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Broadcom Stock Declines 16% on Earnings Warning

High technology: Irvine chip maker's shares fall to lowest point in two years after word that results for first quarter will miss the mark.


Broadcom Corp. shares plunged 16% Wednesday to their lowest point in nearly two years in the wake of the company's warning that its first-quarter results will fall well below forecasts, partly because a key customer canceled a $361-million order.

The stock, one of the most actively traded, fell $7.63 to $40.25 a share on Nasdaq.

Analysts had been anticipating Broadcom's warning about lower earnings and sales, and some believed the stock already had suffered the brunt of investor wrath. But Wednesday's retreat was the fourth-largest one-day drop ever for the Irvine communications chip maker.

The continued battering of the stock in recent months also has taken a toll on the wealth of the company's co-founders, Henry T. Nicholas III and Henry Samueli. With stock once worth close to $10 billion each, they were the richest men in Southern California last year.

By Wednesday their holdings were worth less than $1.5 billion each.

Broadcom is the latest in a long list of technology companies that have said they will miss earlier forecasts. JDS Uniphase Corp., a San Jose fiber-optic components maker, said Tuesday that it would miss an expected target by 3 cents a share.

Nicholas, Broadcom's chief executive, attributed the revised estimates partly to a "significant economic downturn."

"All of our largest customers have announced that their demand has weakened--people like Cisco, 3Com, Motorola and Nortel," Nicholas said Wednesday at an investment conference in Dana Point.

The company's revision also was spurred by 3Com Corp.'s cancellation of future orders for cards used to link computers to networks. 3Com was Broadcom's second-biggest account last year and its biggest in the fourth quarter.

Late Tuesday, Broadcom said in a press release that it expects earnings of 8 or 9 cents a share for the first three months this year on sales of $315 million to $325 million. That's a dramatic shortfall from the earnings of 25 cents a share on sales of $398 million that analysts had expected.

Broadcom also said in the release that it may change the way it accounts for agreements that provided Broadcom stock warrants as a reward to customers of some acquired companies for their future orders. The warrants effectively give discounts on those orders. Broadcom said it may account for the entire value of the warrants as a reduction in revenue, rather than as an asset to be written off.

Nicholas remained upbeat Wednesday, saying he believes Broadcom is poised to weather the market conditions "better than our competitors."

Because the company has some flexibility in its commitments with its contract manufacturers, "we are in a position to benefit" from lower production costs, he said.

Broadcom has more than $600 million in cash on hand, Nicholas said.

Even so, analyst Nathaniel Cohn at Goldman, Sachs & Co. downgraded the stock Wednesday for the second time in a month, this time to "market perform" from "market outperform." Cohn cited "unanswered questions" about the value of revenue at some acquired companies and the accounting for the use of warrants and said he had additional questions about Broadcom's "competitive outlook."

Jim Liang, an analyst at W.R. Hambrecht & Co., also cut his rating Wednesday on Broadcom stock to "neutral" from "buy."

"The magnitude of the shortfall and the extent of the deterioration of the fundamentals seems to be much more significant than we anticipated," he said.


Broadcom Slumps

Shares of Broadcom Corp fell 16% Wednesday after the Irvine chip maker's warning of drastically lower first-quarter results. The stock hit a high of $274.75 during trading in August. Closing prices for the past year:

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