Broadcom’s Q3’14 Growth Driven By Strength In Connectivity & Broadband

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Broadcom (NASDAQ:BRCM), a leading semiconductor provider for wired and wireless communications, reported is Q3 2014 earnings on October 21. At $2.26 billion, revenue was up 10.7% sequentially and up 5.3% year over year (at the high end of the guided range and ahead of consensus estimates), driven by strength in set-top box broadband access and connectivity products. The Infrastructure business was roughly flat (in line with expectation), due to a pause in data center and service provider spending. Non-GAAP product gross margin declined by 70 basis points sequentially due to stronger than expected cellular baseband revenue. Non-GAAP earnings per share (EPS) was $0.91 per share, $0.07 above the first call consensus of $0.84 per share.

Broadcom announced its decision to exit the cellular baseband business in Q2 2014 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 anticipates to complete the cellular cost reductions by year end, faster than originally forecasted.

The company expects its revenue to decline marginally in the current quarter, in line with seasonal trends. It anticipates revenue from the baseband business to decline to $50 million, and believes its positions in all three business segments (Broadband, Infrastructure & Connectivity) remains strong. New products across its portfolio will help retain its growth momentum in the future, in our view.

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Our price estimate of $38.49 for Broadcom is slightly above the current market price. We are in the process of updating our model for the Q3 2014 earnings.

See Our Complete Analysis for Broadcom Here

Broadcom’s broadband and connectivity revenue (combined) came in ahead of its expectation at $1.51 billion, up roughly 16% sequentially. Strength in connectivity products was driven by the company’s continued leadership in high-end smartphones, tablets and access points as well as the increasing penetration of  802.11AC and 2×2 solutions. The broadband business continues to witness steady growth driven by leadership in set-top box and broadband modems.

Strength In Connectivity Driven By Leadership In High-End Smartphones

Broadcom witnessed a 20% year-on-year growth in its connectivity business in Q3 2014. The company expected its exit from the baseband business to negatively impact the low-end of its connectivity business, but remains confident of retaining its strength in the high-end. It witnessed exceptional strength and increased traction at the higher end of the business in Q3 2014, which was offset by a decline in the lower end. Broadcom is the No.1 player in connectivity with most of the high end smartphones using Broadcom connectivity solutions. The company does not foresee any change going forward.

In Q3 2014, Broadcom’s connectivity business was driven by seasonal demand and new phone launches, as well as increasing penetration of 802.11ac and 2X2 solutions, which drove higher average selling price (ASPs) in the quarter.  During Q2 2014, Broadcom launched the second generation of its 2×2 MIMO 802.11ac combo chip, which improves its industry leading performance for high end smartphones and tablet resulting in faster speeds, lower power consumption, less interference and lower board space compared to its competitors. The 2×2 MIMO 802.11ac combo chip is currently shipping in volume production. Broadcom also launched the industry’s first GPS Sensor Hub combo chip, which significantly reduces power consumption in smartphones and tablets while enabling always on health fitness and life logging applications. The company is also ramping its newly launched LTE and TDS CDMA Solution while maintaining its market leading position in 3G.

Additionally, Broadcom 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.

Though Broadcom anticipates its broadband and connectivity business to be down sequentially in Q4 2014, we believe the business will see strong growth in the future driven by product cycles and new launches from key customers.

Broadband Business To Be Driven By The Set-Top Market & Access Business

Broadcom’s strong performance in Broadband in Q3 2014 was driven by growth in the set-top box and broadband access businesses.

The company continues to see solid trends in access products as operators deploy the latest technologies including VDSL upgrades to power faster connections in the home. It gained share in VDSL, enjoyed increased operator spending and saw a richer mix of technologies such as vectoring and channel bonding. Broadband access over cooper witnessed meaningful upgrades and the company expects the next DSL standard (G.fast) to begin ramping in 2015. Broadcom also claims to be gaining share in PON and sees new product cycles coming in Broadband Access.

The set-top box product group continues to perform well too, and Broadcom gained market share in emerging markets in Q3 2014 as it deployed new HD designs, particularly in Latin America. The company benefits from the rising digital penetration in emerging markets and a ramp to richer features, including multi-stream transcoding, more tuners and a stronger mix of MoCA-enabled platforms. Driven primarily by rising demand from emerging markets, the global set-top box shipments are forecast to grow at a CAGR of 9.7% through 2016.

Another long-term growth driver for the set-top box market is the transition to HEVC and Ultra HD. Broadcom claims that the industry is still in the early transition (to Ultra HD) phase and sees this strength as a powerful product cycle that will contribute growth over the coming years. Broadcom is one of the leading players in the worldwide set-top box integrated circuit (IC) market.

Q4 2014 Outlook

– Net revenue in the range of $2.00 billion to $2.15 billion, of which cellular SoCs should be roughly $50 million.

– Broadband connectivity and infrastructure networking to be down sequentially.

– Non-GAAP gross margin to be 55%, +/- 75 basis points. GAAP gross margin to be 53%, +/- 75 basis points.

– Non-GAAP R&D and SG&A expenses to be down $40 to $60 million and GAAP to be down $50 to $70 million.

 

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