its share of the JV's losses, which would be about $4M this time.
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