Broadcom’s Q3’14 Earnings Preview: Infrastructure, Broadband & Connectivity To Drive Growth

Leading semiconductor provider for wired and wireless communications Broadcom (NASDAQ:BRCM) will announce its Q3 2014 earnings on October 22. Having exited the cellular baseband business in June this year, Broadcom intends to instead increase its focus and competitiveness in the broadband, infrastructure and connectivity businesses. Broadcom performed well in all three segments in Q2 2014 and expects to see strong growth from these markets in the future as well. The company 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 $38.49 for Broadcom is slightly above the current market price. We will update our valuation after the Q3 2014 earnings release.

See Our Complete Analysis for Broadcom Here

Winding Down The Baseband Business

Broadcom announced its decision to exit the cellular baseband business on account of intense competition in the market. The company believes this will allow it to eliminate the ongoing losses from the business and enable it to focus on its core strengths in other segments. Broadcom expects ongoing customer commitments to decline over the remainder of the year and anticipates 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 believes that its leadership in connectivity solutions remains intact. It has some new technologies ramping and is generating higher ASPs for its products from the integration of additional functionality ahead of its competitors. Additionally, the  company sees new growth potential in both emerging markets such as for the Internet-of-Things, as well as the increasing electronics penetration in the automotive and wearable devices markets. 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)

The company expects to see strong sequential growth in connectivity solutions in Q3 2014 driven by product cycles and some launches from key customers.

Infrastructure & Broadband Business To Drive Future Growth

Broadcom continues to deliver innovative solutions that set the stage for an industry transition to more virtualized scalable data center architectures. Its next generation Trident II is now in volume production and it expects the same to contribute to its growth momentum in networking through 2014. During Q2 2014, in partnership with with other cloud market leaders, Broadcom announced a new 25-gigabit and 50-gigabit  Ethernet specification to drive performance and cost efficiency in data centers.

We expect Broadcom to benefit from the ongoing transition to 4G LTE in China, where it has secured wins for switches, processors, the back haul and other technologies. Currently, only China Mobile is aggressively building out its TD-LTE network, but we expect the other carriers to join soon as FDD-LTE licenses are rolled out in the coming years. Broadcom has seen double digit growth in this segment over the last three years and it believes that the additional waves of LTE buildouts, especially in China, will be helpful to sustain that growth for the next few years.

The set-top box and access business are key growth drivers for Broadcom’s broadband business. Broadcom claims that in the first half of 2014 it gained share in set-top boxes in international markets on account of rising digital penetration and a ramp to richer features, including multi-stream transcoding, more tuners and a stronger mix of MoCA-enabled platforms. Another long-term growth driver for the set-top box market is the transition to HEVC and Ultra HD. Broadcom is one of the leading players in the worldwide set-top box integrated circuit (IC) market.

Broadcom is seeing strong momentum in its VDSL and PON sales due to share gains, increased operator spending and new operator service launches. Its access business is growing as operators continue to deploy the latest technologies, including VDSL upgrades, to power faster connections in the home. Broadcom claims to be gaining share in PON and sees new product cycles coming in Broadband Access. Broadcom’s modem sales reached a multiyear high in Q2 2014, increasing over 15% year on year, with growth across cable, DSL and PON.

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