On Oct. 23, communications chip maker Broadcom (NASDAQ:BRCM) released third-quarter earnings for the period ended Sept. 30, 2007.

  • Operating income dropped 97% to a mere $1.5 million -- mostly because the research and development budget increased by 29% while sales only grew 5.2%. A technology business can commit worse crimes in this Fool's book than investing in R&D.
  • The bottom line was rescued from the Red Ink Sea by the balance sheet. The strong and debt-free cash balance generated $31.4 million in net interest income.
  • As shocking as these numbers may look when compared to the year-ago period, it's simply the logical continuation of a broader trend. Fellow Fool Dave Mock can explain it in plain English.

(Figures in millions, except per-share data)

Income Statement Highlights

Q3 2007

Q3 2006

Change

Sales

$950.0

$902.6

5.2%

Net Profit

$27.8

$110.2

(74.8%)

EPS

$0.05

$0.19

(73.7%)

Diluted Shares

577.6

572.6

0.9%

Get back to basics with the income statement.

Margin Checkup

Q3 2007

Q3 2006

Change*

Gross Margin

51%%

50.1%

0.8

Operating Margin

0.2%

6%%

(5.9)

Net Margin

2.9%

12.2%

(9.3)

*Expressed in percentage points.

Margins are the earnings engine.

Balance Sheet Highlights

Assets

Q3 2007

Q3 2006

Change

Cash + ST Invest.

$2,346.1

$2,377.2

(1.3%)

Accounts Rec.

$395.7

$424.3

(6.7%)

Inventory

$213.2

$223.5

(4.6%)

Liabilities

Q3 2007

Q3 2006

Change

Accounts Payable

$349.8

$240.4

45.5%

       

The balance sheet reflects the company's health.

Cash Flow Highlights

Q3 2007

Q3 2006

Change

Cash From Ops.

$211.9

$229.9

(7.8%)

Capital Expenditures

$15.9

$19.9

(20%)

Free Cash Flow

$195.9

$209.9

(6.7%)

Owner Earnings

$38.9

$104.8

(62.9%)

Free cash flow is a Fool's best friend.

Competitive Context

Market Cap

 P/E Ratio

CAPS Rating

Intel (NASDAQ:INTC)

$150,026

24.2

***

Texas Instruments (NYSE:TXN)

$44,007

18.5

****

Broadcom

$18,750

80.5

****

Marvell Technology Group (NASDAQ:MRVL)

$10,001

N/A

****

Conexant Systems (NASDAQ:CNXT)

$633

N/A

****

Using the latest reported numbers from Capital IQ. Nobody is anybody without some context.

Related Foolishness:

Intel is a Motley Fool Inside Value pick. Try this market-beating publication free for 30 days.

Fool by Numbers is designed to give you the raw earnings information in a timely fashion, putting all the numbers you need in one easy-to-read place. But at The Motley Fool, we believe numbers tell only part of the story, so check Fool.com for more of our in-depth discussion of what the numbers mean.

At the time of publication, Anders Bylund had no position in any company mentioned. Fool rules are here.