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Shares of



flopped Thursday as the market digested a gloomy analyst report that nearly cut in half cut the chipmaker's growth outlook for 2003. The chief culprit: the likelihood of a weak market for the cable set-top boxes that contain the company's silicon.

The stock lost $2.04, or 14.7%, to close at $11.86.

In a research note, Salomon Smith Barney analyst Clark Westmont said he thinks the company should have no trouble meeting Street expectations for the third quarter. It's the fourth quarter and next year that he's worried about.

For the fourth quarter, he now expects growth of around 6% rather than 10%.

More worryingly, he has dumped expectations for Broadcom to grow as much as 40% in 2003, saying 22% looks more likely. The Street currently expects revenue growth of 30% between 2002 and 2003, according to Thomson Financial/First Call.

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Also, Westmont has pulled in earnings expectations to a mere 3 cents per share next year, down from an earlier prediction for a 29-cent profit. Analyst consensus expectations are for earnings of 28 cents.

Dissecting Broadcom's Markets

The biggest problem, in Westmont's view, is that the outlook has dimmed for cable chips, which kick in 35% of Broadcom's revenue. He now expects cable chip sales to actually drop by 1% to 10% in 2003, down from expectations for growth of 11%.

That's largely because he expects slow growth in net new cable subscribers. This year, only about 5.5 million people are expected to be added to subscriber rolls, down nearly a third from 2001. Westmont says he tentatively estimates that next year could see another 30% drop in net new subscribers -- a drop double the size that he was initially expecting. Another concern is that consumers may not clamor to buy set-top boxes with fancy features like cable telephony and personal video recording.

On the IT side, the outlook is better. Westmont now expects networking chip sales to grow by a still respectable 10% to 15%, though that's down from an earlier estimate of 30%. He thinks Broadcom can grow faster than the networking market, thanks to its gigabit Ethernet exposure and strength in switch chips.

Westmont hasn't changed his outlook for 8% growth in x86 server chipsets, though he notes that competition from


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poses some risk to that outlook. His company has not done recent banking for Broadcom.

In the could-be-worse category, Westmont concludes that Broadcom deserves some credit for its performance this year under "fairly awful market conditions." He predicts the company will end 2002 with sales growth of 13%. But most, if not all, of that growth came from acquisitions, he added.