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Broadcom Bets on Rebound in Core Semiconductor Business

Dec. 24, 2019
Broadcom said it plans to separate its wireless business—which sells chips that integrate Bluetooth, WiFi and GPS, and radio frequency chips that resolve cellular signals in smartphones sold by Apple, Samsung and others—from its core semiconductor unit.

Broadcom, dented and dinged by the trade war between the United States and China, said in September that its chip business had bottomed out. But after it reported results for the fourth quarter of 2019, the San Diego, California-based company said it should start to rebound in the second half of 2020. Broadcom said its semiconductor segment will add almost 10% in 2020, buoyed by strong spending on data centers.

Broadcom said it believes the core networking chip business should surge more than 5% to $12 billion in 2020 as cloud vendors and other customers struggle to address a deluge of data in data centers. Broadcom said its overall sales of semiconductors, including radio frequency and wireless chips, will grow to $18 billion in 2020. Broadcom's chip business declined 8% to $17.4 billion in 2019, accounting for about 80% of its total sales.

“Our semiconductor solutions segment continued to work its way through a cyclical correction," Hock Tan, Broadcom's chief executive, said in a statement. Broadcom's chip sales surged to $4.6 billion in the fourth quarter, versus $4.35 billion in the prior quarter and $4.9 billion a year ago. "We continue to believe that our core semiconductor business is bottoming and will return to year over year growth in the second half of our fiscal year."

The results capped a turbulent year for Broadcom, which has weathered weak demand in recent quarters. Slow spending on data centers has damaged its core chip business, which centers on selling the networking chips used in Ethernet switches. Broadcom is also one of the world's largest sellers of WiFi, Bluetooth and radio frequency ICs slapped on smartphones. But the company has been hit hard by the global slump in smartphone sales.

Broadcom has also been dragged down by trade tensions between the United States and China. The uncertainty surrounding the spat has pushed some customers to halt orders. Broadcom has blamed harsh restrictions on selling to Huawei Technologies, the world's largest telecom equipment manufacturer, for eroding billions of dollars of business. In June, the company slashed its 2019 sales forecast from $24.5 billion to $22.5 billion.

But things are turning around. Broadcom's sales ballooned to $5.78 billion in the fourth quarter, up from $5.52 billion in the prior quarter and from $5.44 billion a year ago. The company's income totaled $847 million, or $1.97 per share, jumping from $715 million, or $1.71 per share, over the last quarter and plunging from $1.1 billion, or $2.64 a share, over the last year. Gross profit margins improved to 54.6%, up from 53.9% in the fourth quarter of 2018. 

Broadcom could face further uncertainty after Cisco Systems, one of its largest customers, said it would start supplying switch chips to combat information overload in data centers. Cisco, which also sells networking hardware with its own custom chips, has started selling the Silicon One ASIC to some of its largest networking gear customers, including Microsoft and AT&T. The company said it brings routing performance to more than 10 Tbps.

That could dent Broadcom's stronghold in the market for networking chips used in data centers and cloud servers. Broadcom sells to customers ranging from Amazon, Microsoft, Google and other cloud vendors to Arista Networks, Juniper Networks, Hewlett Packard, Dell and other sellers of networking hardware. The company's flagship Tomahawk chips are the industry standard in Ethernet switching and can cost thousands of dollars each.

Broadcom is also confronting competition from Intel. The Santa Clara, California-based company agreed to buy startup Barefoot Networks, which sells software and silicon that can be programmed for different functions, giving customers more freedom to build out more massive data centers. The buyout is a bid to scale up Barefoot's Tofino networking chips and pair them with Intel's Xeon processors, which are the gold standard in cloud computing.

Trying to preserve its dominance in the data center market, Broadcom has started selling chips that can be programmed to handle different networking standards and other chores. Facing pressure from Barefoot Networks and other startups, the company also opened up a programming language that can be used to update its Trident 4 and Jericho 2 product lines. That enables customers to add features instead of installing all new networking chips.

Broadcom is also looking to repel rivals with its latest generation of Tomahawk ASICs, which serve as the vertebrae of the largest data centers. Broadcom has started selling its Tomahawk 4, which is capable of carrying 25.6 trillion units of data per second (Tbps), or double the speed of other solutions on the market. Barring production delays, Broadcom is positioned to preserve its market share lead in switch silicon, industry analysts say.

The chip is based on 7-nanometers and incorporates 512 50G SerDes cores, which doubles the port count of its predecessor, the Tomahawk 3. Broadcom said it is targeted at  100 Gb, 200 Gb and 400 Gb Ethernet switches. The chip offers up to 75% lower power and cost compared with other switches on the market, the company said. Robert Wheeler, semiconductor analyst at The Linley Group, described it as an "engineering tour de force."

Broadcom is also trying to broaden its business after the Trump administration blocked its buyout of Qualcomm. The San Diego, California-based company is doubling down on supplying infrastructure software that serves as a more stable complement to its core business. Last month, it agreed to buy Symantec for $10.7 billion, following its acquisitions of Brocade Communications in 2017 and CA Technologies in 2018totaling $24.4 billion.

"Our infrastructure software businesses, which focus mostly on large enterprises are in fact complementary and enhance the core semi businesses by bringing us closer to our end customers," Tan, Broadcom's chief executive, said on an analyst conference call. "That gives us a natural barrier to entry." Chief financial officer Thomas Krause, said Broadcom's total sales will range from $24.5 billion to $25.5 billion in 2020, from $22.6 billion in 2019. 

The company is also reclassifying what represents its core chip business as growth in the global smartphone market stalls and it faces competition from Qualcomm. Broadcom said it plans to separate its wireless business—which sells chips that integrate Bluetooth, WiFi and GPS, and radio frequency ICs that resolve signals in smartphonesfrom its core semiconductor unit. "Increasingly, we view them as small financial assets," Tan said. 

"We are still investing and making sure it can sustain itself," he said. "It's just that we are highlighting the fact that it's differentiated from the core set of products." 

Broadcom's radio frequency business came out to $2.2 billion in 2019 and it is estimated to grow in the high single-digits in 2020 as more 5G smartphones are rolled out. It also sells products to phone manufacturers including Samsung and Apple that integrate Bluetooth, WiFi and GPS. Sales totaled about $2.2 billion in 2019 and could slump up to 5% in 2020. Another unit makes chips that enable touchscreen technology and wireless charging.

Broadcom's chip business is also facing legal threats. The European Union has ordered it to pause contracts with some customers on the grounds that the terms illegally impede rivals. Broadcom is also suspected of curbing competition by the U.S. Federal Trade Commission. The agency is weighing whether it had granted rebates and other favors to customers in return for only buying Ethernet, WiFi, Bluetooth and other products from Broadcom.

"We all know it has been a tough year for semiconductors in general," Tan confessed. He said that despite the sudden slowdown in recent quarters "we plan to increase our investment in our core semiconductor businesses to position ourselves for future growth opportunities." He added: "We think the business is stabilizing and we believe given the growth drivers over several years that this business can actually grow 6% to 8% annually."

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