There is a lot of uncertainty surrounding Broadcom's (UNKNOWN: BRCM.DL ) cellular baseband business. When the company's internal efforts hit a roadblock (and as a result, production shipments were delayed to the end of 2014), investors quickly bailed. However, in a bid to deliver value to shareholders more quickly, the company bought Renesas Mobile. A carrier-certified LTE modem and accompanying system-on-chip in hand, the company announced that it would begin to see material revenue in the "first part" of 2014. While investors have remained skeptical about the size and importance of the wins this solution could get, an initial read -- courtesy of J. P. Morgan's Harlan Sur -- suggests that Broadcom has won some major deals with its first LTE product.
A seemingly great start
According to Sur, Broadcom will have "significant deals" with Samsung as well as another "top smartphone maker" for its LTE products. It also appears as if additional companies are showing interest in Broadcom's LTE solution. While this isn't a surprise, especially considering that Samsung is a customer of Broadcom's 3G smartphone chips, this is exactly the kind of "confirmation" that investors (many of whom have grown impatient with Broadcom's continual slip-ups) have been looking for. So what kind(s) of deals could these be, and what can investors expect going forward?
Probably a low-end design
Broadcom's LTE system-on-chip features a dual-core ARM Cortex A9, which suggests that this is targeted at the low-end/mainstream portion of the smartphone market. So this isn't a "sexy" design along the lines of a Galaxy S5, but as players like Intel have pointed out, the vast majority of the units (and the growth) will actually occur in the mainstream/value segment of the handset market.
Furthermore, this helps bolster the company's connectivity business. At the high end of the handset market, device makers are concerned with features and performance above all else. This typically leads these players to go with discrete connectivity chips, baseband, and apps processors, as the freedom to choose the best part for each job is valuable. However, at the low end of the market, connectivity is viewed as a "good enough" type of thing, as these handsets are often built on shoestring budgets and the struggle for every gross margin dollar is tangible.
On the downside, this has meant that Broadcom has seen share loss to complete platform vendors such as Marvell and Qualcomm (NASDAQ: QCOM ) . On the bright side, once Broadcom is able to ship the "complete package," there should be material upside to revenue (as each "sale" includes a connectivity chip and an apps processor/baseband, among other chips).
A high-end presence is coming
It's tough to ignore the fact that, while Broadcom will likely gain share at the low end with its complete platforms, there's still plenty of opportunity at the high end. Indeed, while initial efforts are focused on getting a low-cost integrated system-on-chip to market, the company has made it clear that a stand-alone cellular baseband platform will also hit the market during late 2014. At the Credit Suisse Technology Conference, CFO Eric Brandt noted that this product -- complete with Cat 6, Voice over LTE, envelope tracking, carrier aggregation, and more -- would be out in the third quarter of 2014. This is a bit later than Intel's upcoming XMM 7260 (which supports these features), but should be right around the time when Qualcomm launches its next-generation MDM9x35 with said features (Qualcomm's product is sampling in early 2014 for launch in the second half of 2014).
Since high-end products tend to use discrete basebands, this would give Broadcom a shot at everything from a future Samsung Galaxy to a next-generation iPhone. While Qualcomm and Intel will also be viciously competing for these sockets, Broadcom will at least be better-positioned than it is today.
Foolish bottom line
Owning Broadcom isn't easy, particularly because the company has plenty to prove with respect to its cellular baseband business. But, if the long thesis is right and the company emerges as one of the last players standing in cellular baseband, then there's plenty of smartphone content share for the company to take and plenty of money to be made. If not, jettisoning this business could -- according to the Credit Suisse Technology Conference -- be worth 300-600 basis points in operating margin, and the money saved could be reinvested into one of Broadcom's other, thriving businesses.
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