A Strong Quarter for Broadcom, Thanks to the iPhone

Semiconductor supplier Broadcom (AVGO +0.03%) reported its fiscal fourth-quarter results after the market closed on Dec. 6. Revenue grew across all segments, with the wireless segment producing the strongest growth thanks to the recent iPhone launch. Broadcom sees this strength continuing into the first quarter, driven by the later launch of the iPhone X. Here's what investors need to know about Broadcom's fourth-quarter report.

Broadcom results: The raw numbers

Data source: Broadcom.

Image source: Broadcom.

What happened with Broadcom this quarter?

• The wired infrastructure segment produced $2.15 billion of revenue, up 3% year over year.
• The wireless communications segment produced $1.80 billion of revenue, up 33% year over year.
• The enterprise storage segment produced $645 million of revenue, up 15% year over year.
• The industrial and other segment produced $257 million of revenue, up 66% year over year.
• Cash from operations totaled $1.96 billion, up from $1.66 billion in the third quarter and $1.35 billion in the fourth quarter of 2016.
• Cash and short-term investments totaled $11.2 billion, up from $5.4 billion at the end of the third quarter. Cash from operations along with $3.98 billion from the issuance of debt and $440 million from the sale of real property boosted this number.
• Broadcom completed the acquisition of Brocade Communications Systems on Nov. 17, following the end of the fourth quarter.
• Broadcom proposed to acquire Qualcomm for $70 per share on Nov. 6.

Broadcom provided the following guidance for the first quarter of fiscal 2018:

• Revenue of $5.3 billion, plus or minus $75 million, up from $4.1 billion during the first quarter of fiscal 2017.
• Non-GAAP gross margin of 64%, plus or minus 1%, and non-GAAP operating expense of $900 million.

Guidance implies non-GAAP EPS of $4.93, up from $3.63 in the first quarter of 2017.

Broadcom also updated its long-term operating model and boosted its interim dividend:

• Annual revenue growth target of 5% was unchanged.
• The long-term target for non-GAAP gross margin raised to 65%, up from greater than 60%.
• The long-term target for non-GAAP operating margin raised to 47.5%, up from 45%.
• The long-term target for free cash flow raised to 40% of revenue, up from 35%.
• An interim dividend of $1.75 per share was declared, up from a previous dividend of $1.02 per share.

What management had to say

Broadcom CEO Hock Tan discussed the drivers behind the strong wireless growth during the fourth quarter in the earnings call: "Fourth-quarter wireless revenue was driven by the ramp in shipments of next-generation platform from our large North American smartphone customer. The growth was partially offset by a decline in shipments to other customers, and the substantial year-on-year growth in revenue was driven by the large increase as we had indicated in Broadcom's total dollar content in this new platform."

Tan sees a strong first quarter as well, driven in part by the late launch of Apple's iPhone X: "As we look into first quarter 2018, unlike the last two years we expect wireless revenue to continue to grow sequentially as the ramping demand from our North American customer this year was pushed out compared to prior years."

Looking forward

Broadcom is benefiting from the launch of the iPhone 8 as well as the iPhone X, and those benefits will roll into the first quarter as the iPhone X continues to ramp up. The rest of Broadcom's business is also performing well. The storage business will get a boost in fiscal 2018 from Brocade's Fiber Channel SAN business, expected to add $250 million of revenue during the first quarter.

Broadcom's offer to buy Qualcomm was rejected, but a deal isn't off the table. Broadcom could raise its offer or attempt a hostile takeover. Acquiring Qualcomm would make Broadcom even more dependent on the smartphone market, but it could also give it more leverage when dealing with customers like Apple.