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BRCM AT A GLANCE

P/E ► -78.5   EV/EBITDA ► -473   ROA ► -3.1% AVG ROE ► -3.9% AVG Debt to Equity ► 0.277 AVG Current Ratio ► 2.84 AVG

 

 

 

 

 

 

Broadcom is a top-ten semiconductor firm that designs, develops, and sells system-on-a-chip and software solutions to manufacturers of wired and wireless communications products. In 2006 Broadcom generated over US$ 3.6 billion in total revenue, at a 6.7% operating margin. Broadcom's diversified catalog of products is used in digital cable, satellite and IP set-top boxes, media servers, high definition televisions and HD-DVD players, cable and DSL modems, wireless local area networks, cell phones, and mobile multimedia devices such as video iPods. One of Broadcom's specialties is chip integration, the placement of multiple functions on one chip, providing end-to-end solutions for its customers. Only a few companies possess the ability to create integrated chips.

Broadcom operates as a fabless semiconductor company. ("Fabless" means the firm designs, develops and supplies semiconductors, but outsources the actual manufacture and packaging of its semiconductors to other companies called semiconductor foundries that specialize in semiconductor production.) Broadcom holds the number two position in the fabless semiconductor industry, behind only Qualcomm.

Broadcom is on the cutting edge of the highly competitive semiconductor industry, facing competition from other fabless firms as well as semiconductor manufacturers like Texas Instruments. Broadcom and the other semiconductor companies often experience difficulties because of the cyclicality of the semiconductor industry. Broadcom's sales are also heavily dependent upon the health of the end-markets in which Broadcom's products are used.

One advantage Broadcom possesses in the semiconductor industry is the breadth of its technological experience and its ability to draw from its extensive tech patent portfolio (ranked fifth most valuable in the entire technology industry). This knowledge allows Broadcom to successfully place multiple functions into single chips in order to offer unique, integrated solutions to its customers; Broadcom's chip integration ability is matched by few competitors. Other important industry trends for Broadcom include the shift towards 3G in cell phone technology and the growing sales of HDTVs and HD-DVD players.

Company Overview

Broadcom is one of the world's leading semiconductor companies, its total 2006 revenue topping $3.6 billion and boasting a 22% compounded annual growth rate over the past five years. With its 2006 gross profit margin at 51%and its operating margin at 6.6%, Broadcom is an exceptionally profitable company. According to a 2006 study conducted by the research firm 1790 Analytics, Broadcom also has the fifth most-valuable patent portfolio in the technology industry worldwide, topped only by tech giants Intel (INTC), Hewlett-Packard Company (HPQ), International Business Machines (IBM) and Micron Technology (MU). In order to protect itself from changes in individual product markets, Broadcom provides a wide array of semiconductor solutions to a range of customers, as is detailed below.

Business Segments

• Broadband Communications: This is Broadcom's largest segment in terms of revenue (nearly $1.4 billion in 2006). It provides a range of silicon solutions that are used in broadband modems, digital cable, both satellite and IP television signal reception equipment, residential gateways, and high definition televisions and HD-DVD players.

• Enterprise Networking: Broadcom's second-largest operating segment provides semiconductor solutions designed for usage in computers, servers, and networking equipment for small-to-medium sized businesses, corporate enterprises, and service providers. Broadcom's products enable the high-speed transfer of voice, data, audio, and video across wired and wireless networks.

• Mobile and Wireless Networking: Despite being Broadcom's smallest segment, this operating segment exhibited the greatest revenue growth (60% growth from 2005). This segment provides semiconductor solutions for wireless LAN equipment, cellular and area networking equipment, and mobile technology such as cell phones and portable media players. Through this segment, Broadcom provides the semiconductors used in 3G and Bluetooth technology as well as in video iPods and the Nintendo Wii.

Customers

Broadcom's customers are Original Equipment Manufacturers (OEMs) of technology products. Broadcom supplies these customers with semiconductors that are then used in the development and assembly of technology products such as broadband modems, computers, iPods, wireless routers, cell phones, and other wired and wireless communications devices. Broadcom's top twenty customers of 2006 by sales include Apple (AAPL), Hewlett-Packard Company (HPQ), Motorola (MOT), Cisco Systems (CSCO), International Business Machines (IBM), Dell (DELL), Nintendo (NTDOY), Samsung, and Pioneer Companies (PONR). Of these, the top five customers accounted for 46.5% of revenue in 2006. This puts Broadcom at high risk were it to lose one of its top customers to a competitor. Broadcom has realized the importance of minimizing customer concentration, and although dependence on the top five customers is still relatively high, it has fallen considerably from 2004's 53%.

