Broadcom’s Q3’15 Might Be Weaker Than Expected But Long-Term Growth Remains Intact

Leading semiconductor provider for wired and wireless communications, Broadcom (NASDAQ:BRCM) is expected to release its Q3 2015 earnings on October 19th (as per Google Finance), though Broadcom has not yet released the date on its website. Nevertheless, the company will most likely report its Q3 2015 earnings sometime next week.

While Broadcom retained its growth momentum in Q2 2015, driven by growth in high-end smartphones, broadband access, and networking markets, the company’s Q3 2015 guidance came in below Wall Street estimates. Despite the weak Q3 2015 outlook, we believe the company will continue to grow in the future, driven by product cycles and new launches from key customers. Additionally, Broadcom’s pending acquisition by Avago will make the combined entity (to be known as Broadcom) 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) 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.

Our price estimate of $46 for Broadcom is at an approximate 10% discount to the current market price. We will update our model after the Q3 2015 earnings release.

See Our Complete Analysis for Broadcom Here

In light of Broadcom’s pending transaction with Avago, Broadcom did not conduct a conference call with analysts and investors to discuss its Q2 2015 financial results. Below is a quick update on its key business segments:

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 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 started sampling next generation products in the StrataDNX and StrataXGS family earlier this year. 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. A few months back, it introduced Trident II plus, which is a pin-for-pin compatible upgrade to its Trident II switch chip targeting 10 gigabit and 40 gigabit 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 gigabit data center application and which is on track to hit production and shipment later this year.

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