Broadcom cuts revenue targets as demand dips

The communications chipmaker says sagging demand from network equipment manufacturers and uncertainty at PC maker Gateway will mean less money this quarter.

3 min read
SAN FRANCISCO--Henry Nicholas, CEO of communications chipmaker Broadcom, on Wednesday said that revenue growth in the current quarter would likely be lower than earlier expected.

"We are still seeing growth," Nicholas said at the Banc of America Securities Conference in San Francisco. "But we're not experiencing the kind of growth we were expecting in our previous guidance."

The move sent fund managers racing to the phones and then sent Broadcom's stock diving more than 10 percent. Shares of Broadcom, which had been down a few points before Nicholas' speech, were down $9.94, or 10.8 percent, to $82.56 in afternoon trading.

"I saw the people who were quick" leave first, said Banc of America analyst Alex Guana, who was on the stage with Nicholas. "Then I noticed some anxious eyes wondering if (leaving) would be rude. Then the wealth effect took over," he said. Guana estimated that several dozen people left the packed conference room, which can hold 400 or 500 people.

Broadcom, one of the leaders in the expanding market for communications processors, said earlier that first-quarter revenue would be up 22 to 23 percent from last quarter, while revenue for the year would double from 2000, when the company reported $1.1 billion.

The slowdown stems from falling demand from network equipment manufacturers, which are delaying and canceling orders for Broadcom chips due to slowing demand for their own parts, Nicholas told reporters.

Broadcom's relationship with computer maker Gateway, however, could also contribute to the problem. Broadcom earlier signed a deal with Gateway that would have led to Gateway incorporating Broadcom's home-networking technology into its PCs, he said.

A recent management shakeup at Gateway, which led to the replacement of former CEO Jeff Weitzen and six other high-level Gateway executives, could change the outlines of the alliance.

"We basically need to sit down with the management team," said Nicholas, who like a lot of the technology world, didn't anticipate the changes at Gateway. "We pride ourselves on being a company that doesn't surprise the marketplace, but this (the Gateway shakeup) is one where we were surprised."

Gateway spokesman John Spelich said that Broadcom remains a strategic partner and that Gateway continues to include Broadcom's home networking on two of its main desktop lines and as an option on the third.

Nicholas' comments came a day after Cisco Systems posted earnings that missed analysts' estimates by a penny a share and warned that it expect sales to remain flat for the next two quarters.

Morgan Stanley Dean Witter analyst Mark Edelstone said that while the technology slowdown has cut a wide swath, a few companies might be able to survive unharmed. "I would have thought that Broadcom would have been a company that could have gotten through it," he said.

Nicholas said the decline in revenue is not a result of a breakdown in the company's tight relationship with 3Com. Rumors have swirled recently that 3Com was going to start using chips from other manufacturers for its network cards. "Our business with 3Com is as strong as it has ever been," Nicholas maintained.

Nicholas said the slowdown would not impact Broadcom's aggressive acquisition strategy or hiring practices.

Although he warned of slowing sales, Nicholas declined to peg the exact extent of the decline.

"Right now, we're not ready to identify how much less growth," he said.

Broadcom CFO Bill Ruehle added that the company expects orders to pick up in the second half.

The warning from Nicholas is the first significant financial blow to the high-flying company, which consistently has topped Wall Street estimates while swallowing 18 other companies in a string of acquisitions.

As recently as two weeks ago, when Broadcom posted better-than-expected fourth-quarter earnings, Nicholas was speaking confidently about the company's prospects despite the downturn.

"Everyone's blowing up," Nicholas said. "We aren't."

At the time, Nicholas said Broadcom might be able to avoid a slowdown by continuing to enter new markets and adding more functions--and therefore dollar value--to the products it already provides chips for.

"No one is impervious to a slowdown," Nicholas said at the time, "but I would say we have as good or better immunity to any slowdown as any chip company out there."

News.com's Sam Ames contributed to this report.