Broadcom - Valuation

Friday, February 29, 2008

The last article in my Broadcom's article on Sramana Mitra's site..

The last month has been a great revelation for me. I have ventured beyond my comfort zone to research and understand the nuances of various other related segments like WLAN, Bluetooth, GPS, set-top boxes, broadband modems, DVD players, and Ethernet. Such is the depth of Broadcom’s business. Before I go into the details of this valuation, I wish to emphasize that I have learnt as much as you have through this process and have tried my best to present an objective, unbiased, well-researched and detailed work. I hope that this analysis provides a comprehensive data-point for your investment decisions.

I value Broadcom at $39.30 per share. Surprising, considering that the company’s share price is hovering under $20 these days. However, it should also be noted that this is only a few dollars off the company’s 52-week high of $43.07. This valuation is buttressed by the strength of the Mobile and Wireless business and complemented by the stability offered by the other businesses.

I would also like to put it in context. There is a reason why the shares are viewed unfavorably now. Apart from the lack of sizeable 3G design wins, it is the company’s expense management that has been causing worries in the market. The company spent over a quarter of its revenues in R&D, primarily associated with the conversion to 65 nm. Secondly, its protracted legal battle with Qualcomm has increased its SG&A expenses in recent times. These two factors have kept the operating margins low. The result is the depletion of its profits to a very small percentage of its revenues. It is illustrative (though unrealistic) to see what happens if Broadcom continues to incur high expenses. An additional operational overhead of 45% subtracted from its revenues yields a valuation of $22.24. Add to this a degree of uncertainty surrounding the mobile business and voila, you get closer to the current share prices.

The expenses last year have been a necessary evil to complement Broadcom’s aggressive mobile phone campaign. But the company’s management has taken pains to assure investors that its expense management is back on track. Additionally, they assert that once the mobile design wins start to yield revenues, the R&D expenses will be per the model of 20-22%. Broadcom also demonstrated slightly reduced Operating expenses in Q4 2007 as a pointer towards their internal measures to tighten the screws. In order for the company to successfully execute these promises, it needs more design wins and I am sure its Product marketing department is working round the clock to achieve this.

In summary, the $39.30 valuation is contingent on Broadcom’s mobile success and careful expense management. While this valuation relies substantially on the market condition and Broadcom’s proven product delivery track record, the reality depends on its continued ability to come up with competitive products and secure actual design wins. So, while my valuation is twice the current share price, I suggest waiting for another quarter or two before making an investment in the company. At the same time, my thought for those who currently own the company’s shares is to hold on to it. I don’t expect the share price to drop much below its current value. In either case, you will have more data this year to make your moves.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

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Broadcom - Wireless Revenue

Thursday, February 28, 2008

My article re-printed from Sramana Mitra's site.

In the last few articles, I dealt extensively with the Mobile and Wireless business of Broadcom. It is time we take a look at what this means from a revenue point of view for the company.

The strength of the Irvine-based company’s Bluetooth and WLAN product lines will drive the revenues for 2008. If we add the revenues from its GPS and Cellular divisions as well, I estimate that the Mobile and Wireless business will account for about 37% of the company’s revenue this year. This will be on par with the revenue from the Broadband Communications business.

With the Nokia design win starting to show material gains in 2009, the revenues from the wireless division look to double up contributing about 53% of Broadcom’s revenues. If the company sustains this momentum, we will see this business generating around $6 billion in 2012 accounting for almost two-thirds of its revenues. Consequently, the company’s overall revenues will grow at about 20% over the next five years. So, the business clearly will serve as Broadcom’s license to future growth.

The risk, as I alluded to in my last article, is that Broadcom is unable to deliver on its rather aggressive stance in the cell-phone space. Timing is important here - if ‘3G phone on a chip’ does not materialize before the other vendors catch up, Broadcom will lose its ‘first-to-market’ advantage. Besides, the future of its other wireless product lines is also tied to its success as a cell-phone IC vendor. Its revenues from the GPS division, for example, will primarily come from its chips being sold in tandem with its mobile chipsets.

As an example, if Broadcom ends up with low single-digit 3G market share for the next few years, its outlook will drastically change. While the Mobile and Wireless business will still contribute to about 50% of the company’s revenues, the overall revenues will grow only at a CAGR of 13% over the next five years.

In summary, the synthesis of the revenues from Broadcom’s Mobile and Wireless business reinforce the fact that it is the company’s future champion. Moving ahead, in my final installment in this series, I will use all the tools that we have acquired over the past several articles to come up with my valuation of Broadcom.
Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

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Broadcom - Time for Stellar Execution

Wednesday, February 27, 2008

My next article as published on Sramana Mitra's site..

In the last part of this series, I talked about Broadcom’s aggressive campaign to become a leading vendor in the cellular IC market. In this piece, I will talk about the plan, the challenges and the need to execute these plans in style.

So what is the plan? CEO Scott McGregor said in his Q4 2007 conference call, “Our goal in cellular baseband is to reach a 10% unit market share by the time we exit 2009. The plan remains the same -- 2007 was a year to win designs; 2008 is the year to get products and phones done; and 2009 is the year to grow share and generate significant revenue.”

I like the plan. I also think that the execution has gone quite well so far. Broadcom announced a design win with Nokia last year for its single-chip EDGE chip. Nokia’s dominating market share in this space, coupled with the fact that there will be over 400 million EDGE phones for 2009 augers well for Broadcom. These factors imply that even the design wins for ‘selected future EDGE phones’ translates to large unit shipments instantly getting it closer to the target envisioned. Add to this the 3G business with Samsung, the 10% target looks very reasonable.

The catch, however, is this. 2008-2009 are the peak years for EDGE. Later, these phones will give way to faster phones using WCDMA/HSDPA. I also estimate that the per-unit cost for the EDGE chips will be much lower than the $23 price for the 3G chips. Broadcom has also not won any substantial designs for its 3G solution. While we may see some design win announcements later this year, my worry is two-folds. For data-centric phones, cost advantages apart, performance becomes a key criterion for design wins. Broadcom purchased Zyray in 2004 but is yet to deliver in the 3G space. This makes me think that Broadcom is battling basic performance issues. Secondly, the engineering challenges associated with the complicated design and the level of integration in the new product may push the delivery and in some cases, also lose customers.

