After cracking open Apple’s (AAPL) iPhone and looking at its insides, FBR has determind that Broadcom (BRCM) contributes fewer parts to the unit than expected, while Marvell (MRVL) and Linear Technology (LLTC) met expectations.
Unexpectedly, Broadcom did not win the GPS socket contract:
BRCM does not have the GPS chip ($2.50 of content; IFX won) but does have the touchscreen controller ($1.00–$1.50 of content). With 10 million incremental iPhones and iPod Touches in 3Q versus 2Q, incremental revenue contribution is only 1%–2% sequential growth instead of previous estimate of 4% sequential growth.
Broadcom’s 3Q guidance now likely in line with Street estimates; some profit taking is appropriate:
We now think Broadcom could guide 3Q revenues to $1.15 billion, plus or minus $20 million, about in line with the Street estimate. This is about $25 million less than our prior estimate, since the firm is not supplying the GPS chip into the iPhone 3G and iPod Touch, as we previously expected. With BRCM still sitting near recent highs of $28, and with the firm not winning the GPS chip, some wouldargue that the stock could retrace back to the $25 level. As such, some profit taking in the name near term may be appropriate.
Marvell does supply the WiFi chip, as expected; shares again attractively priced:
Marvell does have the WiFi chip ($2–$3 of content) in the iPhone, as we thought. With about 10 million incremental iPhones and iPod Touches in 3Q versus 2Q, incremental revenue contribution is 2%–3% sequential growth, as we expected. We like shares of MRVL here, given that they have retraced to the $15 level, and since the firm is a margin turnaround story now as operating expense leverage kicks in over the next year.
Linear Technology does have the battery/USB charger, as expected:
Linear Technology (LLTC) does supply the battery/USB charger ($1.00–$1.50 of content), as it did in the prior generation. With 10 million incremental iPhones and iPod Touches in 3Q versus 2Q, incremental revenue contribution is about 3% sequential growth, as we previously thought. Linear (Market Perform, $38 target) is a defensive stock to own in difficult macroeconomic times.
*UPDATE FROM FBR:
We were incorrect when we said Broadcom does not have any GPS content. Broadcom and Infineon (IFX – Not Rated) are co-marketing the Hammerhead II chip in a collaborative effort in an agreement that predates Broadcom’s acquisition of GPS chip supplier Global Locate. Thus Broadcom is technically “co-supplying” this chip with Infineon and should see some revenues from it. Because Broadcom’s older GPS solution is in use (socket likely won one year ago), the revenue-sharing arrangement with Infineon is still in place. Future generations of Broadcom’s GPS chips will not be subject to collaborative or revenue-sharing requirements. Thus, Broadcom is likely to see about 3% to 4% of sequential revenue growth from the iPhone and iPod Touch in 3Q versus 2Q, about in line with our original expectations.
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