Judging by the past two weeks, you might think Scott McGregor has a touch of gold.
Broadcom Corp.’s chief executive went to New York to open trading at Nasdaq on May 10. The next day, shares of the chipmaker broke out of their doldrums with a surge that led Broadcom to its yearly high on Wall Street last week.
So far, Broadcom’s recent stock gain has been the high point for McGregor, who took over Jan. 1. After seeing business pick up in early 2004, Broadcom has been wrestling with weak chip sales since late last year.
Part of the problem is a broader slowdown that hit all chipmakers in the fall.
Also at play is what one analyst calls “Broadcom specific” issues.
Before this month’s stock surge, Broadcom saw its shares fall 15% from the start of the year to a 2005 low in mid-April. For the 12 months through April, Broadcom’s shares were off more than 30%.
Last month, Broadcom reported first-quarter sales of $550 million, which were down 4% from a year earlier.
Net income was up 73% to $69 million, topping Wall Street estimates.
“Our first-quarter results highlight Broadcom’s ability to profitably grow even in the midst of the challenging sales environment we have been facing recently,” McGregor said in the company’s earnings release.
The question now is whether Broadcom’s troubles are behind it.
The company upped its outlook for the second quarter, saying it expects sales to grow 4% to 5% from a year earlier to about $575 million.
Sales of chips for data storage, wireless networking, voice over Internet and videogame consoles are likely to pick up in the second half of the year, according to a recent report on Broadcom from Goldman Sachs Group Inc.
And Broadcom saw an upgrade last month from one influential analyst, Joe Osha of Merrill Lynch & Co.
Osha upped Broadcom shares from “neutral” to “buy,” saying other chipmakers aren’t as attractive.
Another good sign: Taiwan Semiconduc-tor Manufacturing Corp., a contract maker of chips for Broadcom and other companies, said in April it is sticking with an earlier forecast for 2005, despite a big drop in first-quarter sales.
“It looks to us as though inventory is depleting,” said Morris Chang, Taiwan Semiconductor’s chairman, at an investor conference. “The first quarter saw a very healthy reduction in our customers’ inventory.”
Investors have been encouraged by Broadcom’s shrinking supply of unsold chips, which fell by 15% in the first quarter.
Broadcom’s inventory appears to have “hit a trough,” said Albert Lin, an analyst with the San Francisco office of Greenwich, Conn.-based American Technology Research Inc., which advises institutional investors.
Inventory Mending
The company’s inventory ballooned to $207 million in June of last year.
Broadcom’s shares have declined since then as the company worked through stockpiles.
As of March 31, Broadcom had $109 million in inventory, down from $128 million at Dec. 31.
Part of the buildup was unique to Broadcom, according to Lin.
Take the company’s satellite chip business, which saw big increases in 2004 but came to a screeching halt in fourth quarter as companies such as EchoStar Communications Corp. slowed buying.
“The impression was that something might not be sustainable,” Lin said. “They had tremendous growth in the satellite business with EchoStar, which tends to buy in large chunks in order to get quantity discounts.”
Satellite TV operators seem to be buying again, according to Lin.
As for McGregor, his effect on the company is “too early to tell,” Lin said.
“Things were already in motion before he officially took charge,” he said. “McGregor is still relying on the abilities of others. I would say he’s off to a good start. But people expect a lot more of him. He’s in the honeymoon phase right now.”
The first quarter was McGregor’s first full one at Broadcom.
He took over at the start of the year from Alan “Lanny” Ross,who himself took over from cofounder Henry “Nick” Nicholas in 2003.
Before coming to Broadcom, McGregor was chief executive of Philips Semiconduc-tors, the chip arm of Royal Philips Electronics NV.
McGregor inherits another touchy issue: expensing stock options.
Broadcom, along with every other public company, could have to report stock options as expenses as early as the end of this year.
While the timing still is unsettled, Broadcom noted in its first quarter filing that it expects to have to expense options next year.
It’s of particular importance for Broadcom since the company has made heavy use of options to pay workers since its 1991 founding.
Under the old system, companies are allowed to account for the potential impact of stock options in the footnotes of their financial statements.
In March, Broadcom said it would have had to expense about $677 million in stock options for 2004. That would have turned its $218.7 million profit into a loss of $383 million.
Earlier losses in 2003 and 2002 would have increased from $3.1 billion to $4.2 billion, the company said.
The company didn’t say what the impact of expensing options would have been in the first quarter.
