Can you read smoke signals? Broadcom (Nasdaq: BRCM) is waving up some subtle ones about the upcoming holiday season, if you only know what to look for.
The second-quarter report showed a perfectly respectable effort. Sales shot up 54% year over year to $1.6 billion, including a 10% increase from the first quarter. GAAP earnings multiplied manifold to $0.52 per share from $0.03 per share. Broadcom provides many types of networking and video processing chips. The company benefits when networking giants like Cisco Systems (Nasdaq: CSCO) and Juniper Networks (NYSE: JNPR) are enjoying great business, which is the case right now. On top of that, you'll find Broadcom chips are a major component for most smartphone companies and many kinds of consumer electronics. Score, then score again.
But that's not the interesting part of this report. A quick look at the cash flow statement reveals some drastic changes to Broadcom's inventory balances as well as an unseasonably low increase in accounts payable. That should be enough to send you to the earnings call for further clues, and sure enough, there's a story there.
According to Broadcom CEO Scott McGregor, the company is holding an unusually large number of chips in warehouses right now, waiting to ship them out and charge for the products on demand. This practice, known as "hubbing," allows gadget manufacturers to manage their build-outs for hectic sales periods such as year-end holidays. It's starting kind of early this year, and Broadcom is doing more of it than usual.
Management talked itself warm about the sneak attack of this holiday rush and the "magnitude of new products and tape outs coming out of the company" in the third quarter. It's anyone's guess exactly what products we're talking about here, though: Broadcom supplies chips for a wide variety of consumer electronics and enterprise-class infrastructure equipment. Large customers range from Cisco and Alcatel-Lucent (NYSE: ALU) to Nintendo and Samsung, touching nearly every market in between those extremes. Broadcom might be lauded for recent high-profile wins with Apple (Nasdaq: AAPL), but its expertise and scope ranges across a vast breadth of products.
Broadcom is a fabless chip designer and depends completely on Taiwan Semiconductor Manufacturing (NYSE: TSM) and other third-party manufacturing houses to crank out those chips. A handful of large foundries are buckling under unprecedented order volumes from Broadcom and many others, and supply is lower than demand. Under these circumstances, I suppose it only makes sense to grab manufacturing capacity while you can get it and sock it away for a snowy day. But it's also an encouraging sign for retail shops in general and electronics companies in particular, because we're looking at the telltale signs of an optimistic food chain.
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