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Broadcom (AVGO) Q3 Earnings & Revenues Surpass Estimates

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Broadcom (AVGO - Free Report) reported third-quarter fiscal 2020 non-GAAP earnings of $5.40 per share, which surpassed the Zacks Consensus Estimate by 3.1%. Moreover, the bottom line improved 4.7% from the year-ago quarter and 5.1% sequentially.

Net revenues were $5.821 billion, up 6% from the prior-year quarter. Moreover, the top line beat the Zacks Consensus Estimate by 0.7%. On a quarter-over-quarter basis, revenues inched up 1%.

Segmental Revenues

Beginning first-quarter fiscal 2020, the company clubbed reporting of revenues from Intellectual property licensing with Semiconductor solutions segment. The company now reports in two reporting segments — Semiconductor solutions and Infrastructure software.

Semiconductor solutions’ revenues (72% of total net revenues) totaled $4.219 billion, down 4% from the year-ago quarter’s level. The downside can be attributed to coronavirus-induced supply chain constraints and product cycle delay across wireless vertical. Moreover, increasing lead times limited shipments and remained a headwind.
 

Broadcom Inc. Price, Consensus and EPS Surprise

Broadcom Inc. Price, Consensus and EPS Surprise

Broadcom Inc. price-consensus-eps-surprise-chart | Broadcom Inc. Quote

Nonetheless, Semiconductor solutions segment was up 5% on a quarter-over-quarter basis, driven by robust demand for high storage capacity drives in enterprise vertical, networking, and broadband products. However, wireless and industrial verticals declined sequentially.

The company witnessed strength in networking end market with revenues up 9% sequentially, driven by uptick in demand for latest Tomahawk 3 and Trident 3 switch products across cloud customers. In network routing, growing clout of Jericho 2 across telco customers was noteworthy.

In broadband end-market, revenues were up 7% sequentially, courtesy of robust adoption of Wi-Fi 6 in next-generation access gateway with solid demand from large enterprises, telcos and other service providers.

Also, solid uptick of next-generation cable DOCSIS 3.1 modem products aided segmental performance. However, growth was limited by sharp decline in video, particularly in satellite set-top boxes, amid the existing constraints on live sporting events. Telecom and consumer end-markets benefited from favorable work-from-home trends.

Revenues from wireless vertical, was down 4% sequentially, owing to significant push of wireless revenue recognition in the fiscal fourth quarter on account of product delay. In the fiscal second-quarter earnings conference, management had noted that it estimates semiconductor revenues in wireless domain to decline in fiscal third quarter, as its “large North American mobile phone customer”, likely indicating Apple (AAPL - Free Report) , delays ramp of its next-generation smartphone.

In server storage connectivity domain, revenues were up 10% sequentially, on robust adoption of data protection controllers from enterprise customers. Meanwhile, industrial and resales revenues were both down 3%.

Infrastructure software revenues (28%) increased 41% year over year to $1.602 billion. The company is benefiting from synergies from acquisitions of CA and Symantec’s enterprise security business.

Notably, Symantec’s enterprise security business contributed more than $400 million to revenues in the reported quarter. Moreover, revenues from Brocade and CA improved 3% and 6%, respectively, on a year-over-year basis.

Operating Details

Non-GAAP gross margin expanded 220 basis points (bps) on a year-over-year basis to 74%. The increase can be attributed to improving mix of infrastructure software sales.

Total operating expenses on a non-GAAP basis increased 13.3% year over year to $1.14 billion. As a percentage of net revenues, the figure expanded 140 bps to 19.6%.

Non-GAAP operating margin expanded 180 bps from the year-ago quarter’s figure to 54.6%, due to expansion in gross margin.

Adjusted EBITDA (excluding $138 million of depreciation) came in at $3.342 billion, representing 57% of net revenues in the fiscal third quarter.

Balance Sheet & Cash Flow

As of Aug 2, 2020, cash & cash equivalents were $8.857 billion compared with $9.207 billion reported as of May 3, 2020. The company also has access to $5 billion of untapped revolver capacity.

Broadcom has executed an $8 billion bond refinancing and $3.9 billion exchange offering, which aided it in extending weighted average debt maturity to nearly six years and reducing weighted average interest rate to roughly 3%.

As of Aug 2, 2020, long-term debt (including current portion) was $44.023 billion compared with $45.863 billion as of May 3, 2020.

Broadcom generated cash flow from operations of $3.178 billion compared with $3.213 billion in the previous quarter. Capital expenditure totaled $105 million compared with the last reported quarter’s figure of $148 million. Free cash flow during the quarter was $3.073 billion compared with 3.065 billion in the prior quarter.

During the reported quarter, Broadcom returned $1.386 billion in form of dividends to shareholders during the fiscal second quarter.

On Sep 3, the company announced a quarterly dividend of $3.25 per share. The quarterly dividend is payable on Sep 30 to shareholders as on Sep 22.

Guidance

For fourth-quarter fiscal 2020, the company anticipates revenues of $6.4 billion (+/- $150 million). The Zacks Consensus Estimate is currently pegged at $6.21 billion. Adjusted EBITDA is anticipated at $3.744 billion (+/- $75 million) in the fiscal fourth quarter.

Key Takeaways

Broadcom delivered stellar fiscal third-quarter results. Moreover, both earnings and revenues increased year over year. Further, synergies from acquisitions of CA and Symantec’s enterprise security business are expected to boost Broadcom’s presence in infrastructure software vertical, in the days ahead.

Further, the chipmaker provided encouraging revenue guidance for the fiscal fourth quarter. Management expects to witness 50% uptick in wireless revenues, on a sequential basis, driven by acceleration in 5G deployment, significant production ramp up and increase in RF content. In broadband end-market, management projects 20% year-over-year growth in revenues driven by robust adoption of Wi-Fi 6 in next-generation access gateway with solid demand from enterprises, telcos and other service providers. Also, solid uptick of DSL and next-generation cable DOCSIS 3.1 products, triggered by coronavirus crisis induced work-from-home wave, is encouraging. In networking domain, momentum is anticipated to sustain on the back of strong demand from cloud and telco customers.

However, anticipated sluggishness in enterprise demand is likely to lead to decline in server storage revenue in high single digits on a quarter-over-quarter basis. Notably, the company is striving to reduce channel inventory globally, amid market uncertainty led by the COVID-19 pandemic. This is expected to lead to a double-digit sequential decline in industrial revenues in the fiscal fourth quarter. Further, increasing lead times is an overhang.

Nevertheless, despite these factors, management projects semiconductor business to return to year-over-year growth and sustain the momentum through fiscal first quarter.

For fiscal fourth quarter, revenues from Symantec are expected to be up 4% on a quarter-over-quarter basis with revenues from the software segment projected to be up in "low-single-digit percentage."

Also, efforts to deleverage the balance sheet deserve a special mention. The company reduced its total debt by $1.9 billion during the fiscal third quarter. The company intends to pay down an additional $3 billion of debt in fiscal fourth quarter.

Zacks Rank & Stocks to Consider

Currently, Broadcom carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader sector are Qorvo (QRVO - Free Report) and Blackbaud (BLKB - Free Report) , both flaunting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Blackbaud and Qorvo is currently pegged at 7.6% and 11.4%, respectively.

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