Despite A Weak Q2 Broadcom’s Long Term Outlook Remains Bright

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Broadcom

Quick Take

  • Broadcom’s share have come under pressure in the last few weeks on account of speculation that Apple and Samsung will either shift to competing products from Qualcomm or start making their own connectivity chips.
  • While Broadcom saw strong growth in its broadband and infrastructure business in Q2 2013, its wireless division slowed down on account of lower revenues from the baseband business.
  • Despite speculation that it is losing share to Qualcomm, Broadcom believes that its connectivity market share remains stable.
  • In addition to its strength in connectivity technologies, including 5G Wi-Fi and NFC, Broadcom’s investment in emerging growth opportunities in nascent market for Internet of things and wearables can help retain its dominance in connectivity solutions.
  • Broadcom does not have a large customer base for its 3G business and pointed weakness in the same to be the primary factor behind lower wireless revenues.
  • Its upcoming quad core SoC, its expanding footprint in China and the LTE certification can help Broadcom gain share in the baseband market.

Broadcom’s (NASDAQ:BRCM) share have come under pressure in the last few weeks on account of speculation that Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF), which together account for 30% of its revenue, will either shift to competing products from Qualcomm (NASDAQ:QCOM) or start making their own connectivity chips. [1]

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Broadcom’s Q2 2013 results and bleak Q3 2013 earnings outlook did little to instill confidence in the investor community. The leading semiconductor provider for wired and wireless communications reported $2.09 billion in revenues for Q2 2013, witnessing a 4.2% q-o-q and 6% y-o-y growth. Though product gross margins remained flat sequentially, the company posted a net loss of $251 million due to the increase in some non-standard costs, including obsolete inventory.

While Broadcom saw strong growth in its broadband and infrastructure business, its wireless division slowed down on account of lower revenues from the baseband business. The company claims that connectivity solutions continues to remains a strong point in its portfolio. Broadcom’s mobile and wireless business grew 7% y-o-y, but declined by 3% on a q-o-q basis as strength in NFC and 5G Wi-Fi was offset by softness in baseband solutions. While growth in sales of both set top box platforms and broadband modem solutions contributed to 6% higher (q-o-q) revenues from the broadband market,  the growing strength in Ethernet switches and PHYs led to a 19% q-o-q growth in the infrastructure and networking segment.

Broadcom’s outlook suggests that the company’s growth might slow down this year as it faces intense competition in the connectivity domain and invests to build its baseband portfolio. However, it is confident that by delivering new innovative products across all its markets, it will be able to accelerate the growth pace next year onward.

See Our Complete Analysis for Broadcom Here

Broadcom derives more than 45% of its revenues from the mobile and wireless division. It provides baseband solutions for EDGE, 3G and 4G systems as well as multimedia and application processors for mobile phones and handheld devices. Though it remains the leader in the mobile wireless market, the company accounts for only 3.4% of the baseband and application processors market.

Despite Rumors To The Contrary Broadcom Believes That Its Share In Connectivity Will Remain Intact

Broadcom claims that its connectivity solutions posted strong growth in Q2 2013. Despite speculation that it is losing share to Qualcomm, Braodcom believes that its connectivity market share remains stable. NFC products more than doubled and 5G Wi-Fi grew by over 50% q-o-q in Q2 2013. Additionally, Broadcom saw sequential growth in discrete connectivity driven by technology leadership and new standards, like 5G Wi-Fi and bluetooth low energy.

In 2012, Broadcom expanded its product portfolio with 5G Wi-Fi smartphone chips and NFC quad-core chips, which targets growth in mass market mobile phones as well as high-end mobile phones and devices. It has crossed $100 million in revenue from 5G Wi-Fi products. It expects 5G penetration in mobile devices, especially high-end smartphones to significantly increase this year and anticipates a double-digit growth in its NFC portfolio by the end of 2013. [2]

In addition to its strength in connectivity technologies – 5G Wi-Fi and NFC – Broadcom is investing in emerging growth opportunities in nascent market for Internet of things and wearables. We believe that Broadcom can retain its market dominance in connectivity solutions.

Less Visibility In The Baseband Market; New Product Can Spur Future Demand

Currently, Broadcom does not have a large customer base for its 3G business and pointed weakness in the same to be the primary factor behind lower wireless revenues in Q2 2013. Nevertheless, with continuous improvement in its product portfolio, Broadcom has managed to increase its market share in the last few years. It is focusing on expanding its customer base as well as the number of models which it designs. Here are some factors that can help the company gain additional market share in the future –

1. Quad core cellular SoC – In Q2 2013, Broadcom introduced a new quad-core HSPA+ processor designed for the mid-range smartphone market which is optimized for the Android 4.2 Jelly Bean operating system. The new chip offers high-end features like 5G WiFi, globally certified NFC technology and advanced indoor positioning technology. While quad-core chips are common in high-end smartphones, there is a growing demand for their use in high-performance entry-level smartphones as well, with mobile phones increasingly being used as computing devices. The chips are currently in a sampling stage and will be ready for production this quarter.

2. Increasing presence in the Chinese market – Broadcom’s expanding footprint in the low-cost smartphone market has helped position it among the top four players in the baseband and smartphone application processor market. [3] [4] The company claims that it has tripled its number of customers in China and its reference and turnkey designs are gaining traction in the market. (Read: Low Cost Phone In China Using Broadcom’s Chip Will Lift Its Market Share)

3. LTE certification – Broadcom announced its first LTE-compatible baseband chip earlier this year. It claims it to be 35% smaller compared to current products making it the industry’s smallest 4G LTE chip in the market. The smaller chip size not only makes it cheaper to produce, but also more power-efficient. Of the various technologies that are driving the market currently, LTE is seeing the strongest growth as carriers around the world increasingly shift to the new standard for wireless communication. Broadcom expects its AT&T ADAPT certification to complete by the end of this year and is in talks with other carriers as well. It expects LTE to be a major growth driver for its baseband business but does not anticipate any significant revenues before the second half of 2014.

Q3 2013 Outlook

– Net revenue in the range of $2.05 – $2.20 billion.

– Broadband revenue to be roughly flat sequentially. Infrastructure, and the mobile and wireless revenues to be up slightly.

– GAAP & non-GAAP gross margins to increase by roughly half a point due to non-recurrence of some non-standard charges.

– GAAP expenses to decline by approximately $5 million to up $15 million.

We are in the process of updating our price estimate of $44 for Broadcom.

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Notes:
  1. Broadcom Predicts Sales That May Fall Short of Estimates, Bloomberg, July 23, 2013 []
  2. Broadcom’s CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 23, 2013 []
  3. Qualcomm, MediaTek and Intel Together Held Three-Fourth of Cellular Baseband Revenue Share in 1H 2012, Strategy Analytics, October 31, 2012 []
  4. Qualcomm Maintains Lead in Smartphone Apps Processor Market, Cellular-News, January 11, 2013 []