Here's How Broadcom Ltd. Hopes to Grow Its Wireless Business
This year, chip giant Broadcom's (NASDAQ: AVGO) wireless chip business, which depends heavily on sales of chips to premium smartphone customers like Apple (NASDAQ: AAPL), is set to be the star of the show.
Thanks to what appear to be substantial dollar content gains in the next iPhone (Broadcom management pegs the year-over-year dollar content growth at about 40%), Broadcom enjoyed 27% year-over-year revenue growth in its wireless business last quarter and is expecting solid growth here over the next couple of quarters.
It won't be every year that Broadcom scores a dollar content increase of that magnitude inside Apple's iPhones, but a key part of Broadcom's overall strategy to outperform the end markets that it participates in is to try to consistently grow the dollar content that it ships to major customers.
On Broadcom's most recent earnings call, CEO Hock Tan explained how the company plans to continue to grow its wireless chip dollar content in premium smartphones in the near to medium term.
RF content growth
During the conference call, analyst Vivek Arya observed that radio frequency (RF) chips, such as the ones that Broadcom sells to Apple and other high-end smartphone vendors, have become "a bigger part of the bill-of-materials" for a premium smartphone.
Arya, on the call, pegged RF content at about 10% of a premium smartphone's bill of materials.
The analyst then asked Broadcom management if there's "a limit to how big" RF chip dollar content in such phones can get.
Tan conceded that while trying to drive its dollar content up across its businesses is a "continuing challenge," he doesn't see the trend of increasing Broadcom dollar content across its businesses coming to a halt, claiming that Broadcom has visibility into such increases "for the next three years."
It's not just RF
Arya asked specifically about RF chips, but those aren't the only chips that Broadcom sells in smartphones. Broadcom also provides connectivity combo chips into premium smartphones. These are chips that enable Wi-Fi and Bluetooth capability in mobile devices.
In terms of connectivity combo chips, Tan expressed optimism that its customers will continue to demand higher-performance solutions and that they'll be willing to pay Broadcom for that additional performance.
Specifically, Tan cited the transition to increasingly sophisticated Wi-Fi standards, such as the transition to 802.11ac from 802.11n, the pending transition from 802.11ac Wave 1 to 802.11ac Wave to, and the slightly further out transition from 802.11ac Wave 2 to the even more feature-packed 802.11ax Wi-Fi standard.
Furthermore, Tan went on to note that Broadcom also sells chips that handle touch input for some of these premium phones (Broadcom has supplied the touchscreen controller for iPhones, iPads, and even MacBook trackpads for several generations).
Tan then concluded by indicating that across the portfolio of products that Broadcom supplies into these phones, the required performance and attendant complexity continues to grow.
So far, these trends appear to have played out. If Broadcom management is right -- and I think that this management team has earned substantial credibility both by being consistently open and honest with investors and delivering great financial performance – the good times will continue to roll, at least in wireless.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.