Broadcom has a good track record of delivering on its promises. So, despite the odds, I am willing to give it the benefit of doubt. If the execution is good, then we will see 3G design wins this year resulting in significant revenue contributions in 2010. I anticipate that in the long-term, pending delivery, Broadcom is positioned to capture around 20% of the 3G market. This will help it to about 15% market share in 2012. The drivers will be its continued relationship with Nokia, its complete solution and its aggressive pricing. Most of these gains will come from TI and the other smaller vendors as I expect Qualcomm to retain its engineering leadership, and hence also grow its market share, in this space.

In summary, the cell-phone market appears promising for Broadcom. In the next piece, I will complete the picture with a synthesis of the various revenue streams in its Mobile and Wireless business.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

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Anand Charity - what we do

Tuesday, February 26, 2008

In my post titled “Me, Anil and Anand”, I said I was joining Anand Charity as a volunteer. Here is a synopsis of what the organization stands for.

‘Anand’ is a beautiful Indian word for JOY. That is what drives us - A smile on the face of every child in India.

We are a U.S. based nonpolitical, nonreligious, and nonprofit charity organization committed to improving the standard of living of the people in India. It has been instituted and operated exclusively for the purpose of charity under US Internal Revenue Code, Section 501(c) (3). It is co-founded by a group of volunteers from different professional backgrounds.

Our mission is to identify and provide need based financial support to organizations in India involved with education, health care, and disaster management. We believe that today's children are tomorrow's future. Hence it is imperative to make quality education and healthcare accessible to them. We envision providing these basic amenities to all Indians without any discrimination. We also hope and strive to provide a dedicated and honest medium for bringing donors and grantees together. We feel that it is a moral responsibility that we owed to our people and our country.

Our first project is Umang, a charity organization based in Jaipur, India. Umang rehabilitates children with mental and physical disabilities. With our help, they plan to build a vocational-cum-work training center. Recently, Shankar Krithivasan, visited the site at Umang and was very touched by the work they do. We are in the process of evaluating other projects. We will soon be adding them to our list of active projects.

Our grant process is one of rigor and careful selection. We evaluate potential projects and partners in India. Every grantee organization has so far been credible personal referrals. Once a project is approved, donations are then solicited from individuals and organizations in the United States and all around the world through our website and other publicity and fund raising events. Our network of volunteers will continuously monitor the funded projects. The progress and impact made will be conveyed to all our donors on a regular basis through the website and a newsletter.

So, please donate generously to our cause. All your donations will be tax-exempt under IRS Section 501c3. We encourage you to setup a recurring donation. Let us join hands to bring smiles to those who deserve it.

For more information about us and our activities please visit the website

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Posted by Vijay Nagarajan at 9:00 AM 0 comments Links to this post  

Broadcom - Aggression in the Cell Phone Market

My article on Sramana Mitra's site discussing Broadcom's mobile phone business

We have so far looked at Broadcom’s Enterprise Networking business, Broadband Communications business, and the Bluetooth and WLAN components of its Mobile and Wireless Business. I will now look at its cellular mobile business which, in my mind, is the make-or-break component for the company.

The cellular space is Broadcom’s avenue for growth today considering that all its other businesses are mature. With these turning into flat, stable revenue streams, the move to challenge Qualcomm, TI and the others in the cellular IC market was a necessary gamble. Broadcom is approaching the mobile space rather aggressively. Just last year, it broke into the top-5 mobile merchant IC suppliers according to an iSuppli research report. It also announced a string of products including a single-chip 65 nm EDGE chip, a complete HSDPA reference design and its much publicized ‘3G-phone on a chip’. This single chip 3G-phone design, which Broadcom claims is a year ahead of competition, combines baseband and RF functionalities along with FM and multimedia processing capabilities and has been priced at $23 for early customers.

The company has also been involved in an extended legal battle with Qualcomm over intellectual property. From Broadcom’s standpoint, wins here will reduce the pricing advantage that Qualcomm has in the 3G business. Also, it helps project the company as the new champion in the mobile world. If we add the extensive PR campaign through the last two years, it is easy to appreciate the strides Broadcom has made in this space recently.

Broadcom also spent a substantial portion of last year’s revenues directed to this business. This includes its migration to 65 nm (the process technology employed by leading IC vendors in the mobile space) and its purchase of Global Locate for GPS capabilities. Both these are seen as imperatives for the company to stay amongst the top vendors each of whom have a complete portfolio of wireless products to complement their mobile chipset solutions. With these moves and the product announcements, Broadcom is targeting 10% market share by the end of 2009.

While the product and marketing strategy cannot be faulted, it now boils down to execution. In the sequels, I will take a brief look at what this means and also on the expected revenue growth from this division.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

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Me, Anil and Anand Charity

Monday, February 25, 2008

Last December, I met up with Anil Goteti, a friend from Qualcomm, Campbell. Anil’s simplicity, modesty and friendliness are stand-out traits. But that day he certainly impressed me with his devotion to the Charity that he has started with some of his undergraduate friends from the Indian Institute of Technology, Madras (Chennai) – Anand Charity.

Before I get into the details of the charity, I should also mention that the other folks at Anand are equally accomplished. I have high respect for Karthik Raghupathy, another key Anand Board member who is currently pursuing his MBA at Wharton. As I learnt more about the organization, I also realized that I knew many of the other board members and volunteers through mutual friends. The fact that this group shared Anil’s traits and passion for social service made me realize that this organization can deliver on its agenda.

The work at Anand made me recognize that I have been too mired in my professional pursuits for quite some time now. I suddenly missed the joy of community service that I cherished during my Rotaract Club days as an engineering student. So, I decided to contribute to the charity’s noble cause as a Bay Area volunteer. My first week in which I passively observed the infectious enthusiasm of the core group has reinforced my decision.

