Broadcom Finally Ditches Cellular

After burning through a lot of cash trying to pursue cellular baseband chips, Broadcom finally puts an end to the bleeding.

Jun 2, 2014 at 7:15PM

Shares of Broadcom (NASDAQ:BRCM) closed up nearly 10% today after the company announced that it will be bowing out of the cellular baseband space. The company's hope was that it could emerge as a viable second source to market leader Qualcomm (NASDAQ:QCOM) in the baseband/applications processor market, although this has proved to be quite a challenge for the company. After what was likely billions burned chasing cellular, Broadcom's management has finally pulled the plug on this expensive venture. 

A rather large cost savings
According to Broadcom's press release, the company expects to save as much as $700 million in GAAP R&D and SG&A expenses (of which $100 million consisted of share-based compensation expense). While a large investment in its own right, it still doesn't hold a candle to the over $3 billion that market leader Qualcomm invests per year, making catching up to the leader very difficult.

Further, the company claims that the entire cellular business during the first half of 2014 was on track to generate between $200 million and $250 million, with gross margin in the tens of millions. This suggests that even though Broadcom will lose meaningful revenue associated with this business, the impact to raw gross margin dollars won't actually be that high (probably because most of the current revenue base consists of low-margin 3G chips). Most of that $700 million saved will flow right to the bottom line (and potentially into the pockets of shareholders via buybacks and dividends), with $50 million peeled off to bolster investments in the company's other businesses.

Does this leave connectivity vulnerable?
One of the key motivations behind Broadcom's cellular push was to defend its share in connectivity chips that provide key functionality such as Wi-Fi, Bluetooth, and NFC. At the high end of the market (think Samsung (NASDAQOTH:SSNLF) and Apple (NASDAQ:AAPL)), Broadcom has been able to defend its share by providing better-performing parts that also topped the charts on energy efficiency. At the low end and mid-range, however, many handset OEMs prefer to get the entire platform from one company rather than incur additional R&D expenses mixing and matching components from different vendors.

This business, according to Broadcom, is worth between $500 million and $800 million of the company's total $1.65 billion-or-so mobile and wireless operating segment. The risk to this business is real, particularly as Qualcomm, MediaTek, Intel, and others already (or plan to) offer such bundled solutions for these lower-end mobile products. However, Broadcom claims that its connectivity solutions are bundled as part of some low-cost smartphone chip players' platforms (for instance, Spreadtrum), so not all is lost in this segment of the market.

Foolish bottom line
While the smartphone chip market has gained a reputation for being low-cost and low-margin, this has largely been due to the accessibility of CPU/GPU IP and a glut of companies thinking that they could cash in on this new mobile goldmine. However, as the complexity of these products have gotten much higher, and as cellular basebands have proved expensive to compete in, the reality is that even with the accessibility of core IP, R&D barriers will eventually lock all but a select few out of this market.

Broadcom is just yet another of the victims of the chase of mobile chip riches, but it certainly won't be the last. Only those that can afford to spend large amounts of money over sustained periods of time will be able to compete with market leader Qualcomm. The next question, then, is "who's next?"

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!

Ashraf Eassa owns shares of Intel. The Motley Fool recommends and owns shares of Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information