Broadcom, PairGain Tell a Tale of Two High-Tech Firms
Broadcom Corp., the Irvine maker of high-speed networking chips, reported financial results Thursday that put it on track to become the fastest-growing chip maker in history.
The company said that third-quarter profit soared fivefold as sales more than doubled. Broadcom’s meteoric rise--it is worth nearly $12 billion 18 months after going public and counts more than 500 millionaires among its employees--shows the lengths that some entrepreneurs will go to become a dominant player in the still-evolving Internet economy.
The company and its founders have branched out into such nontraditional areas as television programming and apparel, and it is even considering making a bid for Walt Disney Co.’s professional sports teams, baseball’s Angels and hockey’s Mighty Ducks.
“They are the best executors in the industry,” said Jef Graham, senior vice president of the personal connectivity business unit at 3Com Corp., a customer. “They make outrageous promises and always deliver.”
Thursday’s results put Broadcom on a pace to top $500 million in annual sales in only its second year as a public company. It took chip giant Intel Corp. eight years to accomplish the same feat.
But as another company’s financial results showed Thursday, today’s rising star can quickly become tomorrow’s flop in the fast-paced world of technology.
Across town, the picture was a decidedly darker one at PairGain Technologies Inc. The Tustin maker of high-speed data networking products, whose future once was as bright as Broadcom’s, reported its first quarterly loss in four years. Revenue fell 33%. PairGain, which has been the victim of both an Internet hoax and an investment scam, noted that its core business was “at a low point.”
In a cruel twist of irony, PairGain is the former employer of Broadcom’s founders, Henry T. Nicholas III and Henry Samueli. Nicholas was pushed out by PairGain in the early 1990s over a disagreement about the kind of technologies to develop, according to sources familiar with both companies.
While Broadcom is basking in Wall Street’s limelight, Intel--which is more than 50 times larger--is quietly taking steps to become one of Broadcom’s biggest competitors.
Intel, an early Broadcom investor, said last month it would buy the cable-modem assets of Stanford Telecommunications Inc., marking its 10th acquisition in the communications niche in the last two years.
The moves by the world’s largest semiconductor maker are born out of a fundamental shift in the technological landscape: The future, say analysts, isn’t in making more powerful computers; it’s in clearing up the clogged arteries of the networks that send and receive large amounts of data.
“Everything Intel has been doing these days has been gunning for Broadcom,” said Allen Leibovitch, program manager for the semiconductor group at the research firm International Data Corp.
But even Intel has hit a few bumps. It surprised Wall Street on Tuesday with lower-than-expected earnings. Broadcom attributed its spectacular growth in the third quarter to its expanded product lines and recent acquisitions that bolstered the communication chip maker’s bottom line, as well as the exploding use of the Internet for phone and video traffic.
After the markets closed Thursday, Broadcom said it earned $27.2 million, or 23 cents a share, up from $5.2 million, or 5 cents, a year earlier. Wall Street was expecting a profit of 20 cents a share, and Broadcom shares jumped as high as $124 in after-hours trading, after closing on Nasdaq at $116.81, down $2.69.
The results included a $4.1-million charge relating to five acquisitions Broadcom has made this year. Revenue more than doubled, to $138.4 million, from $55.5 million.
It has been a tough year for PairGain, which has seen four consecutive quarters of declines in net income. In April, the company was the victim of a national Internet hoax that claimed the company had been sold. The scam, committed by one of PairGain’s employees, temporarily sent the company’s stock price skyrocketing, only to plummet again when the fraud was discovered.
PairGain, which develops high-speed networking equipment, posted a $4.2-million loss for the quarter, compared to a $12-million profit during the same period last year. Revenue fell 33%, from $76.4 million to $51.2 million.
The company’s stock has been on a bit of a roller-coaster ride, topping $16 at one point in May, and closing Thursday at $12.31, still nearly double the $6.75 of a year ago.
During the quarter, PairGain said it made progress in marketing and developing its line of next-generation networking technology, signing up several new customers and reaching two technological milestones related to sending voice over computer networks.
But competition in PairGain’s older line of networking products, which make up the vast majority of their revenues, continued to heat up during the quarter, driving down prices, sales and profit margins.
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Opposite Fortunes
Broadcom Corp. and PairGain Technologies, two of the Southland’s biggest tech companies, have taken widely different paths in the past year.
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Broadcom PairGain 3rd qtr. profits* $27.2 -$4.2 Chg. since ’98 +426% -- 3rd qtr. sales* $138.4 $51.2 Chg. since ’98 +149% -32.9% Market cap* $11,916 $889.5 Year-to-date stock +98.5% +62.6% performance
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*Dollar amounts in millions
Source: Bloomberg News, companies listed
