3Com's Storage Shines in China

3Com, whose $2.2 billion acquisition by Bain Capital hit the rocks last week is seeing strong sales of its storage offerings in China.

The vendor's Q3 results, released last night, were boosted by a 10 percent year-over-year revenue hike in China, as well as strong performance from 3Com's Hong Kong-based H3C subsidiary.

"The other significant positive performance driver in the quarter was progress the H3C team has been making in selling its high-end routers as well as its new products and services, such as IP storage and IP video surveillance," said Edgar Masri, 3Com's CEO, during a conference call last night.

"These products and services not only have higher margin, they also pull through our switching and routing products."

3Com's total Q3 revenues were $337 million, up from $323.4 million in the same period last year, beating analysts' estimates of $333 million.The vendor's earnings per share were impacted by a $6.1 million tax liability provision. As a result, 3Com posted a net loss of $7.8 million, or 2 cents per share, compared with $4.8 million, or 1 cent per share, in the same period last year.

On a non-GAAP basis, 3Com's earnings were 8 cents per share on net income of $34.2 million, compared to 3 cents and $11 million in the same period last year, beating analysts' estimates by 5 cents.

Despite 3Com's growing business in China, a question mark now hangs over the vendor's relationship with Chinese technology giant Huawei, with whom it initially created the H3C joint venture.

Under the terms of the proposed Bain acquisition, Chinese technology giant Huawei would have taken a 21.5 percent stake in the merged company, which led U.S. lawmakers to veto the deal.

Huawei nonetheless remains H3C's largest customer, although sales to the Chinese vendor were down 9 percent year-over-year in Q3, prompting analysts to grill Masri last night."Huawei is and has continued to be a strong partner of 3Com, specifically H3C, and we are looking to maintain this relationship," replied the CEO.

3Com currently has a non-competition agreement with Huawei, although this will expire in September, prompting at least one analyst to predict tougher times ahead.

"We believe 3Com faces the risk of increased competition with Huawei [from] late 2008 into 2009, and the possible loss of Huawei as a customer," wrote Lehman Brothers analyst Inder Singh in a note released late last night.

The analyst also discussed the fallout from the failed merger with Bain Capital, notably 3Com's decision to pursue a $66 million "break-up fee" following the investment firm's decision to terminate the merger agreement.

"This indicates that 3Com plans to run its business as a going concern, though we do not rule out the possibility of other suitors down the road," wrote Singh. "We believe the company has been keenly watched by private equity for sometime, as well as other equipment suppliers, which likely find certain parts of its business attractive."Despite solid performance from 3Com in China and EMEA, where revenues were up 15 percent year-over-year, 3Com's North American business experienced a 27 percent decrease over the same period.

The 3Com CEO blamed this on a number of factors, both internal and external, during last night's call.

"Clearly this region was most affected by the uncertainty surrounding our proposed merger and by aggressive deal posturing by several of our key competitors," he said. "We also did not execute well in North America. As a result, we have made significant changes to the North American management team and plan to further strengthen our management team in the near future."

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