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3Com Reports Results for Second Quarter Fiscal Year 2010

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MARLBOROUGH, Mass., Dec 23, 2009 (BUSINESS WIRE) -- 3Com Corporation (Nasdaq: COMS) today reported financial results for its fiscal 2010 second quarter, which ended November 27, 2009. Revenue in the quarter was $322.2 million, compared to revenue of $354.6 million in the corresponding period in fiscal 2009, a 9.1 percent decrease.

Second quarter revenue increased 10.9 percent sequentially, from $290.5 million in the prior quarter. Revenue grew sequentially across all major sales regions, primarily driven by a solid recovery in the Europe, Middle East and Africa region and in our Latin America business, and continued strong performance in China. Sales to Huawei continued to decline as expected, coming in at $18.2 million, down 35.3 percent sequentially, while China based direct-touch sales reached $151.1 million in the quarter, up 21.9 percent sequentially.

3Com achieved gross margin in the quarter of 60.1 percent. This compares with gross margin of 57.3 percent in the first quarter of fiscal year 2010, and 56.3 percent in second quarter of fiscal year 2009.

3Com also achieved GAAP operating profit margin of 4.5 percent in the quarter. Non-GAAP operating profit margin hit a record 13.5 percent in the second quarter, compared with 9.1 percent in the first quarter of fiscal year 2010, and 10.8 percent in the second quarter of the prior year.

Net income in the quarter was $20.0 million, or $0.05 per diluted share, compared with net income of $12.9 million, or $0.03 per diluted share, in the second quarter of fiscal year 2009. Q2 FY10 results include a favorable tax adjustment of $10.8 million offset in part by transaction costs of approximately $4.6 million relating to the Company's pending merger with Hewlett-Packard Company. On a non-GAAP basis, net income for the second quarter of fiscal year 2010 was $38.3 million, or $0.09 per diluted share, compared with net income of $46.9 million, or $0.12 per diluted share, for the second quarter of fiscal year 2009.

3Com generated $118.2 million in cash from operations in the quarter. 3Com's cash and equivalents and short term investments balance at November 27, 2009 was $704.1 million. During the quarter 3Com repaid $88.0 million of its debt, including a voluntary payment of $40.0 million.

"We are pleased with 3Com's performance in the quarter," said Bob Mao, 3Com's Chief Executive Officer. "We exceeded our guidance for revenue, operating profit, earnings per share, and our cash balance, while delivering sequential revenue growth across all our sales regions and achieving record gross and operating margins."

3Com Corporation does not intend, and disclaims any obligation, to update any forward-looking information contained in this release or with respect to the announcements described herein.

The non-GAAP measures used by the Company exclude restructuring, amortization, stock-based compensation expense and, if applicable in the relevant period, unusual items, such as those items detailed in the tables attached to this press release. The required reconciliations and other disclosures for all non-GAAP measures used by the Company are set forth later in this press release, in the Current Report on Form 8-K furnished to the SEC on the date hereof and/or in the investor relations section of our Web site, www.3com.com.

References to the financial information included in this news release reflect rounded numbers and should be considered approximate values.

About 3Com Corporation

3Com Corporation is a $1.3 billion global enterprise networking solutions provider that sets a new price/performance standard for customers. 3Com has three global brands--H3C, 3Com, and TippingPoint--that offer high-performance networking and security solutions to enterprises large and small. The H3C enterprise networking portfolio--a market leader in China--includes products that span from the data center to the edge of the network, while TippingPoint network-based intrusion prevention systems and network access control solutions deliver in-depth, no-compromise application, infrastructure and performance protection.

Copyright© 2009 3Com Corporation. 3Com, the 3Com logo, H3C and TippingPoint are registered trademarks of 3Com Corporation or its wholly owned subsidiaries in various countries around the world. All other company and product names may be trademarks of their respective holders.

