Leading semiconductor provider for wired and wireless
communications, Broadcom (
), reported its Q3 2013 earnings on October 22.
Our price estimate of $41 for Broadcom
is at a significant premium to the current market price of $27 and
we continue to believe in the company's long-term growth potential.
We are in the process of updating our valuation to incorporate the
Q3 2013 earnings.
Recap of Q3 2013 Earnings
Earning $2.15 billion in revenues the company witnessed a 2.7%
q-o-q and a 0.8% y-o-y growth in its top-line, much in line with
its expectation. Broadcom earned a gross profit of 51.4% in Q3 2013
as compared to 50% and 50.7% in Q3 2012 and Q2 2013, respectively,
as it benefited from stronger than expected mix and a decline in
its excess and obsolete inventory.
While Broadcom registered an 11% and 5% sequential growth in
networking and handset segments respectively, its broadband
communication business was roughly flat. Anticipating the
short-term headwinds to impact its growth, Broadcom estimates a
sequential decline in all its business segments - baseband,
broadband and networking - in the current quarter. However, it
accepts growth to accelerate in 2014 backed by the LTE
certification early next year, continued strength in data
center as well as rising 5G Wi-Fi and other multiple technology
See Our Complete Analysis for Broadcom Here
Broadcom To Retain Its Connectivity Share With
Growing 5G WiFi Penetration
Broadcom's wireless connectivity sales were roughly flat
sequentially as it underwent a channel inventory correction
and a mix shift towards 802.11 in the quarter. The 15% q-o-q
growth in its WiFi combo and rising NFC sales were offset by lower
discreet connectivity revenue. Broadcom believes that the mix shift
is a short-term trend and claims that its customers are firmly
committed to 5G Wi-Fi. It expects higher 5G Wi-Fi penetration
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 (
), 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 market share remain
stable as it won designs from new customers that offset the
loss of a few handsets.
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 it will continue to retain its market
share in connectivity solutions over our forecast period.
LTE Certification To Expand Presence In The Baseband
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. However, we believe the LTE
certification will help expand the company's foothold in the
baseband 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.
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. Earlier this month, Broadcom closed its
acquisition of the LTE-related assets of Japanese chipmaker Renesas
Electronics. The deal gives Broadcom access
to 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.
"Our goal is to introduce a quad core LTE platform next year
and the driver LTE technology toward the leadership platform to
enable us to cover the complete spectrum of LTE devices. We're
poised to gain share in 4G LTE starting in early 2014."
Strong Growth In Infrastructure & Networking
Earnings $564 million in revenues Broadcom saw continued
strength in its infrastructure and networking segment. The data
center business grew by more than 20% in 2012 and the company
expects a similar growth rate for 2013 as well. Data center remains
a strong growth driver for the company with
Broadcom's leadership in high density Ethernet switch. Its
next generation Trident II is now in volume production and
Broadcom expects the same to contribute to its growth momentum in
networking through next year.
Equipped with NetLogic's leading multi-core embedded processor
solution, Broadcom has managed to expand its potential addressable
market and earn higher revenue from the infrastructure and
networking market. We believe that the upward trend will continue
in the future as well.
Q4 2013 Outlook
- Net revenue in the range of $1.79 billion to $1.98
billion, +/- 3%.
- GAAP and non-GAAP product gross margin to be down
approximately 0.5% to 1%.
- Non-GAAP and GAAP R&D and SG&A expenses to
increase by $40 million to $60 million.
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