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3 Things Broadcom Inc. Management Wants You to Know

By Daniel Sparks – Sep 10, 2018 at 11:46AM

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Broadcom management provides insight into how it thinks about acquisitions, how the company is benefiting from rapid growth in cloud services, and more.

Shares of Broadcom (AVGO -0.37%) surged on Friday, rising 7.7% by the time the market closed. The stock's gain followed the company's third-quarter earnings release, which featured double-digit revenue and earnings-per-share growth and a huge jump in free cash flow.

While the company's third-quarter results were revealing, some of the most important insights from the quarterly update came from management's conference call with analysts after the company posted its earnings release. During the call, management provided a window into the reasoning for its acquisition of CA Technologies, explained how it's benefiting from the cloud services boom, and provided commentary on how management is approaching acquisitions.

A server room with a cloud in it.

Image source: Getty Images.

Why CA Technologies?

There has been some concern about whether or not CA Technologies will live up to its $18.9 billion price tag. But Broadcom management couldn't be more optimistic about the pending acquisition's prospects.

CA represents "a new and huge opportunity," said Broadcom CEO Hock Tan about the potential deal. He explained:

Just as we have done with hyper cloud players, we believe we can bring our compute offload solutions, our Tomahawk switches, Jericho routers, fiber optics, and our server storage connectivity portfolio directly to these same large enterprises that are buying CA software. These launch end users invest tens of billions of dollars on IT infrastructure every year.

Summing it up, Tan said, "So bottom line, we actually see this opportunity, a great opportunity I might say, to double down for future growth."

Benefiting from the cloud services boom

One area management singled out as a key driver for growth during the quarter was its strong data center demand. More specifically, one of the catalysts for strong data center demand was the fast-growing cloud services market, management explained.

Tan gave some insight into the impact of cloud service providers on its data center demand during Broadcom's earnings call:

Now Broadcom does a lot of business with the cloud companies building the digital economy, the leaders -- Google, Amazon, Microsoft -- are all large customers for us. They are growing rapidly and we are, as you noticed, growing with them. They use our leading-edge silicon solutions to develop their next-generation data centers to enable many businesses worldwide.

In other words, Broadcom has importantly positioned itself to benefit from the rapid growth in cloud services at the world's most important cloud service providers.

Acquisitions outside of the semiconductor industry

Since CA Technologies operates outside of the semiconductor industry, some investors may have wondered how management approaches acquisitions outside of the company's normal scope of operations. Further, investors may wonder whether Broadcom's decision to venture beyond semiconductors implied management is worried about its growth rate.

After explaining that Broadcom continues to believe its long-term growth rate for its semiconductor business "will remain mid-single digits," Broadcom CFO Tom Krause provided perspective on how it's thinking about non-core acquisitions:

As we acquire businesses outside of semiconductors, including Brocade and more recently CA, we are taking a conservative approach relative to our internal expectations on revenue growth. The returns we modeled do not require growth to hit our targets but make no mistake: We do expect to grow these businesses. So the important message is that we do not see any fundamental changes in our long-term growth rate.

Broadcom has historically proven adept at making accretive acquisitions that build shareholder value. Krause's comments imply the company is maintaining the same fiduciary discipline it has with past acquisitions.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Daniel Sparks owns shares of Broadcom Ltd. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

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