3Com's share price stumbled on Tuesday after the company said sales for its latest quarter would be disappointingly low.
Eric Benhamou, 3Com's chief executive, attributed some of the blame to the company's tighter control on releasing products into the channel, but analysts said this strategy will pay off in the long term.
3Com said sales for its fiscal third quarter, ended February 26, 1999 are expected to be between $1.41 billion and $1.415 billion. These sales would most likely result in earnings of $0.23 per share. Analysts surveyed by First Call had predicted earnings of $0.36 per share.
Wall Street reacted badly to the news, with 3Com's share price falling 12 per cent on Tuesday to $27.
Benhamou said he is "clearly disappointed" with the results, but pointed out that they represent a significant improvement over sales of $1.25 billion and earnings of $0.02 per share, reported a year earlier.
"Our seasonally weak third quarter was exacerbated by several factors," said Benhamou. "An unexpected slowdown in the US and Latin American enterprise markets, a weakness in the traditional two tier distribution channel, and lower than expected PC OEM sales all contributed to third quarter results."
3Com sales have also been slowed down since it revised its channel inventory management process. The move was necessary to slow the flow of products into the channel, shielding the company from the impact of unsold product backlog.
But while the move will have impacted sales in the short term, it is a good move in the long term, said IDC networking analyst Richard Mol. "3Com kept stuffing things into the channel, so while it seemed as though they were making the same shipments into the channel, shipments to customers actually decreased," said Mol.
"In the long term it is the right thing to do, otherwise it is going to hit them like it did last year," said Mol. "Now, as soon as there are disappointing sales out of the channel, you notice it in their revenues. It's not a nice picture, but I think they can recover quickly."
3Com will report its full third quarter results on or around 23 March, 1999.
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