Broadcom Reports A Strong Start To Fiscal 2015: Q1’15 Earnings Review

A leading semiconductor provider for wired and wireless communications, Broadcom (NASDAQ:BRCM) started fiscal 2015 on a strong note. At $2.06 billion, the company’s revenue came in at the upper end of its guided range, increasing 3.7% year on year. Excluding the baseband revenue (Broadcom exited this business in Q2 2014), Broadcom’s reportable segment revenue and operating profit grew 11% and 23% year-over-year, respectively. At $0.64, the company’s non-GAAP EPS in the quarter came in ahead of the first call consensus of $0.60, backed by higher revenues and Broadcom’s prudent fiscal management. Both revenue and EPS figures for Q1 2015 were ahead of analysts expectation, and the stronger than expected earnings led to a more than 5% increase in Broadcom’s stock price in after-hours trading.

In April 2015, Broadcom transitioned to a new enterprise resource planning system, in preparation of which the company intentionally took certain measures that impacted its cash flow from operations in Q1 2015 by over $400 million. The company built additional inventory and paid certain liabilities earlier than it otherwise would have. It expects this to reverse in the coming quarters.

For Q2 2015, Broadcom expects its operating performance to continue to strengthening on tight operating expense discipline and strong margins, consistent with the company’s objective of driving profitable growth (detailed Q2 2015 guidance mentioned below). 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 $44 for Broadcom is just slightly below the current market price. We are in the process of updating our model for the Q1 2015 earnings release.

See Our Complete Analysis for Broadcom Here

Connectivity Performing Better Than Expected; Emerging Markets & New Technologies Will Continue To Drive Growth In Broadband

Broadcom’s broadband and connectivity revenue came in ahead of its expectations at $1.41 billion, up 13% year over year and down 4.5% sequentially. Upside in the quarter was mainly driven by wireless connectivity and broadband modems.

Q1 2015 was the second consecutive quarter of year on year growth in Broadcom’s connectivity business as the company continued to see successful new smartphone launches, rising consumer adoption of new high end phones, growing penetration of new technologies, such as 802.11ac and 2×2, and the ramp of new highly integrated products such as the location hub that all direct higher ASPs. The company claims to be seeing significant customer interest in its latest 5G Wi-Fi chip that offers an industry first real simultaneous dual band or RSDB. This technology, which allows a smartphone or tablet to transfer data across two bands is expected to ship later this year. It also at the same time enables new applications and increases the performance of existing applications.

A quarter or two back, Broadcom expected its connectivity business to decline in 2015. However, the company now claims that its overall connectivity portfolio is definitely strengthening, and expects the business to probably be flat or even up on a year on year basis this year. Broadcom claims that a lot of concerns that it had about the loss of business on exiting basebands have not materialized and the company does not expect them to at this point. Broadcom expected that its exit from the baseband business would negatively impact the low-end of its connectivity business. However, the company has infact gained share in the low-end of the market in the last few quarters. Some of Broadcom’s partners are gaining share in the baseband space, which helps Brodcom’s penetration in the market.

On a year-over-year basis, Broadcom’s combined revenues from set top box and broadband modems were up in double digits, while broadband modems actually grew sequentially versus a typical seasonal decline in Q1. Growth in the broadband business is being driven by: 1) broadband access subscriber additions in emerging markets; 2) technology upgrades to video cell with vectoring and bonding;  and, 3) the proliferation of PON technology in China.

Going forward, Broadcom sees emerging markets, new media server architectures and new technologies such as ultra HD and HEVC, as key growth drivers for its broadband business. Ultra HD and HEVC are still in the early adoption phase and are expected to drive growth for many years to come. Additionally, emerging businesses of home networking and small cells are expected to be solid growth drivers as for the company. Broadcom is a the largest shipper of small cells.

Continuous Innovation & New Products To Drive Long-Term Growth In Infrastructure

Broadcom’s infrastructure and networking business reported revenues of $631 million, up 6% year over year and slightly up sequentially. Growth in the business was driven by the company’s strong product portfolio in the data center and enterprise markets and ramps in new product introductions by customers where Broadcom expects to gain market share. Broadcom’s switch business delivered record revenue and better than seasonal growth in Q1 2015.

Though Broadcom admits to be seeing a bit of a pause in the service provider segment, it claims that the enterprise and data center business remains strong. New product introductions and a strong pipeline of upcoming products will continue to drive growth in the business in the next few quarters.

The company recently started sampling next generation products in the StrataDNX and StrataXGS family. In the StrataDNX family, new products target datacenter and service provider applications and will help drive transitions from in house basics to merchant solutions. Broadcom introduced eight new switch products over the past year to further broaden and strengthen its portfolio. Just this month, it introduced Trident II plus, which is a pin-for-pin compatible upgrade to its Trident II switch chip targeting 10 gig and 40 gig datacenter applications.  n addition, it offers lower power and an enhanced feature set. These products are complementary to Broadcom’s Tomahawk solution that targets 25 gig data center application and which is on track to hit production and shipment later this year.

Q2 2015 Guidance

– Net revenue of $2.1 billion, +/- $75 million. Broadband and connectivity to be flat to up slightly and infrastructure networking to be up sequentially.

– Non-GAAP gross margin to be roughly 56%, +/- 75 basis points.

– GAAP gross margin to be about 0.5 lower.

– R&D and SG&A expenses to be down roughly $15 million, +/- $10 million.

View Interactive Institutional Research (Powered by Trefis):

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

More Trefis Research