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stock pick3Com Corporation (older news) (coms) 10/25/99 After some digging, I've found that Psion licenses the Epoc OS for about $5-10 per device. Assuming that Palm gets the high-end of that at $10/device and that licensees can sell 1 million devices this coming year, that amounts to about $10 million in revenue. However, I think that Palm gets much more per device that Psion. Management had stated at one point that their licensing arrangements are not stright royalty deals. To me that means that 3Com makes more money per device sold than its competitors in return for doing more than simply licensing (R&D?). Whatever the case, The switch from hardware centrism to software will hurt top-line growth as it helps net revenue growth for Palm. Hopefully, the market will recognize the switch and not penalize Palm too much on its IPO. On another front, 3Com has announced that it has teamed up with Concentric Network to offer small businesses a DSL package that includes a 3Com router. The routers will be available through regular retail channels. I don't think this news is a big deal. It just shows how 3Com is leveraging its non-growth Personal Connctivity division's distribution channels to increase sales in growing businesses. I hope that Concentric Network isn't the other major company 3Com was referring to when they announced partnerships with more phone companies. Since I seem to remember that they specifically said "RBOC", I assume that Concentric isn't it. I talked to one of the webmasters of the 3Com site who has reiterated 3Com's intention to revamp their site to include e-commerce. I expect a roll-out sometime in late November.
10/19/99
10/18/99 In general, I'm disappointed but sympathetic about the recent rash of press releases which emphasize the conference's enterprise theme. On the one hand, it takes away from the company's transformation and any news regarding the IPO. On the other hand, the enterprise market is extremely lucrative and may become a huge success. But from my point of view, it's a little premature to focus on enterprise with Palm's limitations. Palm has simply not been as good PR-wise as when Hawkings, now of Handspring, was running the show. As evidence, I point to several pieces of news that should have been delivered at the conference to great fanfare, and which have now been relegated to company press releases. The more minor news is that Palm released software and hardware that make it easy for corporate Palm users to sync their PDA's to corporate network databases. It's a boon to Enterprise users, but if the PalmSource Conference is about Enterprise Palm developments, why not wait until then to release the news? As to sales? I don't expect much although the recent hubub regarding the cost of maintaining Palm's in the corporate world may give you pause to take me for my word. I don't really expect much because the corporate users probably don't need much syncing outside of planning their day and updating phone numbers, a job the current Palm does well without the new stuff Palm just introduced. Besides the $2700 that I remember the Gartner quotes as the cost of maintaining Palms does not seem reasonable to me. (I can't find the link for the story) The bigger news is Motorola's rollout of a new DragonBall processor that achieves speeds of 33MHz, double the current 16MHz. The new processor will support color! Although Palm is being coy about whether or not it will support color in its new OS, I predict that as a software company, they will have to in order to satisfy demand from potential licensees. The problem with color is that it drains power and may slow the OS. On the other hand, Microsoft Windows CE has color. The chip is expected to ship in January. If I were a Palm executive, I would have asked that Motorola announce their product tomorrow as a surprise to PalmSource conference-goers who include members of the press. Such an act would have added more fuel to the Palm fire. This site has disproportionately discussed developments in Palm, without mentioning the other 93% of the company. I don't think things will change soon, but 3Com does have some news. Only some of it is interesting. 3Com announced yet another product for the SOHO market. This one will allow users to connect PC's through their phone-lines. Costs will go from $80-$150. Dell is expected to announce this week that they will include this phoneline network product in new computers. There are many competitor products available that do the same thing, though this product is faster than most others. One competitor who will unveil products with the same speed is Diamond Multimedia, the ones who brought you the MP3 Rio Player. The market for networked homes is expected to include 650,000 households. 3Com also announced that Korea Telecom has agreed to use its products in the convergence of voice and data. The deal is valued at about $10 million. On the bad news front, 3Com doesn't look like it's even in the running to supply DSL products to SBC. Lucent and Nortel may be in the running in this $6 billion overhaul. COMS stock is down to about $28 in sympathy for the tech downturn. I expect the stock to spike a little tomorrow as news coverage for the PalmSource conference begins. However, there will be pressure on tech stocks as Dell warns of depressed earnings due to higher memory prices.
10/15/99 Nokia, Palm and
Symbian
In the interview, Bercow said that Nokia has licensed the Palm OS. They will put the Palm OS on top of Symbian's Epoc kernel. A kernel is the underlying structure for an OS. This means that users will see a Palm interface, but developers will have to distribute two versions of their applications. The cool part for the developers is that they won't have to tweak their programs much, only recompile it (a relatively simple procedure). As Nokia already has the license for Epoc, this deal is separate from the Palm Symbian announcement.
Psion's PR department said that Symbian (of which it owns a majority interest) is in talks with Palm to discuss possibilities for joint ventures. Understandably, this press release coupled with the Nokia announcement caused many (yours included) to assume that there was an actual link-up. In fact, Palm and Symbian are only talking about what they can do together. These talks were prompted by Nokia, according to Bercow. The long and short of this whole episode is that Palm is proliferating its OS. Concurrently, it is in talks with Symbian to do something or nothing. Either way, the transformation of Palm from a hardware to a software company has begun.
