A Look at Broadcom's First Quarter and Beyond
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Communications chipmaker Broadcom (NASDAQ: BRCM) beat the Market’s expectations in the first quarter and followed it up with a decent guidance. However, its shares dropped some 2% in extended trading as investors took note of the rising costs plaguing the company. We will now take a look at the quarter that was and what lies ahead for Broadcom.
Into the quarter
Broadcom is a supplier to smartphone bellwethers Samsung and Apple (NASDAQ: AAPL), deriving almost 23% of its revenue from both of them combined. However, weak sales to Nokia (NYSE: NOK) and other phone makers weighed on the company’s top line. As a result, Broadcom’s revenue in the quarter was $1.83 billion, almost flat from $1.82 billion posted in the year-ago quarter, but good enough to brush past the Street's estimate of $1.8 billion.
However, it was the costs that worried investors the most. The company’s gross margin improved in the quarter on a non-GAAP basis. But Broadcom expects its gross margin to remain roughly flat in the ongoing quarter, which didn’t do much to inspire confidence among investors as they would have liked a margin expansion on the back of increased sales. Gross margin is expected to decline on a GAAP basis because of acquisition-related costs attributable to NetLogic Microsystems, closed in the reported quarter, and the acquisition of Broadlight which was closed in the ongoing one.
The way ahead
The acquisition of NetLogic, which has currently given rise to margin worries, is well capable of providing the returns in the long-term. The acquisition enhanced Broadcom’s profit in the quarter and also enables the company to increase its presence in the Infrastructure & Networking business. It seems Broadcom has made an intelligent move by acquiring NetLogic as the prospect for this business is bright, probably reaching $28 billion in sales in the next five years according to analysts.
Moreover, the top line is expected to reach higher in the current quarter with some help from sales of the iPad and other handsets. But it was the 3G business about which CEO Scott McGregor was bullish about. He says that Broadcom is not going to get orders from Nokia, as expected earlier, but that will be more than made up by Samsung and other “new” customers.
Broadcom says that its wireless sales will remain flat in the quarter whereas the networking infrastructure business is expected to grow, driven by the NetLogic acquisition. The growth in networking is a positive sign as it was a laggard in the fourth quarter and dropped 13%. And as far as wireless sales are concerned, I believe that they will pick up since the next version of the Apple iPhone and the Samsung Galaxy S III are lined up going forward.
Thus, even though Broadcom’s stock slid a bit in late trading due to cost worries, it is capable of bouncing back as its prospects are on the brighter side.
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