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Broadcom (AVGO) Tops Q1 Earnings, Up Y/Y, Ends Qualcomm Deal

Broadcom Limited AVGO reported impressive first-quarter fiscal 2018 results. Earnings of $5.12 per share beat the Zacks Consensus Estimate by 8 cents. The figure improved 41% from the year-ago quarter and 11.5% sequentially.

Non-GAAP revenues from continuing operations were $5.33 billion, which increased 28% from the year-ago quarter and 10% on a sequential basis. The figure was almost in line with management's guidance and slightly higher than the Zacks Consensus Estimate of $5.25 billion.

The company also approved a quarterly interim cash dividend of $1.75 per ordinary share, payable on Mar 29, 2018.

Yesterday, shares of the company went up 2.75%. Notably, the stock has returned 22.9% year over year, substantially outperforming the 13.6% rally of its industry .

Segment Revenues

Wired Infrastructure revenues (35% of total revenues) were $1.88 billion, down 10% from the year-ago quarter and 13% sequentially. The decline was primarily due to seasonal weakness in demand for broadband access and set-top box products.

Broadcom stated that a slowdown in demand for optical products from access and metro networks hurt the top line. However, demand for data centers and cloud shipments were strong in the quarter.

Wireless Communications (41% of total revenues) were up 88% year over year and 23% quarter over quarter to roughly $2.21 billion. The strong growth was driven by the ramp-up in shipments of next-generation platform from the company's large North American smartphone customers. Higher dollar content in this platform also drove top-line growth.

Enterprise Storage (19% of total revenues) increased 40% from the year-ago quarter and 54% sequentially to $991 million. The increase was due to the contribution from the recently acquired Brocade Fibre Channel switch business.

Further, servers and storage connectivity business reported strong results, driven by an increase in demand from Intel Corporation's INTC Purley server launch cycle.

Industrial & other (5% of total revenues) soared 40% year over year but declined 2% sequentially to $251 million. The strong year-over-year growth was driven by a significant increase in IP licensing revenues. Industrial resale continued to grow at a double-digit rate.

Operating Details

Non-GAAP gross margin expanded 240 basis points (bps) on a year-over-year basis and 150 bps to 64.8%. The increase was due to a favorable product mix, driven by better-than-expected revenues from the Brocade fiber channel, SAN switches.

Non-GAAP operating expenses increased 12.6% year over year and 13.9% sequentially to $883 million.

Operating expenses, as a percentage of revenues, declined 230 bps from the year-ago quarter, thanks to the lower research & development expenses and selling, general & administrative expenses. Sequentially, operating expenses fell 100 bps.

Operating margin expanded 470 bps from the year-ago quarter and 90 bps from the previous quarter to 48.2%.

Liquidity

As of Feb 4, 2018, cash & cash equivalents were $7.1 billion compared with $11.2 billion in the previous quarter. Long-term debt was $17.5 billion at the end of the first quarter, up slightly $17.4 billion from the previous quarter.

Broadcom generated cash flow from operations of roughly $1.7 billion, down $2 billion from the prior quarter. Capital expenditures were $220 million, down from $233 million in the previous quarter.

Acquisition

Early in the first quarter, Broadcom completed the long-delayed Brocade acquisition. It completed the divestiture of Brocade's campus WiFi and switch business to Arris for 800 million in cash. Moreover, it sold Brocade's headquarter building in Santa Clara for approximately 225 million in cash.

Donald J. Trump has released an order, asking Qualcomm Inc. QCOM to immediately and permanently abandon its proposed takeover by Broadcom on grounds of national security concerns.

The presidential order put an end to the tech deal on grounds of national security. The deal would have affected United States' leading position in creating technology and setting standards for next-generation mobile phone communications as China is steadily taking a lead in the space.

Recently, the U.S. Committee on Foreign Investment in the United States (CFIUS) investigated and reviewed Broadcom's proposed $117 billion hostile takeover offer for Qualcomm. (Read more: Qualcomm's Takeover Bid by Broadcom Raises Security Concern ).

Guidance

For second-quarter fiscal 2018, Broadcom forecasts non-GAAP revenues of almost $5 billion (+/- $75 million).

The company project growth to be driven by increasing traction of 10G technology to support broadband video delivery. Also, 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. The set-top box is expected to be flat.

Wireless Communications revenues are projected to experience a seasonal decline, sequentially, owing to the weak demand from the large North American customers. For the rest of 2018, Broadcom expects a significant increase in FBAR content, driven by the need for additional filtering in the antenna.

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

Management stated that Enterprise Storage segment results in the second quarter of fiscal 2018 will benefit from Purley product cycle, robust demand from enterprise and datacenters and recovery in HDD demand. The segment will also include Brocade Fiber Channel SAN business that is expected to generate a partial quarter revenues contribution.

The company expects double-digit sequential growth in industrial product revenues and projects growth in resale.

Broadcom believes that the storage business will benefit from strong adoption of All-Flash arrays in storage appliances infrastructure that uses the company's PCI Express and NVMe technology.

Industrial shipments and resale are likely to grow, which will drive segmental revenues in the second quarter. For the rest of 2018, strong adoption and ramp up of the company's optical isolation product will continue to drive growth for electric vehicles.

Non-GAAP gross margin is anticipated to be 66% (+/- 1%) while non-GAAP operating expenses are expected to be approximately $890 million.

The company expects capital expenditures of approximately $190 million for the second quarter of fiscal 2018. Over the long term, Broadcom targets capital expenditure to be 3% of revenues.

Zacks Rank & Other Key Picks

Currently, Broadcom carries a Zacks Rank #3 (Hold). A better-ranked stock in the Technology sector is NVIDIA Corp. NVDA , sporting Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Long-term earnings estimates for NVIDIA are currently pegged at 10.25%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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