Foolish Forecast: Broadcom's Building Quarter

Communications-chip maker Broadcom (Nasdaq: BRCM  ) will grace the market with its third-quarter 2007 earnings after the bell on Tuesday. Here's the lowdown on the company.

What analysts say:

• Buy, sell, or waffle? A total of 23 analysts follow Broadcom, with 16 of these currently giving a buy rating. Another six say hold, and one says sell. Broadcom also holds a four-star rating (out of five) with more than 460 opinions in the Motley Fool CAPS community.
• Revenue. Based on company guidance, the average analyst sees quarterly revenue ticking up 3% to $929 million compared with the same quarter last year.

What management says:
Broadcom braced investors for what sports teams call a "building year," as the company intends to sacrifice near-term profitability for (hopefully) long-term gains. Aside from margin squeezes from the usual competitive threats, such as Texas Instruments (NYSE: TXN  ) and Qualcomm (Nasdaq: QCOM  ) , Broadcom is anticipating lower profitability in the third quarter because of the acquisition of Global Locate and the migration of designs to 65-nanometer chip processes. CFO Eric Brandt emphasized that process migration and investment in new products "are critical to our revenue growth and gross margin in 2008 and later years."

What management does:
"Sacrifice" is a pretty accurate description of Broadcom's profitability, as the company's margins have been spiraling downward on increased expenses.

Margin	3/06	6/06	9/06	12/06	03/07	06/07
Gross	52.9%	52.4%	51.4%	51.3%	51.1%	51.1%
Operating	15.8%	13.9%	11.4%	6.8%	4.9%	2.9%
Net	13.9%	15.8%	14.6%	10.3%	8.8%	6.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Broadcom investors have to have faith that the millions the company is spending now will convert into substantial revenue down the road. Broadcom has put years of R&D effort into its recently announced third-generation (3G) chip for handsets, and it will take several more quarters to see if the money spent building this single-chip solution pays off for investors. The company has a good track record of making wise investments in large markets, though, and recent news indicates its efforts may already be paying off.

While Motorola (NYSE: MOT  ) played spoiler in Broadcom's results earlier this year, Nokia's (NYSE: NOK  ) move to favor Broadcom as a supplier for its phones had investors cheering. With Broadcom's silicon inside the Apple (Nasdaq: AAPL  ) iPhone as well, it's hard to argue that landing two top-tier clients isn't worth the big upfront investments.