Broadcom: Strong Revenue Growth, but Still Subject to Market Cycle

Broadcom Corporation (BRCM) reported revenues of $1,027 million in Q4 of 2007, slightly above our and consensus estimates of $1,020 million. GAAP EPS came in at $0.16 versus $0.05 in the prior quarter and $0.08 in the year-ago quarter. Non-GAAP EPS of $0.34 came in ahead of our estimate of $0.31 (and consensus estimate of $0.32).

The growth in revenues was driven primarily by the strength in the mobile and wireless segment, which in turn was attributable to the customer ramp-up in Bluetooth solutions, strength in wireless LAN product offerings, and royalties of $32 million received from Verizon Communications, Inc. (VZ).

Going forward, we expect strong product cycles in digital TV, Bluetooth, and WiFi to drive revenue and profitability in CY08, with wireless baseband gaining traction in late-FY2009. However, we also expect near-term uncertainty in BRCM's consumer segment growth to persist through late 2008, with visibility into a resumption of growth in the latter half of 2008 still limited at this time.

Management expects revenues between $975 million to $1.005 billion in Q1:FY2008. The basic underlying theme to watch at Broadcom continues to be the progress with the launch of new, more highly integrated IC products at more advanced progress geometries. This is the ultimate (and most likely, the only) competitive differentiation factor in every end-market where Broadcom competes.

Nevertheless, based on our pro forma EPS estimate, we believe the stock is richly valued, despite the company's leading position in wireless, broadband and networking. Moreover, we are also concerned with the cyclicality inherent in the semiconductor market and the potential difficulty to penetrate any particular market or a combination of markets. Accordingly, we maintain our Hold rating on the stock and have reduced our target price to $24.