Acquisitions Push Broadcom Profits Sky High
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 profits soared fivefold as sales more than doubled. Broadcom’s meteoric rise--it is worth nearly $12 billion just 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 areas such as extreme-sports TV shows, surf apparel, and even are considering making a bid for Walt Disney Co.’s Angels baseball and Mighty Ducks hockey teams.
Broadcom, and co-founders Henry T. Nicholas III and Henry Samueli, 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, as 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.”
Ironically, PairGain is the former employer of Nicholas and Samueli. Nicholas was pushed out at PairGain in the early 1990s over a disagreement about the kind of technologies to develop.
Broadcom boasts a solid line of emerging technologies and an “enormously deep well of top-notch engineering talent,” but much of the company’s current success is tied to its two founders, said Allen Leibovitch, program manager for the semiconductor group at the research firm International Data Corp.
Nicholas, Broadcom’s chief executive, joined PairGain in the late 1980s as the manager of an integrated circuits team of engineers. Samueli, Broadcom’s chief technology officer, worked as a part-time consultant for PairGain for many years.
Their goal at PairGain was to develop technology that could cram more data across copper wires and revolutionize the way the corporate world used telephone lines.
Over time, Nicholas wanted to begin developing a broader line of technologies and pushed to make his team a separate PairGain unit. But PairGain officials declined to finance such a venture.
Nicholas left and started Broadcom out of his home and the research laboratories at UCLA’s electrical engineering department, his alma mater. Samueli eventually left PairGain and joined Nicholas at Broadcom.
In its third-quarter earnings report, Broadcom attributed its spectacular growth to its expanded product lines and recent acquisitions that bolstered its 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 from $5.2 million, or 5 cents, in the year-earlier period. 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 the 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. A little more than $3 million in revenue came from its two biggest acquisitions, Canadian telecommunications software maker HotHaus Technologies Inc. and Mountain View, Calif., modem software maker AltoCom Inc.
Despite the industry buzz about Broadcom, the company remains focused on staying ahead of the technological curve.
Said William Ruehle, Broadcom’s chief financial officer: “One of the worst things we can do is believe our own hype and PR. . . . Right now, it’s up to us to make this company perform.”
Move by Intel
While Broadcom is basking in Wall Street’s limelight, Intel Corp.--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 said it would buy the cable-modem assets of Stanford Telecommunications Inc., marking its 10th acquisition in the communications niche in the past two years.
The moves by the world’s largest semiconductor maker are born out of fundamental shift in the technological landscape: Moving information around is becoming more important than processing the information itself. 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,” Leibovitch said “It’s been a quiet push. But going forward, there’s going to be healthy competition.”
But even Intel has hit a few bumps, surprising Wall Street on Tuesday with lower-than-expected earnings. The news marked Intel’s second straight quarterly disappointment.
It also 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 its revenue, continued to heat up during the quarter, driving down prices, sales and profit margins.
The company’s loss included a $1.6-million charge to cover the tentative settlement of a lawsuit brought by federal government agencies. Last month, PairGain agreed to plead guilty to improper accounting related to 1995 investments with S. Jay Goldinger and his Beverly Hills investment firm, Capital Insight Inc.
