Broadcom (UNKNOWN:BRCM.DL) made a smart move earlier this year when it decided to ditch its cellular baseband chip business. Having failed to find a buyer for the unit, Broadcom is now winding the business down. The company is cutting 20% of its workforce in order to become leaner, and this is expected to improve its performance going forward.
However, Broadcom's second-quarter results were mixed as it missed on the top line. The company's gross margin was strong, and it beat the consensus estimate on the bottom line. With Broadcom strengthening its focus on new areas such as the Internet of Things, wearable devices, and connectivity solutions, it stands to gain new business from the likes of Apple (NASDAQ:AAPL).
The company is counting on strong product development to address its existing markets and new industries. For instance, Broadcom introduced a new 25-gig Ethernet switch standard to assist customers in managing the exponential growth of traffic in the data centers. This is a smart move as data center construction is increasing at a fast pace. According to TechNavio, the global data center construction market is expected to increase at a compound annual rate of 22% till 2018. This should open up some handsome opportunities for Broadcom.
Broadcom is also transitioning to high-efficiency video coding, or HEVC, and Ultra HD in broadband. Management also reported share gains in passive optical networks, or PON, while a new product cycle in broadband access is another tailwind.
In connectivity, Broadcom is busy driving cutting-edge features in high-end smartphones and tablets. It is also strengthening and diversifying the business through new low-power connectivity solutions for the Internet of Things, and by supporting iBeacon and HomeKit.
Apple's home automation could be a catalyst
Broadcom is partnering with Apple on the HomeKit platform. Through HomeKit, Apple is looking to increase its presence in home automation. The purpose of HomeKit is to allow users to control their home with iDevices. As reported by Macworld, HomeKit provides "a suite of tools for controlling such devices in your home as thermostats, furnaces and air conditioners, smart appliances, lights, cameras, garage-door openers, and security systems."
Apple is developing its own standard through this platform, allowing chipmakers such as Broadcom to find another area for growth going forward.
Addressable markets are improving nicely
Broadcom is also seeing strength in both set-top box and broadband modem platforms. The company's set-top box chips did well in the previous quarter with 8% sequential growth, driven by share gains in the emerging markets. Growth of features such as multi-stream transcoding, more tuners, and a robust mix of MoCA-enabled platforms are the growth drivers in this segment. Moreover, the transition to HEVC and Ultra HD is expected be the longer-term growth driver in the set-top box market.
In the broadband segment, modem sales grew more than 15% year over year, driven by strength in cable, DSL, and PON. Broadcom launched its latest-generation LTE offerings for small cells, which are expected to deliver higher efficiency at a lower cost, to improve its performance in this market. Moreover, the LTE build out and backhaul deployments, particularly in China, are driving growth on the service provider side.
On the connectivity side, Broadcom is focusing on the Internet of Things and wearables. It has announced new low-power connectivity solutions for the next-generation wearables. It has also introduced its first-generation system-on-a-chip for wireless charging. On the access point side, the world's fastest Wi-Fi router was introduced and is powered by Broadcom.
The bottom line
Broadcom's efforts look impressive. The company did the right thing by exiting the cellular baseband business where it was facing stiff competition from Qualcomm and MediaTek. It can now focus on markets that can deliver growth in the long run, making it worth considering for investors' portfolios.
Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.