Since Broadcom (UNKNOWN:BRCM.DL) announced that it will shut down its cellular baseband business, the company's stock has been on a roll. However, as nice as the baseband shutdown has been in unlocking the underlying profitability of the company's core business, that underlying core business is still important to understand. To that end, the company's management delivered the following must-know insights on its most recent conference call.
Broadcom looking to enhance buyback program
On the call, CLSA's Srini Pajjuri praised Broadcom's buyback increase to $800 million but wondered why, with over $2 billion in U.S. based cash on hand, the company wasn't getting more aggressive on the buyback. CEO Scott McGregor had the following to say:
Well, I mean, we have said in the past that we would like to have about $1 billion of U.S. cash, so we are taking $2.1 billion down to $1.3 billion. I think the right way to think about this, Srini, what we have said before is that, we are actually looking at ways to sustainably increase our share repurchases by increasing our U.S. cash flow, relative to what the mix is between U.S. and foreign, and what we really wanted to do is show our investors that we we're not standing still, and that we were starting the movement now, despite the fact that we haven't yet communicated some of the long-term changes which could improve U.S. cash flow.
It will be interesting to see what Broadcom does going forward with respect to trying to increase U.S.-based cash flow. However, investors now know that Broadcom's minimum target for U.S.-based cash on hand is "about $1 billion" and that the company is actively seeking to increase its ability to execute share buybacks.
Ultra HD and HEVC revenue become material next year
One of the key secular tailwinds that Broadcom has repeatedly highlighted, as have its competitors, is the transition to HEVC and Ultra HD. These transitions will require more sophisticated set-top boxes (which means potentially higher value chip content), and Broadcom appears confident that it is well positioned to capitalize on this trend as it unfolds next year.
Ultra HD and HEVC, I see this as more of a revenue driver into next year, rather than this year, so that's where growth will come from next year. And while the revenue isn't until next year, that is a very big factor for design wins this year. So all of the set-top box, MSOs and so forth, looking at deploying designs, are really choosing based on the quality and the maturity of the HEVC and Ultra HD technology, and I think we are unparalleled in that space.
Broadcom's Broadband Communications segment generated $625 million in revenue in the most recent quarter, breaking out from a multiyear range of $494 million to $568 million. Given that this major technological shift in set-top boxes is still ahead of the company, there's reason for continued optimism for this operating segment.
Connectivity set to see a richer mix this quarter
In its earnings release, Broadcom guided to its Mobile and Wireless division to be "up" from the second quarter, adding in the release that "connectivity expected to be up significantly." When pressed by Ross Seymore of Deutsche Bank about the factors driving this strength, Broadcom's CFO, Eric Brandt, offered the following explanation:
It's definitely an [average selling price] improvement as well as some volume launches with key customers, and so it's a combination of those things. So it should be a very, very strong quarter for connectivity.
While management can't give specifics on what's going on here (for obvious reasons), it is likely that the "average selling price improvement" is driven by Apple's move from the older 802.11n standard to 802.11ac in its upcoming iPhone and iPad refreshes..
Samsung, on the other hand, utilized Broadcom's 1x1 802.11ac solution in the Galaxy Note 3 and its 2x2 MIMO 802.11ac solution in the Galaxy S5. It is likely, then, that the upcoming Galaxy Note 4 will transition to 2x2 MIMO 802.11ac, which should drive average selling price upside for Broadcom -- assuming, of course, Broadcom wins this socket.
Connectivity should remain strong longer-term
On the call, J.P. Morgan's Harlan Sur asked, "[H]ow does your design win pipeline at the high end look as you sort of think about kind of the next 12 months?"
McGregor offered the following response:
So in terms of design wins, we see very strong design win programs going forward. We've got great products, and we are coming out with new technologies and a lot of different things, and so I think for us, it's very much business as usual in terms of winning those high-end designs.
Given that one of the key risks to Broadcom's connectivity business is that rival Qualcomm could snatch away high-profile, high-end designs from Broadcom, this statement -- though not proof that Broadcom has won a particular set of designs -- tends to suggest that Broadcom's position at the high end is fairly safe.
What does Broadcom's future growth look like?
Needham's Quinn Bolton asked McGregor, "Can you give us some sense going forward, what kind of growth rate do you tink Broadcom is targeting?"
McGregor was bullish on the Broadband and Infrastructure businesses, stating, "I don't see any reason why we wouldn't continue to outgrow peers in those spaces. [They are] very strong performing businesses."
However, his near-term outlook for the connectivity business was less bullish in the near to medium term as the company's position in the low end and mid-range of the connectivity market comes under pressure as a result of its exit from cellular baseband. However, McGregor added, "I certainly see [Broadband and Infrastructure] continuing to perform well, and I expect that to normalize over time, and put us back on sort of the normal Broadcom trajectory."