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.