Broadcom’s Q2’14 Earnings: Reports Declining Wireless Revenue But Sees Continued Strength In Infrastructure, Broadband & Connectivity

Leading semiconductor provider for wired and wireless communications, Broadcom (NASDAQ:BRCM) reported its Q2 2014 earnings on July 22. At $2.04 billion, revenue was near the midpoint of company guidance, and increased 2.9% annually but declined 2.3% sequentially on account of diminishing revenue from the baseband business. GAAP EPS for the quarter was breakeven but non-GAAP EPS came in at $0.65, above first call estimate of $0.61. While Broadcom continued to witness strong growth in its broadband and infrastructure business segments, it reported a steep decline (8% sequential and 19% annual decline) in its mobile and wireless business, mainly driven by lower baseband revenue as the connectivity business continues to perform strongly.

Last month, Broadcom announced its decision to exit the cellular baseband business on account of intense competition in the market. (Read: Rising Competition Forces Broadcom To Exit The Baseband Market) The company intends to instead increase its focus and competitiveness in the broadband, infrastructure and connectivity businesses, and believes that it is will positioned in these dynamic segments of the communication semiconductor market. It believes that its decision to exit the baseband business puts it on a path towards being a stronger, more profitable company, that can return more capital to shareholders.

Our price estimate of $38 for Broadcom is almost in line with the current market price. We are in the process of updating our valuation for the company.

See Our Complete Analysis for Broadcom Here

At $635 million, Broadcom’s infrastructure and networking revenue came in ahead of expectations and was up 10% sequentially and 24% annually. Growth in the quarter was mainly driven by Ethernet switching, particularly in the data center and service provider markets. At $625 million, the broadband communication revenue was also ahead of Broadcom’s expectation and grew 12% sequentially and 10% annually. Upside in the quarter was across the board in the Broadband segment.

Broadcom’s mobile and wireless revenue decreased 8% sequentially and 19% annually driven principally by a sequential reduction in sales of cellular SoCs to $84 million in Q2 2014. The company’s mobile and wireless business can be split into two parts: connectivity solutions and baseband solutions. With a 33% market share, Broadcom has been the leader in connectivity solutions for many years and, despite losing some low-cost smartphone sockets to Qualcomm (NASDAQ:QCOM), Broadcom claims that its market share in the segment remains stable. On the other hand, Broadcom accounts for less than 3% of the mobile baseband and application processor market.

Winding Down The Baseband Market

Broadcom has made the decision to pursue a wind down of it baseband business, which it believes will minimize the ongoing losses from the business and enable the company to focus on its core strengths in other segments. The company has begun to implement its exit and expect ongoing customer commitments to decline over the remainder of the year.

Broadcom expects the wind-down of its cellular baseband business to result in a $700 million reduction in annualized GAAP research and development (R&D) and selling, general and administrative (SG&A) expenses, including $100 million in estimated reductions in stock-based compensation. Broadcom plans to originally reinvest around $50 million of these savings on an annualized basis into projects in the broadband, infrastructure and connectivity businesses. In Q2 2014, Broadcom recorded restructuring costs of $23 million and expects to record an additional $230 million of principally cash based restructuring charges over the next 12 months related to the further reduction of its worldwide headcount by an additional 2,250 employees, the closing or consolidation of 18 locations, and the termination of certain existing contracts.

Connectivity Business Remains Strong

Broadcom incurred losses in the paired connectivity-baseband products and expects to see some continued erosion in the low to mid range of platforms as well. Nevertheless, the company believes that its leadership in connectivity solutions remains intact. It has some new technologies ramping and is seeing higher ASPs for its products due to additional functionality for some customers. Additionally, the  company sees new growth potential in the markets for the Internet-of-Things, as well as automotive and wearable electronics. The company continues to drive leading-edge features, to maintain its strength in high end smartphones and tablets, and is strengthening and diversifying its portfolio with new low power connectivity solutions for the Internet of Things and the support of iBeacon and HomeKit. (Read: Broadcom Aims To Be An Early Entrant In The Booming Wearable Technology Market)

Broadcom expects to see strong sequential growth in connectivity solutions this quarter driven by product cycles and some launches from key customers.

Q3 2014 Outlook

– Net revenue in the range of $2.10 billion to $2.25 billion, of which cellular SoCs should be $50 million to $60 million. Broadband to be up slightly; Infrastructure to be roughly flat; and Mobile and Wireless to be up.

– Non-GAAP gross margins to be 55%, plus or minus 75 basis points. GAAP gross margins to be 52.5%, plus or minus 75 basis points.

– Non-GAAP and AAP R&D and SG&A expenses to be down $40 million to $60 million.

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