I will give you some details about Anand Charity in the sequel. In the meantime, I implore you to take a look at its website, and I am confident you will be bowled over, much like I have been.

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Posted by Vijay Nagarajan at 9:00 AM 0 comments Links to this post  

Broadcom - Wireless LAN

Broadcom series continues on Sramana Mitra's site.

In the last article, I talked about Broadcom’s Bluetooth business and its co-dependent relationship with Wireless Local Area Network (WLAN). In this article, I will take a deeper look at the WLAN market and Broadcom’s position in it.

Broadcom is a leader in the WLAN market as well with around 25% of the market share. In 2007, WLAN accounted for around $500 million in revenue for the company due to the penetration in notebooks/laptops, and the strength of its 802.11g line of products. Broadcom’s WLAN devices are found in non-Centrino laptops, gadgets like Nintendo Wii and various wireless access points found in your local Fry’s store.

The total addressable market (TAM) for WLAN is expected to double to $4 billion in the year 2012. This growth will be driven by a variety of factors. Firstly, the migration to the faster data-rate 802.11n standard will enable more wireless applications and networking. Secondly, the convergence devices movement will result in a steady increase in WLAN-enabled handheld devices, growing to over 20% penetration. Thirdly, portable consumer electronics devices will also offer WLAN as a value-add. This in turn will be driven by the rapid adoption of WLAN in Portable Media Players. Microsoft Zune and Apple iPod Touch are good examples of where the industry is headed. Similarly, WLAN will have a 100% penetration in the gaming devices market. Fourthly, stationary consumer electronics gadgets like printers are increasingly becoming wireless. Finally, the current market for Access Points, Routers etc. will also grow in strength with the increasing number of applications.

The WLAN market is fairly mature and so the leaders will retain their shares in the future. With mobile devices being important growth drivers, the key to sustained leadership will be integration, smaller form-factor and lower power. Broadcom is working on integrated products. It is leveraging its 65 nm migration towards smaller form factor (though this relationship is not straightforward). Its combined Bluetooth, WLAN and FM chip, if found hassle-free, is a sure winner. However, I am not as confident about its push towards low power. As I mentioned in my previous article, Marvell and Atheros are way ahead in terms of low-power designs. As a result, the company may not be able to exploit the penetration of cellular and portable devices optimally. This situation is accentuated by the flux surrounding the company’s cellular mobile business.

Overall, the WLAN business is yet another strong revenue stream for Broadcom. It will grow to yield a billion dollars in revenue for the company early next decade growing at a CAGR of 15%.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

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Broadcom - Bluetooth today and tomorrow

Sunday, February 24, 2008

I have, so far in this series, looked at Broadcom’s Enterprise Networking business and also its Broadband Communications business. In the next few articles, I will present a discussion of the various components of its mobile and wireless business unit before proceeding to its valuation. This piece focuses on Bluetooth.

Broadcom is a leading Bluetooth semiconductor vendor with 25-30% market share. The company’s solutions are used in mobile phones, PCs, notebooks, gaming devices and headsets among other gadgets. I also estimate that about $500 million of Broadcom’s 2007 revenues came from its Bluetooth solutions primarily driven by the cellular market. The company has also been the ‘first-to-market’ here with products such as its integrated FM plus Bluetooth solution. Besides, it has been helped by new-found traction with the headset OEMs.

Bluetooth, with its rapid adoption as the low-power wireless standard, presents a good opportunity for Broadcom. I estimate that the total addressable market (TAM) of Bluetooth will grow at a CAGR of 10% from about $1.7 billion for 2007 to $2.7 billion in 2012. This corresponds to around 2 billion Bluetooth chips sold in 2012. This growth will benefit from the 50% growth in Bluetooth penetration in mobile phones. About 75-85% of future phones are expected to be Bluetooth-enabled. Also, hands-free driving legislations will provide a boost to the sale of headsets and embedded Bluetooth-units for cars. Gaming devices (Nintendo Wii, Playstation, X-Box, etc.) and portable media devices (iPod, Zune) which are looking to embrace Bluetooth will also be key drivers accounting for almost 20% of the Bluetooth semiconductors in 2012. Finally, these devices also provide good opportunities for high-quality Bluetooth stereo headsets.

Broadcom’s position in this lucrative market has to be seen in the context of some future trends.

Firstly, there is a trend towards consolidated devices and chips. Broadcom is looking to expand its leadership here through its triple play product with a 65 nm FM, WLAN and Bluetooth chip.

Another key development in recent times is the announcement of the BT3 AMP (Alternate MAC/PHY for next-generation Bluetooth). This allows Bluetooth to piggyback on the high-data rate capabilities of WLAN. This will allow Broadcom, one of the WLAN leaders, to consolidate its hold in the Bluetooth space potentially taking market share away from CSR, the current leaders.

The market, however, is extremely competitive. Companies such as Marvell and Qualcomm have plans for integrated products as well. Atheros has also made recent strides in this space. Along with Marvell, Atheros is perhaps better positioned to exploit BT3 AMP. Both of them have lower power WLAN solutions that are more suited for all mobile and gaming devices. So, though 65 nm looks a jazzy proposition along with the integrated solutions, Broadcom will have to work on low-power WLAN chips to effectively tackle the growing competition. Besides, a substantial portion of its mobile Bluetooth sales will also be dependent on its own success as a cellular mobile chipset vendor. This component adds to the risks associated with this business.

In summary, it appears that while this business is a shining star today for Broadcom, it comes with inherent risks and a more aggressive competitive landscape. If Broadcom works on the ‘right’ innovations (not necessarily the ‘eye-catching’ ones), then it will continue to maintain its market share while the competition will encroach into CSR’s market share, especially if BT3 AMP takes off. This, in my mind, is a reasonable assumption despite the fluidity of the company’s mobile chipset business.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

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Broadcom - Broadband Communications business

Saturday, February 23, 2008

In my last article on Broadcom, I took a look at its Enterprise Networking Business and concluded that it is a steady revenue source for the company. I will now proceed to dissect the Broadband Communications business.