Research and Development

A large portion of Broadcom's costs come from research and development expenditures which topped $1.1 billion in 2006. Approximately 72% of Broadcom's nearly 4,000 employees are involved in research and development, and current R&D expenses are to equal more than 30% of total 2006 revenue, demonstrating Broadcom's commitment to and reliance upon technological innovation. Strong research and development leads not only to sales increases from new products and methods, but also to lower costs because manufacturing silicon chips is incredibly expensive (production of some chips can cost over $1 million) and faulty chips due to miscalculated engineering can seriously impede a semiconductor company's success and profitability.

Fabless Business Model

Broadcom is a fabless semiconductor firm; it designs, develops and sells its semiconductors but outsources the actual production of its semiconductors to manufacturing companies called foundries. Being a fabless company brings several key advantages and disadvantages for Broadcom:

Advantages

• Broadcom is less affected than its competitors by cyclicality in the semiconductor industry because it does not need to operate expensive manufacturing facilities, the cost of which is exacerbated by downturns in the semiconductor industry and which reduce gross margins.
• Broadcom also does not need to invest in expensive manufacturing equipment in order to keep up with changing technology. This frees up cash flow within the company for research and development expenses.
• Broadcom's products are all produced on a standard CMOS process. The majority of foundries are familiar with these standard processes, which gives Broadcom the ability to switch foundries if necessary (and thus to ensure competitive rates from foundries).

Disadvantages

• Broadcom is heavily reliant upon its foundries, without which Broadcom would have no way to supply its customers with its products. All of Broadcom's foundries are located in Asia, two of which are in Taiwan and have been closed because of earthquakes and subsequent power outages in the past. Future earthquakes or another outbreak of SARS in Asia could seriously cripple Broadcom's ability to supply its customers with products.
• Relying upon foundries for the manufacture of its products limits Broadcom's control over delivery schedules as well as over production costs and methods.

Trends and Forces

3G Mobile Phone Technology Sales

Broadcom has been increasing its emphasis on sales to the mobile phone industry which has become one of the largest industries in the US. As cell phone penetration (the percentage of the population that owns a cell phone) topped 77% at the end of 2006, the standard technology in mobile phones is changing to third-generation or 3G technology. 3G is a superior type of wireless technology allowing for high-speed data transmission that enables mobile Internet-browsing, downloading, and media usage. Broadcom is one of the leading producers of 3G semiconductor solutions and as 3G technology becomes the new standard, Broadcom has the opportunity to win over new customers in the cell phone manufacturing industry. An example of such activity recently occurred as Verizon Communications (VZ) agreed to use Broadcom's 3G technology in its mobile phones. Broadcom also has deals with Samsung and Motorola. The market opportunity for Broadcom with 3G is huge and more deals with cell phone providers would significantly fatten Broadcom's revenues and profits.

Growth of Home Entertainment Sector

The growing demand for expensive, high-tech products for home entertainment is contributing significantly to sales of semiconductors for Broadcom. Broadcom is one of the companies pushing the envelope in home entertainment by enabling the convergence of digital entertainment with its semiconductors. Broadcom provides key components for high definition televisions and high definition DVD players (for both Blu-Ray players and HD-DVD players), and digital cable, satellite and IP set-top television reception equipment. As more consumers decide to upgrade their home entertainment systems and purchase HDTVs, high-def DVD players, and digital television service, Broadcom's products will rise in demand.

Susceptibility to Changing Demands in End-Markets

One major risk Broadcom faces is its reliance on the demand for the end-market products that use Broadcom's semiconductors. The demand for products such as HDTVs and wireless LAN equipment drives the demand for Broadcom's products. If the demand for one of Broadcom's major customers' products were to fall significantly, possibly if replaced by a new technology released by a competitor, the demand for Broadcom's semiconductors would fall and substantially affect revenues. As the technology industry is fast-paced and highly competitive, such scenarios could feasibly occur, although they are unlikely to be large enough to seriously harm Broadcom.

Legal Battles Against Qualcomm

Broadcom has been in various legal battles in several court cases since 2005 against rival fabless semiconductor firm QUALCOMM (QCOM) over what began as patent infringement issues. Since May of 2005, several lawsuits have been filed by both parties claiming damages from patent infringement and misappropriating trade secrets. Recently, Broadcom has been claiming victories over QUALCOMM (QCOM) in the legal arena. On August 10th, Broadcom was tentatively awarded over $33 million in damages and legal fees in one of the QUALCOMM (QCOM) cases. Earlier in August Broadcom was awarded payment for legal fees in another patent case QUALCOMM (QCOM) had lost against Broadcom in 2007. Also, President Bush recently upheld a US International Trade Commission ban on mobile phones that include QUALCOMM (QCOM) technology that was determined to infringe upon Broadcom patents. Litigation between Broadcom and QUALCOMM (QCOM) is ongoing, but continued success in the legal arena could help Broadcom succeed against competitor QUALCOMM (QCOM) in the market as well. Not only have the cases given Broadcom great publicity and kept QUALCOMM (QCOM) from manufacturing several patent-infringing products, but winning the cases bodes well for the Broadcom brand and poorly for QUALCOMM (QCOM).

