FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

3Com Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COMS)") else Response.Write("(NASDAQ: COMS)") end if %>
5400 Bayfront Plaza
Santa Clara, CA 95052
(408) 764-5000
http://www.3com.com/

UNION CITY, Ca., December 21, 1996/FOOLWIRE/ --- 3Com announced record revenue and earnings for their second fiscal quarter of 1997 after the market close yesterday. The company began their analyst conference call by reading their earnings press release. The full text of the press release can be accessed on 3Com's Web site: Fiscal 1997 Press Release.

RESULTS. For the quarter, sales increased 46% to $820.3 million from the same quarter a year ago. Net income of $105.6 million, or $0.56 per share, included a non-tax-deductible charge of $6.6 million associated with the acquisition of OnStream Networks, Inc., a leading supplier of broadband and ATM access products and concentrators. Excluding non-recurring charges in both years, pro forma net income in the second quarter of fiscal 1997 was a record $112.2 million, or $.60 per share, compared to $65.6 million, or $.37 per share, posted in the year-ago quarter, representing growth of 62% in pro forma earnings per share.

GROWTH IN EXCESS OF INDUSTRY. The company's first objective (outlined at the analyst conference held last July) was to achieve a growth rate in excess of the industry. Most analysts estimate the networking industry, all segments combined, grows in the range of 30-50% per year. 3Com is clearly now growing at the high end of this range. In fact, in the past quarter, with a sequential growth rate of 16%, they grew faster than their largest three competitors -- Cisco Systems, Bay Networks, and Cabletron. The fundamental drivers of this rapid growth are the broad deployments of intranet applications and client/server applications among enterprise customers. These application deployments stimulate the continuing proliferation of switching fabrics, both in the data center and in wiring closets. The graphic upgrade is building in campus backbones to ATM and the upgrade of desktop and server connections to fast Ethernet. Other important growth drivers include the deployment of remote access services, Internet connectivity services, extranets (the interconnection of companies' intranets with customers and suppliers), and the upgrade of legacy SNA infrastructures to TCP/IP. These applications stimulate the growth of remote access servers, of subscriber and carrier access equipment, of modems and full-featured firewalled IP routers.

IMPORTANT MARKET SHARE GAINS. Examining 3Com's growth performance by segment, they were very pleased at the market share gains they registered in Ethernet and fast Ethernet mix. They extended their lead over Intel in the desktop server segment, and over Xircom in the mobile segments. Similarly, they scored market share gains in the hubs against Bay Networks, Cabletron, and HP. They have now moved to the number one market share position in the overall hub markets and in the flexible/stackable segment they have nearly twice the market share of their nearest competitor. In the workgroup segment, they are very pleased with the overwhelming market acceptance of their SuperStack II switching line which has also moved them into the number one market share position in the last three months, just past Cisco. The combination of these three number one positions in NICs (network interface cards), hub, and workgroup switches makes 3Com the leading vendor in the edge region of the network (the combination of the wiring closet and the client's NICs connection).

ATM BUSINESS GROWTH STRONG. In the core region of the network, for data center and central site connections, they have also enjoyed good growth, albeit from a smaller base. Particularly encouraging to them was a very strong double-digit sequential growth posted by their OnCore product line, which they inherited from their Chipcom acquisition. This growth was visible in both their IBM channel and their commercial business and was stimulated by the availability of a new series of switching modules which they announced last Summer and began shipping in the Fall. Also encouraging was the continuing momentum of their CellPlex product line for ATM switching in the building and campus core. Their ATM business, largely based on their acquisition of NiceCom two years ago, is continuing its fast growth with a run rate which they estimate at more than half of Fore's run rate for their equivalent product line. One difference with Fore's business, however, is that most of 3Coms customers tend to run Ethernet or fast Ethernet at the edge of their networks with ATM at the core, whereas more of Fore's customers would tend to run ATM at the edge.

HIT FINANCIAL TARGETS. Their second objective was to perform within the financial model parameters set last Summer and to achieve continuous improvment in their financial performance. With record results in Q2 they have clearly beaten these targets and are very proud of their financial results both on the income statement and the balance sheet.

NEW PRODUCTS. In their third objective, new products, they set out to make fiscal 1997 a banner year for new products. At the midway point in the fiscal year they are holding to this objective. Their new product ratio -- the proportion of their revenues coming from products introduced in the last 12 months -- is now in excess of 57% which is near an all-time record for 3Com. They are tracking development schedules for key R&D programs and, with few exceptions, they were able to meet customer requirements for new products in Q2. Although a few of their new product configurations in very high demand were on allocation for portions of the quarter.

