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Analysts: Broadcom Chips Attract Chinese Co.?

Broadcom Corp. has gained the eye of Wall Street again with the renewed chatter about a big Chinese customer.

That’s good news for investors and analysts, who have been monitoring the Irvine-based chipmaker’s ambitious plans to design and sell the processor and radio chips that make up the brains of a cell phone.

“We have kind of reached the point where we are ready to go out and start applying with new customers,” said Scott Bibaud, executive vice president and general manager of Broadcom’s mobile platforms group. “We are looking at good opportunities in China, which is quickly becoming a big center of handset development.”

Some on Wall Street expect Broadcom to announce a third major customer in the coming months.

That’s after wins in 2008 and 2009 with two of the world’s biggest cell phone makers: No. 1 Nokia Corp. of Finland and No. 2 Samsung Group of South Korea.

The two companies have about 60% of the market for mobile phones.

“Broadcom’s ramp with Samsung and Nokia remains on track,” said Adam Benjamin, an analyst at Jefferies & Co. in New York. “We are continuing to track its potential third baseband customer.”

According to Benjamin and other industry watchers, the new Chinese customers are thought to be ZTE Corp. or Huawei Technologies Co., both based in Shen-zhen, in Guangdong province.

The companies are the primary suppliers of telecommunications gear to Chinese phone companies, which are looking to roll out fourth generation networks soon.

Both also design and manufacture cell phones and are said to be scouting new chip suppliers.

“The unit volumes from Huawei and ZTE are not insignificant,” Benjamin said. “This third customer could reasonably contribute 10 million to 20 million units annually” to Broadcom’s sales.

Broadcom’s Bibaud declined to say if either company is buying its chips.

“We don’t have any specific customer that we are ready to announce yet,” he said.

Consolidation

Broadcom is swooping in to take advantage of an opening in the market for new baseband players after several years of consolidation.

“In 2006, we counted around 18 major semiconductor players focused on mobile phones, but now we are down to about seven or eight,” Broadcom’s Bibaud said. “It absolutely helps us.”

Another big customer win could help justify the millions Broadcom has spent to develop baseband, or processor, chips.

Along with baseband chips, Broadcom makes power-saving chips, radio transmitters and chips that add Bluetooth, wireless networking, video, TV and GPS functions to phones.

Analysts like that Broadcom, which sees yearly sales of about $4 billion, has a lot of offerings for cell phone makers.

“We continue to believe that Broadcom’s broad portfolio of wireless semiconductor devices is a competitive differentiator that improves its probability of long-term success in the wireless baseband market,” Deutsche Bank Securities Inc. analyst Ross Seymore said in note to clients.

Seymore estimates Broadcom saw roughly $250 million in revenue from its cell phone chip segment, which includes both baseband chips and power management chips.

For this year, he expects that to double as Samsung ramps up production.

Sales to Nokia should climb slowly.

“Broadcom’s shipments to Nokia are likely to ramp in 2010, albeit at an extremely measured pace as is typical when Nokia ramps with new vendors,” Seymore said.

Smart Phones

Broadcom is looking to carve out a niche in supplying chips for what’s known as “smart feature phones,” mid-level phones that have some features of a smart phone but aren’t as expensive.

Smart phones generally can access the Internet, retrieve and send e-mail and have data-heavy applications.

Feature phones may have a standard set of software applications and aren’t equipped to do heavy Web surfing. They also cost much less than a smart phone.

The so-called feature phones have the look and feel of a smart phone without all the bells and whistles. They typically have a selection of the most asked-for Web-connected applications, such as stock quotes, weather, e-mail and access to social networks such as Twitter and Facebook.

“In the past year this new category has emerged,” Bibaud said. “Smart feature phones have all the important characteristics of a smart phone but are less expensive. They include things that people want that don’t actually take a lot of high speed data transmission.”

Last year, Broadcom’s chips landed in one of Samsung’s best-selling smart feature phones, called the “Star,” which hasn’t yet been released in the U.S.

“It started production in June and by the beginning of October Samsung said it had shipped 10 million of them, the fastest in their history,” Bibaud said.

Jefferies analyst Benjamin estimates Broadcom has roughly half the market for baseband chips in Samsung’s phones.

“Being on a lot of blockbuster phones and in a strong position in this segment, we are happy with where we are today and we hope to continue building on it,” Bibaud said.

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