Broadcom starts to bounce back from modem failure


Despite exit from cellular basebands, high end smartphones are still its biggest growth driver, thanks to WiFi

Broadcom may have failed in the smartphone modem market, but the growth in high end handsets is still driving its growth, along with its traditional broadband access offerings. However, while the smartphone segment is proving more resilient than many analysts predicted last year - also boosting ARM in the last quarter - it is increasingly hard to squeeze more profits out of it as the sales pattern shifts to emerging markets and featurephone upgraders.

Broadcom delivered solid results for its first quarter, and predicted a return to more significant growth in the current Q2. Its Q115 revenue was $2.06bn, up 3.7% year-on-year, though down 4% on the last quarter of 2014. Connectivity and other chips for high end smartphones were the most significant contributor, said the company, along with broadband access products. Those two categories together delivered a 13% year-on-year increase in revenue.

Net income was $209m, which was sharply down on $390m in Q414 but up on the year-ago figure of $165m.

In a preliminary statement on its second quarter, Broadcom said it expected to return to sustained growth and to report $2.1bn in Q2, just about meeting Wall Street predictions. The exit from the lossmaking modem business is helping to improve profits and reduce expenses.

"Our connectivity business continues to strengthen with two sequential quarters of year-over-year revenue growth [driven by] the ramp of new highly integrated products such as a location hub…and significant customer interest in 5G WiFi chips," Broadcom CEO Scott McGregor said.

He also singled out small cells as a source of future growth - the firm acquired one of the pioneers of small cell SoCs, Percello, back in 2010. This could be taken as a sign of long-sightedness, though much of Broadcom's success has been based on its excellent sense of timing, entering markets just as they are about to explode (as it did, spectacularly, in 802.11g WiFi), so it may be more likely that the firm expected small cells to gain volume more quickly than they did. Now, however, the market really is seeing mass deployment, especially in homes, and Broadcom should be able to profit from that.

Its modem acquisitions have, of course, proved to be complete miscalculations, rare at Broadcom. Initially it bought former WiMAX baseband specialist Beceem, then added Renesas Mobile (itself based around its parent's acquisition of Nokia's inhouse modem business). Only months after the second deal, however, Broadcom gave up hope of stealing significant share in Qualcomm's heartland and in July 2014 said it had decided to exit, laying off about 2,500 people and taking on restructuring charges of $230m spread over the ensuing 12 months.

At the time, McGregor sought to cheer up investors by showing them how Broadcom

would look "when the baseband exit is in the rearview mirror", promising growth (above the sector's overall rate) in every other major area of activity, and "a market lead in chips for DSL, cable, satellite and fiber".

Three quarters later, shareholders can see some signs of that upbeat outlook coming true. Much of the $100m attached to the baseband business actually stayed within the company, said Broadcom, as baseband partners chose to continue working with the firm on the communications side (WiFi, Bluetooth, GPS and so on). "The theoretical worse case did not materialize, and we've grown since then," McGregor said.

Despite relinquishing the modem slot, smartphones remain important to growth, with key drivers including the uptake of 802.11ac and 2x2 MIMO WiFi in high end phones, with the adoption curve particularly sharp among Chinese OEMs.

"You used to think of phones in China in the low and mid-range, but now Xiaomi, Huawei, and Lenovo are focusing more on the high end market. There is an increased opportunity in those customers. They really want the better specs they get from our products," McGregor told the Q1 analyst call.

Broadband revenue was primarily driven by pay-TV, upgrades to video cells, set-top boxes and the spread of GPON networks in China, said the firm.

"If you want to design wins today you have to have leading products with HEVC and 4K….and Broadcom was first there with that technology," McGregor said.

This reflects some of the shifts of emphasis which Broadcom announced in the wake of its cellular modem decision. It said at the time that it was leading the world in HEVC Ultra-HD set-top box chips, with McGregor claiming that MSOs and their set-top providers were all heading down that route in time for 2015.

Another important move is from 10 Gigabit to 25 Gigabit Ethernet for the enterprise and with 50 Gigabit on its drawing board (it is applying pressure for the world to standardize on its approach).

The network infrastructure business is also in a buoyant phase, with revenue up 6% year-on-year to $631m, largely driven by data center switch-chips.

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