Broadcom Gives Tech Investors a Boost

Updated from Aug. 18

Broadcom (BRCM) nudged its third-quarter outlook into rosier territory, and investors applauded.

The closely watched communications chipmaker boosted its forecast for September-quarter sales amid what it called strong bookings, suggesting revenue will rise 10% from the prior quarter.

Hoping to ease worries over the prospects of its server chip amid impending competition from Intel (INTC), Broadcom also endorsed analyst consensus estimates for 2004. The company said those estimates will hold true even if the server chip subsidiary sees a worst-case scenario in revenue.

The news prompted at least two equity analysts to upgrade the stock Tuesday morning. Thomas Weisel raised the shares to outperform from peer perform, saying the company "continues to emerge as the premier name in the communications IC space." CIBC raised the stock to sector outperform from sector perform, saying concerns about its ServerWorks unit have been allayed and are reflected in existing estimates.

The company's shares were recently up $1.55, or 7%, to $24.31 on the Instinet premarket session. In regular trading Monday, the shares added $1.59 to $22.85 in a session that saw robust gains across techland.

On the conference call, Broadcom sought to dispute perceptions of trouble in its server chip subsidiary. In March, the head of Serverworks left abruptly after ongoing strategic arguments with Broadcom CEO Lanny Ross. Moreover, analysts widely believe that the pending debut of a server I/O chip from Intel will erode Broadcom's market share, which is currently around 80% in the space.

But today Broadcom said that in the worst case, revenue in the Serverworks division wouldn't fall below $200 million next year, down from about $300 million this calendar year.

Serverworks has accounted for a steadily diminishing share of Broadcom's total revenue, down from 28% in 2002 to an estimated 20% this year. By the last quarter of 2004, it should account for less than 10% of sales, said CFO William Ruehle today.

Ruehle told TheStreet.com that there has been misunderstanding among analysts "suggesting Serverworks is much more important than it is. Any time there's been negative news, it would beat up the stock. So we said it's time to go and clear the air."