The Broadband Communications business is Broadcom’s biggest revenue generator today. Its 2007 revenue of $1.42 billion represents 37.66% of the company’s overall revenue. This also represents a 2.67% increase from the 2006 revenues of $1.38 billion. Discounting an anomalous drop in the 2005 revenues, this division also appears to be solid and growing at a CAGR of 8.2% between 2004 and 2007.

The strength of this business is clearly the diversity of its product offerings. The company produces silicon for all key broadband modems, High-Definition (HD) and Personal Video Recorder (PVR)-enabled set-top boxes (STB), DVD players, etc. The comprehensive and bullet-proof portfolio allows Broadcom to use competing technologies to its advantage. For example, it has chipsets that process both HD-DVD and Blu-Ray. Similarly, it leverages its competencies to enable STBs for the three pervasive television mediums today namely cable, satellite and IPTV.

The Broadband Communications business has and will continually benefit from upgrade cycles of the installed base of products. A good example is the conversion from HD-MPEG2 to MPEG-4 STBs. Besides, with the penetration of its products into new places, especially the emerging markets will be growth driver for this sector. India, for example, is warming up to the idea of digital cable STBs. I also anticipate PVRs to pick up there in the next few years. For that matter, as CEO Scott A. McGregor pointed out in the 2007 Q4 conference call, “in the United States, only 17% of cable, satellite, and IPTV subscribers have HD service today and only 25% have a PVR. Worldwide, the numbers are even lower.”

Additionally, in the short-term, the analog turn-off will help buttress this business further. Essentially, we will not have any analog TV transmissions in the US beyond April 7, 2009. This generates a market for digital-analog STBs that will enable the end-user to retain his analog TV beyond that date. The cable industry is also investigating similar options to make more efficient usage of the analog bandwidth. Also, the convergence of devices and home services will fall right into Broadcom’s lap. The consumer seeks integration of WLAN, Bluetooth, Ethernet and broadband modems into STBs. The company’s broadband modem business is also seeing a demand for integrated switching and WLAN in its products. Broadcom is positioned to tap its expertise in each of these areas to catalyze a unified growth of these communication products.

With the plethora of products in this business, the task of managing timelines seems rather daunting. More crucial for this business’ future is its ability to see the synergy in these various areas (customers, convergence etc.). As it is working towards these various focal points, Broadcom has announced 65 nm STB products in Q4 2007. We will see such products regularly timed to help the company stay ahead of the competition. The risk, of course, is the possibility that a ‘cool’ innovative product catches the consumer’s fancy to pretty much destroy Broadcom’s calculations. Otherwise, apart from the 65 nm process conversion, I see this as a relatively low maintenance business unit with high reward potential.

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Broadcom - Enterprise Networking Business

Friday, February 22, 2008

Here is a dissection of Broadcom's Enterprise Networking Business as part of my valuation sereis for Sramana Mitra's site.

In the previous articles in this series, we looked at the strengths and weaknesses of Broadcom. We also looked at the pros and cons of its broad portfolio of products and its growth by acquisition. Going forward, I will start to dissect the company’s enterprise networking products business.

The enterprise networking business is driven by the stability of the Ethernet market and the company’s insurmountable leadership position in it. Broadcom is the leading Ethernet semiconductor vendor with about 30-35% market share. Its nearest competitors, Marvell and Intel have less than 20% of the market share each. Broadcom’s well-integrated and low-power switching and Ethernet controllers are part of various computers, VoIP phones, wireless access points and network infrastructure products.

2007 saw the overall revenues for the enterprise networking business drop slightly. The revenues decreased 5% from the 2006 figure of $1.18 billion to $1.12 billion. The revenue from this business represents about 30% of the total. However, the revenue drop also signifies a reversal of trends for this business which grew 11.2% between 2005 and 2006. The prime reason appears to be a loss of market share in the Gigabit Ethernet controller product-line attributed to some aggressive marketing and pricing strategies by its competitors.

Looking ahead, the Ethernet semiconductor market will grow at around 5.5-6% CAGR. This modest growth number will be driven by the continued transition to Gigabit Ethernet across all product lines like switches and network interface cards. This being said, the competitive landscape has also widened. While Marvell, Vitesse and Agere continue to make Broadcom work to maintain its leadership here, Atheros, its chief WLAN competitor has also made strides in this market. In its first year in the Ethernet business, Atheros, announced the industry’s smallest PCIe Gigabit Ethernet controller last November. Then there are the smaller players and startups stacking further pressure on Broadcom by reducing the price-points and giving the OEMs more options.

Despite the stiff competition, Broadcom continues to innovate ahead of its competitors. It is leveraging its 65 nm migration as the key to its future success. In Q4 2007, it announced multiple 65 nm products – a Gigabit controller, a Gigabit switch and a 10-Gigabit switch. By integrating WLAN and security features and by also offering customer value-add features, the company has sought to differentiate itself from the smaller players.

As Broadcom takes measures to counter the new entrants who threaten to rock the boat, I anticipate that Broadcom will continue to maintain an average of around 30% market share over the next few years. Its positive spin on its 65 nm move is expected to help. However, with the Ethernet market itself growing rather modestly, I estimate that the Enterprise Network business revenue will grow only at a CAGR of about 3.85% over the next five years. In summary, this business will offer a steady but relatively flat revenue stream for Broadcom.

In the sequels, we will dissect the Broadband Communications and the Mobile and Wireless businesses, followed by a valuation analysis.

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Broadcom - Growth by Acquisition

Thursday, February 21, 2008

My next piece on Broadcom, originally written for Sramana Mitra's site.

Over the last two parts of this series, we discussed the advantages and disadvantages of Broadcom’s wide portfolio at length. It is also illustrative to look at a key strategy that the company has been following for a while now: Growth by acquisition.

