Following the announcement by semiconductor firm Broadcom that it is looking to sell or wind down its cellular baseband business, CEO Scott McGregor, in a conference call, claimed the low- to mid-end of the market was over-crowded and it made more sense to divert resources to higher-margin opportunities.
“It’s been a hard decision for us,” he said, adding that the product and engineering teams had done a “great job”.
Aside from concerns about fiercely-competitive low- and mid-end markets – McGregor said he was surprised the two segments were still attracting new entrants – the CEO was troubled about how stable the high-end smartphone market for baseband chips might be, despite the opportunity to make money there.
“High-end depends on a couple of customers but we didn’t see enough traction to cover the cost of 3,000 engineers,” said McGregor.
Broadcom splits its business into three groups – broadband communications, mobile & wireless, and infrastructure and networking.
Within mobile & wireless are connectivity solutions and baseband. But while Broadcom has done well in connectivity – more than a 33 per cent market share according to some estimates – it only has a 3 per cent slice of the mobile baseband and application processor market.
In addition to its cellular baseband announcement, McGregor said Broadcom would integrate the connectivity team with the broadband communications group to form a new broadband & connectivity group.
There is no news yet of any potential buyers, or how long Broadcom would be prepared to wait before winding the business down if no buyer could be found. McGregor, however, does not want the process to drag on. “We will move expeditiously,” he said.
Eric Brandt, Broadcom CFO, said he expected $200-250 million cellular revenue during H1 2014, but gross margins only to be in the “tens of millions of dollars”. (Broadcom’s Q1 turnover was $1.98 billion with a gross margin of 49.4 per cent).
Brandt and McGregor, while expecting to see revenue decline from cellular baseband, said the impact on the bottom line would be minimal due to the low margins.
By off-loading the cellular baseband business, Brandt said $550 million of related expenses would be removed from the books.
Broadcom also expects to reinvest about $50 million of the savings into its broadband, infrastructure and connectivity businesses annually.