Semiconductor supplier Broadcom (NASDAQ:AVGO), which maintained its full-year guidance just three months ago, was forced to cut that guidance when it reported its second-quarter results due to an escalating trade war between the U.S. and China. The loss of business from Huawei was responsible for some of the guidance cut, but the rest was due to an increasingly uncertain environment. Customers are reducing inventory levels, prompting Broadcom to scrap its expectation of a second-half recovery.

Broadcom results: The raw numbers

Metric

Q2 2019

Q2 2018

Year-Over-Year Change

Revenue

$5.52 billion

$5.01 billion

10%

Non-GAAP earnings per share

$5.21

$4.88

6.8%

Data source: Broadcom.

What happened with Broadcom this quarter?

  • Semiconductor solutions revenue was $4.09 billion, down 10% year over year. A steep decline in wireless revenue and weakness in the storage business more than offset strength in the networking segment.
  • Infrastructure software revenue came in at $1.41 billion, up 216% from the prior-year period. This growth was due to the acquisition of CA Technologies, which closed last November.
  • Intellectual property licensing revenue was $16 million, down 47% year over year.
  • GAAP gross margin was 56%, up 5.1 percentage points compared to Q2 2018. Non-GAAP gross margin was 72%, up 5.4 percentage points year over year. The acquisition of CA Technologies helped boost margins.
  • Free cash flow came in at $2.54 billion, up from $2.12 billion in the prior-year period.
  • Broadcom spent $830 million on share repurchases during the quarter.
  • Broadcom declared a quarterly dividend of $2.65 per share, payable on July 2 to shareholders of record on June 24. The dividend is unchanged from the previous quarterly dividend.
Shipping containers painted with U.S. and Chinese flags.

Image source: Getty Images.

What management had to say

CEO Hock Tan explained during the earnings call why the company no longer expects a recovery in the second half: "While enterprise and mainframe software demand remained stable, particularly in North America and Europe, with respect to semiconductors, it is clear that the U.S.-China trade conflict including the Huawei export ban is creating economic and political uncertainty and reducing visibility for global OEM customers."

The company now sees the second half of 2019 more in line with the first half, prompting it to cut its guidance for the full year.

In response to an analyst question, Tan explained that the company's guidance takes into account another possible round of tariffs on Chinese goods:

I think at this point, we try to capture everything including that proposed next round into the picture. We are of the belief that things are -- environment is very, very nervous. And that's why we see a very, very sharp and rapid contraction of supply chain and orders out there from our customers, especially of global OEM customers.

Looking forward

Broadcom knocked $2 billion off of its previous revenue guidance for the full year, entirely due to weakness in the semiconductor business. The company now expects:

  • Revenue of $22.5 billion, down from previous guidance of $24.5 billion. That's still up from $20.85 billion in 2018, but this growth will be solely due to the acquisition of CA Technologies.
  • Revenue of $17.5 billion from the semiconductor solutions segment, down a high-single-digit percentage year over year.
  • Revenue of $5 billion from the infrastructure software segment, unchanged from the company's previous outlook.
  • GAAP operating margin of 14.75%, and non-GAAP operating margin of 52.5%.
  • Net interest expense and other of $1.3 billion.
  • GAAP income tax rate of -9%, and non-GAAP income tax rate of 11%.
  • Guidance implies non-GAAP net income of $9.35 billion, or $22.15 per share using the current share count. Broadcom's previous guidance implied non-GAAP EPS of $23.87.

Broadcom is taking a conservative stance for the rest of the year, given the high level of uncertainty. At this point, there's no telling how long this downturn in the semiconductor business will last, or how bad it will get.