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

To: Lizzie Tudor who wrote (6403)	1/27/2003 7:41:08 PM
From: Jay King	Respond to of 6531

Broadcom's Blaze of Glory By Alex Romanelli -- 1/27/2003 12:33:00 PM Broadcom Corp.’s staggering $1.8 billion GAAP net loss for Q4 2002 is just the latest example of government mandated accounting practices altering the face of the semiconductor landscape. It is also indicative of the recession’s crippling effects upon the once promising telecom and networking spheres. And it shows a company willing to change and come out of the downturn with all guns blazing, no matter how harsh the cost. Although its Q4 loss was mostly balance sheet non-cash write offs, it demonstrates a company determined to change itself to stay more competitive as markets become more cutthroat. The resignation of long-time CEO Henry Nicholas III and his temporary replacement by COO Alan E. “Lanny” Ross further indicates a company determined to change. Ross has only been with the company since November, and already it has seen the largest restructuring in its history. In a conference call last week, Ross said the company would turn its fortunes around and report a pro forma profit for Q1, after a $6.6 million loss in Q4. So far, Broadcom seems to be executing according to plan. Analysts are happy with Broadcom’s restructuring and financial write-offs. “If you look at their revenue and the restructuring they’ve done, everything should line up,” said Linley Gwenapp, principal analyst with The Linley Group. “Of course, if there is a big dip in revenue again, that’s going to throw a monkey wrench in the whole thing. As long as things stay reasonably steady they should be in good shape.” Analyst Peter Glaskowsky, editor in chief of the Microprocessor Report, said Broadcom’s $1.8 billion loss is mostly a matter of accounting principles changing. (Microprocessor Report is published by In-Stat/MDR, which is owned by Reed Business Information, the parent company of Electronic News.) “Remember most of its intangibles. It isn’t really cash value disappearing,” he said. “They had to take a huge lump penalty for not following these practices before. It’s a matter of some arbitrary decision whether they needed to do it at all or not.” So if Broadcom is executing correctly now, where did it go wrong? Broadcom underwent a huge purchasing spree during the boom, and has had trouble integrating its various acquisitions into a cohesive whole. It acquired upward of 16 companies from 1998 to 2000, building a strong WAN portfolio as well as delving into technology as varied as network processing, mobile phone technology and personal video recorders. Obviously, not all of these investments paid off. Broadcom’s acquisition strategy started looking like its Achilles' heel when 3Com Corp. cancelled a key order with Altima Communications Inc., a Broadcom acquisition. That caused the company to lower its Q1 2001 outlook, the first public warning sign that something was amiss. What happened to the market after that is all-too-current history. “It is fair to say it indicates some of their investments did not accrue the benefits they were expecting,” Glaskowsky said. “The market shrank around them. They made investments expecting datacom and telecom would grow rapidly, and it simply hasn’t happened that way. When those markets recover then these investments may yet turn out to make good money for Broadcom.” Ross indicated that Broadcom’s customer base has altered. Its current top three customers are Hewlett-Packard, Motorola and Dell -- a list featuring a distinct lack of networking vendors such as Cisco, which was once a key customer. Glaskowsky said that reflects the transition of the networking business from high-value, difficult-to-develop products to commodity products. Dell purchases commodity-networking products from Broadcom. Dell is in a position to easily and cheaply sell turnkey equipment without the necessary costs of supporting complicated network environments. “One of the things Broadcom has done is develop networking hardware unit chips and software stacks that make it possible to create commodity networking equipment,” Glaskowsky said. “In years before, it was very difficult to do this. You had to do your own custom ASICs and then you needed a team of hardware designers, and a team of software designers and so forth. Dell would have never gone into the business those days. Broadcom and other companies made it possible to be a network equipment vendor without that huge amount of development effort. So in a sense, companies like Broadcom have been trying to undercut companies like Cisco, by making it possible for other people to compete more effectively with Cisco. Since Cisco is the kind of company that can do its own development work -- and certainly these days is trying to stay ahead by focusing on other niches that companies like Dell still can’t get into because Broadcom has not commoditized that technology -- you wouldn’t expect Broadcom in the long-run to have Cisco as one of its primary customers. They have created a market so that other people can become reputable significant network equipment vendors.” Broadcom’s changing customer portfolio is further example of its efforts being in the right direction, despite however costly its Q4 restructuring was, Glaskowsky said. e-insite.net