Here is the latest from Morgan Stanley
Date: July 22, 1999
Type: Sales/Earnings Analysis
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Rating: Outperform Price: $131
52-wk Range: $150-24 Price Target: $160
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FY Ends ----EPS---- Rel. P/E
Dec Curr Prior P/E (S&P Pr/Bk
Indust.)
98A $0.23 $0.39 570.7 1306% NAV
99E $0.75 $0.64 175.0 473% 46.1x
00E $1.10 $1.00 119.3 353% 41.0x
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Qtrly ---- 1Q ---- ---- 2Q ---- ---- 3Q ---- ---- 4Q ----
EPS Curr Prior Curr Prior Curr Prior Curr Prior
98A $0.06 $0.09 $0.05 $0.08 $0.05 $0.08 $0.06 $0.13
99A/E $0.15A $0.14 $0.19A $0.16 $0.20E $0.16 $0.22E $0.18
00E $0.24E $0.22 $0.27E $0.24 $0.27E $0.25 $0.32E $0.29
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5 Yr. EPS Growth: 45% Debt to Cap.: 0%
Dividend: - - Yield: - - Mkt Cap./Rev: 20.1
Shares Outst.: 111.6MM Mkt Cap.: $14,648MM
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*1998 and 1Q99 historicals have been restated to reflect three pooling-
of-interest acquisitions closed in 2Q99.KEY POINTS
- Broadcom succeeded again this quarter, reporting $116.3 million
in revenues, up 21% sequentially and 157% year-over-year, resulting in
$0.19 operating EPS, above our consensus estimate $0.16.
- Sequential growth in both cable modem and networking product
lines exceed that of others in the quarter, as expected.
- We are raising our 2000E estimates to $1.10 EPS, from $1.00, on
revenues of $728 million, up 52.4% year-over-year and greater than our
previous $690 million estimate.
- We are maintaining our Outperform rating on the stock of this
emerging Communications Semiconductor giant with a new 12-month price
target of $160.
DETAILS:
Broadcom succeeded again this quarter, reporting $116.3 million in
revenues, up 21% sequentially and 157% year-over-year, resulting in
$0.19 operating EPS, above our consensus estimate $0.16. General
Instrument (GIC) was 27.7% of revenues versus 36.5% last quarter, 3Com
was 19.3% versus 21% last quarter and Cisco was 13.6% versus 12.8%
last quarter. Digital cable set-top revenues to GIC were down 10%
sequentially, though both revenues and units grew sequentially to all
set-top box customers. The Days Sales Outstanding (DSO) ratio in the
quarter was a world-class 38 days, down two days from last quarter,
and inventory turns were 26 times.
Sequential growth in both cable modem and networking product lines
exceed that of others in the quarter, as expected. It appears that
the cable modem industry has been catalyzed by the recent DOCSIS 1.1
standards completion, with cable modem revenues well over the 10% of
revenues level experienced in pre-standard quarters. Taiwanese and
other networking vendors such as Hewlett-Packard, Nortel and
Cabletron, grew faster than the combined networking related revenues
from Cisco and 3Com, suggesting a broadening of its customer base in
this key area.
We are raising our 2000E estimates to $1.10 EPS, from $1.00, on
revenues of $728 million, up 52.4% year-over-year and greater than our
previous $690 million estimate. In addition, we estimate $0.75 EPS
for 1999E on $478 million in revenues. Interestingly, over the past
quarter, we had reduced our 1999 EPS estimates to $0.64 from $0.75 to
reflect anticipated dilution from recent acquisitions.
We are maintaining our Outperform rating on the stock of this emerging
Communications Semiconductor giant with a new 12-month price target of
$160. With continued world-class execution on the company's strategy
to commandeer the lion's share of the communications semiconductor
market, we would expect there to be upside to our estimates. Our
revised target would represent a 16-17 times market-capitalization to
revenue multiple to our trend-line C2001E revenue estimate, and a 95-
100 P/E multiple to our trend-line 2001E EPS estimate. The stock
currently trades at a 119.5 times P/E to our C2000E EPS. In light of
growing visibility, broadening of its addressable market through
acquisitions and internal developments, as well as apparent
acceleration in current addressable markets such as broadband, premium
multiples seem reasonable. With each quarter of excellent
performance, we grow increasingly confident that the company is well-
poised to benefit from the explosive broadband, home networking, high-
speed data networking, and digital television markets.
Second Quarter Details
The company reported second quarter revenues of $116.3 million, up
20.7% sequentially and 157.4% year-over-year, and above our $111.0
estimate. Revenues were strong along all major product lines,
particularly in the networking and cable modem areas. The firm
continued to diversify its customer base as the three largest
customers accounted for just over 60% of total revenues, down from
just under 70% at the end of the first quarter. The largest customer,
General Instrument, represented 27.7% of total revenues, down from
36.5% at the end of 1Q99, while 3Com declined to 19.3% from 21%, and
Cisco increased from 12.8% to 13.6% sequentially.
Broadcom - Actual vs. Estimates at a Glance, F2Q99
-- MSDW
Est.
Actual
Net Sales ($Mil) 116.3 111.0
EPS 0.19 0.16
Growth (%)
Revenues (Y/Y) 157.4 145.7
Revenues (Q/Q) 20.7 15.2
EPS (Y/Y) 135.0 97.0
% of Revenues
Gross Profit 59.5 57.0
Opr. Profit 26.3 22.7
SG&A 10.7 10.9
R&D 22.5 23.4
Total Op Ex. 33.2 34.3
Tax Rate (%) 35.0 35.0
Source: Morgan Stanley Dean Witter Research; Broadcom
Operating margins were 26.3%, versus 23.2% last quarter, while gross
margins increased to 59.5% from 58.7% over the same period. R&D
expenses, as a percentage of revenue, declined to 22.5%, from 22.8%
(pro forma), sequentially, while SG&A decreased slightly to 10.7% from
12.1% (pro forma). Revenue per employee, adjusted retroactively for
merger activity, increased sequentially to $676,000 from $625,000 per
capita.
Days sales outstanding (DSOs) were just under 38, a decrease of 2 days
from the previous quarter, while inventory turns equaled 26 times.
Cash and cash equivalents were $98.4 million, up from $73.5 last
quarter. Cash and investments equaled $162.7, up from $120.8 million
in the first quarter. The unusually high inventory turns figure is
expected to return to a more normal mid-teen level going forward,
according to management.
The company completed three acquisitions during the quarter, resulting
in one-time charges. Including charges, earnings per share was $0.03.
The company completed its acquisitions of Maverick Networks (Layer 3
and Layer 7 networking), Epigram (home networking), and Armedia
(digital video), without a single employee departure. As a result of
the completion of the mergers, the company recognized a $11.1 million,
non-recurring pre-tax expense item, or $0.06 per share, after tax.
The company also settled two significant litigation matters, which,
along with attorneys fees, etc. resulted in an aggregate pre-tax
charge of $17.0 million, or $0.10 per share, after tax. Also, the
company announced during the quarter its intention to acquire Hothaus
Technologies of Vancouver, Canada, a company that develops Voice over
IP software.
Research assistance provided by Pete Carrillo.
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