Amid A Weak Q2 Broadcom Retains Its Strength In The Broadband Market

Broadcom’s (NASDAQ:BRCM) stock price has declined by more than 15% since the company declared a disappointing Q2 2013. 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. (Read Our Earnings Article: Despite A Weak Q2 Broadcom’s Long Term Outlook Remains Bright)

While Broadcom’s wireless division slowed down on account of lower revenues from the baseband business, it saw strong growth in its broadband and networking segments in Q2 2013. Driven by higher sales of set-top box platforms and broadband modem solutions, Broadcom marked a 6% q-o-q and 5% y-o-y rise in revenues earned from its broadband and infrastructure division. The company shared the top slot in the worldwide set-top box integrated circuit (IC) market with STMicroelectronics in 2012, though Broadcom earned higher revenues as it accounted for significantly larger value design wins. ^[1]

Broadcom derives 20% of its valuation from the broadband market. Though macro headwinds, increasing competition and declining average selling prices (ASP) threaten Broadcom’s competence in the set-top box market, it claims that its set-top business strengthened in Q2 2013. With a focus on innovation and the addition of entry-level systems to its portfolio, we believe that the company is in a strong position to retain its leadership in the global set-top box market.

See Our Complete Analysis for Broadcom Here

Growing Demand From Emerging Markets Driving Set-top Box Shipments

Research firm Infonetics Research estimates the global set-top box revenue growth to have accelerated to 10% in 2012. ^[2] Though macro challenges are expected to lower the growth rate in the future, global set-top box shipments are expected to increase from 221 million in 2011 to 242 million in 2016 and global satellite subscriber base is forecast to grow 7% per year through 2017. ^{[3] [4]} Emerging digital TV markets in China, India, Latin America and Russia will be the key drivers behind the expanding global set-top market.

The cable and terrestrial digitization projects in emerging markets are expected to drive robust growth in set-top box shipments. Digitization of the Chinese and Indian cable platforms, China’s free-to-air satellite expansion, and pay-satellite growth in India and Latin America are forecast to require close to 500 million set-top boxes between 2011-2015. ^[5]

In addition to subscriber growth, the ongoing shift from standard-definition products to high-definition products in developed markets is driving global demand for set-top boxes.

Broadcom To Expand Its Footprint In The Low-Cost Set-Top Box Market

Broadcom and STMicroelectronics differ in terms of the key set-top box markets that they target. While Broadcom’s primary customers are located in North America and Western Europe, STMicroelectronics targets the developing regions with its comparatively lower average selling price (ASP).

However, Broadcom has been continuously innovating its product portfolio to expand its footprint in the rapidly expanding low-cost set-top box market. In Q1 2013, it introduced the latest generation of set top box SOCs for entry level systems, which is a cost effective platform enabling advanced video experiences to subscribers. It claims to be witnessing an increasing penetration of its products in emerging markets such as India and Brazil among others.

In its earnings call transcript Broadcom declared that it saw accelerated design win momentum for its broadband access business. Its SSP was selected by Dish TV India for upcoming satellite set top box deployments and TataSky selected its MPEG-4 standard definition set top box solutions. Additionally, the company saw solid momentum in LTE and next generation 3G small cells and femtocell as French telecom operator, Free, began providing Broadcom based 3G femtocells to users of its Freebox Revolution home gateway in Q2 2013.

Broadcom claims to be a front runner for the industry transition to HEVC next year and ultra HD in the years that follow. We estimate it to retain its market leadership in the broadband market over our review period.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Broadcom and STMicro Tie for Top Slot in Set-top Box IC Market as Ali Technology Gains Ground, ABI Research, April 25, 2013 [↩]
2. STB market springs back; video getaways, media players drive future growth, Infonetics Research, April 8, 2013 [↩]
3. Global Research of Set-Top Boxes Market – Global Industry Size, Market Share, Trends, Analysis and Forecasts 2012-2018, SB Wire, March 15, 2013 [↩]
4. Broadcom Corporation (BRCM) CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 23, 2013 [↩]
5. Emerging Markets Account for 45 Percent of all Set-top Boxes Shipped Globally between 2011 and 2015, IMS Research Forecasts, August 11, 2011 [↩]