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Broadcom (AVGO) Q2 Earnings Top Estimates, Revenues Rise Y/Y

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Broadcom Limited (AVGO - Free Report) has put up an impressive second-quarter fiscal 2018 show. Earnings of $4.88 per share beat the Zacks Consensus Estimate by 11 cents. The figure improved 32.2% from the year-ago quarter but was down 4.7% sequentially.

Non-GAAP revenues from continuing operations were $5.014 billion, up 20% from the year-ago quarter but down 6% sequentially. The figure was almost in line with management’s guidance and slightly higher than the Zacks Consensus Estimate of $5.003 billion.

Notably, the stock has returned just 8.8% in a year’s time, substantially underperforming the 12% rally of its industry. Sequential decline in revenues and earnings might have impacted the share price movement.

Segment Revenues

Wired Infrastructure revenues (46% of total revenues) totaled $2.3 billion, up 9% from the year-ago quarter and 22% sequentially. The upside was primarily driven by seasonal retrieval in demand for broadband access and robust demand for cloud data centers.

Broadcom also stated that robust growth in networking and compute offloading in cloud data centers and solid growth spending by enterprise IT positively impacted the segmental revenues. However, management noted that sluggish spending on video access and in the China optical markets is a concern.

Wireless Communications (26% of total revenues) rose 13% year over year but contracted 41% quarter over quarter to roughly $1.29 billion. The sequential decline was primarily led by a sharp drop in shipments of next-generation platform of the company’s large North American smartphone customers. However, ramped up shipments to a large Korean smartphone customer was a positive.

Enterprise Storage (23% of total revenues) increased 63% from the year-ago quarter and 17% sequentially to $1.16 billion. The improvement was largely backed by contribution from the recently-acquired Brocade Fibre Channel switch business.

Industrial & other (5% of total revenues) rose 17% year over year and 5% sequentially to $263 million. The strong year-over-year growth was driven by a significant increase in IP licensing revenues. Industrial resale continued to grow, highlighting 20% increase year over year.

Operating Details

Non-GAAP gross margin expanded 330 basis points (bps) on a year-over-year basis to 66.6%. The increase was buoyed by favorable product mix, driven by higher revenues from wired segment.

Non-GAAP operating expenses increased 11% year over year to $887 million.

Operating expenses, as a percentage of revenues, declined 140 bps from the year-ago quarter, courtesy of lower research & development expenses as well as selling, general & administrative expenses.

Operating margin expanded 470 bps from the year-ago quarter to 48.9%.

Liquidity

As of May 6, 2018, cash & cash equivalents were $8.2 billion compared with $7.1 billion in the previous quarter. Long-term debt was $17.5 billion at the end of the second quarter, flat with the preceding quarter level.

Broadcom generated cash flow from operations of roughly $2.3 billion as compared with $1.7 billion in the previous quarter. Capital expenditures totaled $189 million, down from $220 million last quarter.

During the quarter, the company repurchased approximately 1.5 million share worth $347 million. The company also revealed that over the first four weeks of the third quarter, it has repurchased an additional 4.9 million shares worth $1.16 billion.

Additionally, Broadcom returned $766 million in the form of dividends to shareholders during the second quarter. The company also approved a quarterly cash dividend of $1.75 per ordinary share.

Guidance

For third-quarter fiscal 2018, Broadcom forecasts non-GAAP revenues of almost $5.05 billion (+/- $75 million).

The company expects an increase in demand for networking products from cloud and data centers as well and broadband access products to positively impact Wired Infrastructure revenues.

Wireless Communications revenues are projected to see a seasonal sequential decline owing to weak demand from large North American customers.

However, the launch of next generation WiFi products is expected to be a growth driver for the segment.

Management stated that Enterprise Storage segment will benefit from robust demand from enterprise, cloud storage and datacenters and recovery in HDD demand.

The company expects mid-single-digit sequential growth in industrial product revenues and projects growth in resale. Industrial shipments and resale are likely to grow, which will drive segmental revenues in the third quarter.

Non-GAAP gross margin is anticipated to be 66.5% (+/-1%), while non-GAAP operating expenses are expected at around $882 million.

The company projects capital expenditures of $125 million for the third quarter of fiscal 2018.

Zacks Rank & Key Picks

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

Amazon.com, Inc. (AMZN - Free Report) , NVIDIA Corporation (NVDA - Free Report) and Citrix Systems, Inc. (CTXS - Free Report) are stocks worth considering in the broader technology sector. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Amazon, NVIDIA and Citrix Systems is currently pegged at 30.2%, 10.3% and 9.1%, respectively.

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