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.

Posted by Vijay Nagarajan at 9:00 AM  


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