The Street was highly negative regarding the quarterly performance and the accompanying outlook of Broadcom (BRCM, Financial). The weakness in its mobile and wireless business, which comprises nearly 46% of the top line, is expected to be overly negative. But the strength in Broadcom’s remaining 54% of the business is being completely ignored by the analysts.
Broadcom doesn’t depend on its mobile business only. Broadcom is based on three pillars, and needs to focus on all of them. The Broadband Communications and Infrastructure & Networking businesses of Broadcom are doing quite well and are worth analyzing.
A huge market
For the broadband business, the company experienced a 5% increase in revenue from last year to $568 million. It also witnessed growth sequentially, but the mobile segment declined 3% as a result of short-term headwinds. The broadband communications segment enables solutions for set-top boxes and media servers and is believed to have enough opportunities in the emerging markets.
For example, the Indian pay TV provider Dish TV and another major player, Tata Sky selected Broadcom chip and also chose Broadcom’s MPEG-4 standard definition set top box solutions. Thus, these can be considered as major customer wins as digitization is yet to penetrate in India.
Both, Dish TV and Tata Sky have celebrity endorsers and are among the most popular TV service providers in India. The overall subscription revenue of the cable TV industry in India is estimated to increase from $4.2 billion in 2011 to $6.4 billion in 2020 including broadband growth.
Hence, Broadcom is on the right track towards growth in this huge emerging market and its solutions for set-top boxes and connected homes are expected to drive revenue growth in the long run. The broadband access business of the company is also gaining traction with Broadcom witnessing design wins concerning passive optical networks (PON). The PON market is forecasted to grow robustly at a rate of 20% till 2016, benefiting the company thereafter.
Further, the 3G small cells and femtocells of Broadcom are also becoming popular on account of growth in LTE and next-gen 3G networks. For instance, ZTE selected Broadcom’s small cell baseband processors for residential access points in the previous quarter. So, overall, it can be concluded that the broadband business of the company has certain weaknesses which cannot be sidelined, and therefore investors must buy more shares at depressed levels.
Looking ahead
The Infrastructure & Networking segment generated $512 million in revenue for the previous quarter which is 7% improvement from the previous year. The large build outs in the business drove the performance in this segment and the service provider segment also benefited from the customers of Broadcom who participated in tenders across the globe.
But, Broadcom has to suffer $501 million impairment charge for its February 2012 acquisition of NetLogic Microsystems, which it had earlier and originally acquired for $3.7 billion. However, going forward, the conditions look stable. According to IDC, the spending on cloud services is expected to be approximately $60 billion by 2020, and Broadcom is believed to benefit from this growth due to some targeted innovations.
More positives
Broadcom must gain strength from the deployment of LTE networks across the globe, especially in the U.S. and China with service providers all tuned to implement it. Earlier in the last conference call, management had indicated to expect gains from a tender in China as companies in the country are moving to deploy LTE.
For example, China Mobile is all set to deploy TD-LTE in the region and it had released a big LTE tender in June which’s the largest in its history, according to China Daily. The capital spending of China Mobile is also expected to leap almost 50% this year to around $30 billion, 50% of which is expected to be allotted for TD-LTE deployment. Currently, ZTE selected Broadcom’s small cell baseband processor which is a key China Mobile supplier is estimated to help Broadcom’s prospects as well.
Sprint is also expected to spend $16 billion in the next two years to expand its LTE services after being acquired by SoftBank, which is double of what it currently does. The LTE service of Sprint currently covers 90 cities, but is expected to be able to increase that number having enough spectrum and financial power of SoftBank.
Conclusion
So, Broadcom is not just based on one business, so judging the company’s future performance on just one of its three pillars is not wise. The end-markets of the company look good for the long run, and should even get better from here.
