Broadcom (AVGO) reported third-quarter fiscal 2023 non-GAAP earnings of $10.54 per share, beating the Zacks Consensus Estimate by 1.15% and improving 8.3% year over year.

Net revenues increased 4.9% year over year to $8.88 billion, which surpassed the Zacks Consensus Estimate by 0.22%. The year-over-year growth was driven by robust networking performance.

Top-Line Details

Semiconductor solutions revenues (79.3% of revenues) totaled $6.94 billion, up 4.8% year over year, driven by strong adoption by hyperscalers, which grew double-digits on a year-over-year basis.

Networking revenues were $2.8 billion, up 20% year on year, representing 40% of Broadcom’s semiconductor revenues. The company witnessed strong demand for its switches, routers and custom silicon AI solutions from hyperscale customers.

Broadcom Inc. Price, Consensus and EPS Surprise

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

Storage connectivity revenues were $1.1 billion, accounting for 17% of semiconductor revenues and flat year over year.

Broadband revenues climbed 1% year over year to $1.1 billion and accounted for 16% of semiconductor revenues. Wireless revenues of $1.6 billion represented 24% of semiconductor revenues and were flat year over year.

Industrial resale revenues of $236 million declined 3% year over year due to softness in China.

Infrastructure software revenues (21.8% of net revenues) increased 5.2% year over year to $1.94 billion.

Core software revenues grew 5% year over year. Consolidated renewal rates average was 119% of expiring contracts despite adverse forex. In strategic accounts, the renewal rate average was 129%.

Operating Details

Non-GAAP gross margin contracted 80 basis points (bps) on a year-over-year basis to 75.1%.

Research & development, as a percentage of net revenues, declined 150 bps on a year-over-year basis to 10.3%. SG&A expenses declined 30 bps on a year-over-year basis to 2.4%.

Adjusted EBITDA increased 7.9% year over year to $5.80 billion. The adjusted EBITDA margin expanded 180 bps on a year-over-year basis to 65.4%.

The non-GAAP operating margin expanded 90 bps on a year-over-year basis to 62.4%.

Balance Sheet & Cash Flow

As of Jul 30, 2023, cash & cash equivalents were $12.06 billion compared with $11.55 billion as of Apr 30, 2023.

Total debt (including the current portion of $1.12 billion) was $39.34 billion as of Jul 30, 2023.

Broadcom generated a cash flow from operations of $4.719 billion compared with $4.502 billion in the previous quarter. Free cash flow during the quarter was $4.60 billion compared with $4.38 billion in the prior quarter.

On Jun 30, 2023, the company paid a cash dividend of $4.60 per share of common stock, totaling $1.901 billion. In the fiscal third quarter, Broadcom spent $2.167 billion on repurchases and eliminations.

Guidance

For the fourth quarter of fiscal 2023, Broadcom anticipates revenues of $9.27 billion, suggesting 4% year-over-year growth. Semiconductor revenue growth is expected in the low-to-mid single-digit percentage range on a year-over-year basis.

Broadcom expects networking revenues to grow more than 20% year over year in fourth-quarter fiscal 2023, driven by strong generative AI, in which Broadcom expects to witness 50% growth sequentially.

Server storage connectivity revenues are expected to decline mid-teens percentage year over year. Broadband revenues are expected to decline high-single-digits year over year.

Broadcom expects wireless revenues to decline low-single-digit percentage year over year but increase more than 20% sequentially.

Industrial resale is expected to grow at a low single-digit percentage year over year.

Infrastructure software segment revenues are expected to be up mid-single digit percentage year over year.

Adjusted EBITDA is expected at approximately 65% of projected revenues in the fiscal fourth quarter.

Broadcom also expects gross margins to decrease approximately 80 bps sequentially, due to an unfavorable product mix.

Zacks Rank & Other Stocks to Consider

Broadcom currently has a Zacks Rank #2 (Buy).

Shares of Broadcom have gained 65% year to date compared with the Zacks Computer & Technology sector’s growth of 40.7%.

Salesforce (CRM Quick QuoteCRM - Free Report) , Freshwork (FRSH Quick QuoteFRSH - Free Report) , and Splunk are some other top-ranked stocks that investors can consider in the broader sector. While Salesforce and Freshwork carries a Zacks Rank #2 Splunk sports Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Salesforce shares have gained 67% year to date. The long-term earnings growth rate is pegged at 21.47%.

Freshwork shares have gained 48.7% year to date. The long-term earnings growth rate is pegged at 30%.

Splunk shares have gained 40.9% year to date. The long-term earnings growth rate is pegged at 24.71%.