Apple and Samsung Pass on Broadcom's Cellular Business

Broadcom's cellular division is scheduled to be wound down as the company failed to find a buyer.

Jul 22, 2014 at 10:39PM

Broadcom (NASDAQ:BRCM) spent several years attempting to become a major player in the cellular baseband market. In addition to building an in-house baseband team, it acquired Beceem Communications in 2010 and then, when those efforts failed to pay dividends, it picked up the Renesas Mobile team. When it became clear that this venture was unlikely to generate the economic returns that management had hoped, it announced in early June that it would exit this business. 

Apple apparently not interested
Frankly, it's quite surprising that Broadcom was unable to find a buyer for its baseband operations. (It's laying off about 2,500 workers in the wind-down process of this business.) Though I found it hard to believe the rumors that MediaTek or the government of China (both rumors from Digitimes) would buy this business, I thought there was a legitimate shot that Samsung (NASDAQOTH:SSNLF) or -- more likely -- Apple (NASDAQ:AAPL) would be buyers of this business. 

Indeed, all of the major smartphone chip vendors aside from Apple -- Samsung, Qualcomm, Intel (NASDAQ:INTC), HiSilicon, and MediaTek -- have their own baseband efforts in-house. Now, of this crop of vendors Qualcomm generally has the most robust solutions. This is evidenced by the fact that Apple exclusively employs Qualcomm stand-alone modems and Samsung often eschews its own solutions for integrated products from Qualcomm. 

However, given how obsessive Apple is about controlling the critical parts of its supply chain, it's a bit surprising that Apple didn't scoop these efforts up (though Apple may not have wanted to take on the added burden of a modem R&D team). 

Samsung has apparently pulled it together
Samsung, which may have been another potential buyer of the Broadcom cellular business, recently announced its very first integrated LTE and applications processor offering, known as ModAP -- modem + applications processor. The modem inside of this Samsung offering isn't a Qualcomm-level product, but it seems perfectly competent for the low-end, cost-sensitive handsets that Samsung is pushing these products into. 

At the high end, there are rumors from Digitimes that Samsung has made good progress on its own internal LTE-Advanced baseband. Further, at Samsung's analyst day, management clearly outlined that it planned to continue to work with tier-1 modem vendors (Qualcomm and Intel, from the looks of it) for its high-end handsets. Given that Samsung seems to be winning Qualcomm's foundry business, this arrangement looks like it'll work out splendidly. 

What now?
With Broadcom winding down this business, it will incur a number of restructuring and impairment charges, which will make the company's GAAP earnings look pretty ugly. That's why it will be important to focus on the company's free cash flow and non-GAAP earnings per share to understand how the underlying business is doing (the latter came in at a very healthy $0.65 in the most recent quarter, beating analyst estimates by $0.04).

It's also worth noting that Broadcom signaled plans to significantly step up its capital return program as a result of the divestiture of cellular baseband. Expect a significant increase in buyback activity and potential dividend raises over the next year or so. 

Foolish bottom line
With the bleeding from cellular gone, Broadcom's free cash flow and -- eventually -- GAAP net income is likely to trend much higher. In addition to greater capital returns, the stock price is also likely to trend higher, particularly as the company's recent results signal strength across all of its core business units.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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