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Technology Stocks : Broadcom (BRCM) -- Ignore unavailable to you. Want to Upgrade?

To: SteveG who wrote (2427)	8/17/1999 2:13:00 PM
From: SteveG	Respond to of 6531

BRCM: Begins Sampling Of Important New Layer 3 Switching Chip Deutsche Banc Alex. Brown - US Equities James P. Wade,Thomas B. Bain August 16, 1999 --------------------------------------------------------------------------- ---- BROADCOM CORPORATION [BRCM] "BUY" Begins Sampling of Important New Layer 3 Switching Chip --------------------------------------------------------------------------- ---- Date: 08/16/1999 EPS 1998E 1999E 2000E Price: 127.44 1Q 0.06R 0.15R 0.23 52-Wk Range: 150 - 23 2Q 0.05R 0.19A 0.25 Ann Dividend: 0.0 3Q 0.05R 0.20 0.27 Ann Div Yld: 0.00% 4Q 0.06R 0.22 0.30 Mkt Cap (mm): 14,227 FY(Dec.) 0.22R 0.75 1.05 3-Yr Growth: 50% FY P/EPS NM NM NM CY EPS 0.22R 0.75 1.05 Est. Changed No CY P/EPS NM NM NM --------------------------------------------------------------------------- ---- Industry: COMMUNICATIONS TECHNOLOGY Shares Outstanding(Mil.): 111.639 Return On Equity (1998) : 39.0% --------------------------------------------------------------------------- ---- HIGHLIGHTS: Broadcom unveiled the first product from its Maverick acquisition, the StrataSwitch 5600, targeted at the multilayer switching market. The 5600 is the first switch chip to market (i.e., sampling) specifically designed to address layer 3+ applications. We believe the addressable opportunity in multi-layer switch chips is roughly $300 million-$400 million growing upwards of 60% per year over the next 2-3 years The 5600, coupled with Broadcom's other switch ICs, could have a positive impact on gross margin, in our view. No change to our estimates, reiterate BUY investment rating on the shares. DETAILS: Broadcom announced yesterday that it has begun sampling its StrataSwitch BCM5600 chip, which is targeted at multilayer switching applications. This is the first chip resulting from the Maverick Networks acquisition the Company closed in July. We believe the Company is on or ahead of plan with this product, and bringing a new device to market in such a short time after the acquisition is a strong indication that the integration of the companies is complete and the development teams are executing as a cohesive unit, in our view. Beyond the execution success, we believe this announcement in significant for several reasons: 1) The StrataSwitch represents the first IC targeted specifically at layer 3+ applications. Although there are some devices in the market that possess layer 3 functionality, the Broadcom product is the first specifically designed for that purpose. To date, the overwhelming majority of layer 3+ ASICs have been internally developed by the layer 3 switch manufacturers (e.g., Cisco, Extreme, 3Com). According to industry forecasts, the layer 3 switch market is projected to approach $2 billion in revenues next year, with a CAGR of roughly 60% with respect to port shipments (note: we believe port shipments, rather than end-system revenues, are the most appropriate growth indicator for communications IC providers). Due to the captive nature of the layer 3 market, it is difficult to accurately forecast the semiconductor opportunity, but we would estimate the addressable opportunity in multi-layer switching ICs to be $300 million-$400 million in 2000 growing at a rate similar to the overall layer 3 switch market. 2) In our view, Broadcom has a first-to-market advantage in layer 3 switching. Competition will undoubtedly surface from other players, such as Galileo, PMC-Sierra, and MMC, some of which have more established reputations in switching. Broadcom has been more focused on physical (PHY) layer devices, and is a more recent entrant to the switch market. Nonetheless, we believe the Company could have a 4-6 month headstart in the multi-layer space, assuming no major execution difficulties. 3) The layer 3 products could have a positive impact on gross margin. Layer 3 switches generally exact a price premium over layer 2 products, and relative to the PHY space the switch market is usually not as price driven. Although Broadcom has historically been able to hold or even increase gross margins through engineering cost reductions, we have forecast a moderately steep decline in gross margin going forward, consistent with Management's guidance. If the Company were able to hold gross margin at 58% in 2000 (a level similar to our 1999 estimate), the resulting EPS would be approximately $0.20 greater than our current $1.05 estimate (based on a gross margin of 55%), all else being equal. Product Details The Strataswitch BCM 5600 is a multilayer switch chip that incorporates 24 Fast Ethernet ports and 2 Gigabit Ethernet ports. The aggregated bandwidth of the device is 9 Gbps, with a switching throughput of over 6.6 million packets per second regardless of whether the chip is switching at Layer 2 or Layer 3. The device is sampling now, and we expect the usual 60-90 period between sampling and general availability. Although final pricing has yet to be determined, the Company expects to price the device below $100 for volume orders. (Nick speaks tomorrow at the Extreme/INS Network Universe conference. So far Brocade gave an outstanding presentation)