Seasonal Trends Will Slowdown Broadcom’s Growth In Q4’14

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Broadcom

Leading semiconductor provider for wired and wireless communications, Broadcom (NASDAQ:BRCM) will report its Q4 2014 and full-year 2014 earnings on January 29th. For the first nine months of 2014, the company’s top line growth was almost flat but net income grew marginally (~2%), compared to the same period last year. While Broadcom witnessed strong growth in its Infrastructure business, its Broadband and Connectivity revenue declined on account of the diminishing cellular baseband revenue base. Broadcom exited the cellular baseband business in June last year due to 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), and expects to see strong growth from the other segments in the future.

Broadcom expects its revenue to decline marginally in Q4 2014, in line with seasonal trends. It targets revenue in the range of $2.00 billion to $2.15 billion, of which cellular SoCs should be roughly $50 million. We believe the business will see strong growth in the future driven by product cycles and new launches from key customers.

Our price estimate of $41 for Broadcom is almost in line with the current market price. We will update our valuation after the 2014 earnings release.

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See Our Complete Analysis for Broadcom Here

Infrastructure Business To Remain Lumpy In The Near-Term

Broadcom’s infrastructure business growth slowed to roughly flat last quarter due to a pause in data center and service provider spending. Broadcom claims that the slowdown in its datacenter business was not unexpected following the strong growth the business has seen over the past year and half. Though the company expects its infrastructure and networking business to be down sequentially in Q4 2014 as well, it is confident that 2014 will mark its third consecutive year of double-digit growth for this segment. 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.

Broadcom believes that the longer term growth drivers remain intact and will continue to drive future growth.  These include:  the new build out and expansion of datacenters, increases in data traffic and network speed, and the continued conversions from ASICs to merchant solutions. The company continues to deliver innovative solutions that set the stage for an industry transition to more virtualized scalable data center architectures. (Read: Broadcom’s Infrastructure Business To Be Lumpy Near-Term; Long-Term Growth Remains Intact)

Strength In Connectivity Driven By Leadership In High-End Smartphones

Broadcom expects 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. The company reported a 20% year-on-year growth in its connectivity business in Q3 2014. Broadcom is the No.1 player in connectivity with most of the high-end smartphones using its connectivity solutions, and it does not foresee any change going forward. Strength in connectivity products is underlined 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.

In 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, so as to maintain its strength in high end smartphones and tablets.  It is also strengthening and diversifying its portfolio with new low power connectivity solutions for the Internet of Things, leveraging its support of iBeacon and HomeKit.

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

Broadcom continues to see solid trends in access products as operators deploy the latest technologies including VDSL upgrades to power faster connections in the home. In 2014, 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 both from the rising digital penetration in emerging markets and from the ramp tof richer features, including multi-stream transcoding, additional tuners and a stronger mix of MoCA-enabled platforms. Driven primarily by rising demand from emerging markets, global set-top box shipments are forecast to grow at a CAGR of 9.7% through 2016. (Read: Why Broadcom Will Benefit From The Digitization Drive In India)

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 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.

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