After a relatively flat Q1 2012, Broadcom (NASDAQ:BRCM), a global leader in semiconductors for wired and wireless communications, posted a healthy Q2 2012 with a 8% sequential rise in revenues. Despite visible softness in demand from Europe and a slowdown in growth in Asian economies, Broadcom posted $1.9 billion in revenues and a net income of $160 million. The company claims that the share gain in various markets has helped it offset the macroeconomic headwinds impacting the semiconductor industry.
With additional revenue stream from NetLogic, growing stability in the wireless connectivity segment and the introduction of new broadband platforms post the Broadlight acquisition, Broadcom managed to register growth in three segments.
The broadband segment registered a sequential increase of 10%, fueled by growth in sales of broadband modems that was partially offset by decline in Blu-ray and DTV. Excluding the full quarter impact of NetLogic acquisition, the infrastructure and networking segment posted a 6% sequential rise primarily driven by growth in switching products.
The mobile and wireless segments, which contributes over 53% to Broadcom’s valuation was up 3% sequentially. On account of growing strength in wireless connectivity and 3G basebands, the company registered a higher than expected growth rate in the division this quarter.
Forecasting a sequential increase for all the divisions, Broadcom estimates its Q3 revenues to be in the $2 billion – $2.15 billion range. Here are certain trends that we feel might contribute to higher revenues in the current quarter as well as the rest of the year.
1. Expansion in the addressable market with addition of new PON subscribers
The acquisition of BroadLight gives Broadcom access to the former’s market leading Gigabit Passive Optical Network (GPON) technology and makes it well positioned to offer service providers complete solutions across the access spectrum from DSL to cable to PON. Broadcom believes that PON is a fast growing segment and estimates the subscriber base growth to be above 20% per year. (See our Article: Broadcom Acquisition of Broadlight Bolsters Product Portfolio)
Additionally, Broadcom has meaningfully expanded its footprint in the service provider market by announcing powerful new products such as the world’s highest density scalable 100-Gigabit Ethernet switching solution and next-generation high-performance stackable enterprise switches. We believe that the breadth of Broadcom’s offerings and its wide reach provides it an edge over its competitors.
2. Growing smartphone adoption will increase share in key markets such as wireless connectivity and 3G basebands
Growth in Wi-Fi combos and 3G basebands, with several smartphone launches in Q2, more than offset the anticipated slowdown in 2G baseband solutions and multimedia coprocessors. The company claims that the cross over from 2G to 3G came earlier than expected, and thus the impact of softness in 2G will continue to decline over the course of the year.
Additionally, the continued momentum around the 5G Wi-Fi ecosystem saw new product announcements in Q2 including access points from Cisco (NASDAQ:CSCO), Netgear, Belkin, Buffalo and D-Link and the industry’s first 5G Wi-Fi from Asus.
While Broadcom does face increased threat from Qualcomm’s (NASDAQ:QCOM) Snapdragon processor, we feel the broad product portfolio will help the company retain its foothold in the market.
3. Favorable trends such as data center buildouts and growth in content per platform
Broadcom is witnessing a growth in content per platform by leveraging its expanding IP portfolio. Additionally, growth in the company’s integrated platform approach and increasing trend towards data center buildouts and more advanced networking features will help the company grow in the infrastructure and networking division.
With NetLogic’s acquisition, we feel that the company is better positioned to meet growing customer demand for integrated, end-to-end communications and processing platforms for network infrastructure. The addition of NetLogic’s 700 plus patents to Broadcom’s more than 15,000 patents will help it retain its footprint in this segment and lead to a potential increase in its addressable market.
We are in the process of updating our current price estimate of $47.21 for Q2 2012 earnings.