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Weak Demand for Smartphones Takes Toll on Broadcom

June 16, 2020
Broadcom said the recovery in demand for its WiFi, Bluetooth, GPS, RF and other wireless semiconductors will be delayed to later in the year. The company blamed a "major product cycle delay" at a large customer that industry analysts believe to be Apple.

Broadcom warned it will be weighed down by weak demand for wireless semiconductors as the uncertainty caused by the coronavirus takes its toll on smartphone sales, forcing one of its large customers to delay the launch of its latest phone. But the company said that the weakness will be balanced out by a boom in its core networking chip business. 

"Looking ahead, our third quarter guidance in semiconductors reflects a surge in demand from cloud, telecom, and enterprise customers, offset by supply chain constraints and an expected substantial reset in wireless," said Hock Tan, Broadcom’s CEO, in a statement. "We clearly see significant puts and takes," he added on a conference call with analysts.

Facts and Figures

Broadcom, one of the world's largest chip designers, said its overall sales in the second quarter came out to $5.74 billion, jumping from $5.52 billion over the last year. Broadcom's semiconductor sales, which accounted for about 70% of its business and has dragged on its results in recent quarters, dropped slightly to $4.03 billion from $4.09 billion a year ago. 

Broadcom projects sales of $5.75 billion in its current quarter, plus or minus $150 million, up from $5.52 billion a year ago. Thomas Krause, Broadcom's chief financial officer, said sales of chips would grow 3% quarter-over-quarter and fall 5% year-on-year as declining demand for its wireless chips dents a rebound in orders for networking chips to be used in cloud servers and data centers.

Google, Microsoft, Amazon and other top players in the cloud business are upgrading the servers, storage, networking and other hardware in their data centers as large swathes of the world's population work from home. Technology giants are also straining to deal with demand as people concerned with venturing out due to the virus flock to the internet, to Netflix, YouTube, and Facebook.

Broadcom, which sells chips to most of the major makers of networking switches used in data centers, including Cisco, HPE and others, said sales in its core business ballooned 11% over its last quarter. "The steady recovery in Q2 is turning into a demand surge in Q3," Tan said, adding that customers are struggling to handle the deluge of data as businesses rent out more tools on the cloud.

It has also started rolling out its Tomahawk 4 and Trident 3 switch chips to its customers in the cloud space and Jericho 2 chips used in networking routers by telecom gear makers. It is also seeing an uplift in demand for its latest line of artificial intelligence chips for use servers. Sales in its broadband and storage businesses are rebooting after a sharp drop from its first to second quarters.

Key Insights

Broadcom said the jump in demand for its networking, routing, storage and other server chips was balanced out by weakness in its wireless business, which sells Bluetooth, WiFi, RF and other parts to phone manufacturers, including Apple, Samsung, and Google. Sales slipped 14% from the first to second quarter as economic turmoil sweeped around the world in the wake of the virus's spread.

Broadcom said it usually sees a "double-digit uplift" in sales of wireless semiconductors in the third quarter of the year. But the company warned that the bump in business would be pushed out one quarter later than usual. It blamed a "major product cycle delay" at a large customer widely believed to be Apple.

Apple is one of Broadcom's largest customers, accounting for 20% of its overall sales last year. The Silicon Valley giant uses Broadcom's Bluetooth, WiFi, RF and other chips in its iPhones. Apple usually introduces its latest line of iPhones in September and starts selling the devices by the end of the month. Phone manufacturers tend to order parts months before rolling out a new product line.

Broadcom has hammered out deals to supply a range of wireless components to Apple, including RF chips that clarify signals used by 4G and 5G networks. The deals, which last into 2023, give it guaranteed slots in Apple's iPhone and other products for years to come. The chips it sells for use in 5G smartphones are in the range of 30% to 40% more valuable than the same chips in 4G models.

"Nothing has changed in terms of designs, nothing has changed in terms of content," Tan said, referring to the chips ordered by its large customer. "The business is seasonal and, in the past, the trough of the fiscal year has been in Q2. But we believe, because of product cycle delays, the trough for this year will be in Q3." Apple is reportedly preparing to launch its first 5G iPhones in late 2020.

Supply and Demand

Broadcom said in March it was withdrawing its annual sales forecast as it reeled from the uncertainty caused by lockdowns imposed around the world to curtail the spread of the lethal virus. But Tan said that the semiconductor business had been improving in its first quarter of 2020, adding that he had not seen a significant impact from the viral outbreak. 

But now Broadcom is facing delays in the supply chain it uses to outsource the production, testing and packaging of its chips. Lockdowns in Southeast Asia and other regions where it operates have upended its supply chain and lengthened lead times. The lockdowns also slowed global transportation, which has made sending out orders more of a challenge.

"On the supply chain side, we have experienced some challenges and continue to do so," Tan said. "Bottom line, in Q3, we have much more demand than we can supply and that could continue beyond Q3." 

Broadcom is also facing uncertainty over whether the demand for its networking chips will last into the second half of the yearor whether customers will push out orders for server chips to the future.

The company's total profit dipped in its second quarter to $563 million, or $1.17 per share, from $691 million, or $1.64 per share, from the second quarter of 2019. Broadcom's gross margins came out to 73%.

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