Broadcom Expects a Second-Half Rebound

Semiconductor supplier Broadcom (AVGO 2.26%) reported its fiscal first-quarter results after the market closed on March 14. The company saw a steep decline in wireless sales, which drove semiconductor revenue down by a double-digit percentage.

But strength in other semiconductor markets, despite weak demand in China, as well as the acquisition of CA Technologies, drove revenue and earnings higher. Broadcom left its full-year guidance unchanged, a sign the company is confident it can navigate the choppy waters ahead.

Broadcom results: The raw numbers

Data source: Broadcom. *Q1 2018 GAAP net income included a $5.79 billion tax benefit. GAAP= generally accepted accounting principles.

What happened with Broadcom this quarter?

• The year-over-year decline in GAAP net income was due to a large tax benefit booked in the prior-year period.
• Broadcom switched to new reporting segments starting in the first quarter. There are now two main segments, semiconductor solutions and infrastructure software, as well as a small intellectual property licensing segment.
• Semiconductor solutions revenue was $4.37 billion, down 12% year over year. A sharp decline in wireless revenue was partially offset by strong results in the networking business.
• Infrastructure software revenue was $1.4 billion, up 328% year over year thanks to the acquisition of mainframe software company CA Technologies.
• Intellectual property licensing revenue was $12 million, down 73% year over year.
• GAAP gross margin was 55.4%, up 6.1 percentage points year over year. Non-GAAP gross margin was 71.4%, up 64.8% year over year. This was mostly driven by the addition of CA Technologies.
• Cash from operations was $2.13 billion, up from $1.69 billion in the prior-year period. Free cash flow was $2.03 billion.
• Broadcom repurchased 14.2 million shares during the quarter, spending $3.5 billion.
• The company declared a quarterly dividend of $2.65 per share, payable on March 29 to shareholders of record on March 21. The dividend is unchanged from the previous quarterly dividend.

Check out the latest earnings call transcript for Broadcom.

Image source: Getty Images.

What management had to say

Broadcom CEO Hock Tan discussed weak demand in China and the company's full-year outlook during the earnings call:

Many of our peers have commented that they are seeing a softening demand environment, especially out of China. While we are experiencing the same demand dynamics, we have factored in much of this macroeconomic backdrop when we provided fiscal 2019 guidance last quarter. As a result, after a solid start to the year, we are reaffirming our fiscal 2019 revenue guidance of $24.5 billion.

This outlook depends on the semiconductor business having a strong second quarter. Tan expects strong product cycles in both wireless and networking, along with a recovery in broadband, to drive growth later this year. Another weak iPhone launch from Apple could throw a wrench in those plans.

Tan also commented on the storage business, which he called a "mixed bag":

And as you know, hard disk drive's nothing to yell over these days. And we see that no different from the others, our mitigating factor here is that most of our hard disk drive -- in fact, all our hard disk drive component sales goes to near-line, all basically, and data centers. We do relatively less in PCs, desktops, or mobile. So, we do see the impact of it being weak but not as extreme as, obviously, the industry is saying.

Looking forward

Broadcom provided the following guidance for fiscal 2019:

• Revenue of $24.5 billion, up from $20.85 billion in fiscal 2018. Fiscal 2018 included no revenue from CA Technologies. As a stand-alone company, CA produced revenue of $4.2 billion in its last full fiscal year.
• GAAP operating margin of 17.6% and non-GAAP operating margin of 51%.
• Net interest expense and other of $1.25 billion.
• GAAP income tax rate of 3% and non-GAAP income tax rate of 11%.
• Guidance implies non-GAAP net income of $10 billion, or $23.87 per share using the current share count. Broadcom plans to return a total of $12 billion to shareholders in fiscal 2019, including substantial buybacks that will lower the share count.

Broadcom was able to maintain its full-year revenue guidance despite weak demand in China. The company noted that the semiconductor business actually grew year over year if the decline in wireless is excluded. That's likely a better result than investors were expecting.

Broadcom will need to deliver on its second-half recovery, which isn't a sure thing given the uncertainty in China and the smartphone market. But the acquisition of CA will help boost revenue and profits this year.