Cautious on 3Com

3Com Corp. (COMS - Analyst Report) is expected to announce results for its fourth quarter and full fiscal year ended May 29, 2009, on July 9. During the third-quarter earnings conference call, 3Com had provided guidance for the fourth quarter of 2009. 3Com expects to see increased impact of the global economic slowdown and consequently 4Q revenue is expected in the range of $290.0 million to $300.0 million, a 7% to 10% sequential and year-over-year decline.

On a consolidated basis, gross margins for 4Q are expected to be marginally below 3Q due to lower revenue projections, while overall non-GAAP operating expenses will be slightly lower than 3Q. As a result of these factors, the company anticipates that 4Q operating profits on a non-GAAP basis to be in the $18 million to $23 million range. This implies non-GAAP operating profits for the full year 2009 to be in the $130 million to $135 million range.

Non-GAAP EPS for 4Q is expected to be in the $0.04 – $0.06 range, resulting in full year non-GAAP EPS to be in the $0.39 – $0.41 range. The company also expects to continue generating cash, albeit not at the same level as that of 3Q. The company expects 4Q ending cash balance to be modestly higher than 3Q and expects full-year cash from operations to exceed $200 million. Fourth-quarter results will include impact of the China operations from January to March, including a two-week shutdown for the Chinese New Year, a seasonally soft period in the region.

Headquartered in Marlborough, Massachusetts, 3Com is a well-known player in the server application and network market. The company leads the Chinese enterprise networking market. Year-to-date, 3Com has achieved profitability on a GAAP basis by improving gross margin, operational efficiency and cost control initiatives. With strong operational results in 2008 as well as in the first nine months of 2009, 3Com has outperformed our expectations and given us the confidence that the company will be able to sustain recent improvements.

Currently, COMS shares are trading near their 52-week high. We believe that the company will post 4Q results above its own expectation. We have estimated fourth quarter revenue to be $311.0 million and Non-GAAP EPS to be $0.07.

Although recent results are impressive, 3Com faces increased competition in its core SMB market and the server market. Most of 3Com’s competitors, such as Dell (DELL - Analyst Report), Cisco (CSCO - Analyst Report), Netgear (NTGR - Snapshot Report) and D-link, have greater resources and are currently profitable. We do not believe that 3Com has an edge over competition.

In light of the above thesis, we maintain a Hold rating on the shares of 3Com.