Broadcom’s Q2’15 Earnings Preview: Operating Performance To Continue Strengthening In The Quarter

Broadcom (NASDAQ:BRCM), a leading semiconductor provider for wired and wireless communications, will announce its Q2 2015 earnings on July 30th. The company started fiscal 2015 with a strong Q1 2015, with both revenue and EPS figures ahead of analysts’ expectations. For Q2 2015, Broadcom expects its operating performance to continue strengthening on tight operating expense discipline and strong margins, consistent with the company’s objective of driving profitable growth. For Q2 2015, the company expects revenue of $2.1 billion, +/- $75 million. We believe the business will see strong growth in the future, driven by product cycles and new launches from key customers.

Last month, Broadcom entered into a definitive agreement with Avago Technologies, where the latter will acquire the former in a cash and stock transaction that is structured such that the combined company will have an enterprise value of  $77 billion. The transaction is expected to close by the  end of the first calendar quarter of 2016 and is subject to regulatory approvals in various jurisdictions. The combination of Avago and Broadcom will create a global diversified leader in wired and wireless communication semiconductors.  The combined company, to be based in Singapore and known as Broadcom, will be the third-largest U.S. semiconductor supplier, behind Intel (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM), and the sixth largest in the world according to final annual semiconductor market shares. (Read: Broadcom To Be Acquired By Avago In Record Tech Deal)

Our price estimate of $44 for Broadcom is a little over 10% below the current market price. We will update our model after the Q2 2015 earnings release.

See Our Complete Analysis for Broadcom Here

Connectivity Business To Perform Better Than Expected In 2015

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 the concerns 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 in fact 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.

Emerging Markets & New Technologies Will Continue To Drive Growth In Broadband

Growth in Broadcom’s 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) proliferation of PON (Passive Optical Network) technology in China.

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 (High Efficiency Video Coding) 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 for the company. Broadcom is a the largest shipper of small cells.

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

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.

Broadcom 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.  In addition, it offers lower power and an enhanced feature set. These products are complementary to Broadcom’s Tomahawk solution that targets a 25 gig data center application and which is on track to hit production and shipment later this year.

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