Leading semiconductor provider for wired and wireless communications, Broadcom (BRCM), recently updated its financial guidance for Q4 2013. The company increased its projected revenue range from $1.79-$1.98 billion to $2-$2.05 billion due to better than expected sales across all business segments, particularly Infrastructure and Networking. Additionally, Broadcom lowered the upper limit of the estimated rate of decline in its gross margin (GAAP and non-GAAP) from 1% to 0.75%. The company forecasts its combined R&D and SG&A expense (GAAP and non-GAAP) to increase by $30-$50 million as against its initial guidance of $40-$60 million.
Broadcom’s growth has slowed over the past couple of quarters as it faces intense competition in the connectivity domain and invests to build its baseband portfolio. Despite the revised guidance, the company expects to see a sequential decline in all its business segments – baseband, broadband and networking – in the current quarter. However, Broadcom believes growth will accelerate in 2014 backed by the LTE certification early next year of its mobile devices, continued strength in data center, as well as rising 5G Wi-Fi and other multiple technology transitions.
Our price estimate of $38 for Broadcom is at a significant premium to the current market price of $29 and we continue to believe in the company’s long term growth potential. We forecast Broadcom’s top line growth to accelerate 2014 onward.
Broadcom To Retain Its Connectivity Share With Growing 5G WiFi 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 (NASDAQ:QCOM), including the HTC (OTC:HTCCY) One Mini, Samsung (SSNLLF) 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 remains stable, as it has 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 ((IoT)) and wearable devices. We believe it will continue to retain its market share in connectivity solutions over our forecast period.
Broadcom’s wireless connectivity sales were roughly flat last quarter as it underwent a channel inventory correction and a mix shift towards 802.11. However, the company 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 in 2014.
LTE Certification To Expand Presence In The Baseband Market
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. In October this year, 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.
Trident II To Help Retain Growth Momentum In The Data Center Business
On account of reduced data center and enterprise spending, as well as lower service provider capital expenditures, Broadcom marked a 10% decline in its Infrastructure and Network revenue in 2012. However, the company witnessed continuous growth in the segment in 2013. Equipped with NetLogic’s leading multi-core embedded processor solutions, Broadcom has managed to expand its potential addressable market in the last few quarters.
Data center remains a strong growth driver for the company with Broadcom’s leadership in high density Ethernet switches. Its next generation Trident II is now in volume production and Broadcom expects the same to contribute to its growth momentum in networking through 2014.
Leadership In Set-Top Boxes To Drive The Broadband Business
Driven principally by weakness in its access business, Broadcom expects its Broadband business to decline sequentially in Q4 2013. However, it believes that the set-top market continues to be a key growth driver for the company. Driven primarily by rising demand from emerging markets, the global set-top box shipments are forecast to grow at a CAGR of 9.7% through 2016.
Broadcom shared the top spot 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.
Macro headwinds, increasing competition, growing demand from less technology-intensive emerging markets, and declining average selling prices (NYSE:ASP) will all challenge Broadcom’s ranking in the set-top box market. Nevertheless, with a focus on innovation and the addition of entry-level systems to its portfolio, the company is in a strong position to retain its leadership in the global set-top box market, in our view.
Broadcom has been continuously innovating its product portfolio to expand its footprint in the rapidly expanding low-cost set-top box market. It claims to be increasing the penetration of its products across the BRIC countries in 2013.