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What to Expect When Broadcom Reports on Thursday

By Timothy Green – Updated Apr 12, 2019 at 8:49PM

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The chip company is facing weak smartphone demand, and its peers have been warning about weak data center demand.

Semiconductor giant Broadcom (AVGO 0.54%) is set to report its first-quarter results after the market closes on Thursday, March 14. The company will report against a backdrop of warnings about data center demand from other semiconductor companies. Its results will also be negatively affected by sluggish smartphone demand, particularly weak iPhone sales.

What happened last time

While Broadcom derives a majority of its revenue from data center products, which now includes mainframe software thanks to the acquisition of CA Technologies, the smartphone market is still important for the company. Weak demand for Apple's latest iPhones is causing all sorts of problems for component suppliers, and Broadcom hasn't been immune.

Servers in a data center.

Image source: Getty Images.

Broadcom's wireless communications revenue dropped 5% in the fourth quarter. That doesn't sound great, but it's actually better than the company was expecting. While sales of newer iPhones have been weak, Broadcom benefited in the fourth quarter from higher sales of legacy phones, presumably last-gen iPhones.

The small wireless revenue decline was more than offset by growth in the company's data center-related segments, leading to double-digit revenue and earnings growth.

Metric

Q4 2018

Change (YOY)

Compared to Average Analyst Estimate

Revenue

$5.44 billion

12.4%

Beat by $40 million

Non-GAAP earnings per share

$5.85

27.5%

Beat by $0.27

Data source: Broadcom.

Wired infrastructure revenue was up 3% in the fourth quarter, while storage revenue nearly doubled thanks to the acquisition of Brocade. Industrial and other, the company's smallest segment, grew revenue by 6%.

Check out the latest earnings call transcript for Broadcom.

What analysts are expecting

Analysts see a slowdown in both revenue and earnings growth in the first quarter of 2019:

Metric

Average Analyst Estimate

Change (YOY)

Revenue

$5.82 billion

9.2%

Non-GAAP earnings per share

$5.23

2.1%

Data source: Yahoo! Finance.

The wireless business will continue to be a drag on revenue growth, but Broadcom expects a strong recovery in the second half of 2019 driven by share gains in the next generation of phones. The company expects revenue derived from semiconductors to grow modestly this year, with the storage business expected to be stable compared to 2018.

Broadcom expects to produce revenue of $24.5 billion and non-GAAP earnings per share of about $23.66 in 2019. That's up from revenue of $20.8 and non-GAAP EPS of $20.82 in 2018. Both numbers will benefit from the acquisition of CA Technologies.

Will the data center slowdown hit Broadcom?

Weakness in the wireless business is expected, but so far Broadcom hasn't felt the impact from the slowdown in data center demand experienced by some other companies. Companies warning about sluggish data center demand include Intel, NVIDIA, and Micron.

Broadcom's 2019 revenue outlook already isn't all that optimistic. The company's guidance calls for 18% growth, but that includes revenue from CA Technologies. CA produced revenue of $4.2 billion in its fiscal 2018, and Broadcom's fiscal 2018 ended the day before the acquisition closed. Organic revenue growth will be slow at best, hurt by a weak wireless business and potentially by softening data center demand.

It's possible Broadcom will be forced to reduce its guidance if data center demand has deteriorated since the company last reported. But some data center-focused companies, like VMware, aren't feeling any pain at all. So Broadcom's business may hold up just fine.

Investors will know more when Broadcom reports Thursday afternoon.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Nvidia. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd and VMware. The Motley Fool has a disclosure policy.

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