Broadcom (NASDAQ:BRCM), a leading semiconductor provider for wired and wireless communications, has seen its stock price decline by more than 20% after it reported lower growth in its Q2 2013 earnings and guided a bleak outlook for Q3 2013. Though Broadcom continues to witness strong growth in its broadband and infrastructure business, it witnessed a slowdown in its wireless business last quarter. Broadcom derives more than 45% of its revenues from the mobile and wireless division and thus its stock price is highly sensitive to any adverse development in the mobile market.
In Q2 2013, 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. In addition to the weak results, speculation that Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF), which together account for 30% of its revenue, are shifting to competing products from Qualcomm (NASDAQ:QCOM) or are starting to make their own connectivity chips is also responsible for the negative sentiment around Broadcom.
Though we are wary of the Broadcom’s short-term growth, we remain positive about the company’s long-term prospects in the wireless market. In this article we highlight recent events that reiterate our belief that despite intense competition Broadcom will remain a leading player in the mobile market.
Broadcom Wins Connectivity Socket In Apple’s New iPhone
Apple has a long history of using Broadcom’s connectivity chips for its products. Defying rumors to the contrary, Apple has used Broadcom’s combo connectivity chips (Wi-Fi, Bluetooth, FM and GPS wireless connectivity chip) and touch screen controller IC for its recently launched iPhone 5S. Broadcom is anticipated to earn 10-11% of its sales from Apple this year. ((Broadcom, Qualcomm, NXP winners in iPhone 5S teardown checks, Investors.com, September 20, 2013))
Broadcom recently lost a number of low cost smartphone sockets to Qualcomm, including the HTC One Mini, Samsung Galaxy S IV Mini, and the Motorola X, which had raised doubts about its capability to retain share in the wireless connectivity market. With a 32.8% market share, Broadcom has been the leader in connectivity solutions for many years.
However, in its last earnings call, Broadcom announced that its connectivity market share remains stable and that it witnessed strong growth in the division in Q2 2013. Additionally, it saw sequential growth in discrete connectivity driven by technology leadership and new standards, like 5G Wi-Fi and bluetooth low energy. The company claims that it has won designs from new customers that offset the loss of a few handsets.
Last year Broadcom expanded its product portfolio with 5G Wi-Fi smartphone chips and NFC quad-core chips, which target growth in mass market mobile phones as well as high-end mobile phones and devices. 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 the company will continue to retain its market share in connectivity solutions.
Acquisition Of Assets From Renesas Electronics Will Speed Up LTE Production
Earlier this month, Broadcom announced its acquisition of LTE-related assets of Japanese chipmaker Renesas Electronics for $164 million (cash). The two companies have signed a definite agreement which enables Broadcom to gain a dual-core LTE SoC that is ready for volume production and is carrier-validated by leading global operators in North America, Japan and Europe. The deal has been approved by both boards and subject to customary closing conditions is expected to close in early Q4 2013.
Broadcom announced its first LTE-compatible baseband chip earlier this year but did not anticipate any significant revenues from the same before the second half of 2014. The market anticipated the chip to start production much earlier than that, and we think that this was one of the main reasons for the decline in Broadcom’s stock price. However, Broadcom claims that the acquisition of LTE-assets from Renesas will help it accelerate the production of its first multimode, carrier-validated LTE SoC platform into early 2014.
Of the various technologies that are driving the market currently, LTE is seeing the strongest growth as carriers around the world are shifting to the new standard for wireless communication. The LTE leadership has allowed Qualcomm to command the majority of the smartphone market so far. Qualcomm was the first company to come out with an LTE modem as well as an applications processor with an integrated LTE modem. The early adoption of LTE will help Broadcom compete with Qualcomm and enable it to expand its penetration in the baseband market.
Broadcom currently anticipates the transaction to be dilutive to its non-GAAP EPS by approx. $0.12 and $0.10 – $0.15 in Q4 2013 and 2014, respectively. It expects the deal to be accretive to non-GAAP EPS in 2015. The company also narrowed its revenue estimate for Q3 2013 from $2.05 – $2.20 billion to 2.075 - $2.175 billion.