Broadcom Beats Easily

Broadcom Corp. (BRCM - Analyst Report) yesterday reported revenues of $1.254 billion in the third quarter, down 3.4% year over year but up 20.6% sequentially and surpassed its previously provided guidance of sequential revenue growth in the range of 7% – 14%.

Product revenues came in at $1.19 billion, down 4.7% year over year but up 24% sequentially. License revenue came in at $59.5 million, up 33.9% year over year. The sequential growth in revenues was broad- based driven by a return to normal order patterns from customers and a number of new product ramps. In terms of end markets, growth in broadband communications was driven by growth in the broadband modems and digital set-top box end-markets. In the digital TV market, revenues were adversely impacted by one large customer losing market share in North America and some share loss with other customers.

In mobile and wireless targeted end markets, the company experienced revenue growth in all products with strong new product ramps in cellular basebands driven by normal seasonality as most customers prepare for the upcoming holiday season. On the call, management indicated volume shipments to Samsung and ramping up of products at Nokia. Growth in enterprise networking came in stronger than management’s expectations propelled by improving customer order patterns, particularly in the Ethernet switching area.

Gross margin came in at 50.9% compared to 52.3% in the year-ago quarter and 50.1% in the previous quarter. Product gross margin came in at 48.5% compared to 50.6% in the year-ago quarter and 46.3% in the previous quarter. The sequential improvement in gross margin was due to changes in product mix, cost cutting activities and lower inventory charges.

EPS came in at 16 cents easily beating the Zacks Consensus Estimate of 11 cents.

During the quarter, the company generated $236 million of cash from operations and used $22.5 million in capital expenditures. Broadcom ended the quarter with cash and equivalents of $1.9 billion, down from $2.2 billion at the end of the quarter.

Going forward, management stated that the economic situation remains uncertain and remains cautious about the business prospects. Consumer demand remains uncertain with the upcoming holiday season. Management expects revenues in the fourth quarter to be approximately flat on a sequential basis in each of the target markets. On a year-over-year basis, revenues are expected to be up 11%. Gross margin is estimated to improve by 20 to 50 basis points driven by improvements in cost and mix.

According to the latest updates from Semiconductor Industry Association (SIA), demand is looking much better in the second half of 2009 and chip sales are on the rise. Although management remains conservative, Broadcom, being a market leader, is expected to seize a major chunk of the increase in demand.

Broadcom’s prospect of growth continues to outpace its peers, given its leading ability to integrate communications and processing in both current and emerging markets. Our long-term recommendation for Broadcom is neutral, which means the stock will perform in line with the broader market. 

California-based Broadcom is a leading chipmaker of products used in wired and wireless communications.