If you are considering becoming a 1M/1M premium member and would like to join our mailing list to receive ongoing information, please sign up here.

Subscribe to our Feed

3G iPhone Effect on TI, Broadcom and ST

Posted on Wednesday, Jul 23rd 2008

I recently listed the top 5 component beneficiaries of the 3G iPhone (minus Qualcomm, which is coming). In this post, I cover how Texas Instruments (TI), STMicro (STM), and Broadcom (BRCM) benefit from the 3G iPhone. I also discuss their recent earnings reports.

As per the teardown analysis from Semiconductor Insights, the 3G iPhone uses an updated touchscreen solution that has a TI line driver and a Broadcom chip. I earlier covered TI as a potential beneficiary of the first-generation iPhone. Subsequent discussion, including a synopsis of guest author Vijay Nagarajan’s deep-down analysis, is available here.

TI (NYSE: TXN) reported its Q2 results on July 21 that lagged analyst estimates. Revenue was down 2% y-o-y and up 2% q-o-q to $3.35 billion due to weak demand. Net income was $588 million (down 4% y-o-y and 11% q-o-q) and EPS was $0.44 (up 5% y-o-y and down 10% q-o-q). Analysts were looking for EPS of $0.45 on revenue of $3.40 billion.

Gross margin declined to 52.2% from 53.7% in the first quarter, affected by lower factory utilization levels and higher costs for semiconductor raw materials. Weak demand led to a $73 million increase in inventory from the first quarter. Cash flow from operations was $520 million and TI had $1.65 billion in cash at the end of Q2. It bought back shares worth $433 million and paid dividends of $132 million.

However, its core businesses Analog and Embedded Processing did well with y-o-y growth of 10%. Analog revenue grew 2% q-o-q to $1.29 billion driven by high-performance analog. Embedded Processing revenue grew 4% q-o-q to $436 million driven by Catalog DSP and microcontroller products as well as communications infrastructure. TI is increasing its focus on its Analog business and recently announced that it is overhauling nearly all of its DSP lines, with 15 new chips that focus on low power. TI, as I pointed out earlier, has very strong low-power design expertise.

On the negative side, wireless revenue declined 12% y-o-y and 2% q-o-q to $903 million from a year ago and was down 2% sequentially mainly due to TI’s flawed baseband strategy. With Nokia and Sony Ericsson going for multiple vendors, TI has been hit hard. TI admits to being particularly affected by the loss of the Sony Ericsson mobile platforms and the resultant share erosion.

TI expects revenue in the range of $3.26 billion to $3.54 billion and EPS between $0.41 and $0.47. Analysts estimate $3.56 billion in revenue and EPS of $0.54. TI is trading around $24 versus Vijay’s valuation of $32. Market cap is about $32 billion.

Chart for Texas Instruments Inc. (TXN)

While TI is losing its hold over the wireless business, STM is emerging as a strong player in the European market and could well displace TI from its No.2 position. Its NXP joint venture is bound to help in this. In the 3G iPhone, STM has a design win with the accelerometer, and it also benefits from the NXP win of the Power Management IC application chip.

Yesterday, STMicroelectronics (STM) reported Q2 results that beat analyst estimates driven by strong growth in the Telecom (wireless), Industrial and Consumer market segments. Revenue grew 14.6% y-o-y and 9.7% q-o-q to $2.39 billion, slightly above analyst estimates of $2.34 billion. Net loss decreased to $47 million, or $0.05 per share from $758 million, or $0.84 per share last year. Excluding charges, EPS was $0.18, above analyst estimates of $0.13.

Gross margin declined to 36.8% from 37.6% last quarter and was negatively affected by currency fluctuation by over 300 basis points y-o-y.

Application Specific Product Group (ASG) revenue grew 15.9% y-o-y and 8.4% q-o-q to $1.51 billion, driven by strong 3G digital baseband growth and device unit growth in connectivity and imaging. Industrial and Multisegment Sector (IMS) revenue was $865 million, up 11.9% q-o-q and 12.8% y-o-y, led by MEMS, Advanced Analog and Smartcards/Microcontrollers.

For Q3, ST expects revenue to grow between 7% and 14% y-o-y and between -1% and 6% sequentially. It is currently trading at around $11 with a market cap of about $10 billion. Vijay valued STM at $15.

Chart for STMicroelectronics NV (STM)

As for the 3G iPhone, Broadcom has a touchscreen controller as it did in the phone’s first version. But Broadcom also indirectly benefits from Infineon’s design win of the GPS solution. The Hammerhead II GPS chip was developed by Infineon in partnership with Global Locate, which was bought by Broadcom. As there is a revenue sharing agreement in place with Infineon, FBR analyst Craig Berger expects Broadcom to benefit from 3-4% sequential revenue growth in Q3 from the iPhone and iPod Touch. My recent coverage of Broadcom, including a synopsis of guest author Vijay Nagarajan’s deep-down analysis, is available here.

Yesterday, Broadcom (Nasdaq: BRCM) reported a strong Q2 that topped analyst estimates. However, forecasts of increased spending and lower margins sent its shares sliding.

Q2 revenue grew 33.7% y-o-y and 16.3% q-o-q to $1.201 billion, led by much stronger-than-expected growth in broadband communications and enterprise networking. Net income was $134.8 million, or $0.25 EPS, versus $74.3 million, or $0.14 EPS in Q1 2008 and $34.3 million, or $0.06 EPS last year. Analysts estimated EPS of $0.14 on revenue of $1.1 billion.

Gross margin was 53.8%, up about 40 basis points from last quarter, driven by better product mix, strong demand for higher margin older products, and cost control. Broadcom bought back shares worth $444 million in the quarter.

Broadcom’s enterprise networking business had a strong quarter driven by switching product sales, which grew 20% y-o-y and 10% q-o-q. Its networking business is becoming increasingly strong in Asia and Eastern Europe due to build-outs of communications infrastructure. The mobile and wireless businesses grew 56% y-o-y and 15% q-o-q, driven by a seasonal rebound in the Bluetooth and wireless LAN product lines, as well as strong GPS sales. In the broadband communications markets, there was strong growth in the set-top box and broadband modem areas.

For Q3, BRCM expects revenue in the range of $1.25 billion to $1.3 billion. Gross margin is expected to be 49.5% to 51.5% excluding the effect of the Verizon royalty. This is because of strategic spending of about $2 million and slightly higher operating expenses between $15 million and $20 million, half of which are likely to be legal expenses. Broadcom also announced yesterday that it has started shipping an all-in-one chip for cell phones that combines wireless networking, Bluetooth and FM reception capabilities.

The stock is currently trading around $28 with a market cap of about $14 billion. Vijay Nagarajan valued the company at $39.3.

Chart for Broadcom Corp. (BRCM)

Hacker News
() Comments

Featured Videos


[…] 2. Broadcom With its design win for the touchscreen controller and its revenue-sharing deal with Infineon for the GPS chip in the iPhone, Broadcom (BRCM) is a top beneficiary of the 3G iPhone. Suggested reading: Vijay’s Valuation Series, stock analysis from Q407, Q108 and Q208. […]

Top 10 Semiconductor Stocks - Sramana Mitra on Strategy Wednesday, August 13, 2008 at 8:47 AM PT