Sunday, May 25, 2008

Broadcom 2007 Annual Report

Broadcom (BRCM) has an office in San Jose, but apparently their headquarters are located in Irvine, CA. I first confused Broadcom with, which is famous for making Mark Cuban, owner of the Dallas Mavericks, rich. He wisely sold the online video company to Yahoo at the height of the bubble then turned around and used the proceeds to buy an NBA team (as close to a male version of a Disney fairytale as you can get). Broadcom, not to be confused with, makes semiconductor chips.

Broadcom's annual report shows a difficult future for the company and an unusual ownership structure. Perhaps to divert attention away from its decreased sales, BRCM highlights its litigation success against Qualcomm in the report's first few pages. Whenever a technology company emphasizes litigation rather than business strategy or R&D, shareholders have to wonder whether their company's money is being wisely spent. For the most part, extended litigation is a black hole primarily benefiting lawyers. There is another issue here--while BRCM talks about its success against QCOM, it doesn't highlight its most recent litigation (SiRF is suing BRCM).

BRCM's revenue stream seems too concentrated on a few customers. BRCM states on pages 17 and 28 of its report that "sales to our five largest customers represented 39.7%...of our revenue in 2007." Later, on page F-41, it clarifies that its top two customers are Motorola and Cisco Systems. MOT isn't doing very well these days, and while I own shares of MOT, I bought them as purely a value play, not as a growth story. When your best customer is losing market share, that is a terrible portent for your company.

But it gets worse: BRCM, on page 40, states that company insiders and management "held 58.5% of the total voting power." BRCM also has anti-takeover provisions (see page 41). This double-whammy of unaccountable management and a moat to protect itself from outside interference may have created an insular culture.

Fans of Gordon Gekko might disagree with me: "The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management [of Teldar Paper] has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That's right, you, the stockholder. And you are all being royally screwed..."

But one look at the financials shows that this company is experiencing lower growth, so ownership structure might be the least of its problems. Diluted earnings per share went from 0.64 cents a share to 0.37 cents from 2006 to 2007. Net cash from operations went lower from $891,659,000 in 2006 to $831,909,000 in 2007. In case I have somehow misinterpreted these numbers, see google's finance page, which contains a wonderful tool allowing anyone to view a company's balance sheet, cash flow, and income statement on a quarterly as well annual basis:

To get another measure of how the company is doing, go to Annual Data, click on "Cash Flow," and compare numbers in "Net Change in Cash." Yup--it's not good.

Surprisingly, BRCM stock has rebounded considerably over the past several months. I am leaning towards selling my very small number of shares next week; however, I will keep this stock on my radar screen to see how Motorola--its largest customer--is doing.

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