GROW END USER CHANNEL. Their fourth objective was to dramatically grow their end user channel for both the enterprise and carrier markets. While their headcount grew at approximately 75% of their revenue growth rate, their field headcount grew in excess of 100% of their revenue growth rate. In Q2 alone, they experienced a net increase in headcount of 632 employees, of which more than half joined the ranks of their field and service organizations. They intend to maintain this thrust in the second half of the year as they have seen the strategy generate handsome returns for them in the past few months. For example, the number of enterprise accounts generating more than $1 million of revenues in a quarter has more than tripled compared to last year. Also, the dollar amounts of their average systems order is about three times what it was two years ago. With this gradual change in their business mix at this stage of their growth, they are clearly not product or technology limited. They are only limited by the maximum velocity at which they can recruit and train sales people, network consultants, and service engineers around the world.

WAN MARKET. Their fifth objective was to establish the leadership position in selective WAN market segments. In this area, while they have many encouraging progress milestones to report, they have not been able to translate this progress into gains in market share yet. The acquisition of OnStream in the field of broadband WAN access devices is already showing a very strong pipeline buildup in new opportunities, both with large enterprises and with carriers, which they expect will translate into strong revenue growth in the second half of the year. Similarly, in the field of enterprise remote access, they have more AccessBuilder systems in pilot and evaluation stages than at any other time in their history. They have received glowing technical evaluation reports in the press. However, relatively few of these customers have moved to an operational deployment stage yet, but are planning to do so in the coming months. In the first half of the year, they have won the PacBell Internet business with subscriber equipment and announced it at Comdex last month, and also won the largest ISP networks in China, in Korea, in Thailand, and Chile. They announced a comprehensive ADSL strategy with their partner PulseCom. They added 3Com to the list of managed router vendors with all three of the top inter-exchange carriers in this country -- AT&T, MCI, and Sprint. While they are riding in third place after Cisco Systems and Bay Networks in these carrier accounts, they are beginning to gain mindshare and join the vendor "short list" among network service providers.

NETWORK SYSTEMS FOCUS. Their sixth objective was to dramatically enhance their stature and reputation as a supplier of network systems. This is, admittedly, a hard objective to measure. However, based on feedback from press and market analysts, consultants, and customer surveys they have scored very sharp improvements in both awareness and preference. They think they are pulling away from competitors such as Bay Networks and Cabletron, ranked numbers 3 and 4 respectively in their industry, not only in terms of results, but also in terms of mindshare as a systems vendor. The establishment of 3Com Systems as a new organization within 3Com last Summer has helped to bring a new systems focus to their organization, independent from their traditional NICs focus and reputation. Their marketing programs, service and support programs, ad campaigns, and various end user activities are also much more consistently focused on their systems capabilities and systems image, targetting large end users and senior IS managers. In the second half of the year, the company indicated to expect more of the same with a very strong thrust behind the marketing and branding of their network software capabilities. They also said to expect important introductions of major new capabilities in network management, particularly for large-scale networks. They also said to expect several new systems partnerships with application software vendors in areas such as intranet and client/server solutions.

SMALL BUSINESS MARKET. Their seventh objective was to establish the leadership position in the emerging market of networks for small businesses. Their flagship product lines that address the small business markets include their OfficeConnect stackable systems and their EtherLink NICs. OfficeConnect is only 9 months old but has been extremely well received by the markets. In Q2 they shipped their 1 millionth OfficeConnect connection and established OfficeConnect as the broadest product line in its category including Ethernet and Fast Ethernet hubs, switches, routers, ISDN terminal adaptors, Internet gateways, print servers, fax servers, CD-ROM servers, and Web servers as well. While this market segment is not as well researched as the enterprise markets, they believe they have moved into first place with small business networks during 1996 and are poised to lead this market in 1997.

BUILDING INFRASTRUCTURE TO SUPPORT GROWTH. Their eighth and final objective was to scale their infrastructure to enable the fast growth of a multi-billion-dollar business. For the last three months, several items of note fall under this category. First, from an employee growth perspective, they ended Q2 with a headcount of approximately 6500 people. They upgraded all of their operations worldwide to the SAP environment for order management and financial management; and networking and their worldwide manufacturing applications for deployment approximately 12 months from now. They are in the process of Web-enabling the entire company and rolling out a global intranet based on Netscape software. Last month they broke ground on a new $70 million automated manufacturing plant in Singapore and, this past week, also decided to proceed on a major expansion of their existing plant in Dublin Ireland. From a service and support perspective, they are in the process of establishing a global design and configuration template to help their large customers with large-scale network designs and simulations. Finally, they are wrapping up their investment in Web-based support programs as rapidly as they can recruit competent talent. All in all, at midpoint in the year, they seem to be doing well relative to the key objectives they communicated last Summer. The industry appears to be growing at a fast clip as they expected and this is true around the world. They have emerged as a stronger number two networking company throughout the industry and are well positioned to benefit from most of the major technology trends -- switching, ATM, fast Ethernet, etc. -- from the systems approach to building networks, and from the ongoing industry consolidation. They are not without their share of challenges, namely in demonstrating renewed momentum in their WAN business, but they are executing well and they look forward to the second half of the year.