The breadth of Broadcom’s offerings comes from the various strategic acquisitions that it has invested in. Between 1999 and 2007, Broadcom acquired 36 companies spanning its three target markets. Broadcom has used these acquisitions to fill gaps in its product-lines, to reduce time to market, to carve a niche and also perhaps, to eliminate competition. These acquisitions have also allowed rapid enhancement of the company’s engineering expertise efficiently.

The 2005 acquisition of Sandburst Corporation is a good example of how Broadcom has rounded up its product portfolio through this strategy. The Massachusetts-based company’s semiconductor solutions for enterprise core and metropolitan Ethernet networks have helped Broadcom offer complete end-to-end Ethernet switching products.

Among its other ventures, Broadcom acquired Zyray wireless, a company that developed WCDMA baseband co-processors, in June 2004. The San Diego-based company came at a reasonable $96 million (paid in stock). Not bad considering that its SPINNER chip was Broadcom’s entry-point into 3G. At the time, Zyray’s product complemented Broadcom’s GSM/GPRS/EDGE capabilities and enabled the Irvine-based company to have a cost-effective WCDMA solution. Zyray’s solution, engineering team and its intellectual property have been important value-additions to Broadcom, whose future rests on its delivery and design wins in the mobile space.

Broadcom’s most recent acquisition, Global Locate also deserves a mention. Global Locate, acquired for around $146 million, developed GPS and Assisted-GPS (A-GPS) semiconductor solutions and software. Given its foray into 3G and mobile wireless which is migrating towards convergence devices or highly integrated communication devices, I was expecting Broadcom to make the GPS move much earlier. On the other hand, I am glad it has done it before the impending 3G boom. Adding GPS capabilities to its portfolio not only enables stand-alone solutions but also provides a path towards integrated Bluetooth, WLAN and GPS chips that can go into Personal Navigation Devices and mobile chipsets. Besides, GPS and location-based services are quickly becoming integral to tomorrow’s mobile-phones. Broadcom, through this acquisition, hopes to tap its System-on-Chip (SoC) capabilities to obtain design wins for its now-complete mobile portfolio.

Perhaps the best thing about these acquisitions is that they are well-calculated, strategic moves that did not dent its cash coffers outrageously. While most of these acquisitions have contributed to Broadcom’s mainstream product-line, their relatively cheap price tags allows the company to shed them off if found superfluous. Of course, this is not a desirable outcome. But the point I am making is that Broadcom should not hesitate on tough decisions, since it will provide more focus, and as Michael Kanazawa puts it, lesser corporate A.D.D.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

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Broadcom - The breadth and the blur

Sunday, February 17, 2008

On Sramana Mitra's site...

In the prequel, I discussed the positive aspects of the breadth of Broadcom’s portfolio. A broad product range certainly comes with its issues as well. Perhaps my biggest worry about Broadcom is its loss of focus at times. My point: You cannot be the jack of all trades and master of none in the semiconductor industry (or in any industry, for that matter).

The mobile push is a good illustration of my point. Much of its time and resource has been spent on the aggressive product development and marketing of this business area. In order to stay ahead of the competition, it has posted ambitious sampling deadlines for its 3G chipsets. An equal or greater attention has been given to it legal wrangling with Qualcomm as part of its PR exercise to project itself as a mobile chipset powerhouse with substantial IP. It (and the market temporarily) seems to have gotten carried away with its recent wins against Qualcomm. I also believe that its accelerated 65 nanometer migration is also motivated by its mobile push because its competitors in the other markets are yet to migrate to this new process. The implementation and the pricing in these non-mobile markets do not necessarily lead to the fastest process technology, since the form factor pressure is much lower than in mobile.

Broadcom’s strategic thinking behind many of these moves is well-motivated. Tomorrow’s wireless will be based on convergence devices. These devices will become more pervasive over the next few years. So, for continued growth, Broadcom almost imperatively needs to get into the mobile space. Associated with this move is also the need to prove its performance and production capabilities fast. Simultaneously, it needs to obtain early and substantial design wins that can complement its claims and provide additional credibility. So, the company is making an all out effort to leverage on this product-line.

This certainly comes with an opportunity cost. While the mobile-line is yet proven, focusing its engineering resources on them is eroding its WLAN market share, for example. Also, if these other products are no longer competitive in performance, then Broadcom will try to retain its market share through an aggressive pricing strategy. This, in turn, reduces the already low margins from the semiconductor business. I will also be watching out for quality reviews and customer opinions on these other product lines. If we find it losing existing accounts for these products in the next couple of years, you know it has miffed customers.

The coming days will tell if Broadcom’s strategy will pay off. The space is tough and so are the competitors. But the company has created enough noise to raise expectations. One big design win can help the situation. Else, the company will hit a downward spiral. In either case, it is vital that it does not lose in its core competencies. It should not shy away from throwing non-performing product-lines away. Broadcom should start to focus.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

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Broadcom - Resilient core

Wednesday, February 13, 2008

I follow Broadcom for at least three reasons. The first factor is its aggressive campaign to be right behind Qualcomm and TI in the mobile chipset business. Second is the spate of legal battles it has been involved in with Qualcomm. Of course, my final interest is its ‘big-brother’ competitor status to my company, Atheros Communications.

In my previous piece on Broadcom, I had discussed its strengths and weaknesses. There is one more factor that amazes me about this Irvine-based company: its truly broad portfolio of communication products. Broadcom’s product offering spans Ethernet, DSL, WLAN, Bluetooth, GPS and 3G mobile phones among others. The target markets range from carriers, networking, retail, to cellular mobile communications covering both wired and wireless telecommunications.

What does this mean? This diversification brings in resilience. It can sustain a big hit in any one of its product segments and still retain a substantial portion of its value. Also, it can take a radical technology decision with a long-term vision and afford losing market share. A good example is its latest transition to 65 nm technology. The company incurred substantial losses last year primarily due to its migration to this new process technology. Besides, the associated logistical issues involve inherent product delay risks. But the diversity of its product line and its market penetration should help it wade through such periods.

