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Broadcom Inc. (AVGO) Down 8.7% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Broadcom Inc. (AVGO - Free Report) . Shares have lost about 8.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Broadcom Inc. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Broadcom Q4 Earnings & Revenues Surpass Estimates

Broadcom reported fourth-quarter fiscal 2019 non-GAAP earnings of $5.39 per share outpacing the Zacks Consensus Estimate by 0.56%. However, the figure declined 7.9% from the year-ago reported quarter.

Non-GAAP revenues from continuing operations were $5.776 billion, up 6.1% from the year-ago quarter. The figure surpassed the Zacks Consensus Estimate of $5.755 billion.

On Nov 4, 2019, Broadcom concluded the acquisition of Symantec’s enterprise security business. The buyout is expected to aid the company in expanding presence in infrastructure software space.

Management notes that there has been no contribution from Symantec’s enterprise security business in the fiscal fourth quarter, which ended on Nov 3, 2019.

Segmental Revenues

Semiconductor solutions’ revenues (79% of total net revenues) totaled $4.553 billion, down 7% from the year-ago quarter owing to soft demand in broadband vertical on shift to Wi-Fi 6 platforms. Nonetheless, robust demand for high capacity drives, and seasonal uptick in wireless vertical, limited the decline.

Infrastructure software revenues (21%) soared 134% year over year to $1.20 billion. The company is benefiting from synergies from CA acquisition. However, the company noted soft demand in SAN switching vertical.

Revenues for Intellectual property licensing were $23 million during the reported quarter, down 60% from the year-ago period.

Operating Details

Non-GAAP gross margin expanded 150 bps on a year-over-year basis to 69.9%. The increase can be attributed to improving mix of semiconductor sales and synergies from CA acquisition in infrastructure software vertical.

Non-GAAP operating expenses increased 17.8% year over year to $1.017 billion. As a percentage of net revenues on a non-GAAP basis, the figure expanded 180 bps to 17.6%.

Consequently, non-GAAP operating margin contracted 20 bps from the year-ago quarter to 52.3%.

Balance Sheet & Cash Flow

As of Nov 3, 2019, cash & cash equivalents were $5.055 billion, compared with $5.462 billion reported at the end of the previous quarter.

Long-term debt (including current portion) was $32.798 billion at the end of the fiscal fourth quarter compared with $37.565 billion in the prior quarter. Excess cash flow and contribution from preferred stock offering aided in debt reduction.

Broadcom generated cash flow from operations of $2.479 billion compared with $2.419 billion in the previous quarter. Capital expenditure totaled $96 million, down from the last reported quarter’s $112 million. Free cash flow during the quarter was $2.383 billion, up from $2.307 billion reported in fiscal third quarter.

During the reported quarter, the company repurchased approximately 1.5 million shares for $433 million. Additionally, Broadcom returned $1.054 billion in form of dividends to shareholders during the fiscal fourth quarter.

The company declared a quarterly dividend of $3.25 per share, up 22.6% from the prior dividend payment of $2.65. The quarterly dividend is payable on Dec 31, 2019, to shareholders as on Dec 23, 2019.

Guidance

Broadcom anticipates non-GAAP revenues of $25 billion (+/- $500 million). Semiconductor solutions and infrastructure software are anticipated to contribute $18 billion and $7 billion, respectively, to total revenues.

Moreover, management is banking on contribution from the acquisition of Symantec’s enterprise security business of approximately $1.8 billion.

Non-GAAP operating margin is anticipated to be flat on a year-over-year basis. The company expects to pay down $4 billion of debt in fiscal 2020. Cash dividend pay outs are anticipated at a little more than $5 billion.

From first-quarter of fiscal 2020, the company will club reporting of revenues from Intellectual property licensing with Semiconductor solutions segment. This will result in two reporting segments: Semiconductor solutions and Infrastructure software.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -8.21% due to these changes.

VGM Scores

Currently, Broadcom Inc. has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Broadcom Inc. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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