Broadcom Corporation (NASDAQ:BRCM) on Monday, announced plans to sell or wind down its cost-intensive cellular baseband business that is negatively impacting its operating income in the wake of excessive research and development costs. Following the news, the stock of the chipmaker surged as much as 12% to $35.70 before the market opened today.
Broadcom facing tough competition
According to the company, spinning off the business or shutting it down will save $700 million per year. Broadcom is looking forward to saving $600 million in research and development, excluding the $100 million reduction in the stock-based compensation.
Broadcom Corporation (NASDAQ:BRCM) is experiencing tough competition from rivals like Media Tek Inc (OTCMKTS:MDTKF) and Qualcomm, Inc. (NASDAQ:QCOM) primarily in China. Media Tek is gaining an edge over Broadcom in low-cost smartphones, and with Qualcomm’s command over the 4G long-term market the fight is even tougher.
Broadcom Corporation (NASDAQ:BRCM) launched its own 4G technology in competition with Qualcomm and to cater to changing needs, but could not catch up fast enough.
According to Christopher Rolland, FBR Capital Markets analyst, the unit was unprofitable. The analyst also said, “company’s technological roadmap had fallen behind peers like Qualcomm, MediaTek and Marvel, which left them in a very tough spot.”
Analyst doubt the move
Well Fargo analysts raised concerns that once Broadcom Corporation (NASDAQ:BRCM) sells its baseband business it will become weaker in connectivity and other chips for wireless handsets. The report said that a significant portion of the annual revenue was contributed by the company’s mobile and wireless division in 2013 “associated with base-band, connectivity and other content in wireless handsets.”
The California-based company is planning to reinvest around $50 million of the savings into the broadband, infrastructure and connectivity businesses on an annual business. The company has increased it GAAP and adjusted product gross margin forecast for the quarter ending June 30th. It is forecasting gross margins to be above the previously anticipated range of about 100-200 basis points sequentially.
As of 11 am ET today, Broadcom Corporation (NASDAQ:BRCM) shares were up 8.40% to $34.52. Shares moved ahead in early morning trading after the news. The company has hired JP Morgan Chase to advise on various alternatives.