Global Semiconductor Leader Hits $2 Billion Revenue Milestone

Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

California based Broadcom (NASDAQ: BRCM), a Fortune 500 company, is a global semiconductor leader for wired and wireless communications. It maintains a portfolio of system-on-a-chip (SoC) and software solutions. Broadcom supplies chips for everything from cell phones to cable boxes. It is the chief supplier of chips for Apple’s wildly popular iPhone series. Broadcom’s product cycle-driven strength is a stand out among competitors in a soft chip market. In addition, for the first time in company history, Broadcom boasted over $2 billion in third quarter revenue.

Q3 Earnings

The company delivered a solid third quarter largely due to Apple’s success in the iPhone market. Broadcom is also benefiting from its relationship with Samsung Galaxy products. Growth was up 14% sequentially, but it’s important to note that growth was up in all quarters, not just in the large mobile, wireless arena. Net revenue for Q3 was $2.13 billion. Net income was $220 million or $.38 per share compared with net income in the second quarter of $160 million or $.28 a share. In 2011 the company posted third quarter profits of $270 million or $.48 per share. Product gross margin for Q3 2012 was reported to be 48.8% and cash flow from operations was reported to be $621 million. Those are GAAP results. Non-GAAP product gross margin was 52.1% and diluted EPS were at $.79.

It’s important to remember, however, that the higher revenue was offset by increased investments in research and development. Also there was an 11% increase in manufacturing costs. Investors should not worry about the 11% increase because it is critical for the company to bolster research and development spending especially with strong competition from the likes of Qualcomm (NASDAQ: QCOM) and Nvidia (NASDAQ: NVDA). In the fourth quarter, Qualcomm's total revenue has grown 18% to $4.87 billion with an increase of $0.73 per share, whereas, Nvidia has shown an increase of 17% in its third quarter earnings due to growing demand of its processing chips in the smartphone industry.

Ethernet Deal with Hyundai

Broadcom announced in October that it had signed a deal with Hyundai to build Ethernet networks into next generation Hyundai vehicles. The companies will collaborate to integrate infotainment, telematics and Advanced Driving Assistance Systems (ADAS) features such as surround view parking and lane change sensors.  The telematics technology will fuse information and communications skills. Broadcom shares were up 3.8% after the announcement and analysts see this deal as a positive in the company’s long-term outlook. Broadcom executives perceive the car as a platform for their technology. Ali Abaye, a senior director with the company commented “It’s your digital living room and smartphone on the go.” Pretty neat technology and both companies hope that consumers will line up to buy into it.

Historically, Broadcom’s strategy has been to find a way into a market then build complimentary expertise to increase its foothold with manufacturers. On the whole it is a sound strategy. It works for them and investors seem content with the approach. The automotive industry is a new frontier for Broadcom and they expect to win big after gaining a foothold in that venue.

Q4 Expectations

According to Reuters, Broadcom expects a fourth quarter drop in revenue to a range of $1.95 billion to $2.1 billion. Company executives attribute the expected decline to weak demand for chips used in computer data infrastructure. Even with the expected decline in revenue for the fourth quarter, Broadcom is expected to outgrow its peers. The company does exceptionally well in connectivity and will likely continue in Q4. With the launch of a new Ethernet chip-set (Trident II 10G) in early 2013, Q4 revenue shortfall estimates should rebound nicely by the second quarter of 2013.

Analysts are concerned as to whether the company can maintain both share and margins over time. There is also some question in reference to how long Broadcom can significantly outgrow its markets. But no one seems overly concerned and almost everybody likes Broadcom. Many analysts are calling the stock a buy. Shares are selling for just above $30 as of today. With shares up over 14% this year the company is a pretty good option for perspective bargain hunters. Another plus is that Broadcom has a pretty diverse product portfolio that is attractive to analysts and investors. Also look to Apple to use Broadcom chips in its new iPad Mini which will give the company a nice boost in the mobile segment going forward. This is a nice one for the long-term.

muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of NVIDIA and Qualcomm. Motley Fool newsletter services recommend NVIDIA. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus