Defying the economic slowdown, Broadcom (BRCM) exceeded the $2 billion revenue mark for the first time in Q3 2012 and reported record cash flow of $621 million from operations. It saw strong growth in all three businesses – connectivity & baseband, network solutions and broadband – with the mobile and wireless segment posting the fastest growth on strong demand for connectivity solutions. The third quarter has historically been the strongest quarter for Broadcom as its customers build up inventory to meet demand during the holiday season.
Broadcom is set to announce its Q4 earnings Tuesday, January 29. Owing to seasonal factors and macro weakness, the company estimates a slight decline in its revenue. Though Broadcom’s growth slowed down in 2012 due to macro headwinds, we forecast a higher growth rate 2013 onward. With a robust product road map and accelerating design wins, we believe that Broadcom has strong fundamentals to support a higher valuation.
Growing Strength In 3G & Higher Penetration Of 5G Wi-Fi
Backed by strong demand for connectivity solutions and continued growth in the 3G baseband business, Broadcom’s mobile and wireless division registered robust growth in Q3 2012. Broadcom reported record earnings of $1.02 billion from its mobile and wireless division, primarily on account of solid growth in wireless connectivity, which grew faster than the overall mobile and wireless business. A richer product mix and expanding geographic footprint helped Broadcom gain additional share in the wireless market.
Broadcom’s 3G business strengthened with the ramp up of 40 nm platform and the ramp up of 5G wi-fi across multiple device categories increased the number of orders for its 5G wi-fi solutions to over $100 million.
The smartphone business constitutes the majority of Broadcom’s connectivity business. In its last earnings call transcript, Broadcom declared that some of its customers will ramp a higher number of mid-range and higher-end smartphones with its dual-core products in the coming quarters. However, it did not expect any material contribution from the same in Q4.
With a majority share in the mobile wireless market, Broadcom is the undisputed leader in mobile phones and tablets. We believe that with the increasing adoption of dual-band wi-fi and its growing strength in 5G wi-fi, GPS and NFC, Broadcom will manage to retain its foothold in the wireless market. Last week, Broadcom licensed the ARMv7 and ARMv8 chip architectures that enables the company to build its own application processor based on leading ARM technology.
Growth In Broadcom’s Set-Top Business
Broadcom registered a 2.6% sequential increase in revenue from the broadband business, primarily on account of higher sales of its set-top box platforms. It benefits from strong demand for advanced set-top boxes in developed countries as service providers aggressively transition their subscribers to advanced services. In Q3, Broadcom witnessed share gains and continued growth in pay-TV subscribers in regions outside of Europe and North America.
Solid secular trends and Broadcom’s innovations continue to fuel its set-top box business. The company witnessed a number of positive developments last quarter and offers service providers a complete solution across the access spectrum, from DSL and cable to PON. Having meaningfully expanded its footprint in the service provider market by announcing powerful new products, we estimate Broadcom to retain its share in the broadband market.
On the flip side, the strength in Broadcom’s set-top business is being offset by the roll out of its Blu-ray and DTV businesses. However, the company is close to nearly completing its exit from the two markets, and thus, we do not expect to see any adverse effect of these businesses in the future.
Softness In Data Center & Enterprise Spending Could Impact Network Business
Equipped with NetLogic’s (NASDAQ:NETL) 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. However, it claims to be witnessing softness in demand (from U.S., Europe as well as Asia), on account of reduced data center and enterprise spending as well as lower service provider capital expenditures. Thus, we can expect to see a lower Q4 2012 revenue from this division.
We feel that macro headwinds combined with seasonal variations are responsible for the slowdown and believe that Broadcom has the capacity to retain its foothold in the infrastructure and network market in the future.
Here are some recent developments that reiterate our belief:
- Broadcom introduced Trident II, the world’s highest-density switch chip, extending its leadership in Ethernet switches. With 4.8 billion transistors on a single chip, Trident II is optimized for software-defined networks and cloud-scale data centers, supporting tens of thousands of servers and virtual machines. It will start shipping the product this year.
- It introduced the industry’s first 28 nm multicore communication processor series in November 2012, which is probably the first significant move that demonstrates the successful integration of Broadcom with NetLogic. (Read: Broadcom Retains Its Leadership With A Leap To 28 nm Multicore Network Chips)
We will update our price estimate of $44.95 for Broadcom post the Q4 2012 earnings update.
Disclosure: No positions