Faster Bandwidth Chips: Broadcom Stock Offer May Zoom

It’s always the last mile that’s the hardest. With the Internet, that
represents the bottleneck of the existing telephone networks that max out
at 56.6 kbps on a good day, and the limited cable Internet wires that only
reach small pockets of the U.S. and globe at a few megs per second. Don’t
hold your breath, but here comes warp speed.

Broadcom wants to be at the center of this fatter bandwidth “webtopia” that
many believe may be just around the corner. It makes silicon chips for
cable modems, set top boxes, and xDSL devices, anything that moves data at
the ever voracious PCs at interactive TV speeds.

The Irvine, CA-based firm wants to sell its story and 3.5 million shares of
class A common on Wall Street at a target share price of $11. Our number
crunching shows BRCM may be after a $660 million market capitalization,
about 18x 1997 revenue with losses. We estimate going forward this may be
9x 1998 revenue or about 60x estimated earnings.

On the plus side, fourth-quarter revenue reached $17.3 million and $2.47
net income, as high-speed demand starts to emerge.

Broadcom’s five primary product lines encompass: high-speed communications
and MPEG video/audio devices for the cable television set-top box market;
high-speed data transmission and media access control devices for the cable
modem market; 10/100Base-T Ethernet transceivers and repeater controllers
for the high-speed networking market; receivers and MPEG video/audio
devices for the DBS (satellite) and terrestrial wireless markets; and
broadband twisted pair transceivers for the xDSL market. Translation:
Faster Internet speeds via silicon of various flavors through many mediums.

Broadcom’s customers include an array of set top and cable modem makers
including General Instrument, and 3Com, and others including Cisco, Bay
Networks, Motorola, and Scientific-Atlanta. 3Com alone accounted for more
than half of Broadcom’s revenue in 1997.

The high-speed chip maker should be a no-brainer, right? Maybe not. The
problem is that many of these customers also compete with Broadcom or could
very easily compete for the same market the company is after. The same
customers also have deeper pockets and wider distribution channels.

Broadcom also doesn’t own its own chip fabrication plant which is good and
bad. Good because it saves from building billion dollar plants every few
years like Intel does, bad because it has only two manufacturers–ASAT Ltd.
in Hong Kong and ST Assembly Test Services in Singapore–which make its chips.

Broadcom employs 238 full-time employees and 19 contract employees,
including 172 employees in research and development, 34 in sales and
marketing, 26 in manufacturing operations, and 25 in general administration.
Most of its management have engineering degrees and the two founders came
from PairGain, the leader in DSL solutions (high-speed
networking).

According to Broadcom’s filing, related to Broadcom hiring
former Rockwell employees, Rockwell asserts misappropriation of trade
secrets, breach of duty of loyalty, tortious interference with prospective
business advantage, unfair business practices, and unfair competition. Two
other suits are also pending against Broadcom.

Pro forma insiders own 61%, with Intel, General Instrument,
Scientific-Atlantic, and Cisco each owning between 3% and 6%. Cisco plans on
buying 500,000 shares with this offering at IPO price. Underwriters are
Morgan Stanley Dean Witter, BT Alex.Brown, Deutsche Morgan Grenfell, and
Hambrecht & Quist.

The question remains: Will Broadcom scream on Wall Street? We think the
market for high-speed solutions may be huge as content, commerce, services
and demand grows on the Internet.

So far Broadcom looks like it may have at least a toe hold in several key
markets across the many pipes out there from cable to telco. It’s that last
mile. If Broadcom can keep up with the marathon runners such as Cisco and
3Com by selling them silicon, that toe may be well placed. One slip and it
may get stubbed though.