Broadcom gets all kinds of attention
The hits just keep on coming for Irvine’s Broadcom Corp. Trouble is, they’re not always the kind of hits the company wants.
The chip maker on Tuesday is expected to report robust earnings topping $300 million for its fourth quarter, which ended Dec. 31 — more than five times its profit for the same period last year.
That’s the good news, and it stems from Broadcom’s success is designing chips for for many of the world’s bestselling consumer devices: Android phones and Wiis, iPhones and iPads, to name a few. During the last quarter, Apple Inc.'s blockbuster tablet and smart phone sold far more than most analysts expected.
At the same time, Broadcom has repeatedly become entangled in legal controversies in recent years, including drug charges against one of its founders, Henry T. Nicholas III, and securities fraud charges against Nicholas and co-founder Henry Samueli.
All charges were ultimately dropped against both men, and prosecutors decided last May not to file appeals. But the reprieve from bad news didn’t last long.
In November, a complaint filed by the U.S. attorney in federal court in New York accused an unnamed Broadcom employee in Taiwan “in charge of greater China” for the chipmaker of being involved in an alleged insider-trading ring, providing information about the company’s revenue before the results were publicly disclosed.
Broadcom itself was not accused of wrongdoing, and executives say the incident should not reflect on the company.
“This is an unfortunate thing that is an industry phenomenon, not a Broadcom phenomenon,” said Chief Executive Scott McGregor, who has run the company since 2005. “No executives at Broadcom are involved in this.”
Wall Street’s faith in the company remains unshaken. Broadcom’s shares are up nearly 70% over the last 12 months, outpacing nearly all of its many competitors. Shares rose 77 cents Monday, or 1.7%, to $45.09.
“That Broadcom draws a lot of negative attention has to do with their success, their size and their quote-unquote arrogance,” said Ed Snyder, an analyst with Charter Equity Research. “You don’t hear a lot about unsuccessful companies catching flak.”
In addition to a possible record quarter, analysts are expecting it to post a record $1.5 billion in profit for 2010. Revenue is projected at $6.8 billion, up 51% from 2009.
Broadcom ships nearly a billion chips a year for use in devices all up and down the digital food chain, from the tiny radio in a Bluetooth earpiece to the processors that enable the Internet’s largest data servers to communicate.
The company’s board of directors includes Los Angeles Times Publisher Eddy W. Hartenstein, who has served on it since 2008.
With nearly three-quarters of its 8,300 employees devoted to electrical engineering, the company has been able to storm markets where it had little experience, often dominating them within a few years, analysts said. The Fortune 500 company is now the leading supplier for 11 of the 18 types of chips it makes, including those that go into Blu-ray players and cable modems.
“I don’t know of any other company that has quite the history that they do of attaching themselves to these high-volume, consumer-focused sectors and becoming No. 1,” said Brian Blair, an analyst at Wedge Partners Corp.
Broadcom has grown by acquiring smaller firms that develop complementary technologies in network communications. In the last decade, it has bought 43 companies, many of them in Europe, Asia and the Middle East. As they collaborate on the design and testing of new chips, Broadcom’s far-flung subsidiaries keep in close touch, often using video conferencing and other digital communications enabled by the company’s own technology.
“We can literally track the sun around the planet and be working on a chip 24 hours a day,” McGregor said.
A graphics processor that Broadcom makes for television set-top boxes features dozens of digital components contributed by 13 separate research and development sites from around the globe. The tiny chip can easily fit in the palm of a hand.
“It’s like shrinking something with the complexity of a major city down to the size of a postage stamp,” McGregor said of the company’s design process.
But Broadcom has also been outrun in some of the technology’s industry’s most competitive races.
In 2006, the company began competing in the $10-billion market for the small mobile-phone chips — called cellular basebands — that enable phones to send data back and forth to cellular networks. Broadcom thought it could make quick headway. But almost five years later, analysts say the company has less than 5% share. (AT&T’s version of the iPhone 4, for instance, has a baseband made by German company Infineon Technologies.)
“They sometimes think they have the best of everything, and that they can go attack a market immediately,” said Aalok Shah, an analyst at D.A. Davidson & Co. Shah has given a “neutral” rating to Broadcom’s stock, saying he is concerned about the company’s near-term growth prospects. “They overpromise on some things and under-deliver,” he said.
That critique, however, seems small compared with the tempests Broadcom has weathered over the last few years.
In 2008, company founders Nicholas and Samueli faced charges related to backdating company stock options. A federal indictment also accused Nicholas of doling out drugs to friends and business associates and of building “a secret and convenient lair” at his home in Laguna Hills to indulge his “obsession with prostitutes.”
Broadcom restated its earnings to account for $2.2 billion in costs related to stock options that it had not previously disclosed. But a federal judge dismissed the fraud charges in 2009, citing a “shameful” campaign of prosecutorial misconduct, including a pattern of witness intimidation. Weeks later, the judge dropped the drug charge against Nicholas as well.
At a meeting for Broadcom analysts in December at the Hyatt hotel in Irvine, executives were upbeat as they raised the company’s fourth-quarter revenue forecast and declared that the company was in strong shape.
Nicholas is no longer an executive, but Samueli rejoined Broadcom as chief technical officer last January after the charges against him were dismissed.
A philanthropist who also owns the Anaheim Ducks hockey team, Samueli addressed the investors meeting and noted that Broadcom has 14,200 patents pending or approved, giving it one of the strongest patent arsenals in the electronics industry.
“There’s an overwhelming amount of technology being created in this company,” he said.
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