The stage is set for Broadcom Corp. to show whether it has the stuff to become the clear-cut No. 2 supplier of baseband chips to longtime rival Qualcomm Corp.
That might sound like limited ambition, but a solid second place is crucial to Broadcom’s hopes that its hundreds of millions of dollars it has invested in the hypercompetitive segment will pay off.
Baseband chips are essentially the technical brains of mobile phones. Irvine-based Broadcom has gained some notable customers for baseband chips, including a recent contract for a new- model Samsung phone.
Wall Street analysts and investors are anxious to get a clearer picture on Broadcom’s standing in the segment, which has primarily been limited to baseband chips for older-model 3G wireless phones.
Word on whether it makes significant headway on 4G phones—the latest generation—will filter out in the second half of the year, when a number of big manufacturers announce new models.
When it comes to baseband, Wall Street’s confidence in Broadcom’s potential gains appears to be waning amid a recent sales slump and operating loss.
“We contend Broadcom is late to the 4G baseband party,” Oppenheimer & Co. analyst Rick Schafer wrote in a recent note to investors.
Schafer views Broadcom’s long-term success in wireless as being tied to its long-held dominance in connectivity chips. He expects San Diego-based Qualcomm, by far the dominant leader in baseband chips; MediaTek Inc. in Taiwan; and Marvell Technology Group Ltd. in Santa Clara to gain market share in baseband chips at Broadcom’s expense in the near term.
The Oppenheimer report zeroed in on Broadcom’s first-quarter earnings report, which included a 15% drop in mobile revenue to $846 million from a year earlier, with its mobile and wireless unit posting an operating loss of $32 million. The company projects another slight dip in sales for the unit in the current quarter, with gains expected in the second half of the year, Chief Financial Officer Eric Brandt told analysts in a conference call.
Hundreds of Millions
Broadcom in the last decade has spent hundreds of millions of dollars on acquisitions and in research and development to take on Qualcomm in baseband chips, which are more expensive and carry better margins than the chips for Bluetooth, Wi-Fi, and GPS that built Broadcom’s name in the mobile phone market. Broadcom developed its first baseband chip in 2002, but has more recently concentrated its efforts on catching up on the latest connectivity standard in the segment, known as the LTE—or long-term evolution—network.
Baseband chip sales account for a small portion of Broadcom’s $8.3 billion in annual revenue but hold potential as a big growth driver in the coming years as smartphone sales grow in emerging markets and consumers in the U.S. and other mature regions continually update models.
Broadcom shipped its first LTE baseband processor earlier this year, which is carried on Samsung’s Galaxy Core LTE, a midrange smartphone that’s expected to be released this month primarily in Europe. It was a significant development as Broadcom became the only supplier besides Qualcomm to ship an integrated LTE processor. Marvell quickly followed suit, introducing its first LTE baseband chip in late February at the Mobile World Congress in Barcelona, Spain.
Acquisition
Broadcom acquired the key LTE baseband assets of Tokyo-based Renesas Electronics Corp. in a $164 million deal late last year. The buy included a dual-core LTE chip and brought 1,200 employees—mostly engineers—from Renesas Electronics’ floundering mobile division operations in Europe and India. In 2010, Broadcom acquired Santa Clara-based Beceem Communications Inc. for $316 million, largely based on its baseband processor technology that powers essential functions in a phone.
The aim has been to build on early design baseband design wins with Nokia Corp. and Samsung, the latter of which is Broadcom’s largest customer and the world’s biggest smartphone maker. Most of Broadcom’s baseband wins have been in low-cost and midrange 3G phones, though, prompting some company watchers to question its recent investments in the segment.
“While the weaker mobile outlook is disappointing and creates near-term pain, we believe it could expedite the arguably prudent decision to finally exit the cellular baseband [business],” said Ross Seymore, a research analyst with Deutsche Bank Equity Research, who echoed others in the industry on zeroing in on the second half of this year as a turning point in Broadcom’s bid to be the No. 2 baseband supplier.
“[Broadcom] either garners meaningful design wins … or does not,” Seymore wrote in an investor note.
Broadcom executives have indicated they will give the baseband business some more time to develop, but are prepared to take action if losses mount.
“We don’t do businesses to lose money. We do businesses to make money,” Chief Executive Scott McGregor told analysts in the recent conference call. “We believe right now it’s too early to call on those businesses.”
