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More Guesswork Than Usual in Broadcom's Earnings
Posted by: GMI Ratings (IP Logged)
Date: October 25, 2012 10:05AM
Broadcom Corp. (BRCM), which makes chips for mobile devices, said its profit fell during the three months ended Sept. 30 amid challenging market conditions. But the reality could be worse. Broadcom’s financial statements suggest that CEO Scott A. McGregor and his team are doing more than the normal amount of estimating about their earnings.
Broadcom’s sales gained 8.7% to $2.13 billion in the quarter compared to the same period last year, the company said Oct. 23. Rising research and overhead costs caused profit to sink around 18.5% year over year to $220 million in the quarter. McGregor explained on a conference call that Broadcom is benefiting from trends such as the strong adoption of high-definition cable and satellite solutions in emerging markets.
McGregor and his team have been taking steps in recent years aimed at improving Broadcom’s ability to deliver a complete, end-to-end network infrastructure solution. They also hope to augment their engineering workforce and reduce the time they need to develop new technologies, among other things. So they've been doing deals such as acquiring the semiconductor solutions firm NetLogic Microsystems Inc. (NETL) in February.
They said they had paid nearly $3.71 billion more for their acquisitions than they were actually worth on the books as of September, or around 34% of total assets. To arrive at an estimation of NetLogic’s value, for example, they assumed that the company’s products and technology would have "considerably greater value" once integrated with theirs, according to a regulatory filing. Broadcom said it evaluates its goodwill to make sure it’s still valid in the fourth quarter each year or more frequently if circumstances require it, and warns about the chance that it might have to revise the number downward in a hit to earnings.
Broadcom has had more than a billion dollars of goodwill on its balance sheet in every year since 2004, when its total assets grew from around $2.9 billion to $9 billion as of December 2011. And now after its recent acquisitions, Broadcom has additional quantities of subjectivity also boosting its earnings. Its intangible assets (such as the developed technology, customer relationships and in-process research and development it acquired from NetLogic) amounted to $1.86 billion as of Sept. 30, or 17% of total assets.
This means that more than half of Broadcom’s assets are far less concrete than buildings or computer chips. In contrast, the industry medians of goodwill and intangibles as a percentage of total assets each amount to around 3%.
Due to these red flags as well as others, Broadcom’s financial statements reflect an AGR ® score of 16, indicating higher accounting and governance risk than 84% of comparable companies.
Did Broadcom really earn $220 million in the September quarter? If they did, McGregor and his team are excellent guessers.
Region: North America
Country: United States
Market Cap: $16.38 billion (Large Cap)
AGR Rating: Aggressive (16)
ESG Rating: D
Stocks Discussed: BRCM, NETL,