Broadcom (NASDAQ:BRCM), a leading semiconductors provider for wired and wireless communications, announced its Q4 2012 and full year earning on January 29. As anticipated by Broadcom, seasonal factors and macro weakness led to a 2.3% sequential decline in its Q4 revenues, though the same increased 14.3% compared to Q4 2011. Owing to rapid innovation and strong execution, Broadcom closed its fiscal with an 8% increase in its 2012 revenues. However, it marked a 22% annual decline in net income for the entire year, on account of higher operating expenses.
Despite an annual contraction in the overall semiconductor industry, Broadcom’s product revenue increased by 9%, and the company claims to have gained additional market share in all of its business segments in 2012. While we agree that macro headwinds and seasonal variation might contribute to slower growth in the current quarter, we believe that Broadcom could witness stronger growth in the future. With strong cash flow, a robust product road map for 2013 and beyond and accelerating design wins, we believe that Broadcom has strong fundamentals to support a higher valuation.
Here we review certain significant developments in 2012 as well as Broadcom’s product road-map for 2013 which can help it accelerate its growth momentum in the future.
Expanding Mobile Products Portfolio – 5G Wi-Fi, NFC and 3G Products
With a majority share in the mobile wireless market, Broadcom is the undisputed leader in mobiles and tablets with a presence in the Apple iPad, Samsung Tab and Motorola Zoom. The company has enjoyed major success with its connectivity solutions in cell phones, most notably the main WLAN slot in the iPhone. Broadcom’s wireless connectivity solutions grew faster than its overall mobile and wireless business in 2012. The company shipped approximately 200 million connectivity combos in Q4 2012 alone. 
Last year, Broadcom announced the extension of 5G Wi-Fi chips from routers to smartphones and tablets. It expects the first 5G Wi-Fi smartphone to launch in a few weeks. Broadcom also expanded its wireless product portfolio with NFC quad-core chips which targets growth in mass market mobile phones as well as high-end mobile phones and devices.
Broadcom’s 3G business strengthened with the ramp-up of 40 nm platform. Broadcom also introduced its new 3G smartphone platform last month, which offers strong performance capabilities at faster data speed and feature the industry’s first dual-core HSPA (high speed packet access) processor for affordable smartphones. (Read: Broadcom Could Gain Share With Its New 3G Platform For Android)
Smartphones and tablets market is the fastest growing segment in the semiconductor industry, and the former represents the majority of Broadcom’s connectivity business. The company claims some of its customers will ramp a higher number of mid-range and higher-end smartphones with its dual-core products in the coming quarters, which command a meaningful ASP premium.
Earlier this month, Broadcom licensed the ARMv7 and ARMv8 chip architectures that enables the company to build its own application processor based on leading ARM technology. Additionally, it aims to sample its LTE product for smartphones later this year. With a robust product portfolio, we forecast Broadcom’s share in the baseband and application processor market to increase in the future.
Softness In Data Center & Lower Enterprise Spending Is A Short-Term Trend
Equipped with NetLogic’s leading multi-core embedded processor solution, Broadcom has managed to expand its potential addressable market and earn higher revenue from the infrastructure and networking market. Despite soft demand across all its product categories, Broadcom’s multicore processor business has witnessed consecutive sequential growth since the NetLogic acquisition.
On account of reduced data center and enterprise spending as well as lower service provider capital expenditures last year, Broadcom marked an 8.5% sequential decline and anticipates the weak demand to persist this quarter as well. We feel that macro headwinds combined with seasonal variations are responsible for the slowdown and believe that Broadcom has the capacity to retain its foothold in the infrastructure and network market in the future.
In addition to introducing the first 28 nm multicore network chip last year, Broadcom also launched the latest generation of Ethernet switches for the enterprise market, which are optimized to address increasing workforce mobility.
Equipped with NetLogic’s portfolio, we feel Broadcom has the requisite IP to meet the growing customer demand in the network market.
Growth In The Set-Top Business
Driven by growth in sales of its set-top box platforms, Broadcom marked a marginal increase in its broadband revenue in Q4 2012. With 15% higher set-top box shipments, it gained additional market share and delivered strong growth and profitability throughout 2012.
Broadcom benefits from strong demand for advanced set-top boxes in developed countries as service providers aggressively transition their subscribers to advanced services and emerging markets continue to increase their digital transition.
Solid secular trends and Broadcom’s innovations continue to fuel its set-top box business. The company witnessed a number of positive developments last year and offers service providers a complete solution across the access spectrum, from DSL and cable to PON.
Q1 2013 Outlook
- Net Revenue of $1.9 billion, +/- 4%
- Sequential decline in revenue across all segments
- Product gross margins to be flat to down 50 basic points
- R&D and SG&A to increase by $35-$50 million
We will update our price estimate of $44.95 for Broadcom post the Q4 2012 earnings update.Notes:
- Broadcom CEO Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, January 29, 2013 [↩]