Broadcom's Earning Preview: Connectivity & Baseband Progress In Focus

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Quick Take

  • Broadcom will report its Q3 2013 earnings on October 22. Though it continues to witness strong growth in its broadband and infrastructure business, it expects its wireless business to be flat sequentially.
  • Its strength in NFC and 5G Wi-Fi was offset by softness in baseband solutions last quarter. However, new innovative products can help Broadcom accelerate growth in the wireless market in the future.
  • Broadcom recently lost a number of low cost smartphone sockets to Qualcomm. However, it claims that its market share remains intact as it won designs from new customers that offset the loss of a few handsets.
  • Additionally, contrary to rumors, Apple has used Broadcom's combo connectivity chips and touch screen controller IC for its recently launched iPhone 5S.
  • Broadcom does not have a large customer base for its 3G business but a continuous improvement in its product portfolio can help expand its foothold in the baseband market.
  • An upcoming quad core SoC, an expanding footprint in China and LTE certification can help Broadcom gain share in the baseband market.

Broadcom ( BRCM ), a leading semiconductor provider for wired and wireless communications, will report its Q3 2013 earnings on October 22. The company's stock has declined by more than 20% since it reported lower growth in its Q2 2013 earnings and guided a bleak outlook for Q3 2013. For the third quarter, Broadcom anticipates revenues in the range of $2.05 - $2.20 billion, a -2% to 5% sequential growth.

Though Broadcom continues to witness strong growth in its broadband and infrastructure business, it witnessed a slowdown in its wireless business last quarter. In Q2 2013, Broadcom's mobile and wireless business grew 7% y-o-y but declined by 3% on a q-o-q basis as strength in NFC and 5G Wi-Fi was offset by softness in baseband solutions. On the other hand, strong growth in sales of both set top box platforms and broadband modem solutions contributed to 6% higher (q-o-q) revenues from the broadband market and the growing strength in Ethernet switches and PHYs led to 19% q-o-q growth in the infrastructure and networking segment.

Broadcom's outlook suggests that the company's growth might slow down this year as it faces intense competition in the connectivity domain and invests to build its baseband portfolio. However, it is confident that by delivering new, innovative products across its markets, it will be able to accelerate growth pace next year onward.

Our price estimate of $41 for Broadcom is at a significant premium to the current market price. We will update our valuation for the company after its Q3 3013 earnings release.

See Our Complete Analysis for Broadcom Here

Broadcom derives more than 45% of its revenues from the mobile and wireless division and thus its valuation is highly sensitive to any adverse development in the segment.

Broadcom's Share In Connectivity Solutions To Remain Intact

With a 32.8% market share, Broadcom has been the leader in connectivity solutions for many years. In the last few months, it lost a number of low cost smartphone sockets to Qualcomm ( QCOM ), including the HTC One Mini, Samsung Galaxy S IV Mini, and the Motorola X, which had raised doubts about its capability to retain share in the wireless connectivity market.

However, the company claims that its connectivity solutions posted strong growth in Q2 2013 and its connectivity market share remain stable. NFC products more than doubled and 5G Wi-Fi grew by over 50% q-o-q in Q2 2013. Additionally, Broadcom saw sequential growth in discrete connectivity driven by technology leadership and new standards, like 5G Wi-Fi and bluetooth low energy. The company claims that it has won designs from new customers that offset the loss of a few handsets.

Apple ( AAPL ) has a long history of using Broadcom's connectivity chips for its products. Defying rumors to the contrary, Apple has used Broadcom's combo connectivity chips (Wi-Fi, Bluetooth, FM and GPS wireless connectivity chip) and touch screen controller IC for its recently launched iPhone 5S. Broadcom is anticipated to earn 10-11% of its sales from Apple this year.

In addition to its strength in connectivity technologies - 5G Wi-Fi and NFC - Broadcom is investing in emerging growth opportunities in nascent market for Internet of things and wearables. We believe the company will continue to retain its market share in connectivity solutions over our forecast period.

New Products Can Accelerate Growth In The Baseband Market

Currently, Broadcom does not have a very large customer base for its 3G business and accounts for only 3% of the mobile baseband and application processor market. Nevertheless, with continuous improvement in its product portfolio, Broadcom has managed to increase its market share in the last few years. It is focusing on expanding its customer base as well as the number of models which it designs. Here are some factors that we believe will help the company expand its foothold in the baseband market -

1. LTE Certification - Broadcom announced its first LTE-compatible baseband chip earlier this year. It claims it to be 35% smaller compared to current products making it the industry's smallest 4G LTE chip in the market. Of the various technologies that are driving the market currently, LTE is seeing the strongest growth as carriers around the world increasingly shift to the new standard for wireless communication.

Earlier this month, Broadcom announced its acquisition of the LTE-related assets of Japanese chipmaker Renesas Electronics for $164 million (cash). The two companies have signed a definitive agreement that enables Broadcom to gain a dual-core LTE SoC that is ready for volume production and is carrier-validated by leading global operators in North America, Japan and Europe. Broadcom claims that the acquisition of LTE-assets from Renesas will help it accelerate the production of its first multimode, carrier-validated LTE SoC platform into early 2014.

2. Increasing presence in the Chinese market - Broadcom's expanding footprint in the low-cost smartphone market has helped position it among the top four players in the baseband and smartphone application processor market. The company claims that it has tripled its number of customers in China and its reference and turnkey designs are gaining traction in the market.

3. Quad core cellular SoC - In Q2 2013, Broadcom introduced a new quad-core HSPA+ processor designed for the mid-range smartphone market. The new chip offers high-end features like 5G WiFi, globally certified NFC technology and advanced indoor positioning technology. While quad-core chips are common in high-end smartphones, there is a growing demand for their use in high-performance entry-level smartphones as well, with mobile phones increasingly being used as computing devices. The chips were expected to be ready for production by Q3 2013.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , BRCM , QCOM , SSNLF

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