3Com Revenue Grows

3Com (COMS) reported third-quarter earnings per share of $0.15, which exceeded the Zacks consensus estimate of $0.08.

Revenue

Revenue of $345.9 million decreased 6.5% from $324.7 million in the year-ago quarter, and increased 7.4% sequentially from $322.2 million. This was partially offset by sales to Huawei, which fell 77.9% sequentially to $12.4 million, while China-based direct-touch sales reached $165.9 million in the quarter, up 29.7% compared to the year-ago period.

China direct sales for the quarter were $165.9 million, which increased 29.7% compared to the year ago quarter. The sequential improvements were due to the effects of the global economic recovery, which were felt across major geographies, except China.

Operating Results

3Com's gross margin was 60.4% in the third quarter, compared to 57.2% in the corresponding period last year, largely driven by a change in product mix. The Non-GAAP gross profit margin for the quarter was 60.5% improving from 57.4% reported in the year-ago quarter.  Non-GAAP operating profit margin was 13.9% in the third quarter compared to 11.3% in the year-ago quarter as operating expenses reduced slightly compared to the year-ago quarter.

Net income in the quarter was $41.4 million, or $0.10 per share, compared with a net income of $1.8 million, or $0.00 in the third quarter of fiscal year 2009. Including special items such as restructuring, amortization, legal expense, impairment etc the non-GAAP net income for the third quarter of fiscal year 2010 was $67.2 million, or $0.15 per share, compared with a net income of $49.1 million, or $0.13 per share in the year-ago quarter.

Balance Sheet, Cash Flow

The company ended the quarter with $795.0 million of cash and cash equivalents, compared to $704.1 million in the previous quarter. During the quarter, 3Com generated $89.7 million of cash from operations, versus $118.2 million generated in the previous quarter. Long-term debt (including current portion) was $112 million, flat compared to the previous quarter.

Acquisition

The company is being taken over by Hewlett Packard (HPQ - Analyst Report) for $2.7 billion, which is a premium to the current market capitalization of $2.5 billion. We currently have a Neutral recommendation on the stock, as it is evident that the current market capitalization is almost in line with the acquisition value.

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