A wide portfolio also helps ‘bundle’ products. Laptop manufacturers, for example, are happy if Broadcom offers a ‘bundle’ of Bluetooth and WLAN chipsets at a discounted price. Of course, this strategy reduces margins but the volumes and the increased market share will offset it. In fact, Broadcom has married this concept with its integration and system-on-chip expertise to come up with a single chip Bluetooth-WLAN chipset. It is easy to see this being taken further by integrating GPS solutions as well.

The positives of a broad portfolio work well for Broadcom. Not even Qualcomm, its prime adversary, can challenge its breadth. I will complete the picture in the sequel by looking at the drawbacks of its broad portfolio.

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Nuviphone - who is inside?

Friday, February 8, 2008

The Nuviphone has stirred my curiosity on one other front - the silicon inside the phone. The question I am itching to know - whose chipset forms the basis for the phone? Who is to the Nuviphone what Infineon is to the iPhone?

This also gives rise to other related questions like-
  • Who is the GPS chip provider?
  • Who provides bluetooth and WiFi capabilities for the phone? Is this a single-chip solution?
  • Whose chip does the phone use for touch-screen controls?
As an open fan of Qualcomm's engineering leadership, I like to look at the Snapdragon platform as the panacea for all integration woes and perhaps the heart of the Nuviphone. Here is an excerpt from my July 07 integration article -

"Qualcomm's Snapdragon platform has 3G cellular capability along with GPS functionalities. Plans are on to incorporate WLAN and blue-tooth into this platform. The company is already pitching this as the ultimate dream-solution for any dream-phone. The idea is fairly clear, provide to the phone manufacturers, this all-in-all solution at a cost they cannot resist."
The diagram above seems to illustrate everything that QCOM's all-in-all chipset has to offer. What is more, this is a superset of features that the Nuviphone advertises. The QSD8250 platform supports HSDPA, is GPS, WiFi and bluetooth capable. The GPS and bluetooth will come from its Snaptrack and RFMD bluetooth acquisition respectively. I am, however, not sure if the WiFi capabilities will come from Airgo, or if it is using the mobile WLAN players to reduce the time-to-market. Besides, the platform has a 1 GHz ARM-based processor and a 600 MHz DSP processor that will together make the phone a true mean machine. The chipsets are already shipping to customers. HTC seems to be one of its customers.

As far as the Snapdragon matching the Nuviphone's needs, I do not have visibility into the OS requirements for Garmin. The Nuviphone runs on Garmin's proprietary OS. The literature suggests that the Snapdragon is customizable for Windows mobile and Linux. I am guessing that if need be, writing the drivers for a new OS may not be an issue for QCOM.

Well, that is just my wishful thinking for the moment. I want the Nuviphone to be a great phone and cannot think of a better partner than QCOM for the venture.

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Two Yahoo Finance articles

Thursday, February 7, 2008

There was some unexpected coverage of my Interdigital valuation today. James Altucher from had my article listed on his daily blogwatch. You can read it from the link below- Blog Watch article linking my Interdigital valuation

This got picked up by Yahoo Finance and made it as a news article on IDCC.

Ms.Mitra's article on QCOM and Nokia was also picked up by Seeking Alpha and Yahoo Finance. This article, as I already mentioned, has substantial references to my Qualcomm valuation and can be read from the link below -

Seeking Alpha article referencing my QCOM valuation

It is gratifying to see two good references to my blog effort on the same day!

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Posted by Vijay Nagarajan at 9:00 PM 0 comments Links to this post  

Interdigital - Valuation

My valuation article on Sramana Mitra's website.

“Seventy Five dollars! That cannot be,” was my own reaction when I first glanced at the result of my valuation of my analysis. The number sounded outrageous compared to the current stock price of IDCC - $20.13 after hour on Jan 30th, 2008. It was also 65% above my highest estimate of what QCOM may be willing to pay for IDCC. $75 as IDCC’s stock valuation just did not seem to add up.

So I went back to my model and looked again to see if there were any calculation or transcription errors. There were none. Seventy Five was my model output for all the assumptions and risks I have listed in my earlier articles. With the impending 3G boom and IDCC’s IP portfolio, my assumptions did not seem out of place. In fact, if the company continues to inch up the ASIC market through state-of-the-art engineering efforts like the latest SlimChip, my assumptions about its ASIC business growth may be proven too conservative. The figure below illustrates IDCC valuation as a function of ASIC market share growth percentage. I have assumed a 1% market share as a starting point. As we can see, a 0.5% percent growth each year will put IDCC at a 3% market share in 2012 yielding a valuation of $113.


Similarly, 2008 will bear more concrete information on IDCC’s royalty rates and should also provide positive correction regarding its licensee-base growth. The figure below provides a snapshot of IDCC valuation for various licensing rates per 3G handset sold in the future. The graph indicates the volatility of the share price based on the company’s licensing rates. An average licensing rate of $0.6 for each 3G phone sold will drop its valuation to $43 while a $1 rate can put the share price as high as $107.


I am not discounting a negative correction to my royalty rate assumptions as well, though I think that is less likely. My only other worry is its expense management. I will be closely watching how IDCC spends its revenue in terms of R&D efforts and how it manages personnel growth. I anticipate relatively more money going into development than in research. The company should however strive to balance it with maintaining its IP position. It should also spend commensurate with the design wins it is able to get in the years to come. From my semiconductor industry experience, I can tell that it will be a different ball-game keeping its operations tight to even sustain 50% gross margins from its ASIC business. IDCC is still young on this front and is bound to make a few mistakes before quickly learning the ropes to compete with bigger veterans. The figure below gives a quick overview of how its valuation can fluctuate with operating expenses CAGR. A 20% CAGR will pull the valuation down to $32.7. With all other factors remaining the same, if IDCC is prudent with its spending and keeps the expense growth to 10%, then the price could go up to $105.


So, while I can plug in parameters in my model to pull the valuation down, I am comfortable with a $75 valuation for IDCC. I also think that the valuation can go further up with a high probability. I will therefore sign off with my verdict: LONG TERM BUY.

