3Com, the increasingly harassed networking equipment vendor, is scrapping production of DSL and cable modems for the consumer market.
"There is an industry-wide glut of consumer cable and DSL modems that has driven down prices and margins", according to the company which says the decision conforms to its previously stated intention to withdraw from markets where "lack the potential to deliver superior growth and financial returns".
3Com will retain a presence in business DSL and cable modems and will honour all warranties on discontinued product lines.
3Com announced this plan on the publication of revised financial performance guidelines for Q4. The company now estimates that sales will be $450m to $475m. Lower sales means higher inventories in 3Com's case, and the company is taking a charge to cover this. Add this to one-time charges for restructuring and the result is margins that are "expected to be negative".
On the bright side, 3Com has reduced operating expenses faster than expected. It expects to have $1.5bn-$1.6bn in cash and equivalents when it announces its Q4 results on June 26.
According to 3Com, business conditions deteriorated in its fourth quarter. But the company says that it is
"taking the steps necessary to achieve future profitability in this unfavorable climate".
All well and good, but 3Com operates essentially a scale business. It built an enormous business on the back of commodity networking cards. Now the business is not so huge. Scale down too much, withdraw from too many market sectors, and it becomes increasingly vulnerable to bigger competitors. ®