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Broadcom shares rise despite warning

Shares of the communications chipmaker rise even after it warned Wall Street that second-quarter revenue would fall below previous expectations.

Shares of Broadcom rose Thursday after the communications chipmaker warned that second-quarter revenue would fall below previous expectations but also said that it expects no further revenue declines for the year.

Shares rose $4.67, or 13 percent, to $40.24 by the market close Thursday, a sign that Wall Street believes the company might recover sooner than expected from the slowdown that has cut wide swathes of turmoil through the telecom sector. Nearly 23 million shares changed hands, compared with the stock's daily average of 12 million.

Broadcom told investors Wednesday after the markets closed that second-quarter revenue would fall between 32 percent and 35 percent from first-quarter revenue of $318 million, a range between $205 million and $215 million.

The company also gave investors glimmers of hope. Broadcom CFO Bill Ruehle said in a Thursday conference call that revenue this year will bottom out in the second quarter.

"Visibility is not terrific, although we do not expect to see further (revenue) declines in '01," said Ruehle. Broadcom CEO Henry Nicholas added that third-quarter revenue will be flat with the second quarter.

Broadcom attributed the revenue shortfall to the inventory glut that has wreaked havoc in the communications sector. Telecom service carriers such as AT&T and Verizon will spend less money on equipment from companies like Nortel Networks, Lucent Technologies, and Cisco Systems, meaning that equipment makers will need fewer chips and components from Broadcom and other companies.

A recent Bank of America forecast predicts that telecom-equipment spending will fall about 9 percent in 2001 to $84.1 billion from $92.1 billion the preceding year. Research by U.S. Bancorp Piper Jaffray and Epoch Partners put the decline at 10 percent and 6 percent, respectively.

"Weakness in communications-oriented demand, an inventory correction, and significant customer concentration continue to adversely impact the company's near-term business prospects," Morgan Stanley analyst Mark Edelstone said in a research note.

Broadcom also said in the call that it expects a pro forma loss of between 16 cents and 18 cents a share for the second quarter. Analysts expected the company to lose 8 cents for the quarter, according to First Call.

"The pre-announcement is not unexpected," said Arnab Chanda , an analyst at Lehman Brothers. "Most people knew they were going to have problems."

Chanda said the no-surprise news and the promise of a recovery helped the company's shares rise.

During its first-quarter earnings call in April, Broadcom said it expected a second-quarter revenue decline in the low-20-percent range from the preceding quarter, and analysts surveyed by First Call expected the Irvine, Calif.-based company to make $254.7 million in revenue.

Company executives also said that it sees some positive signs from customers in that order cancellations and delivery delay requests are fading.

"It's a little bit too early to declare an overall trend, but...cancellations and push-outs have slowed and come almost to a stop," Nicholas said.

All this leads some analysts to think that Broadcom is on the road to recovery, but questions remain.

The company hopes that ventures into new markets will help speed its rebound, but Chanda believes Broadcom will not see significant revenue from chips made for optical equipment and Bluetooth devices until 2002. Bluetooth is a technology that allows wireless devices like mobile phones and handheld devices to communicate with each other within a distance of 30 feet.

Meanwhile, the company is taking other measures until sales from new products kick in. Broadcom announced last April it will lay off employees to cut costs and is in the middle of a review to look for ways to further trim its business. The company will give more details in its second-quarter earnings call.

But it might be its core markets, like chips for cable modems and cable set top boxes, that anchor its recovery, according to some Wall Street analysts, because those markets have not suffered as much.

"Their exposure is more to the consumer (and) enterprise market, which is not as bad in inventory terms as the carrier market," said Kalpesh Kapadia of C.E. Unterberg Towbin.