Broadcom gives up profit to boost R&D;
Broadcom Corp. executives have a vision of the Irvine chip maker eventually supplying all the brains and power in cellphones, but Wall Street wasn’t waiting Wednesday for that to happen.
Company shares cratered, losing $7.14, or 17%, to $34.92 after the company said late Tuesday that research and development expenses were higher than normal and would continue to be high. The steep decline, on a day when other semiconductor stocks also fell, came after the company’s report after the markets closed Tuesday that third-quarter profit fell 75% as Broadcom spent more to gain a bigger foothold in designing cellphone chips.
Chief Executive Scott McGregor said the company wanted to invest to improve the “long-term value for shareholders.”
“Broadcom, to its credit, is sticking to its guns,” said Rob Enderle, an industry analyst at technology consulting firm Enderle Group. “It’s going to be a painful path. During the development time, their valuation is going to be pummeled.”
The company had seen a recent run-up in its stock price as investors grew excited by Broadcom’s deeper push into the cellphone market. The company has long provided basic chips but is now aiming at developing full-featured chips, except memory, for cellphones.
In the last three months, Broadcom’s stock has risen nearly 30% as the firm announced deals with Nokia and Samsung Electronics Co. Samsung already has shipped three phones using Broadcom technology.
But Broadcom faces tough competition from Texas Instruments Inc. and archrival Qualcomm Inc. And it doesn’t expect to see the bulk of the revenue from its latest deals until 2009, executives said.
Late Tuesday, the company reported that third-quarter profit dropped to $27.8 million from $110 million a year earlier. Revenue rose 5% to $950 million.
But spending on research jumped 29% to $352 million.
“The single worst thing we could do right now is to not provide the support to deliver the products and get the products to market,” Broadcom Chief Financial Officer Eric Brandt said.
Broadcom, which designs chips for set-top boxes, computers, networking gear and wireless devices, is known for chips that perform multiple functions.
As cellphones evolve from mobile phones to computerlike devices that can handle e-mail, text messaging and Internet browsing, Broadcom sees a chance to take a bigger step into the market.
Broadcom executives say they are at a crucial stage in the firm’s relationships with its cellphone partners.
Still, the spending on research and development, which went into areas besides cellphones, surprised investors.
“No one was expecting them to spend money like this,” said analyst Shaw Wu at investment bank American Technology Research. “What they are learning, I think, and what investors are learning, is that the cellphone business is a large opportunity but it’s not an easy business to get in.”
Broadcom also said it spent more than expected last quarter in its litigation against Qualcomm on patent infringement and anti-competitive behavior. Qualcomm has been found to have infringed four of Broadcom’s cellphone-related patents.
