On April 30, chip giant Broadcom Ltd. (AVGO -1.14%) announced that it had narrowed the range of its revenue outlook for the second quarter of fiscal year 2018.
The company says that it expects revenue for the quarter to come in at $5 billion, plus or minus $25 million. Broadcom had previously guided for second-quarter revenue of $5 billion, plus or minus $75 million.
Apple's iPhone X smartphones use Broadcom chips. Image source: Apple.
That narrowing of the range, according to a statement provided by Broadcom CEO Hock Tan, was due to weaker-than-expected performance in its wireless chip shipments.
This isn't a huge reduction in guidance by any stretch of the imagination -- we're talking about tens of millions of dollars in a quarter that'll still come in around $5 billion -- but it does serve to reinforce the negative reports.
Where things look worse is in the financial guidance that Broadcom provided for the third quarter of its fiscal year 2018. Broadcom tells investors to expect revenue to be $5.05 billion, plus or minus $75 million. The average analyst estimate for the third quarter prior to this announcement was $5.24 billion.
This is by no means catastrophic for Broadcom (the stock is down less than 1 percent as of this writing), especially since the company's revenue would still be up 13% year over year at the midpoint of the new guidance range. But it is a disappointment nonetheless.
Let's dive deeper into what's going on here:
Wireless weakness is not surprising
Broadcom's wireless business depends heavily on chip sales to both Apple (AAPL -0.60%) (which made up more than 20% of Broadcom's overall revenue during fiscal year 2017) and, to a lesser extent, Samsung (NASDAQOTH: SSNLF).
Considering that Broadcom's sales to Apple are entirely contained within Broadcom's wireless business (which made up roughly 30% of Broadcom's overall revenue in fiscal year 2017), Broadcom's wireless business is crucially dependent on iPhone sales.
It's widely believed that Apple's latest iPhone models and, in particular, the highest-end iPhone X are falling short of expectations, with numerous analysts cutting their iPhone shipment expectations for the coming quarters, and press reports claiming significant iPhone production cuts.
Given Broadcom's dependence on Apple, it's not surprising that the weaker-than-expected product cycle for Apple is hurting Broadcom's wireless chip business.
Moreover, Samsung also said in its most recent quarterly results that it was seeing "stagnant sales of flagship models amid weak demand," so the Galaxy S9 smartphones -- in which Broadcom's wireless-connectivity combination chips are featured -- don't seem to be doing as well as expected, either. This seems to be further exacerbating the significant Apple-related weakness at Broadcom.
What to look for from here
Going forward, I think investors should assume that Apple iPhone shipments won't grow much on a year over year basis. In that case, Broadcom's best chances of delivering Apple-related wireless growth will be to continue to boost the amount of dollar content that it ships into the phones.
In the near term, as Apple adopts more-advanced Wi-Fi technologies and makes its eventual transition to 5G wireless, Broadcom should be able to capitalize on those opportunities by offering Apple more-sophisticated chips. Over the long term, though, there's a risk that Apple simply won't be willing to pay more for wireless chips as unit growth continues to prove elusive and Apple potentially tries to cut iPhone prices or offer lower-priced models in response.
