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STATUS REPORT

In June 2000, hopes lingered that the steep stock decline that had recently carved a big chunk out of companies’ market values was just a temporary correction,and that technology companies would again reach their cosmic heights soon enough.

Needless to say, those hopes went unrealized. The tech wreck did its job of ferreting out the weak from the strong.

In Orange County, five leading technology companies shook up their business plans, or even leadership in some cases, in a bid to survive the biggest shakedown in decades.

Some companies have rebounded more than others, but most have made progress in some key areas: revenue, net profits, spending on research and development and local employees.

The one exception: market value. Although one company bucked the trend, the others recorded such steep declines from frothy valuations that it will take many more years to recoup the losses.

The Business Journal had a look at several leading OC companies to see how far they’ve come since 2000. They include:

Irvine-based Broadcom Corp., which makes chips for everything from iPods to set-top boxes.

Newport Beach-based Conexant Sys-tems Inc., which makes chips for modems and set-top boxes, among other devices.

Lake Forest-based Western Digital Corp., a disk drive maker.

Aliso Viejo-based QLogic Corp., which supplies components for data storage networks.

Aliso Viejo-based Quest Software Inc., which makes software that helps large-scale software programs run more smoothly.


Market Value

Market value is probably the broadest measure of a company’s strength and position among its peers. It certainly was an inflated metric during the tech bubble.

In June 2000, Broadcom’s market value was $36 billion, off its record high of about $60 billion during the height of the frenzy.

Now, at about $17 billion in market value, Broadcom has rebounded from its post-bubble dip of less than $5 billion in late 2002. The tech wreck had the semiconductor industry grappling with what some industry observers said was the sector’s worst downturn ever.

At the turn of the millennium, Broadcom and Conexant were battling head-to-head in some communications chip markets.

Back then, Conexant’s market value was $12 billion. As with Broadcom, the company was still feeding off the tech-crazy days of the 1990s, though its market value would soon head south.

Conexant’s market value today has withered to a mere $1.3 billion,though up from its recent nadir below $500 million in the spring of 2005.

Conexant has undergone the most radical changes of any local tech company since 2000.

In 2002, Conexant decided the best way to create shareholder value was to split into several pieces. The decision eventually led to the spinoff or sale of a major wireless business, a chip foundry and a digital-phone based carrier chipmaker, among others.

Combined, Conexant and its spinoffs now would have a market value of maybe $4 billion.

Prospects for Conexant have improved since late 2004 when Dwight Decker returned as chief executive. Decker had stepped down earlier that year after Conexant bought Red Bank, N.J.-based Globe-spanVirata Inc., a maker of chips for digital subscriber line modems. He came back after the company struggled under new leadership.

At $4.3 billion, Western Digital is the sole tech company among this crop to record a gain in market value since June 2000,up from $1.1 billion.

The company, which had a market value of more than $10 billion in 1997, went through a sharp downturn in the late 1990s as the disk drive industry struggled under lower prices.

In 2000, Western Digital also was feeling the effect of slowing computer sales.

Matt Massengill, a longtime Western Digital engineer who became chief executive in 2000, led big changes at the company along with his operations man, Arif Shakeel, who now is chief executive.

Massengill and Shakeel took the view that drives were commodities to be cranked out at big factories in Malaysia and Thailand, and not complex products in need of big spending on research.

Western Digital also retreated from a costly move into drives for servers and other business computers.

The moves paid off. The company’s shares have posted most of its gains in the wake of the downturn during the past two years.

QLogic checked in with a market value of nearly $5 billion in June 2000. It since has given up about $2 billion of its value.

Shares had ballooned more than 1,000% from May 1999 to March 2000, when its market value was more than $7 billion.

The company never seriously stumbled, holding up relatively well through the downturn. But like most in the tech industry, it was hit by sluggish sales from major customers including Dell Inc. and Sun Microsystems Inc.

Quest Software’s market value has plunged about 70% during the past six years, to about $1.4 billion at recent check. Its peak was about $10 billion earlier in 2000 before falling to $4.7 billion in June of that year.

The company’s software helps manage larger software programs. The company has continued to grow sales, in part by actively seeking acquisitions.


Revenue

In 2000, Broadcom posted $1.1 billion in sales, clearing the $1 billion mark in annual revenue for its first time.

But the turn in the chip sector contributed to a 12% decline in sales in 2001,it was the first major yearly decline ever for the chipmaker.

A year later Broadcom brought on Alan “Lanny” Ross as chief executive to replace cofounder Henry “Nick” Nicholas. Ross cut workers and realigned business units.

Broadcom put the tech wreck into its history books in 2003 with sales growth of about 50%. It repeated that feat in 2004 with sales of $2.4 billion. Demand for wireless chips for computers, networking gear, high-speed modems and set-top boxes propelled growth.

Last year, under new leader Scott McGregor, the company’s sales growth cooled a bit, with Broadcom recording a 12% gain to $2.7 billion. Broadcom has put a bigger focus on consumer products, including the iPod, Razr phone and the new Nintendo game console.

With all the spinoffs at Conexant, it’s not surprising the company’s revenue has shriveled from $2.1 billion for the 12 months ended Sept. 30, 2000, to $722 million in 2005. Sales fell about 19% from 2004 to 2005.

But Decker’s turnaround plan has paid off during the past few quarters. Revenue climbed 43% to $243 million for the quarter ended March 31, compared to a year earlier.

