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What Are Broadcom’s Growth Deterrents?

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Jun. 9 2016, Updated 8:05 a.m. ET

Broadcom’s growth deterrents

So far, we’ve looked at the performance of Broadcom’s (AVGO) two biggest business segments: wired and wireless. The two segments together contribute 80% towards the company’s revenue. Let’s now look at the performance of the remaining two segments: enterprise storage and industrial and others, which together contribute 20% towards the company’s revenues.

Both the segments reported slow or negative growth and are likely to be the growth deterrents for the combined company.

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Enterprise storage segment

Avago has a long history of acquisitions. The company created the enterprise storage segment by acquiring LSI and PLX Technology in 2014. The segment’s portfolio consists of LSI’s storage products such as HDD (hard disk drive) and server storage as well as PLX’s PCIe (peripheral component interconnect express) switches and bridges.

In fiscal 2Q16, enterprise storage revenue rose 12% YoY (year-over-year) to $525 million, accounting for 15% of the company’s revenue. On a sequential basis, revenue fell 23% due to declines in HDD and seasonal weakness in the PCIe market. According to AnandTech, HDD shipments fell 13% quarter-over-quarter in 1Q16 with three key HDD suppliers, Western Digital (WDC), Seagate (STX), and Toshiba (TOSBF), reporting revenue declines.

For fiscal 3Q16, Broadcom expects the overall HDD unit shipments to fall further, thus reducing the enterprise storage’s revenue by low single digits on a quarter-over-quarter basis.

Industrial & other segment

This segment serves industrial, consumer, medical, automotive, and military and aerospace markets. The products portfolio consists of optical sensors, industrial fiber optics, LEDs (light emitting diodes), and displays. This segment also includes Broadcom’s IP (intellectual property) licensing business.

In fiscal 2Q16, the segment’s revenue fell 13% YoY to $182 million, accounting for 5% of the company’s revenue. However, revenue grew 27% quarter-over-quarter driven by seasonal strength and mid-single-digit growth in industrial resales.

For fiscal 3Q16, Broadcom expects the segment’s product revenue to grow in the mid-single digits and licensing revenue to fall in the mid-single digits on a quarter-over-quarter basis.

Next, we’ll look at the profitability of the merged entity to understand the impact of the cost synergies on the earnings. The PowerShares QQQ ETF (QQQ) has holdings in technology stocks with 8.7% of its holdings in semiconductor stocks. It has 1.2% exposure in AVGO, 0.22% in WDC, and 0.14% in STX.

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