10/13/99 Also, CNBC has an interesting article regarding 3Com stock. It's generally positive, and even has an analyst putting the Palm division market capitalization at $7 billion. At 3Com's current price, this marktet cap would give 3Com shareholders $5.6 billion in Palm stock and value the rest of 3Com at about $4 billion. Interesting speculation, but until we see the numbers for Palm over the next few quarters, I can hardly speculate as to its value. In other news, Handspring, the company producing Palm OS handhelds is having trouble producing the devices. In fact, orders have been so brisk that they shut down their online web ordering site due to performance issues and will only be taking phone orders. I've ordered one of the devices myself and will tell you what I think when I get it. In the meantime, you can check out www.visorinsider.com for reviews about the Hanspring Visor. It turns out that this is a big day for Palm news. Palm and Symbian will team-up to make the two hand-held, cellphone, little device OS's compatable. Symbian is a collaboration between Nokia, Motorola, Psion and others to create an OS appropriate for cellular phones. Unfortunately, they have been unsuccessful in attracting developers. The combination with Palm will allow them access to the plethora of Palm applications already available. In return, Palm will get access to members of the consortium. In fact, Nokia has announced that they will be working with Palm on creating a cellular phone with an embedded Palm OS. These two bits of news are (in my opinion) pretty significant. 09/23/99 Synopsis Two recent significant tidbits of news that make this stock attractive to me. The first is the spinoff of their handheld division. The second is their operational improvement which has resulted in actual earnings beating consensus estimates by 38%. About 3Com
You probably don't give a damn who makes your modem. That attitude explains their 19% year over year decline in sales of such equipment. These types of equipment fall under the heading, "Personal Connectivity Business." Here's a breakdown of their business for the most recent quarter. I'll explain each segment a bit more later on.
Personal Connectivity The driver of this segment of their business relates to NICs (Network Interface Cards) The prices of these devices which connect the client/user pc to a centralized server or router have been dropping like a rock. As I said earlier, this has essentially become a commodity business. Lower sales last quarter (down 19%) were offset by increased operational efficiency. These efficiencies were caused by a quicker raw material to sold goods cycle as well as better inventory management. 3Com promises that they will be trying to improve sales in this category through increased advertising. I don't think their campaign will be very effective as some of their products often cost 50-60% higher than smaller competitor products. As I noted earlier, you don't care who makes your modem, why should anyone else? I suspect that this part of their business will be like Best Buy's music sales business. Although it will contribute significant gross revenuese, it will probably only be a driver for sales of more profitable products. I'll talk about how this tactic works in a little bit. I'm hoping that personal connectivity will hover at half a billion in sales next quarter. Ever seen a 3com product? If not click here, Network Systems This is where 3Com will probably hope to make most of its money. These equipment are typically sold to larger companies who need a way for their customers or their huge staff to connect with each other. For example, if you wer Pacific Bell and wanted DSL service for your customers, you would need a box to which all DSL lines go. 3Com is a supplier of such a box. I mentioned earlier the other heavy-weights who are competing against 3Com. They recently won two major contracts with some regional Bell carriers. As there are only seven carriers, this news is pretty significant. Their Chairman and CEO, Mr. Benhamou attributes the contract wins to 3Coms presence in the retail channel. So this is where my idea of 3Com Personal Connectivity gear driving Network Systems gears comes into play. You can imagine the Personal Connectivity gear as parts for a stripped car. The Network Systems represents the engine block and the frame. You need parts to finish the car. It's better if you have parts from the same manufacturer as the engine block and frame. In this case, the network systems represent the engine block and frame while the personal connectivity aspect represents the car parts. Mr. Benhamou's comment that 3Com's presence in the retail channel helped secure the Bell contract simply means that Bell liked the idea that their customers could get parts whose manufacturers were the same as their hubs. Handheld Computing 3Com intends to spinoff this aspect of their business by the middle of next calendar
year. The handheld business is basically Palm
Computing. Palm holds about 65% of the handheld computing market and is growing
at a rapid clip. They have recently shifted focus from a hardware centric operation
to one that depends on "software" revenue. That is, instead of having to
buy a 3Com palmpilot to have the critically acclaimed Palm OS, The shift in focus means that Palm is more like Microsoft than Apple. Speaking of Microsoft, the Microsoft Windows CE operating system is the major competitor with Palm. Fortunately, CE still has a few problems and has a slower handwriting recognition system. Otherwise, Microsoft's clout and Windows CE's ability to have color display would blow Palm out of the water. As it is, Palm has a significant edge that would take Microsoft at least a couple of years to beat--if ever. The cool part about the spinoff is that 80% of the shares of the new Palm entity will go to 3Com shareholders. So it's like getting two companies for the price of one. Many have argued that with Palm as a separate company, Palm will get the high Wall Street price it deserves. On the other hand, Palm's spin-off will unmask 3Com's weakness in its other product areas. I happen to disagree with the negative assessment as 3Com has broken Palm earnings out from its other earnings for a few quarters now. This means that analysts see exactly where 3Com is weak and strong and have been seeing it for some time. There will be no "unmasking." Financial Picture The cash and balance sheet look pretty good. They've made huge gains on some of their investments and have a lot of cash with little debt. I'm loathe to get more technical, but if you really want me to, I'll break down some of the financial numbers for you if you ask me. You can take a look at last year's annual report yourself. Their quarterly results are also available. Conclusion I like 3Com because of its potential. Execution is the key. If they get it right, this stock should rocket. If not, they'll at least get bought out. They make a tempting target with $1.6 billion in cash. The stock isn't at an all-time low. It's trending upward.
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Nokia's announcement means that there are now two cellular phone
manufacturers who will utilize Palm, Qualcomm and Nokia. 
What makes 3Com unique and what makes it valued so lowly is that
it targets the little guy. If you're looking for a modem for your computer, an
ethernet card to connect to your company or campus, a way to put your five employees on a
single network, 3Com wants you. The problem with this love affair with the little
guy is that the little guy knows little about tech stuff and so buys the cheapest product
available with little regard for post-purchase service or quality of products made.
This means that things like analog modems (the ones you all use to connect to the net at
home) have become commodity products. Even your LANS (how your company probably
connects its pcs') have cards that were once dominated by 3Com but have now become
commodity products.
there will eventually be manufacturers who will license the OS. Most
notable is a little company called 
