Broadcom Slashes Its Sales, Profit Outlook
Broadcom Corp. drastically lowered the outlook for its first-quarter sales and profit late Tuesday and disclosed that it lost a significant contract--a toll that reflects both the slowing economy and the slumping technology sector.
The Irvine-based communications chip maker, which has been expected to revise its forecast, said in a news release that major customer 3Com Corp. canceled a large contract for networking chips last Wednesday.
Broadcom also said that the Securities and Exchange Commission is examining an unusual accounting method it used in five of its acquisitions last year to assure continued sales by customers.
But 3Com’s cancellation of a contract it had with one of those companies has led Broadcom to pull back from its accounting method, which critics contend amounts to deep product discounts that aren’t fully reflected in financial statements.
“This [accounting issue] is one of those unique situations where there is no clear precedent for how it should be done,” Henry T. Nicholas III, Broadcom’s chief executive, said late Tuesday at an investment conference in Dana Point.
Broadcom said it now expects that it will earn 8 to 9 cents a share, nearly two-thirds off the average estimate of 25 cents a share expected by 16 analysts surveyed by First Call/Thomson Financial.
Revenue will range from $315 million to $325 million, well below the $398 million analysts expected.
Though earnings shortfalls have become common in the tech sector, the Broadcom revision is particularly severe for one of the major players in the industry. In the news release, Nicholas said, “Along with all of our customers and peers, we are now experiencing the effects of the sharp downturn in the U.S. economy.”
After a recent internal review, he said, “we concluded that the isolated signs of softness we had seen earlier have now become widespread, and we do not currently have the visibility to be able to predict when this softness will abate.”
The company’s changed outlook comes after four months of warnings by its customers and other technology companies that sales have slowed and that they would reduce their orders for components in the early part of this year.
The technology sector in general and semiconductor companies in particular have been hit hard on Wall Street. Broadcom, which hit an all-time high of $274.75 in late August, has plummeted 82%. Just this year, the stock has lost 43% of its value, though it gained 75 cents Tuesday to close at $47.88 on Nasdaq.
Broadcom used its high-priced stock last year to make 12 acquisitions as it enjoyed the limelight of being the fastest-growing chip maker.
In five of those purchases, though, it encouraged the companies it was buying to issue warrants--rights to buy stock over time--to their customers in agreements that locked in future sales. The purchase price was less than a penny a share.
When Broadcom completed the acquisitions, those warrants converted to warrants for Broadcom stock. Broadcom accounted for most of the warrants as so-called goodwill, the amount of the purchase price exceeding the value of the company acquired. Goodwill is treated as an asset to be written off over time, and is often overlooked by Wall Street analysts and investors.
“I don’t think that would be typical accounting, that’s for sure,” Jim Kroeker, a staff member of the Financial Accounting Standards Board, said Tuesday. The board sets rules for the accounting industry.
“It would be fairly unusual to account for those warrants as goodwill, especially if they haven’t been issued yet,” he said.
One of the companies issuing warrants was Altima Communications, which Broadcom acquired in July. Altima’s major customer was 3Com, which had agreed to continue buying products in exchange for warrants.
Broadcom had figured that it was highly likely that the warrants would help to keep customers buying its products. But 3Com’s decision to cancel orders as part of its own slowdown has led Broadcom to question whether other customers holding the warrants are likely to meet their purchase commitments.
Broadcom said its outside auditors, Ernst & Young, now have advised the company that the accounting treatment “may no longer be appropriate.”
William Ruehle, Broadcom’s chief financial officer, said last week that the warrants, if all are exchanged for stock, could total about 11 million shares of Broadcom, less than 5% of the more than 250 million shares outstanding.
The accounting method was brought to the attention of SEC officials more than a month ago by another technology company.
Shareholders, meantime, filed a federal lawsuit Monday in Santa Ana charging that Broadcom used the accounting method to deceive investors by inflating revenue figures.