3Com Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
TABLE A
Three Months Ended Six Months Ended
November 27, August 28, November 28, November 27, November 28,
2009 2009 2008 2009 2008
Sales $ 322,164 $ 290,502 $ 354,562 $ 612,666 $ 697,212
Cost of sales 128,542 123,931 154,770 252,473 307,793
Gross profit 193,622 166,571 199,792 360,193 389,419
Operating expenses (income):
Sales and marketing 93,754 84,788 89,920 178,542 177,402
Research and development 41,400 38,968 49,254 80,368 96,401
General and administrative 25,786 21,370 28,652 47,156 53,106
Amortization of intangibles 16,755 17,071 25,060 33,826 50,224
Patent dispute resolution - - - - (70,000 )
Restructuring charges 1,552 1,133 2,504 2,685 4,501
Operating expenses, net 179,247 163,330 195,390 342,577 311,634
Operating income 14,375 3,241 4,402 17,616 77,785
Interest expense, net (1,922 ) (1,088 ) (547 ) (3,010 ) (1,798 )
Other income, net 5,920 11,547 15,899 17,467 28,770
Income before income taxes 18,373 13,700 19,754 32,073 104,757
Income tax provision 1,619 (6,239 ) (6,884 ) (4,620 ) (12,050 )
Net income $ 19,992 $ 7,461 $ 12,870 $ 27,453 $ 92,707
Basic and diluted income per share $ 0.05 $ 0.02 $ 0.03 $ 0.07 $ 0.23
Shares used in computing basic per share amounts 392,688 389,774 394,036 391,231 398,462
Shares used in computing diluted per share amounts 403,501 396,266 395,245 399,884 399,658
3Com Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
TABLE B
November, 27 May 29,
2009 2009
ASSETS
Current assets:
Cash and equivalents $ 704,079 $ 545,818
Short term investments - 98,357
Notes receivable 35,697 40,590
Accounts receivable, net 110,297 112,771
Inventories, net 94,844 90,395
Other current assets 55,307 56,982
Total current assets 1,000,224 944,913
Property & equipment, net 36,805 40,012
Goodwill 609,297 609,297
Intangibles, net 164,931 198,624
Deposits and other assets 23,761 22,511
Total assets $ 1,835,018 $ 1,815,357
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 81,632 $ 68,350
Current portion of long-term debt 48,000 48,000
Accrued liabilities and other 427,943 394,103
Total current liabilities 557,575 510,453
Deferred taxes and long-term obligations 40,695 40,729
Long-term debt 64,000 152,000
Stockholders' equity 1,172,748 1,112,175
Total liabilities and stockholders' equity $ 1,835,018 $ 1,815,357
3Com Corporation
Reconciliation of Non-GAAP Financial Measures
(in thousands, except margin and per-share data)
(unaudited)
TABLE C
Three Months Ended Six Months Ended
November 27, August 28, November 28, November 27, November 28,
2009 2009 2008 2009 2008
GAAP operating income $ 14,375 $ 3,241 $ 4,402 $ 17,616 $ 77,785
Restructuring 1,552 1,133 2,504 2,685 4,501
Amortization of intangible assets 16,755 17,071 25,060 33,826 50,224
Patent dispute resolution [a] - - - - (70,000 )
Acquiree expensed acquisition costs [c] 4,552 - - 4,552 -
Stock-based compensation expense [b] 6,233 4,885 5,638 11,118 12,080
TippingPoint special admin costs [d] - - 800 - 800
Non-GAAP operating income $ 43,467 $ 26,330 $ 38,404 $ 69,797 $ 75,390
GAAP operating profit margin 4.5 % 1.1 % 1.2 % 2.9 % 11.2 %
Restructuring 0.5 % 0.4 % 0.7 % 0.4 % 0.6 %
Amortization of intangible assets 5.2 % 5.9 % 7.1 % 5.5 % 7.2 %
Patent dispute resolution [a] - - - - -10.0 %
Stock-based compensation expense [b] 1.4 % - - 0.8 % -
Acquiree expensed acquisition costs [c] 1.9 % 1.7 % 1.6 % 1.8 % 1.7 %
TippingPoint special admin costs [d] - - 0.2 % - 0.1 %
Non-GAAP operating profit margin 13.5 % 9.1 % 10.8 % 11.4 % 10.8 %
GAAP net income $ 19,992 $ 7,461 $ 12,870 $ 27,453 $ 92,707
Restructuring 1,552 1,133 2,504 2,685 4,501
Amortization of intangibles 16,755 17,071 25,060 33,826 50,224
Patent dispute resolution [a] - - - - (70,000 )
Stock-based compensation expense [b] 6,233 4,885 5,638 11,118 12,080
Acquiree expensed acquisition costs [c] 4,552 - - 4,552 -
TippingPoint special admin costs [d] - - 800 800
Tax adjustment related to resolution of 2008 tax rate in PRC [e] (10,801 ) - - (10,801 ) -
Non-GAAP net income $ 38,283 $ 30,550 $ 46,872 $ 68,833 $ 90,312
GAAP net income per share $ 0.05 $ 0.02 $ 0.03 $ 0.07 $ 0.23
Restructuring 0.00 0.00 0.01 0.01 0.01
Amortization of intangibles 0.04 0.04 0.06 0.08 0.13
Patent dispute resolution [a] - - - - (0.17 )
Stock-based compensation expense [b] 0.02 0.02 0.02 0.03 0.03
Acquiree expensed acquisition costs [c] 0.01 - - 0.01 -
TippingPoint special admin costs [d] - - 0.00 - 0.00
Tax adjustment related to resolution of 2008 tax rate in PRC [e] (0.03 ) - - (0.03 ) -
Non-GAAP net income per share, diluted $ 0.09 $ 0.08 $ 0.12 $ 0.17 $ 0.23
Shares used in computing diluted per share amounts 403,501 396,266 395,245 399,884 399,658
[a] Resolution of Realtek patent dispute.
[b] Stock-based compensation expense is included in the following cost and expense categories by period:
Three Months Ended Six Months Ended
November 27, August 28, November 28, November 27, November 28,
2009 2009 2008 2009 2008
Cost of sales 591 540 562 1,131 1,320
Sales and marketing 2,081 1,590 1,613 3,671 3,371
Research and development 423 476 893 899 1,777
General and administrative 3,138 2,279 2,570 5,417 5,612
[c] These expenses relate to the proposed acquisition of the Company in November 2009.
[d] Costs incurred in the second quarter of fiscal 2009 to facilitate operation of TippingPoint as a more autonomous business.
[e] We recorded a favorable tax adjustment, reflecting final resolution of our calendar year 2008 tax rate in China.

SOURCE: 3Com Corporation

3Com Corporation
Investor Relations
Gene Skayne, 508-323-1080
gene_skayne@3com.com
or
Media Relations
Frank Tutalo, 781-782-5761
frank_tutalo@lpp.com

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