Earnings Preview : Broadcom Corporation (BRCM) (QCOM)

We are maintaining our Neutral recommendation on industry stalwart Broadcom Corporation (BRCM), ahead of its third quarter 2012 results, expected on October 23, 2012.

For the third quarter of 2012, Broadcom projects revenues of $2.0 billion – $2.15 billion. The growth is expected to be driven by the Broadband segment. Infrastructure & Networking segment and other Mobile & Wireless segment are also expected to grow.

On an average, Broadcom, which competes with other bigwigs like Qualcomm Incorporated (QCOM), has surpassed the Zacks Consensus Estimate by 10.42% in the last four quarters. The current Zacks Consensus Estimate for the third quarter of 2012 is 56 cents, with no movement in either direction in the last sixty days.

Earlier, the company reported better-than-expected results in the second quarter of 2012. Broadcom Corporation posted a net income of $160 million or 28 cents per diluted share in the second quarter of 2012. Excluding one-time items, earnings per share came in at 49 cents, easily beating the Zacks Consensus Estimate of 43 cents.

Broadcom generated revenues of $1.971 billion in the second quarter of 2012, an increase of 9.7% year over year and 7.9% sequentially, and within management’s projection of $1.9 billion – $2.0 billion. Excluding the impact of acquisitions, revenue was up 5% sequentially.

Smartphones continue to be growth drivers for the company and management continues to gain traction at Samsung, China Unicom and Vodafone. The ubiquitous demand for increased bandwidth for IPTV services, HDTV broadcasting and high speed Internet access continues to drive momentum for deploying fiber networks.

Broadcom’s product leadership, solid financial performance and strong cash flow generation continue to be positives. Increasing demand for smartphones and tablets and the ongoing convergence of computing and communications should propel growth going forward. We expect the company to drive further growth on the back of increased traction in smartphones from China Unicom along with introduction of new smartphones powered by Broadcom’s near field communications (NFC) chip solution for both connectivity as well as mobile payment.

The recent acquisitions of NetLogic and BroadLight should further expand the company’s product portfolio.

However, we remain concerned about the margin pressure due to the accelerated new product ramps, which typically carry lower margins early in the product lifecycle, acquisition related costs and business concentration.

We currently have a Zacks #4 Rank on the stock, which translates to a short-term rating of Sell.