High R&D Spending Cuts Into Broadcom’s Q3 Profits
Analysts bombarded Broadcom officials with questions about spending in a third quarter conference call after the company said Q3 profits had sunk 75 percent from a year earlier. Net income plunged to $27.8 million after the chip maker spent $352.3 million on research and development, almost $80 million more than it did in 2006. But strong Bluetooth, wireless LAN and DTV businesses drove company revenue to $950 million, up 5.2 percent from last year, it said late Tuesday.
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High R&D costs reflect strong investment in the business and will pay off long term, CEO Scott McGregor told analysts. Most of Broadcom’s R&D spending went to develop products already ordered -- an approach less risky than building a product and then hoping someone will buy it, he said. Chief Financial Officer Eric Brandt said Broadcom is investing strongly in its cellular business, has won several customers and is winning more. R&D costs will drop to target levels when the resulting revenue comes in, he added.
Broadcom also spent more than it had expected in court against Qualcomm, Brandt said, calling legal fees the “other half” of Q3 expenses. But those costs didn’t make the company’s selling, general and administrative costs higher than a year earlier, Broadcom said.
Despite management’s assurances, analysts reduced Broadcom stock ratings after the call. Long-term prospects still look good, but the profit drop’s severity makes it “difficult to justify” a “buy” rating, Deutsche Bank said in a note, downgrading the stock to “hold.” Wachovia analyst David Wong reduced to “market perform” from “outperform,” citing concern about Broadcom’s ability to reduce costs.
Officials also provided updates on Qualcomm litigation and Broadcom’s licensing agreement with Verizon. Broadcom “stands ready” to deal with Qualcomm and others affected by the International Trade Commission’s ban of Qualcomm chips, McGregor said. But settlement discussions with Qualcomm have “not yet born fruit,” he said.
Broadcom should start getting royalty money from Verizon in the middle of the fourth quarter, Brandt said. Verizon is set to send the chip maker sale numbers at the end of the month so Broadcom can calculate royalties, he said. A Federal Circuit stay of the ITC chip ban for Qualcomm customers that filed an appeal (CD Sept 14 p2) haven’t changed the Broadcom-Verizon deal, and other Broadcom- Qualcomm court cases haven’t either, Brandt said. There’s “no reason to believe” Verizon is rethinking the contract, he said.