QUARTER HIGHLIGHTS. 3Com enjoyed a strong quarter of revenue growth at 16% sequentially. While this is traditionally a good growth quarter for them, their revenue was well above any of the published estimates and was higher than their internal expectations. Also, their sequential growth rate of 16% was higher than their sequential growth rate in the same quarter a year ago, which was 13%. They benefitted from margin expansion, both gross margins and operating margins. Gross margins are now at an all-time high and operating margins are near record levels. New product momentum is high in both systems and adaptors and reflected in the 57% new product ratio for revenues in the current quarter. Their competitive position in networking continues to improve. They have solidified their number two ranking, extending the gap between themselves and Bay and Cabletron. And they enjoy greater sequential growth than the number one competitor, Cisco. They had another phenomenal quarter in adaptors, further leveraging their dominant position and gaining market share in fast Ethernet and portable computing products. On the systems front, they are gaining market share in workgroup switching, ATM switching, and stackable systems. They are also winning key accounts in core networking projects.

INCOME STATEMENT. During the quarter they completed the acquisition of OnStream Networks for 3.8 million shares of 3Com stock and options. This transaction was accounted for as a pooling of interests. Accordingly they restated their Q1 financials to include OnStream's results for the Summer months. These restated Q1 numbers show sales of $710 million, gross margins at 54%, operating income of 19.7%, and EPS of $0.50. That is the relevant benchmark entering the quarter. Sales for Q2 were $820.3 million, a 46% increase from the year ago quarter and up 16% sequentially.

BREAKDOWN OF SALES BY PRODUCT LINE. Adaptors were $353.2 million or 43% of the total, up 25% sequentially and 55% over the same quarter a year ago. Systems were $460.7 million, 56% of the mix, up 10% sequentially and 41% over the same quarter a year ago. Other was $6.5 million, 1% of the mix, down 12% sequentially and down 25% from the year ago quarter.

BREAKDOWN OF SALES BY PRODUCT CATEGORY. The adaptor business experienced another outstanding quarter, continuing to benefit from market share gains and industry trends that drive growth in the adaptor business. In addition, their business benefitted from strategic partnerships with Dell and Gateway 2000. And, they just announced a strategic partnership with Acer, the seventh largest PC manufacturer, which should enable them to gain market share in key growth segments -- specifically, emerging geographic markets, small business, and ultimately the home. Sales in adaptors this quarter increased 25% sequentially and 55% year over year, even with a decline in average selling prices. Growth in adaptor sales were particularly strong in Europe, notably for legacy 10 megabit per second Ethernet products as well as mobile or PC card products. The second fiscal quarter is historically the strongest sequential growth quarter for their adaptor business. In fact, this marks at least the fourth consecutive year in which sequential growth in their adaptor business during the Fall quarter has been in excess of 20%. However, over the past 3 years, there are only 3 quarters in which their adaptor growth rate year over year has been above 50%, furthering the point that they are enjoying growth in this business that is near all-time highs. The drivers of market growth remain strong. The strength in the PC market generated from the commercial PC upgrade cycle is being driven by Windows NT and the move to corporate intranets. In addition, key technology transitions continue to fuel growth. 3Com increased their total share of the fast Ethernet adaptor market in the third calendar quarter of 1996. Of the vendors reported, 3Com commands a 47% market share versus its competitor's 41% share. Sales of mobile products which include LAN and LAN plus modem PC cards ramped nicely during the quarter as the market transitioned quickly to the 33.6 kbps card. The unit shipments for the quarter were approximately 4.4 million units, and aggregate average selling prices were down 6% from Q1.

SYSTEMS BUSINESS. Their systems business showed good growth in Q2. Revenues increased 10% sequentially and 41% year over year. Systems sales were particularly strong in stackable systems, workgroup switching, and in the ATM enterprise market. Their stackable systems business remains robust, driven by strong market demand and increasing competitive strength at the edge of the network. Their SuperStack II and OfficeConnect product lines continue to ramp nicely.

