So How Diverse is Broadcom?
Big Three Buyers Now Big Five, and Not as Big
By ANDREW SIMONS
There was a time when Irvine-based Broadcom Corp. got most of its business from three big players: Motorola Inc., Cisco Systems Inc. and 3Com Corp.
Back in 2000, the three companies accounted for as much as 61% of Broadcom’s sales, using the company’s chips in networking gear and cable TV boxes and modems.
In a telling sign of how Broadcom has changed, only Motorola still is one of Broadcom’s biggest customers. Others include Hewlett-Packard Co., EchoStar Communications Corp. and Dell Inc.
The key difference: Broadcom’s top five customers now make up just half of the company’s sales, whereas three once were the lion’s share.
“Broadcom is significantly more diversified now,” said Cody Acree, an analyst with Legg Mason Inc. “They get more of a look as an economic proxy than at any time in their history.”
Focusing on select markets and customers helped Broadcom grow rapidly during the late-1990s. These days, a bigger, broader Broadcom is seeing diversity cushion against soft spots in the chip sector.
In the second quarter, Broadcom saw sales of wireless networking chips fall, prompting a 2% decline in sales for the company’s wireless unit. The culprit: competition from cheaper chips from Asia.
But the falloff in wireless chip sales was more than offset by higher sales to EchoStar, which runs the Dish Network and uses Broadcom chips in its set-top boxes and digital video recorders.
Then there’s HP. The Palo Alto-based computer products company bought $92 million in Broadcom chips during the quarter. Motorola was good for another $70 million in sales of chips for cable modems and set-top boxes.
Broadcom didn’t break out percentage gains on sales to key customers. But overall revenue for the quarter jumped 70% from a year earlier to $641 million.
The company reported second-quarter pro forma net income,excluding costs related to acquisitions, stock options and other items,of $121.9 million, up some 300% from a year earlier.
But it’s not always good to be diversified. Consider rival Conexant Systems Inc., which recently moved from Newport Beach to New Jersey after selling off several disparate businesses and combining with GlobespanVirata Inc.
The challenge: balancing the consistency diversification brings with the growth expectations investors have of Broadcom.
“Their success means they have had to look at large fast-growing markets to consistently produce a good return,” Acree said. “Like wireless (local area networks). They jumped in relatively late but now are one of the top vendors. Unfortunately now, wireless has a lot of consumer sensitivity.”
Broadcom also is looking to more sales from big customers. Take the company’s longstanding supply pact with Motorola. The agreement stems from a 1997 deal with General Instrument, now part of Motorola, to supply chips for its set-top boxes.
“In November 2000, we modified that agreement to amend General Instrument’s minimum purchase requirements and also entered into a new supply agreement with General Instrument covering our sale of cable modem chips,” Broadcom said in a filing with the Securities and Exchange Commission. “In January 2002, we modified the new supply agreement to add minimum purchase requirements of chips for digital set-top boxes. In December 2002, we further modified the supply agreement to extend minimum purchase requirements of chips for cable modems.”
Gaining new customers has been a key focus of Broadcom’s acquisition strategy. This year, Broadcom has done six deals, including a couple related to data storage.
Broadcom started the year with its $16.5 million buy of Nashua, N.H.-based RAIDCore Inc., a maker of software to manage large banks of drives used to store databases.
Then in February, Broadcom made an $18 million buy of storage patents from Austin, Texas-based Cirrus Logic Inc. The patents cover the way data are stored and retrieved from disk drives.
“Broadcom’s move into storage holds a lot of promise,” Acree said.
As a result of the deals, Broadcom could end up with more business from EMC Corp. and other big storage players, Acree said.
