When Samsung (NASDAQOTH: SSNLF) announced its Galaxy S10-series of premium smartphones, wireless chipmaker Broadcom (AVGO -4.31%) announced, in tandem, that its latest BCM4375 Wi-Fi/Bluetooth connectivity combination chip is powering those new flagship smartphones. That chip was the company's first to support the latest Wi-Fi 6 standard, which promises significant performance improvements over previous-generation Wi-Fi technology.
The BCM4375 is a high-end part aimed at premium smartphones, meaning that it's designed for maximum performance, but its cost structure (as well as final selling price) is designed for pricier devices that can handle relatively pricey chips.
Image source: Getty Images.
On Feb. 25, Broadcom announced a new Wi-Fi 6-capable chip known as the BCM43752. This chip, unlike the BCM4375, is aimed at so-called mass-market smartphones.
Let's take a closer look at the announcement and why investors should care.
Cost cutting all around
Broadcom explains that the BCM43752 "significantly reduces smartphone bill of materials by integrating [radio frequency] components such as power amplifiers (PAs) and low-noise amplifiers (LNAs) into the device."
The idea here is simple: Since these components are integrated in the chip that smartphone makers are buying from Broadcom, those smartphone makers won't need to buy those components separately.
In the press release, Broadcom quoted Phil Solis, research director at the market research company IDC, as saying that this chip "reduced costs by going down to single core, 2X2 MIMO for Wi-Fi, integrating the PAs and LNAs, and offering flexible packaging options while keeping the same functionality as their flagship combo chip."
Broadcom explains that this chip is targeted at "the broader smartphone market where high performance and total solution cost are equally important design decisions."
The rationale for Broadcom
The bulk of Broadcom's wireless business comes from sales to Apple. In the former's most recent 10-K filing, the company explained that sales to Apple "accounted for approximately 25% of our net revenue for fiscal year 2018."
Now, also consider that 31.1% of the company's revenue in its fiscal 2018 came from its wireless-chip business. Since Broadcom's Apple-related revenue is likely concentrated entirely in Broadcom's wireless segment, Apple appears to have made up north of 80% of Broadcom's entire wireless business.
As you might be aware, Apple's iPhone sales are in decline -- iPhone revenue dropped 15% last quarter. (Sadly, Apple no longer breaks out unit shipment trends, which are arguably more relevant to a component maker like Broadcom.) It's not surprising, then, that Broadcom would be looking to cultivate additional smartphone-related revenue streams to fortify its wireless business in the face of Apple's weakness.
Broadcom's wireless business should benefit from the secular shift toward more advanced Wi-Fi chips, as well as advancements in cellular technology (Broadcom is a key provider of radio frequency chips that make up a smartphone's cellular subsystem), but it's smart for the company to try to build products targeted at a broader swath of the smartphone market. That's what the company is doing with this new Wi-Fi 6 chip.
Time will tell if Broadcom's efforts to grow its smartphone business beyond premium models (where the company's strength in developing cutting-edge Wi-Fi technology is valued) will be successful, but if it is, then this could help fuel growth in the company's wireless business even in the face of a declining smartphone market (since the company would be taking share).
Check out the latest Broadcom earnings call transcript.
Investor takeaway
Broadcom has a best-in-breed mobile Wi-Fi business that, today, largely serves Apple and, to a much lesser extent, Samsung for the latter's premium Galaxy S-series and Note-series devices. And, for the foreseeable future, I expect the bulk of the company's Wi-Fi business to come from premium smartphones.
Nevertheless, I'm encouraged to see Broadcom working to broaden its product portfolio to ultimately address a bigger portion of the smartphone market. Even though the overall market is stagnant, Broadcom can still grow its wireless business through content gains in the premium portion of the market and, potentially, unit share gains in the so-called mid-tier of the market.
