Broadcom’s Infrastructure Business To Be Lumpy Near-Term; Long-Term Growth Remains Intact

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Broadcom (NASDAQ:BRCM) reported a strong Q3 2014 on October 21, primarily driven by strength in set-top box, broadband access and connectivity products, which came in ahead of its expectation and grew 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. Broadcom’s infrastructure business on the other hand was roughly flat (in line with expectation), due to a pause in data center and service provider spending. (Read: Broadcom’s Q3’14 Growth Driven By Strength In Connectivity & Broadband)

In Q3 2014, Broadcom retained its growth momentum in the enterprise and home market due to increasing traction from its processor SoCs and wireless LAN routers and enterprise access points driven by increasing adoption of 802.11AC. However, growth in the enterprise and home market was offset by a sequential decline in revenue from data center and service provider sub-segments. Broadcom expects its infrastructure and networking business to be down sequentially in the current quarter as well. Nevertheless, the company believes that 2014 will mark its third consecutive year of double-digit growth for its infrastructure business.

Though Broadcom admits that the infrastructure business remains lumpy in the short-term, the company believes it will benefit from new product launches and capabilities rolling out in the near future.

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Our price estimate of $41 for Broadcom is in line with the current market price.

See Our Complete Analysis for Broadcom Here

Pending New Product Launches & Capabilities To Lift Data Center & Service Provider Business  In The Near Future

Broadcom claims that the decline in its datacenter business was not unexpected following the strong growth the business has seen over the past year and half. Since the beginning of 2013, the combined data center and service provider revenue has grown almost 50%, and the segment reported its sixth consecutive quarter of growth in Q2 2014. The company believes that the longer term growth drivers, including new build out and expansion of datacenters, increasing data traffic and faster speeds and the continued ASIC conversions to merchant solutions, remain intact and will continue 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. The company recently launched a new family of switch products called Tomahawk, which deliver 32 ports of 100 gigabit Ethernet connectivity and is specifically designed for 25 and 100 gig applications in the datacenter. Aiming to fulfill the consumer need for higher data rates, Tomahawk is currently sampling with key cloud service provider and communication equipment OEMs. Broadcom believes that Tomahawk will not cannibalize its Trident business (which is now in volume production). On the contrary, Broadcom is of the view that Tomahawk will broaden its footprint into a wider range and applicability for the very large scale data centers that are going to be built.

In its latest earnings call, Broadcom mentioned that its service provider businesses has done better then peers, many of whom reported double-digit declines. The company believes that its wide product portfolio and customer base enabled it to restrict the sequential decline to 2.5% in Q3 2014. Broadcom’s service provide business has seen double digit growth in the last few years and the company is confident the trend will continue for the next few years.

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.

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