Broadcom’s Q4’14 Earnings Review: Better Than Expected Performance In Reportable Segments

Leading semiconductor provider for wired and wireless communications, Broadcom (NASDAQ:BRCM) reported its Q4 2014 and full year 2014 earnings on January 29. While revenue of $2.14 billion was at the high end of the guided range, the non-GAAP EPS 0f $0.90  for the quarter came in ahead of the consensus estimate. Excluding cellular baseband revenue (which the company exited in June 2014), total reportable segment revenue was down 3% sequentially and up 10% year over year, as the broadband and connectivity  as well as the infrastructure businesses performed as per the company’s expectation. For full year 2014, Broadcom delivered record revenues and reportable segment profitability, with combined broadband-connectivity and infrastructure revenue and profit growing 6% and 25%, respectively, compared to 2013.

In the broadband and connectivity segment, revenues declined less than what Broadcom initially expected, due to the success of new phone launches, as well as increasing penetration of 802.11ac and 2×2 solutions. Broadcom’s infrastructure business declined as expected due to lower data center and service provider spending. Nevertheless, the company continues to see ongoing data center build-outs there as a strong opportunity for future growth. It also expects continued geographic expansion to fuel growth in its broadband business and forsees opportunities for new technologies, like NFC and wireless charging, to drive long-term growth in the connectivity business.

Our price estimate of $41 for Broadcom is almost in line with the current market price. We are in the process of updating our model for the 2014 earnings.

See Our Complete Analysis for Broadcom Here

Broadcom’s broadband and connectivity revenue came in ahead of expectations at $1.48 billion, down roughly 2% sequentially. Upside in the quarter was across the board, including set-top box, broadband access and particularly wireless connectivity. In broadband access, there is significant operator interest to upgrade last mile access technologies such as DSL and PON to the fastest speeds. In set-top box, developed markets are upgrading to new media server architectures and Broadcom claims that it has started to see the first ultra HD boxes roll out.

Focus On Adjacent Market To Spur Growth In Connectivity

Broadcom saw increased demand for newly introduced smartphones, combined with the increasing adoption of new wireless technologies such as 802.11ac and 2×2 solutions that drove higher ASPs in the quarter. Its 5G WiFi revenues reached a record high in the quarter and more than doubled from last year. The company claims to be seeing significant customer interest in its 4×4 multiuser MIMO 5G WiFi chip targeted for retail routers, broadband access gateways and set-top boxes. Broadcom’s market share in the high end of connectivity remains very strong, and the company is confident of winning new designs based on very strong product execution.

In addition to smartphones, Broadcom is focusing on broadening its connectivity business into adjacent markets. It received the first design win for its wireless charging solution, and the company now powers both Denon and Harman Kardon’s WiFi home audio systems. Broadcom remains focused on diversifying into new markets such as Internet-of-Things (IoT), automotive, wearables and small cells. In the IoT market, the company claims that the design activity remains high with its current products. It is in the process of refreshing its portfolio with purposeful products that are optimized specifically for different market segments. The registrations for Broadcom’s WICED IoT platform has grown significantly, from 2,000 at the beginning of 2014 to over 8,000 at present. The company has announced the expansion of its distribution channel with over 40 new partners to expand its sales reach to IoT customers.The small cell market also represents an emerging opportunity. Broadcom is ramping its newly launched LTE and TD-SCDMA solutions, while maintaining it market-leading position in 3G.

Broadcom expects its broadband and connectivity business to be down sequentially in the current quarter, and admits that this year will be a little challenging for the business. However,, it firmly believes that the segment offers strong long-term growth potential.

Set-Top Business Benefits From An Expanding Geographic Footprint

Growth in emerging markets and new technologies is driving growth in Broadcom’s set-top box business. Operators such as Dish in North America, Free in France and Tata in India, have begun to offer ultra HD set-top boxes to their subscribers. Broadcom expects around 15 operators across multiple regions to launch 4K television service in 2015. Expanding the geographic footprint is an important factor driving growth in the set-top business. Broadcom’s expansion in new territories, including South America, South Asia, and Africa, benefited the company in 2014 and it expects the trend to continue this year as well.

Additionally, Broadcom expects to benefit from the transition to 4K HEVC over the next three to four years. In cable modems, people are switching over to DOCSIS 3.1. Though Broadcom expects to see initial shipments this year, it anticipates the technology to really kick in next year onwards.

In broadband access, the race to Gigabit speeds in the home continues as telcos invest in G.fast and cable MSOs invest in DOCSIS 3.1, while both invest in high speed optical access. Broadcom is leading this transition with its first design wins with G.fast and 10-GPON already in place.

Long-Term Growth In The Infrastructure Business Remains Intact

Broadcom’s infrastructure and networking business declined by 4% sequentially in Q4 2014, to $625 million. Nevertheless, 2014 was the third consecutive year of double-digit growth for the company, with growth mainly being driven by its leadership in the switch market.

In the data center market, Broadcom has a large number of customers in production with Trident II and is building a solid pipeline of design wins for Tomahawk. At 3.2 terabits per second, Tomahawk is the industry’s highest bandwidth switching solution and has been shipped to over 15 different networking box makers, establishing an early lead over competitors. In the service provider market, the company is seeing broad adoption of its 28-nanometer heterogeneous knowledge-based processers.

Long-term growth drivers for Broadcom’s infrastructure business include: 1) new build-outs and expansions of data centers; 2)  increasing data traffic at faster speeds; 3)  ASIC conversions to merchant solutions; and, 4) overall enterprise network upgrades as people move to higher speeds. Broadcom expects double-digit growth in the infrastructure business for the next few years.

Q1 2015 Outlook

– Net revenue of $2 billion, +/- $75 million. Broadband and connectivity to be down and infrastructure networking to be roughly flat.

– Non-GAAP gross margin to be roughly flat sequentially, at 54.7% (+/-75 basis points).

– GAAP gross margin to be flat, at 52.8% (+/- 75 basis points).

– R&D and SG&A expenses to be up by $5 million to $25 million.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research