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How Seasonality Could Impact Broadcom’s 1Q17 Wireless Revenue

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Broadcom’s wireless communications segment

In the previous part of this series, we saw that Broadcom (AVGO) is expected to witness flat revenue in its wired infrastructure segment. This revenue could partially offset seasonal declines from wireless communications segment, which accounts for 32% of the company’s revenue.

The wireless segment offers wireless connectivity and custom analog handset solutions, FBAR (film bulk acoustic resonator) filters, and power amplifiers. Broadcom’s wireless products, which are expensive, are used in high-end phones and tablets.

Broadcom earns around 20% of its revenue from the wired infrastructure segment’s key customer, Apple (AAPL), and the remaining 12% from Samsung (SSNLF) and other Chinese handset makers (FXI). In this space, Broadcom competes with Qorvo (QRVO) and Qualcomm (QCOM).

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Wireless communications exposed to seasonality

The smartphone market sees seasonal demand in the second half of the year when Apple launches its flagship phone. However, Apple is also witnessing a slowdown in iPhone sales. In the quarter ended December 2016, iPhone sales rose 5% YoY (year-over-year).

As smartphone sales slow, Broadcom can only grow through increasing its semiconductor content per phone. The seasonal nature of the wireless market and slowing sales have encouraged Broadcom to reduce its exposure in the market and focus on other fast-growing markets of enterprise storage. The Brocade Communications Systems (BRCD) acquisition could help Broadcom reduce its exposure to the wireless space.

Broadcom’s earnings from wireless communications

During the seasonal uptrend, Broadcom’s wireless revenue rose 26% and 34.6%, respectively, in fiscal 2Q16 and fiscal 4Q16. Revenue grew as Broadcom’s content per iPhone increased by 25%–30%. Broadcom supplies FBAR chips, which allow for 4G LTE (long-term evolution) data access in iPhones.

In fiscal 1Q17, Broadcom expects its wireless revenue to fall to around $1.1 billion as demand from Apple fades. Rivals Qorvo and Qualcomm reported 4.4% and 1% sequential declines, respectively, in their chipset revenue during the same quarter.

Broadcom’s plan for its wireless communications segment

In 2016, Broadcom increased its FBAR filter capacity at its Fort Collins plant in Colorado by about 50%. It did this by transitioning to a new 8-inch wafer manufacturing process, which generates higher yields. The company plans to continue to transition its 6-inch line to an 8-inch line and increase its capacity by 70% over the next few years.

After witnessing strong capacity expansion at the Fort Collins plant, the company plans to sell its Oregon facility, which it had kept as a backup to meet increasing demand from customers. Next, we’ll look at Broadcom’s enterprise storage segment.

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