Broadcom Corp. could add nearly $1 billion in revenue in each of the next three years on deals signed last week to supply chips for two rival Chinese telecom companies.
Shenzhen-based ZTE Corp., China’s largest telecommunications equipment maker, announced $1 billion in contracts last week with the Irvine-based chipmaker. ZTE will spend another $4 billion with Broadcom competitor Qualcomm Corp. in San Diego.
The deal followed Huawei Technologies Co. Ltd.’s announcement that it plans to buy $6 billion of chips and related products from Broadcom, Qualcomm and San Jose-based Avago Technologies, all existing suppliers for the telecom. Broadcom’s share of that deal is estimated at $1.5 billion to $2.1 billion through 2014.
The chipmaker had almost $7.4 billion in sales in 2011, 11.1% more than in 2010.
Huawei, also based in Shenzhen, announced the deals during a press conference in downtown Los Angeles that coincided with Chinese Vice President Xi Jinping’s four-day U.S. visit. Xi is expected to become China’s president next year.
Revenue Expectations
The two recent deals will likely combine to add at least $900 million per year in revenue for Broadcom, said Craig Berger, an analyst at Arlington, Va.-based FBR Capital Markets Corp. That would be about 10% of Broadcom’s projected annual revenue for the next three years, according to FBR estimates, which pegged the deals as adding 35 cents per share to Broadcom’s annual earnings.
“These [original equipment manufacturing] contracts are clearly a solid positive for Broadcom and show the increasing strategic importance of Qualcomm to global technology OEMs,” Berger wrote an investors note last week.
Company watchers couldn’t confirm whether the contracts are for new or existing work.
“But we still view them as an encouraging indicator of continued design-win momentum for Broadcom, particularly in the infrastructure/connectivity segments at Chinese customers,” Sandeep Shyamsukha, an analyst at New York-based Auriga USA LLC said in a note to investors last week.
Shyamsukha upgraded Broadcom to “buy” from “hold,” largely based on the introduction of the chipmaker’s advanced 5G chip for smartphones and tablets.
The design wins cover new and existing contracts, Broadcom spokesperson Susan Vander May said. ZTE and Huawei declined to comment on deal specifics.
Huawei spokeswoman Francis Hopkins said the contracts will help create tens of thousands of jobs in the high-tech industry in the U.S. and boost community and economic development.
Varied Developments
The deals follow several varied developments at Broadcom in the last few months.
In late January, the Business Journal reported the company is toying with the idea of leaving the headquarters it built at University Research Park, despite having five more years on the lease. Area brokers speculated Broadcom is considering developing 1 million square feet or more of office space at the 820-acre Tustin Legacy site.
Earlier this month, the Business Journal reported that Broadcom quietly exited the Blu-ray disc and digital-television business late last year as part of a broader restructuring plan that calls for a cut of 300 jobs companywide, about 3% of its workforce, according to filings with the Securities and Exchange Commission.
The chipmaker on Feb. 17 closed a $3.7 billion buy of NetLogic Microsystems Inc. in Santa Clara, its biggest to date. The buy extends the company’s reach in fourth-generation, or 4G wireless networks, as well as processors, and adds more than 700 employees.
Broadcom has had business ties with Huawei, the world’s second largest networking equipment maker behind San Jose-based Cisco Systems Inc., for about eight years.
A Huawei spokesperson would not disclose company products that use Broadcom chips.
• Headquarters: Irvine
• Founded: 1991
• Business: Chipmaker
• Ticker symbol: BRCM (Nasdaq)
• Market value: about $20.7 billion
• Notable: expects $900 million or more in revenue from two deals recently signed with telecom companies in China
5G
The companies are known to have worked together on the new 5G system-on-a-chip that debuted last month at the International Consumer Electronics Show in Las Vegas.
The chip enables faster and more reliable Wi-Fi connections to meet growing demand for wireless cloud networks, medium and large businesses, and mobile phone carriers.
Huawei, which makes video conference systems, smartphones, tablets and other products, is locked in a battle in the growing mobile-phone market with South Korea-based Samsung Electronics Co. Ltd., Espoo, Finland-based Nokia Corp., Apple Inc. in Cupertino and ZTE.
The top mobile-phone sellers in 2011 were Nokia, 422.4 million units; Samsung, 313.9 million units; and Apple, 89.2 million units, according to Stamford, Conn.-based market tracker Gartner Inc. Apple, Huawei and ZTE were the fastest-growing mobile phone makers in last year’s fourth quarter.
ZTE’s growth helped it into fourth place globally for units sold in the recently ended quarter, moving ahead of Seoul-based LG Electronics, with more than 18.9 million. Huawei was No. 6 with 13.9 million units sold.
ZTE has annual revenue of more than $10 billion and counts Europe and the U.S. as major markets.
Huawei has $28 billion in annual sales and competes with Cisco, Sunnyvale-based Juniper Networks Inc. and Palo Alto-based Hewlett-Packard Co. in the U.S. It has struggled to secure deals with the top U.S. mobile carriers amid concerns about allegations of ties to the Chinese military and collusion with the government on pricing.
Questions
ZTE and Huawei are the focus of a Congressional investigation launched in mid-November by the House of Representatives’ Permanent Select Committee on Intelligence to assess whether the companies pose a cyber-security threat as a Chinese government front. Both companies have denied such links.