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SiRF - down but not out

Wednesday, February 6, 2008

SiRF plummeted to $7.36 (almost a 55% drop) yesterday prompting a wave of articles in the internet replete with puns about the GPS company. This was also compounded by a spate of analyst downgrades (I think seven in total) reducing the target price to $10 from around $30. Reason: A missed quarter earnings report and an uncertain forecast for the next quarter.

While it seems to have come as a major surprise to many analysts who were very bullish about the company earlier, it does not to me. Here is a link to my article back in July where I discuss the tough position that SiRF finds itself in. I wish to re-analyze that article here. Here is the thesis statement I made there -

"I wish to make a bold statement: SiRF will find itself marginalized and out of business if it does not diversify into other wireless technologies or strive to have a tie-up with a cellular or WLAN provider."

I followed it up with these reasons -
  • interest shown by cellular companies in GPS: This was even before Atheros made a smart move picking up U-Nav (incidentally, I had stated then that U-Nav would be acquired too) and NXP got GloNav. I also mentioned that SiRF with its $2 billion market cap (then) was too big to be acquired. Now the company finds its value almost reduced to a fourth of that valuation.
  • Other companies wanting to grad more silicon: That left SiRF as more of a one-trick pony!
  • 'Keep the Bill of Materials low' dictum: Effectively, with more competition comes lower margins. This was something I saw as a critical issue that faced SiRF. Today, this has shown its ugly face with a reduced gross margin that has got the Street scampering.
I concluded that piece stating "So, in summary, I think that if SiRF is not able to make strides in the mobile world in terms of getting a major customer or by diversifying, it runs the risk of being marginalized. If the future is in cellular mobile communications, and each cellular company has its own GPS solution, then it is only a matter of time before the concerted research and development of mobile GPS devices fructifies and begins to displace traditional GPS devices."

If SiRF is not wary about the growing influence of mobile GPS, then it could lead to a downward spiral. The Street is perhaps justified in its reaction - the reality about the company and the GPS market sank in only now. The threshold to push to stock up is also likely to be quite high. While it is clear that mobile vendors like Qualcomm, TI, NXP and Broadcom will now go for their proprietary GPS chipsets effectively shutting out SiRF from a majority of the mobile market, a good portion of the convergence device market is still open for it to battle with the other smaller players. Even there, the battle will be tough given that companies like Atheros will now strive to bundle their GPS offerings with other peripheral technologies such as bluetooth and WLAN. So it remains to be seen how the company wishes to address this situation now.

The company needs some good design wins in the mobile space now to re-infuse investor confidence. And there is potential. It acquired Centrality Communications for a better positioning in the mobile market. Besides, it has active collaboration efforts with Intel for GPS in laptops, which is not bad considering Intel's path-breaking effort as the core of the Apple Air. If my suspicion is right, we will see more Intel processors in Apple's future convergence devices with smaller form factor than the Air. This bodes well for SiRF.I also think there is a strong possibility that Intel may make a move to buy SiRF.

So, while I am not surprised that the stocks plunged, especially given the reasons that led to the fall, I do think that $7.5 is a little too harsh. It will make a slow recovery this year but will perhaps never see the $40 highs of the past. The company has a strong patent portfolio and is still the GPS leader. Although the lack of diversification has come back to bite it, a strong alignment with a mobile vendor should do its fortunes a lot of good. With its technology leadership, I think it will overcome this crunch. It is down now, but not out yet!

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QCOM and NOK - Sramana Mitra's article

For your reading enjoyment, here is a link to Sramana Mitra's article titled "Qualcomm and Nokia both show headroom". Ms.Mitra uses my valuation to make some insightful conclusions about Qualcomm. The article also refers to my series on Interdigital.

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Number One Hundred

Tuesday, February 5, 2008

Almost a year since I started this pro bono wireless industry analyst blog effort, I am publishing my 100th blog post today. It has been an exciting journey for me as I learn and share knowledge about my industry. When I started it, I felt I had unique tools that I could use to impact my readers: rich wireless research experience, close interaction with TensorComm officers, 3GPP standards body participation, insider understanding of the industry’s legal and geo-political issues, and first-hand negotiation experience with leading wireless companies and the determination to make a difference. This has, in turn, helped me learn more and to write more, providing me the energy to spend over twenty five hours a week besides a demanding full-time engineering job.

I would like to thank my friends and readers for their continued support. I am also most grateful to Ms.Sramana Mitra, who has been instrumental in giving me a wider exposure through her blog. My guest authorship on her website has motivated me to research thoroughly and to present logical and lucid analysis/opinions. Besides, I have gained a lot from Ms.Mitra's mentorship. I think that the quality of my articles has certainly improved since my association with her. In fact, one of the blog highlights for 2007 was my well-critiqued Qualcomm series on her site. I am also learning from her ability to identify problems and her clarity of thought.

Over the next year, I am hoping to make a bigger impact covering a wider portfolio of companies and more industry trends. Shortly, I will be doing a valuation series on Broadcom on Ms.Mitra's site and also take a deeper look at the convergence devices market. My goal is also to reach a wider audience and to impact more people through my writings. I hope to have your continued support as I seek to expand this passionate endeavor of mine over my next 100 postings.

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Posted by Vijay Nagarajan at 9:00 PM 0 comments Links to this post  

Nuviphone - Not yet new iPhone!

Monday, February 4, 2008

Garmin announced its Nuviphone last week. The latest smartphone to be tagged as iPhone's direct competition has me thoroughly impressed, perhaps a tad more than the pioneering Apple product itself. The question however is in the execution, the single most important factor that will govern the phone's success.

I have always liked the idea of combining GPS and a mobile phone. You can read my earlier articles back in July last year on integration where I mention that GPS will be a staple in tomorrow's phones. It was only a matter of time before someone came up with mobile GPS, that was a mobile phone and PND simultaneously. It is hence heartening to note that the GPS leader has taken the step forward rather than wait for the handset vendors to eat into its market and kill it.

Apart from GPS and a HSDPA modem (3G data standard), the nuviphone is advertised to have WiFi, bluetooth, video camera, digital camera and mp3 playback facilities. The details of these features are hazy at the moment. It however seems that Garmin has attempted to market its latest offering as a step beyond the iPhone.