At Western Digital, sales have rebounded in a big way. Revenue was up 115% to $4.2 billion for the year ended July 5, 2005, from the same period in 2000.

Sales have continued to climb in recent quarters. In the quarter ended March 31, revenue was up more than 20% to $1.1 billion. Western Digital has seen its sales rise on growing demand for hard drives for laptops and digital video recorders, though desktop sales have been more sluggish.

The company re-entered the laptop market in 2004, after exiting in 1997.

QLogic saw sales grow steadily,not spectacularly,during the past several years, up 38% to $494 million since the year ended April 1, 2001.

The company has seen general sales growth from its core networking gear host bus adapters and switches.

The company paid about $109 million to buy Sunnyvale-based PathScale Inc., which makes software and devices that connect storage systems. The buy follows QLogic’s recent sale of a disk drive controller business for $225 million to Sunnyvale-based Marvell Technology Group Ltd.

Quest has seen one of the biggest percent gains in sales during the past several years.

From 2000 to 2005, sales nearly tripled to $476 million as the company worked to expand its software lines from primarily Oracle and more to Microsoft and others.

Much of those gains came in recent years with the tech rebound fueling growth.


Net Income

Broadcom was deep in the red with a net loss of $687 million in 2000, nearly 70% of the company’s revenue. The following year the company posted $2.8 billion in net losses, about three times its revenue.

The losses came amid big write-offs linked to acquisitions made during the bubble days, along with the general slowing in the market.

Broadcom returned to the black in 2003 with a $219 million profit. Last year’s profit was $412 million.

The company farms out its chip production to Asian companies, allowing Broadcom to quickly ramp up production without having to invest in its own plants.

Conexant posted net income of $191 million in the year ended Sept. 30, 2000, but slipped to a loss the following year. In 2001, 2002 and 2003, Conexant’s losses outstripped its revenue.

But the company has made some progress since Decker’s return. Conexant posted a loss of $176 million last year, narrower than the $545 million loss of 2004.

Conexant has been looking to cut losses with an aggressive move into India. The company hired several hundred workers in India during the past few years and now has about 900 total. The chipmaker sees the move as a low-cost way to improve engineering and pursue product development.

Western Digital recorded a loss of about $188 million in the year ended June 30, 2000.

The company posted a profit of $181 million in the year ended July 1, 2005. And in the past two quarters alone, Western Digital has posted income of more than $200 million.

QLogic can claim what none of the others can: positive net income every year since 2000/01.

The company produced net income of $69 million in the year ended March 30, 2001, climbing steadily each year to $239 million for the year ended April 1, 2006.

Quest had a loss of $25 million in 2000. The next year the company doubled its losses, but then returned to a net profit in 2003.

It locked in gains of $42 million in 2005, though that was down about 11% from 2004.


Research and Development

Broadcom hasn’t been afraid to boost R & D; investment during the past several years. The chipmaker’s spending on R & D; was $251 million in 2000, doubling to more than $600 million last year.

Broadcom likes to keep its engineering staff at around 67% to 70% of overall employment. It’s been at the high end of that goal during the past few years.

Amid the spinoffs, Conexant’s R & D; spending has shrunk about 40% to $268 million for the year ended Sept. 30, 2005.

Although a substantial decline, the pace is slower than the 66% fall in sales since 2000. Conexant’s push into India has given it a cheaper way of keeping up with other chipmakers. Still, the company said its core engineering remains at its U.S. operations.

Western Digital has a more nuanced approach to engineering.

It’s not necessarily interested in being the front-runner for every new technology that hits the disk drive industry. Western Digital tends to stand back and see how a market develops. If it sees a good opportunity, it goes full throttle, as it did with laptop disk drives.

Still, it’s not abandoning its research and development.

Western Digital’s R & D; spending is up 47% to $239 million since 2000. That puts it back to about the level it was spending in the 1990s.

At QLogic, R & D; spending is up 60% since 2000. The company’s chief executive, H.K. Desai, is an engineer by training and put a focus on engineering from its earliest days,once even curtailing QLogic’s sales operations during the 1990s.

The company has tapped more than 100 people from India-based companies to help with basic R & D;, freeing up U.S. employees to focus on more important work.

Quest, meanwhile, has seen R & D; spending more than double to $88 million from 2000 to 2005. The software maker gets much of its engineering workers from companies it buys.

Local Workers

Local hiring has generally followed the pattern of many companies with worldwide operations.

Although there has been some growth in OC, the companies have seen much of their worker expansions at various sites around the U.S. and globally, including gains from acquisitions.

Broadcom had 793 OC employees in 2000, with overall employment of nearly 2,000. That was prior to the layoffs the company made in the following years, shedding hundreds of workers.

The chipmaker’s employee counts have more than recovered with nearly 1,400 locally and about 4,300 companywide.

Conexant has shrunk from 3,000 OC employees in 2000 to about 500 now. Spinoffs and general cost-cutting have taken their toll. Overall employment has fallen from 8,500 to about 2,400.

Western Digital’s OC employment was about 925 in 2000. It had 21,000 employees overall, mostly in manufacturing. The company has remained relatively stable with about 975 local employees now and 22,000 globally.

QLogic has boosted its local and companywide employment counts during the past several years. It’s grown from 353 employees locally in 2000 to 474 today. Overall employment is up about 50% to 855.

And Quest has expanded OC employment by 80% locally to about 630 workers during the past six years, while overall employment has more than tripled to nearly 3,000.

Much of Quest’s growth has come via acquisitions.

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