Broadcom Can Maintain Its Leadership In The Set-Top Box Market

May.20.13 | About: Broadcom Limited (AVGO)

Quick Take

  • In terms of global shipments, Broadcom shared the top slot in the set-top box market with ST Micro in 2012 but earned higher revenues as it accounted for significantly larger value design wins from North America and Western Europe.
  • Driven by increasing demand from emerging markets and the ongoing shift to high-definition products in developed markets, global set-top box shipments are forecast to increase from 221 million in 2011 to 242 million in 2016.
  • With an estimated increase in chips used per set-top box, the total processor shipment for these devices can grow faster than the overall market.
  • Broadcom’s primary customers are located in North America and Western Europe. However, in Q1 2013, it introduced the latest generation of set top box SOCs for entry level systems in emerging markets and claims to be witnessing increasing penetration of its products in these regions.
  • While the set-top industry is witnessing an increasing shift towards premium products, the ASP for set-top boxes continues to decline on account of falling prices of semiconductors used in these devices.
  • Though the declining ASP puts pressure on Broadcom’s margins, we believe that rising volumes will help cushion the negative impact in the future.

Broadcom (BRCM), a leading semiconductor provider for wired and wireless communications, shared the top slot in the worldwide set-top box integrated circuit (IC) market with STMicroelectronics in 2012. While both companies shipped between 85-86 million video SoCs for set-top boxes last year, Broadcom earned higher revenues as it accounted for significantly larger value design wins within the North American and Western European cable and satellite markets. [1]

Witnessing 15% higher set-top box sales in 2012, Broadcom gained additional market share and delivered strong growth and profits throughout the year. The company earns less than 30% of its revenue from its home entertainment and broadband division. It offers a wide range of solutions for key markets including video set top boxes (cable, satellite, IPTV) and residential broadband access. Broadcom exited the blu-ray and television processor market in 2011 as a surge of Asian suppliers increased competition for the established Western suppliers. However, it remains the leading player in the global set-top box market.

Macro headwinds, increasing competition, growing demand from emerging markets and declining average selling prices (ASP) threaten Broadcom’s competence in the set-top box market. Nevertheless, with a focus on innovation and the addition of entry-level systems to its portfolio, we believe that the company is in a strong position to retain its leadership in the global set-top box market.

Growing Demand From Emerging Markets Driving Set-top Box Shipments

Owing to the economic slowdown, the global set-top box market noted slow growth in the last few years. However, research firm Infonetics Research estimates the global set-top box revenue growth to have accelerated to 10% in 2012. [2] Though macro challenges are expected to lower the growth rate in the future, global set-top box shipments are expected to increase from 221 million in 2011 to 242 million in 2016. [3]

Rising demand from Asia, Latin American and a number of countries in Europe along with the ongoing shift from standard-definition products to high-definition products in developed markets is driving demand for set-top boxes. Emerging digital TV markets in China, India, Latin America and Russia are forecast to account for 45% of the total set-top box shipments between 2011-2015.

The cable and terrestrial digitization projects in emerging markets are expected to drive robust growth in set-top box shipments. Digitization of the Chinese and Indian cable platforms, China’s free-to-air satellite expansion, and pay-satellite growth in India and Latin America are forecast to require close to 500 million set-top boxes between 2011-2015. [4]

Broadcom To Retain Its Leadership In Set-Top Box ICs

Broadcom and STMicroelectronics differ in terms of the key set-top box markets that they target. While Broadcom’s primary customers are located in North America and Western Europe, STMicroelectronics targets the developing regions with its comparatively lower ASP.

However, Broadcom has been continuously innovating its product portfolio to expand its footprint in the rapidly expanding low-cost set-top box market. In Q1 2013, it introduced the latest generation of set top box SOCs for entry level systems, which is a cost effective platform enabling advanced video experiences to subscribers. It claims to be witnessing an increasing penetration of its products in emerging markets such as India and Brazil among others. Though Broadcom’s subscriber growth in developed markets remains low, we believe the technological growth will help drive its business in these markets in the future.

ARM Holdings, which designs technology to develop chips for set top boxes, forecasts the shipments for digital TV and set-top box to increase to 600 million units by 2017 compared to 420 million units in 2012. Currently, every set-top box on average uses 1 to 2 chips per device. However, with increasing technological development in the digital space, ARM estimates the number to increase to as high as 4 chips per device by 2017. [5] Thus, total processor shipments for these devices can grow faster than the overall market.

Declining Average Selling Prices

Though the set-top industry is witnessing a shift towards premium products, the ASP for set-top boxes continues to decline on account of falling prices of semiconductors used in these devices. The gradual advancement in processing technology has made semiconductor chips more affordable over the years with a high definition processor costing as low as $13. The industry ASP for a set-top box declined from $107 in 2009 to $103 in 2010, and we estimate the trend to have continued in 2011 and 2012. The overall bill of materials for set-top boxes are expected to retreat an additional 10-15% by 2015. (Emerging Markets Account for 45 Percent of all Set-top Boxes Shipped Globally between 2011 and 2015, IMS Research Forecasts, August 11, 2011)

Though the declining ASP puts pressure on Broadcom’s margins, we believe the rising volumes will help cushion the negative impact in the future.

Our price estimate of $44 for Broadcom is at a significant premium to the current market price.

Notes:

  1. Broadcom and STMicro Tie for Top Slot in Set-top Box IC Market as Ali Technology Gains Ground, ABI Research, April 25, 2013
  2. STB market springs back; video getaways, media players drive future growth, Infonetics Research, April 8, 2013
  3. Global Research of Set-Top Boxes Market – Global Industry Size, Market Share, Trends, Analysis and Forecasts 2012-2018, SB Wire, March 15, 2013
  4. Emerging Markets Account for 45 Percent of all Set-top Boxes Shipped Globally between 2011 and 2015, IMS Research Forecasts, August 11, 2011
  5. ARM Holdings Q4 2012 Analyst Presentation

Disclosure: No positions