In April 2009, Qualcomm Incorporated and Broadcom Corporation announced that they had entered into a settlement and multi-year patent agreement. The agreement resulted in the dismissal with prejudice of all litigation between the companies, including all patent infringement claims in the International Trade Commission and U.S. District Court in Santa Ana, as well as the withdrawal by Broadcom of its complaints to the European Commission and the Korea Fair Trade Commission. Under the agreement, the companies have granted certain rights to each other under their respective patent portfolios. Qualcomm will pay Broadcom $891 million over a four-year period. Qualcomm will pay Broadcom $891 million in cash over a period of four years, of which $200 million will be paid in the quarter ending June 30, 2009. The agreement does not provide for any other scheduled payments between the parties.The terms of this agreement will not result in any change to Qualcomm's 3G (e.g., CDMA2000®, WCDMA and TD-SCDMA) and 4G (e.g., LTE and WiMAX) licensing revenue model.

The iPod's Effect on Broadcom

Broadcom supplies a video-multimedia processor chip to Apple (AAPL) that is a key component in the wildly successful iPod. In April 2007, Apple celebrated the sale of its 100 millionth iPod, after selling over 25 million iPods in 2006. Broadcom receives an estimated $8 per iPod for the processing chip it provides to Apple (AAPL). With iPod sales over 25 million annually, it is estimated that sales of chips for iPods accounts for approximately $200 million of sales (approximately 5% of total revenue). Continued success for the iPod would provide Broadcom with significant sales, but Apple could switch semiconductor suppliers if it decides to change iPod's features, possibly to a touch-screen based device similar to Apple's newest device, the iPhone.

Competition

Broadcom is the number two ranking fabless semiconductor company in terms of revenue (ranked only behind Qualcomm) and one of the top ten semiconductor companies when compared across fabless and in-house manufacturers. Broadcom has a first or second place in market share for most of its product portfolio, but one of its biggest markets, cell phones, is highly competitive and Broadcom is just beginning to gain ground as a player in the market. It faces heavy competition in the mobile phone market from industry leaders Texas Instruments and Qualcomm. Also, one of Broadcom's main products is television set-top boxes, a market which is becoming more competitive as Conexant has begun encroaching upon Broadcom's past customers in the market. Overall, because Broadcom's product and solutions portfolio is so diverse, it faces various competitors in different markets across the globe:

• QUALCOMM (QCOM) : Qualcomm is the leading fabless semiconductor company, boasting $7.5 billion of total revenue in 2006. Qualcomm's product portfolio is focused on wireless technologies, particularly in mobile phones. Although Qualcomm holds an advantage over Broadcom in terms of revenue and profitability, Broadcom has a more diversified product portfolio and has been making up ground in its contest with Qualcomm in the mobile phone semiconductor market as well.
• Texas Instruments (TXN) : Texas Instruments is one of the largest semiconductor companies in the world, with annual revenue surpassing $14 billion in 2006. The bulk of Texas Instruments' revenue comes from its Semiconductor operating segment, which produces analog and digital semiconductors. The key end markets for Texas Instruments' semiconductors are mobile phones, HDTVs, and projectors and cinema screens. TI is one of the stiffest competitors Broadcom has in supplying the cell phone industry with semiconductors because TI has a distinct advantage in both size and scale.
• STMicroelectronics N.V. (STM) : STMicro is one of the world's largest semiconductor companies with $9.8 billion in total sales in 2006. STMicro is one of Broadcom's most direct competitor as STMicro produces semiconductors that are used in the same products as Broadcom's, including mobile phones, digital cable, satellite and IP television set-top box products, Bluetooth devices, HDTVs and wired and wireless networking equipment. STMicro is based in Switzerland but approximately 13% of its sales in 2006 came from North America, making it a prime competitor of Broadcom both domestically and internationally.
• Marvell Technology Group (MRVL): Marvell is a fabless semiconductor company that is slightly smaller than Broadcom, generating about $2.2 billion in sales in 2006. Marvell also had virtually no operating margin despite exhibiting a 50% gross profit margin because of high operating costs (largely due to a nearly $78 million acquisition of Intel's communications and applications business). Marvell is a direct competitor to Broadcom in supplying semiconductors used in mobile phones, wireless LAN equipment, wired networking equipment, and portable media devices.
• Conexant Systems (CNXT):Although Conexant is a relatively small competitor, with less than $1 billion in sales in 2006, Conexant is one of Broadcom's main competitors in set-top boxes for televisions, particularly in digital cable set-top boxes. Within this market Conexant is a major semiconductor provider and has begun working with Motorola (MOT), Broadcom's largest customer. Losing more of Motorola's demand for semiconductors could seriously harm Broadcom. However, Conexant's threat to Broadcom is mostly limited to the digital set-top box market,as the company's product portfolio is much smaller and more concentrated than Broadcom's, focusing on semiconductors designed for use broadband modems and home networking equipment.

Note: All figures in US Dollars.

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