Broadcom Wins vs. Emulex

Broadcom Corporation (BRCM - Analyst Report) recently announced that the United States District Court for the Central DistrictofCaliforniahas issued a decision whereby the court granted Broadcom a permanent injunction against certain products ofEmulex Corporation(ELX - Snapshot Report).

The company has been involved in a patent infringement suit with Emulex since 2009. In September 2009, Broadcom filed a complaint against Emulex Corporation wherein it alleged that the latter infringed ten of its patents relating to networking technologies.

Later, in subsequent filings, Broadcom added two additional patents but withdrew six patents, bringing the total to six asserted patents. Emulex denied the charges stating that the asserted patents are invalid and not infringed. Recently, the court found that Emulex infringed U.S. Patent No.7,058,150 and 7,471,691.

Management stated that Patent No.7,058,150 relates to the use of a phase interpolator to optimize clock and data recovery in a high speed chip and Patent No. 7,471,691 relates to the techniques used in Fibre Channel Loopnetworking.

Consequently, the permanent injunction forbidsEmulexfrom importing, manufacturing, using and selling the enjoined products in the United States. The injunction also has a sunset period.

During the sunset period of both the patents, Emulex can sell the enjoined products but only to customer devices for which the customer had placed a firm order for production, prior to the start of the sunset period. The enjoined products are Emulex's BladeEngine 2 (BE2), BladeEngine 3 (BE3) and Lancer (XE201) chips and certain of Emulex's Fibre Channel switch products. In addition, Broadcom is entitled a royalty of 9% on such sales.

The news pushed the stock price up by 2.57% in regular trading to close at $38.78. The stock gained 0.83% to close at $39.10.

Meanwhile, earnings estimates have increased by $0.11 in the last sixty days. Broadcom reported a net income of $254 million or $0.45 per diluted share in the fourth quarter of 2011 compared to a net income of $266 million or $0.47 per diluted share in the year-ago quarter and a net income of $270 million or $0.48 per share in the previous quarter. The net income per share came reported in the quarter beat the Zacks Consensus Estimate of $0.40.

We continue to maintain a Neutral recommendation on Broadcom Corporation. Our Neutral recommendation is supported by Zacks #3 Rank, which translates into a short-term rating of Hold.