Broadcom (BRCM) is a leading semiconductor provider for wired and wireless communications. Despite an annual contraction in the overall semiconductor industry, Broadcom registered an 8% increase in its 2012 revenues as it gained additional market share in all of its business segments. While macro headwinds might limit the company’s short-term growth, we believe in its long-term growth potential. With strong cash flow, a robust product road map for 2013 and beyond, as well as accelerating design wins, we believe that Broadcom has strong fundamentals to support a higher valuation.
Our price estimate of near $44 for Broadcom marks our valuation at a >20% premium to the current market price. Here we provide a quick snapshot of the important segments that contribute to Broadcom’s business and the key trends that could help drive the stock in the future.
What Are The Important Segments That Contribute To Broadcom’s Business?
Broadcom products enable the delivery of voice, video, data and multimedia to and throughout the home, the office and the mobile environment. It provides the industry’s broadest portfolio of state-of-the-art system-on-chip (SoC) and software solutions to manufacturers of computing and networking equipment, digital entertainment, broadband access products and mobile devices.
The company earned $8.1 billion in revenue in 2012, and earned 50% gross margins and 8% operating margin on the same. Broadcom incurs a low capex (~5% of gross profits), as it does not operate its own manufacturing facilities but relies on semiconductor foundries like TSMC and USMC for manufacturing the products it designs. However, with 45% R&D and 15% SG&A expenses as a percentage of gross profits, the company devotes a significant amount of its resources to developing and marketing new products.
Broadcom’s business can be divided into the following key segments:
1. Wireless Connectivity: Broadcom’s mobile and wireless segment offers products supporting a range of portable devices that enable end-to-end wireless connectivity. Its wireless connectivity solutions include its WiFi, Bluetooth, GPS SoC solutions, as well as a combo (all three solutions on one chip) SoC. Other solutions include baseband solutions for EDGE, 3G and 4G systems, and multimedia and application processors for mobile phones and handheld devices. The buyers of Broadcom’s products are the manufacturers of portable devices such as Nokia, Motorola, Samsung, Apple, Cisco, Sony, HP, Lenovo, Dell and AT&T.
Broadcom derives 48% of its revenue and earns approximately 46% gross profit from the wireless & mobile baseband division. With a majority share in the mobile wireless market, Broadcom is the undisputed leader in mobiles and tablets with a presence in the Apple iPad, Samsung Tab and Motorola Zoom. The company has enjoyed major success with its connectivity solutions in cell phones, most notably the main WLAN slot in the iPhone.
Broadcom currently accounts for close to 4% of the mobile baseband and application processor market. With a robust product portfolio, we forecast its market share to increase in the future.
Last year, Broadcom announced the extension of 5G Wi-Fi chips from routers to smartphones and tablets. It also expanded its wireless product portfolio with NFC quad-core chips, which targets growth in mass market mobile phones as well as high-end mobile phones and devices. Broadcom has licensed the ARMv7 and ARMv8 chip architectures that enables the company to build its own application processor based on leading ARM technology.
Earlier this year, Broadcom announced its first LTE-compatible baseband chip that it claims to be 35% smaller compared to current products, making it the industry’s smallest 4G LTE chip in the market. The smaller chip size not only makes it cheaper to produce, but also more power-efficient. The 4G LTE modem along with Broadcom’s leading Wi-Fi, Bluetooth, GPS and NFC technologies provide manufacturers with a comprehensive product offering needed to build advanced mobile devices.
2. Home Entertainment & Broadband: Broadcom’s broadband communications business offers a wide range of solutions that enable voice, video, data and multimedia services over wired and wireless networks for the home. Key end-markets include video set top boxes (cable, satellite, IPTV), residential broadband access (modems for cable, xDSL and passive optical network or PON), digital TV and blue-ray players. Cisco, Echostar, Motorola, Pace, Thomson and Samsung are some of Broadcom’s key customers.
The home entertainment and broadband division contributes approximately 27% to Broadcom’s revenue, and the company earns 55% gross margins in the segment. Broadcom currently accounts for 31% of the home entertainment and broadband market, and we expect its market share to increase marginally over our review period.
With 15% higher set-top box shipments, Broadcom gained additional market share and delivered strong growth and profitability throughout 2012. The company benefits from strong demand for advanced set-top boxes in developed countries, as service providers aggressively transition their subscribers to advanced services and emerging markets continue to increase their digital transition.
Solid secular trends and Broadcom’s innovations continue to fuel its set-top box business. The company witnessed a number of positive developments last year, and offers service providers a complete solution across the access spectrum, from DSL and cable to PON.
3. Infrastructure & Networking: The Infrastructure & Networking segment designs and develops complete silicon and software infrastructure solutions for service providers, data centers, and enterprise and small-to-medium business networks. Broadcom’s products are used in end products like switches, hubs and routers, servers, workstations, desktops, notebooks, LAN cards, etc. Its customers include Cisco, IBM, Juniper Networks, HP, Netgear and Dell among others.
Broadcom derives 23% of its total revenue from the infrastructure and networking division, and earns approximately 58% gross margins from the same. Broadcom accounts for 54% of the networking market, and we forecast the company to maintain its market share over our review period.
In addition to introducing the first 28 nm multicore network chip last year, Broadcom also launched the latest generation of Ethernet switches for the enterprise market, which are optimized to address increasing workforce mobility. Equipped with NetLogic’s portfolio, we feel Broadcom has the requisite IP to meet the growing customer demand in the network market.
4. Licensing: Broadcom also earns some license revenue from patent cross-licensing deals with Qualcomm. In 2012, licensing revenue represented around 2% of Broadcom’s total revenue. Broadcom’s licensing agreement with Verizon ended in 2009, and the agreement with Qualcomm will expire after 2013.
Disclosure: No positions.