Semiconductors . . . Atmel's fourth-quarter net loss narrowed to 3 cents a share from 7 cents a year earlier.
Merrill Lynch downgraded Broadcom to sell. The firm cited the high P/E multiple, and departure of the CEO. The firm believes will undergo a cultural change, if not a bit of a leadership vacuum.
Broadcom reported December quarter revenues grew by 30% Year over Year and by 2% sequentially to $296 million, better than our $290 million estimate. The company reported a loss per share of $0.02, also better than $0.03 estimate. The company’s emerging products, which include wireless LAN, wireless IC, DSL, satellite and broadband processing grew from 15% of revenues last quarter, to 19% of revenues this quarter. Gross margins declined slightly by 20 bps to 50.2%. DSOs increased from 35 to 39 days, while inventory turns declined from 15 to13. BRCM’s cash and investment position declined by $78 million to $543 million, mainly due to restructuring and other one-time expenditures.
The company also announced the resignation of its CEO and co-founder Henry Nicholas III due to family reasons. Henry Nicholas III has served as the CEO of Broadcom since he co-founded the company more than a decade ago. The company announced that the current COO and board member Lanny Ross will assume CEO responsibilities while the company searches for a permanent replacement.
HPQ remained Broadcom’s largest customers and accounted for 15.9% of revenues. Revenues from HPQ grew 19% sequentially, which we believe are driven mostly by server chipsets, gigabit Ethernet chips, and wireline LAN networking ICs. Revenues from Motorola grew by 2% and accounted for 11.1% of total revenues. BRCM supplies Motorola with digital set-top box and cable modem chipsets. Dell declined by 9% sequentially and accounted for about 10.7% of revenues, while Cisco accounted for less than 10% of the sales.
The company’s top line growth was driven by networking, cable modems and emerging products:
1) Broadcom’s wireless LAN products grew significantly, driven by its 802.11g chipset shipments. The company has already shipped more than 1 million units of its 802.11g chipsets. We expect wireless LAN revenues to grow in the Mar-03 quarter driven by continued demand for the 802.11g standard.
2) Networking products such as gigabit Ethernet and switching products drove growth for Broadcom during the quarter. OEMs are opting for gigabit Ethernet technology as the price differences between gigabit and fast Ethernet IC continue to shrink. The company is meeting with success as OEMs reduce their own chip development staffs and look to merchant solutions.
3) Broadcom benefited from growth in a number of its emerging products, such as wireless (Mobilink), control plane processors (SiByte), Blue Tooth and DSL.
Broadcom announced that it has completed the previously announced restructuring to reduce operating expenses by 10-12% from the September quarter levels. The company took actions to reduce its expenses as well as a headcount reduction of about 500 people. The company will see full benefit of these actions in the March- 03 quarter.
Analysts remain impressed with the breadth and depth of BRCM’s product portfolio, and are encouraged to see that business is improving. The company dominates most of its markets, and now that it has addressed its cost structure, it is well positioned to post improving fundamentals for the rest of the 2003.
However, at $17.61 per share, the stock is trading at a P/E ratio of 84x our 2003 EPS estimates and 41x our 2004 EPS estimate. Furthermore, there are concerns that with the resignation of the CEO, the company’s culture, which has been an important reason for its success, will undergo a fundamental change. As co-founder and CEO, Henry Nicholas is a legend at the company. He is known as being a strong leader, a great motivator, and in many ways drove the intensely competitive culture of the company. The current management is capable, but with the departure of such a strong leader, the company will undergo a cultural change, if not a bit of a leadership vacuum.
RBC Capital downgraded RF Micro Devices to Outperform from Top Pick and cuts price target to $14 from $18 due to the current volatility in the markets and lower visibility in the channel.
Power Integrations posted earnings of $3.6 million, or 12 cents a share, for the fourth quarter, beating consensus estimate for the period by 4 cents. Revenue rose 23 percent in the latest three months to $29.2 million from $23.6 million in the same period a year earlier. Looking ahead, Power Integrations forecast earnings of 10 to 12 cents per share for the first quarter, and revenue growth of 15 to 25 percent for 2003 from 2002's total of $108.2 million.
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