Broadcom Disappoints, But Is the Long-Term Story Intact?

Broadcom (NASDAQ: BRCM  ) announced its earnings after the close of the Oct. 22 session. While the company's results for the quarter were a mild beat, the company's guidance was weaker than expected -- $1.975 billion, +/- 3%, against consensus of $2.13 billion. The company announced a fairly substantial set of layoffs, to the tune of 1,150 personnel, or about 10% of the workforce. While the network-infrastructure business is in good shape and its home business throws off plenty of cash, significant concerns around its mobile and wireless business loom.

High-end phone growth slowing significantly; low end in desperate need of a solution
Broadcom's connectivity combo chip share -- semiconductor products that build in Wi-Fi, Bluetooth, NFC, and/or GPS -- has been quite strong in the high end of the market. But in the mid-to-low-end space, its lack of a competitive offerings -- particularly lack of LTE -- has been a clear negative. Indeed, in the lower end of the smartphone/tablet markets, Broadcom's seemingly superior solutions still don't hold up against cheaper, bundled solutions from other players such as Qualcomm (NASDAQ: QCOM  ) . Broadcom needs to be selling the entire platform, soup to nuts, in order to continue to drive meaningful growth here.

The problem here is that while Broadcom has 3G solutions, the 3G market is dwindling. The margin situation there is terrible -- lots of competitors all selling largely the same technology, which is a problem Intel (NASDAQ: INTC  ) has faced with its own 3G solutions, and why it is rushing to get its LTE solutions to market as soon as possible.

The transition to LTE has been difficult for most players, and it is likely that Broadcom ends up one of the increasingly fewer players that compete in the 4G/LTE market. However, the first products -- an integrated dual Cortex A9 coupled with Renesas-designed modem -- will roll out in early 2014 (CEO Scott McGregor defined this as "January to April"). Management seems optimistic that these will gain meaningful design traction, although investors rightly remain skeptical, particularly in light of the difficulties that the company has had in the cellular baseband space thus far. The company is already late and can't afford yet another delay.

Apple's lack of 802.11ac damages mix/confidence
Apple's latest iPhone 5c/5s, as well as its freshly launched iPad Mini and iPad Air tablets, feature Broadcom's lower-end 802.11n Wi-Fi rather than the 802.11ac (5G) Wi-Fi that some other higher-end devices, such as the HTC One, come packed with. While Broadcom's management is confident that the trend toward higher-end 802.11ac is intact and should manifest itself more prominently over the next year, Apple's adoption of older, lower-dollar content technologies may raise some doubt among investors. In addition, Apple's use of 802.11n rather than 802.11ac means that Broadcom doesn't see what could have been a very real ASP/margin dollar uplift with this year's Apple product models.

Nevertheless, shares are dirt cheap
Excluding the NetLogic impairment charge, but keeping in share-based compensation expenses, the company is set to earn between $1.53 and $1.69 per share. On a non-GAAP basis, the company is set to earn between $2.58 and $2.73. This means that at the most recent after-hours price of $24.98, Broadcom trades at 15.5 times the midpoint of expected full-year earnings, excluding share-based compensation. On a non-GAAP basis, shares trade at 9.4x fiscal 2013 estimates.

The shares are dirt cheap, and once the company can show signs of material traction in the highly integrated low-to-mid-range of the cellular platform space, then it is likely that we will see significant operating leverage into fiscal 2014 -- operational expenses will likely be flat in 2014 year over year, but mobile and wireless investments into LTE have been significant with no payoff yet.

As long as Broadcom can execute on its LTE plans into 2014, shares should trade meaningfully higher from current levels. In addition, the company's analyst day is coming up in November, which could help to assuage investor fears and explain/expand upon the long-term strategy. Until then, it will be a very volatile ride.

 

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  • Report this Comment On October 24, 2013, at 8:08 PM, cdkeli wrote:

    Yeah and how much does the CEO and his top-management floozies draw for salaries and bogus bonuses?! Methinks they fired 1200 people just to get their contractually obligated annual raises,,,more to follow no doubt what with Xmas bonuses coming due!!

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