Broadcom Corp. faces dim prospects for the rest of this year.
But the Irvine-based company isn’t letting stunted sales slow its groundwork for when the market comes back, according to Chief Executive Henry Nicholas.
“A contraction in the market can play to our advantage over the long term,” Nicholas said. “We’re well-positioned to benefit from a re-acceleration of the economy.”
In the first quarter, Broadcom saw one of the biggest jumps in research spending in the company’s history,up nearly $50 million from the fourth quarter. Though partly from work being done at recently acquired companies, Broadcom’s research spending has steadily risen at least 20% quarter-to-quarter in the past year. And Nicholas suggests that the company plans to invest more in coming months.
The result, he said, is new design wins for Broadcom.
“We’ve gotten a clean sweep of all design wins from all our major customers,” Nicholas said, citing Cisco Systems Inc., 3Com Corp. and Motorola Inc. Broadcom is looking to mount a comeback after a tumultuous year. In the past 12 months, the company has lost billions of dollars in market capitalization as its stock went from a high last year of more than 270 to a recent low of 21. A group of shareholders also slapped the company with a lawsuit after news broke about how Broadcom accounted for certain sales that were accompanied by warrants to buy Broadcom stock.
“No one foresaw the swift decline in the tech market that we’ve seen. No one did,” Nicholas said. “Our job is to execute on a business plan whether stocks go up or stocks go down.”
Besides design wins, one of Broadcom’s biggest efforts during the downturn has been to retain engineers. The company has made moves to make sure employees stay with the company, including a grant of new option contracts worth 45 million shares of Broadcom stock to employees with old options made worthless by the stock’s steep decline.
Moreover, Nicholas boasts that Broadcom engineers can watch their ideas go from the drawing board to production,an opportunity not available at some of the company’s rivals. Engineers seem to be pleased: Nicholas claims the company’s turnover is 2% at most.
“One of the advantages we had is a loyal employee base,” Nicholas said. “People are not threatening to turn in their resumes just because the market gets bad.”
And despite a recently announced plan to lay off some employees, Nicholas said the company is seeking to hire top-notch engineers.
“One thing I will not do is cut off the life blood of this company,” he said. “We will add top-tier people.”
But one analyst said he believes Broadcom will have to make room for any new hires by laying off more workers.
“We expect that the company will officially announce a headcount reduction of approximately 10% before the end of the second quarter,” said Mark Edelstone of Morgan Stanley Dean Witter & Co.
And Broadcom still faces the problem of too many products sitting in its customers’ warehouses. Lehman Brothers Holdings Inc. analyst Arnab Chanda recently upgraded Broadcom’s stock to a buy from a market perform, saying that the company’s customers could burn off excess inventory later this year. Still, some analysts, such as Morgan Stanley’s Edelstone, say extra products won’t burn off until the first quarter of next year.
“We believe that inventory workdowns in the enterprise networking market continue but have slowed due to the glut of enterprise equipment being pushed through the used resale channel,” Edelstone said.
Broadcom’s woes in this area are part of a problem plaguing the entire chip industry. In March, worldwide chips sales dipped 4.5% from a year ago, to $14.4 billion, according to the San Jose-based Semiconductor Industry Association.
Broadcom is set to emerge from the downturn as a more diversified company. While Broadcom makes chips for a single market,communications,the company sells semiconductors into 12 segments,the result of as many acquisitions last year.
“This is not a good time to be a single-market company,” Nicholas said. “One thing about Broadcom is that we are able to go off and enter new markets. We place products into markets in which we have no market share.”
After last year’s buying spree, Nicholas said the focus this year is on consolidation.
“What keeps me up at night? The integration of the companies we’ve acquired,” he said. n
