UPDATE 3-Broadcom quarterly profit down as costs rise
(Adds analyst comment, outlook, shares)
By Sinead Carew
NEW YORK, Oct 23 (Reuters) - Chip maker Broadcom Corp (BRCM.O) posted a 75 percent fall in quarterly profit due to a rise in R&D and litigation expense, and said spending would stay high, sending its shares down more than 12 percent.
Broadcom has been making inroads in the market for wireless baseband chips, the main processor in a cell phone, and said it would invest heavily next year to serve new customers though it does not see substantial revenue from that market in 2008.
Charter Equity Research analyst John Dryden said this meant Broadcom's 2008 profit margin would be significantly weaker than what Wall Street was expecting.
"That doesn't bode well for earnings," he said. "The revenue isn't coming as fast as people wanted to see."
Broadcom said on a call with analysts that it saw a "slightly greater" fall in gross profit margin in the fourth quarter than in the third quarter, when its margin fell 0.3 percentage points to 52.1 percent.
Its shares fell as much as 12.8 percent after that comment to $36.69, from their Nasdaq close of $42.06.
Broadcom, which also makes chips for digital music players and televisions, said its third-quarter net profit fell to $27.8 million, or 5 cents per share, from $110.2 million, or 19 cents a share, a year ago.
The latest earnings per share figure was 2 cents short of analysts' average estimates, even though a 5.2 percent rise in revenue to $950 million had beaten Wall Street's forecast of $928.47 million, according to Reuters Estimates.
"Given the revenue upside they should have been able to post an EPS upside," American Technology Research analyst Shaw Wu said. "They look like they're investing more than people thought they would."
R&D COSTS
Broadcom said its research and development costs increased to $94.6 million in the quarter from $78.2 million a year ago.
It said R&D spending, which was 27 percent of third-quarter revenue compared with its target range of 20 percent to 22 percent, would remain high as it spends heavily on new projects until it generates revenue from those projects.
Earlier this month, Broadcom unveiled a wireless chip design that put it several months ahead of bigger rivals Texas Instruments Inc (TXN.N) and Qualcomm.
Broadcom announced a new chip supply deal with Nokia Oyj (NOK1V.HE) in August and said earlier this month that Samsung Electronics (005930.KS) had begun shipping advanced phones using its chips.
It said operating expenses had increased by $20 million from the second quarter -- $10 million more than it had expected. About half of the extra spending was on R&D and the other half was on litigation costs, executives said.
The company is engaged in multiple patent infringement disputes with Qualcomm Inc (QCOM.O), which is appealing a U.S. government ban on sales of some phones with Qualcomm chips found to infringe a Broadcom patent.
Broadcom forecast fourth-quarter product revenue of $960 million to $990 million. It said this excludes revenue from technology license payments from Verizon Wireless, a venture of Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L).
On average, analysts estimated fourth-quarter revenue of $986.56 million, according to Reuters Estimates, but that included some forecasts that incorporated Verizon revenue.
Broadcom said it would book revenue from Verizon during the current quarter when it receives information on how many cell phones Verizon sold in the last quarter.
It signed a license agreement with the wireless provider in July so that Verizon could avoid the ITC ban, which could otherwise have affected many of its new phone models.
Broadcom said it expects a 10 percent to 15 percent share of the cell phone baseband chip market by the end of 2009. It had a roughly 1.4 percent share of that market in 2006, according to research firm iSuppli.
"2009, is when we're really focused on driving for market share," an executive said during the conference call.