While the phone looks GREAT on paper, I must say that it now boils down to execution. The big question is whether it can match the user experience that is the key selling point of Apple’s offerings. The levels of integration being promised are certainly a novelty. But these features can fall flat if the device is difficult to use. Besides, the OS should be capable of handling various applications that can make use of its 3.5 inch screen display and its touch screen. To be fair to Garmin, the intuitive UI of its PND products is proof that the company has the potential to live up to the hype that this announcement has created.

I am also curious to know several other details which the coming days will tell us. Does the phone have a flash drive or the likes? How many songs can we store? What is the resolution of the camera? How well is the OS integrated with the web? How about its WiFi capabilities?

I will certainly watch out for more announcements about the nuviphone and gather more details on existing Garmin’s existing products to have a better idea of what to expect from the phone. For the moment, I am quite ecstatic about Garmin’s move. It bodes well for the company and the mobile industry. If the nuviphone does live up to its billing, it already has one iPhone proponent ready to make a switch!

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Interdigital - A note on my assumptions

A reader and IDCC investor wanted me to throw more light on my assumptions. Here is my response to him on Sramana Mitra's site.

I had left out the analytical calculations behind my estimates so as to make it lucid to all readers. Since you have asked for it, here is a rigorous description of the same.

My understanding of the CEO's $2.00 statement was that it pertained to the royalty rate per handset sold under an IDCC license currently. A similar number can be calculated using the following information -
1. Statements from IDCC suggesting that 60% of its revenues come from 3G licensing.
2. Statements from IDCC that it draws license money from 30-35% handsets shipped today
3. Total 2008 handset shipment estimates
4. Total IDCC revenues for 2008

With this information, we get around $2.25 per handset sold under IDCC license. The difference between this and my $0.8/phone is that I have calculated the royalty rate as a function of EVERY 3G phone sold, not just those under an IDCC license. I did this for two reasons-

1. While I am sure that the 35% number will grow, I do not have any visibility yet into the growth percentage. So, it was more appropriate for me to look at the royalty per handset sold to remove variables from my model. Alternately, you can look at $0.8/phone to be $2.25/handset under IDCC license. This view suggests that I have not accounted for market share growth and is hence a conservative estimate.
2. Secondly, as the 3G volumes grow, it is likely that even if IDCC draws in the whereabouts of $2 per licensed handset, the upper bounds or caps for royalties will be reached bringing the effective number below this price.

On the basis of these two reasons, I am comfortable with my assumption on this front for the moment. You will notice that all my valuation analysis in the sequel are done for ALL handsets sold around the world. So, $0.8 is not as low as it seems in the wake of the CEO's statements. While incorporating the 3G market share growth rate (knowing Nokia and the others will ultimately pay royalty to IDCC) and estimating the caps is possible with more data, it will make the model unwieldy without serving extra purpose.

My rationale on expenses was based on component growth rate based on historic data, besides taking into account the cost of revenue for the ASIC business. I have also used the lessons learnt from my QCOM valuation in terms of the operating margins for companies with the IP licensing model. I think if IDCC is prudent, then in the long term, it will strive to get to the kind of margins that QCOM has currently. Note that if the ASIC business is accounted for, then the margin will be a weighted average of the high-margin IP-licensing and the tough ASIC business.

I hope these details help. To get more insights into my 3G market assumptions, I will direct you to my QCOM series.

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Posted by Vijay Nagarajan at 10:00 AM 0 comments Links to this post  

Interdigital - Key Valuation Assumptions

Sunday, February 3, 2008

My IDCC valuation on Sramana Mitra's site continues with this piece..

As I mentioned in the prequel, the uncertainties surrounding the IP business model and also its new ASIC ventures make it impossible to come up with an accurate mathematical model for Interdigital’s valuation. Nonetheless, I have made certain simplifying assumptions to make the problem more tractable.

3G Royalties: I believe that most, if not all, 3G vendors will have to pay royalties to Interdigital. Whether it comes through licensing deals or as a result of litigations is secondary. Based on some public statements by company executives, it seems that the royalty per unit today is close to $2. As the 3G volumes grow, I do not see this number sustain. Companies are likely to negotiate lower numbers and the caps will also be reached. This will result in a smaller net dollar amount per handset unit sold. With these in mind, I estimate an average of $0.8 for every 3G handset sold in the future.

Long-term view: While the licensing fee is Interdigital’s to collect, the timing and the legal proceedings associated with it will result in variations in its revenue pattern. I have, however, discounted the exact timelines and this potential fluctuation to take a long-term stance as I evaluate its intrinsic value. This allows a direct correlation between the growth of 3G and IDCC revenues.

ASIC division: I like the position that IDCC has taken on its ASIC business. It strives to be the champion of the high-end data-centric phones. It has also sought to validate its claims through field trials. This does create value. But the true metric for any chipset company/division is the number of design wins, the number of chipsets that will be in tomorrow’s cell-phones. With no big deals in place, I am unable to attribute a market share percentage to IDCC’s ASIC solutions. However, I have assumed a modest 1% chipset market share starting 2009. This number can only go up if the solution is market-proven.

Expenses: IP Licensing is a high-margin business while ASIC manufacturing incurs a very high percentage of expenses. As the company grows, I estimate that its operating margins will be a little less than 50% early next decade and get closer to the Qualcomm margins of about 35% 10 years from now. This is assuming that IDCC will stay as a stand-alone company and slowly widen its footprint in the ASIC business while still getting royalties from various wireless standards.

Miscellaneous: Among other factors, I have taken into account continued revenue from 2G licenses world-wide. I have also assumed a reduced growth rate of about 10% moving beyond 2012 and a 0% terminal growth rate. For this analysis, I have used a discount rate of 8% and 47.45 million as the number of outstanding IDCC shares.

These assumptions and parameters form the basis of my event-based DCF analysis and valuation which I will provide in the sequel to this piece.

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