Previously, I'd explained why analysts were overly negative about Broadcom's (BRCM) third-quarter performance and the accompanying outlook. The weakness around its mobile and wireless business, which makes up almost half of the top line, seemed overblown. But what seemed completely ignored in analysts' opinions about Broadcom was the strength of the other half of its business.
Broadcom doesn't live and die by its mobile business only, even though mobile was probably the reason behind a downcast outlook. Broadcom stands on three pillars, and focusing on just one is certainly not the way to go. The company's Broadband Communications and Infrastructure & Networking businesses have been doing pretty well, and they are worth analyzing.
A big opportunity
Beginning with the broadband business, the company witnessed a 3% jump in revenue sequentially. The broadband communications segment provides solutions for set-top boxes and media servers, and has a lot of potential in the emerging markets.
For instance, Broadcom's chip was selected by Indian pay TV provider Dish TV, and another major player, Tata Sky, also chose Broadcom's MPEG-4 standard definition set top box solutions. These are huge customer wins in my opinion, since digitization has a long way to go in India.
The number of households with a TV in India is expected to grow from around 160 million currently to 200 million by 2017, with both cable digitization and direct-to-home services growing in sync. The Indian government has been making digitization necessary in a phase-wise manner, with the final phase expected to be complete by 2015. This digitization drive will require set-top boxes or a customer won't be able to watch TV. The total subscription revenue of the cable TV industry in India is expected to reach $6.4 billion by 2020, up from $4.2 billion in 2011, including broadband growth.
So, Broadcom is certainly making the correct moves in this huge emerging market, and its solutions for set-top boxes and connected homes should bring in revenue in the long run. Then again, the company's broadband access business is also doing well, as Broadcom saw design wins related to passive optical networks (PON). The PON market is expected to grow at a solid rate of 23% until 2016, and the company is expecting to make the most of it.
Moreover, Broadcom's 3G small cells and femtocells are also finding traction on the back of growth in LTE and next-gen 3G networks. For example, earlier this year, ZTE selected Broadcom's small cell baseband processors for residential access points. So, all in all, it can be said that the company's broadband business has certain tailwinds that cannot be ignored, and this is a reason why investors should consider buying more shares at depressed levels.
There's more to Broadcom
The catalysts don't stop here. I haven't focused on the final piece of the puzzle yet -- the Infrastructure & Networking segment. This segment grew 5.2% sequentially in the previous quarter. The performance in this segment was driven by large build outs, while the service provider segment also witnessed strength as Broadcom's customers participated in tenders across the globe.
However, a dark spot in this segment was the $501 million impairment charge that Broadcom had to take on account of its February 2012 acquisition of NetLogic Microsystems, which it had originally acquired for $3.7 billion. Broadcom had taken this charge in the second quarter. But when you look forward, things seem brighter. According to IDC, spending on cloud services is expected to rise to $60 billion by 2020, and Broadcom has some innovations up its sleeve to benefit from this growth.
The company recently unveiled an industry-leading communications processor and states that its performance is unmatched. Hence, it is not surprising that this segment is expected to be up on the strength in the data center market.
The deployment of LTE networks across the globe, especially in the U.S. and China, should aid Broadcom, as it is witnessing strength at service providers as well. The company expects gains from China, which is not surprising, as many companies in the country are moving to deploy LTE.
For instance, China Mobile is going to deploy TD-LTE in the region and it had initiated a big LTE tender in June, the largest in its history, according to China Daily. The source also states that China Mobile's capital spending is expected to jump almost 50% this year to around $30 billion and 50% of that is expected to be allotted for TD-LTE deployment. ZTE, which recently selected Broadcom's small cell baseband processor, is a key China Mobile supplier, and this might help Broadcom's prospects as well.
Broadcom cited strength on carrier spending in the U.S. as well, which is, again, not surprising. While it's no secret that the likes of AT&T (T) and Verizon (VZ) have been dominant players in LTE in the U.S., the emergence of others such as Sprint (S), would provide further opportunities for Broadcom.
After its acquisition by SoftBank, Sprint will be spending $16 billion in the next two years to expand its LTE services, which is double of what it currently spends. Sprint's LTE currently covers 90 cities, but the company has plenty of spectrum and with SoftBank's financial muscle, it should be able to increase that number.
Hence, it is clear that Broadcom doesn't rely on just one business and pinning the company's future performance on just one of its three pillars is unwise. All of the company's end-markets look good for the long run, and I won't be surprised if things get better from here.