SWITCHING BUSINESS. Their switching business, which includes both LAN and ATM switches, continues to benefit from the overall strength of the switching market, particularly in workgroup switching and ATM. 3Com gained share in workgroup switching. Looking at 3Com's continuing gains in adaptors, stackable systems, and workgroup switching, one can see why they believe their dominance at the edge of the network is expanding. This strength is an important competitive advantage, one that is indicative of their strong manufacturing capabilities, their channels of distribution, and their increasing name brand recognition.

ATM MARKETS. Also noteworthy during the quarter was an improving growth rate for the ONcore product line, reflecting the initial success of the new ONcore switching modules. The November 15th issue of VAR Business named 3Com the number one router and switch reseller, edging out Cisco, Bay, and HP. 3Com finished first thanks to top scores in the three most important features to VARs -- reliability, vendor technical support, and profitability. Overall, the ATM and the core market remains hot as customers continue to build large scale switched infrastructures. The CELLplex family of ATM switches was a major contributor to 3Com's growth in Q2. During the quarter they acquired OnStream Networks, a leading provider of cost-effective solutions for integrating voice, video, and data networks over ATM for LANs and WANs. Initial feedback from customers regarding the OnStream products, rebranded under 3Com's AccessBuilder family, suggest that interest in ATM broadband WAN access is strong.

SALES BY GEOGRAPHY. Geographically, the breakdown of sales between the US and international markets is as follows: US sales totalled $387.9 million or 47% of the total which was up sequentially 5% and year over year is up 50%. International sales were $432.4 million representing 53% of the total, up sequentially 27% and year over year up 41%. Sales in the US were up 5% sequentially, similar to the results last Fall quarter and remain at 51% year over year for the second consecutive quarter, reflecting strong demand for networking products in the US as the growth of the Internet and corporate intranets accelerates. International sales increased 27% sequentially from Q1 and 41% from the same quarter a year ago. Sequential growth was high, both in Europe and the Asia/Pacific regions.

GROSS MARGINS. The Q2 gross margin of 54.7% improved 0.7% over Q1. The primary drivers of the increase in gross margins were a favorable sales mix and an extremely competitive environment among semiconductor manufacturers which drove down component costs. Higher sales volumes clearly contributed as well. Q2 expenses were $280 million excluding the non-recurring merger charge of $6.6 million related to the OnStream acquisition. The mix of expenses as a percentage of sales was relatively consistent with the past quarter, although as a percentage of sales total operating expenses declined 0.2% sequentially to 34.1%. Headcount at quarter end was 6449 people which included 96 people at OnStream compared to a restated 5817 at the end of Q1, an increase of 13%. Q2 operating income increased 0.9% to 20.6%, up from 19.7% in Q1. Strong sales growth and increased gross margins were the key factors. Other income increased $1.9 million to a total of $4.8 million, primarily reflecting increases in their cash balances. Their tax rate at 36.9% is higher than last quarter due to the non-deductability of the acquisition cost. If you back out those costs, the underlying tax rate remains at 35.5%, the same as last quarter and the rate they expect to use throughout the remainder of the fiscal year.

BALANCE SHEET. Cash and cash equivalents increased $160 million to $742 million. Accounts receivable days sales outstanding decreased to 51 days from Q1's 53 days, in part due to a slightly more linear shipment cycle this quarter. It is important to note that their business is not the back-end loaded "hockey stick" seen in many other companies. It is unusual for them to have as much as 40% of a quarter's business n the last month of the quarter. This metric will deteriorate next quarter, due in large part to the short month of February at the end of the quarter. Inventory levels increased by $5 million from Q1, a relatively modest increase given the ramp in sales. This led to a sizeable jump in their inventory turns ratio which now stands at 6.4, significantly improved over Q1's 5.5.

LOOKING FORWARD. They are making a slight change to their long-term financial model. They are raising the range for gross margin by 1% to a new range of 53%-55%. They are also raising the range for expenses 1% to 33%-35%, reflecting the continued intent to expand their selling and support infrastructure. This leaves their operating margin range unchanged, from the high teens to the low 20s. Aside from the financial model they noted a number of other things. The growth rate drivers for the industry remain in place. Their new product momentum in strong. They have increased their dominance at the edge of the network. They have more feet on the streets, and their stature is higher. They don't want people to become overly bullish in their short term outlook because historically Q3 is a slower growth rate quarter for them, especially in adaptors. Their year over year growth rate in adaptors is not sustainable and is likely at a high point. And, they face the challenge of building their WAN business against entrenched competitors. Still, they remain quite confident in the industry and their competitive position in the industry.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.