Wall Street sometimes seems unreasonable or unfair. The reaction to Broadcom's (NASDAQ: BRCM) Q4 results serves as a perfect example. The company posted in-line results with soft guidance, and the stock went up. Meanwhile, the Street was quick to punish VMware and Riverbed with 20%-plus plunges in market cap for similar infractions. Broadcom essentially was excused. But was it deserved?
Q4 was not great, nor was an overreaction warranted
Investors in Broadcom are thanking their lucky stars, while those holding shares in beaten-down companies wonder what just happened. It seems unfair, but not all disappointments are the same. In that regard, Broadcom deserved the pass it received. The company will be the first to say it can do better. And that seems to be what the Street believes will happen. That said, although Q4 was not up to the company's usual standards, it was far from a disaster.
The company had already revised guidance back in December, so there were no bombshells in the quarter, which was essentially why the stock held steady. VMware and others should take notice. As expected, Broadcom posted a 14% year-over-year increase in revenue. However, that it declined 2% sequentially was a concern, especially since Qualcomm grew 32% revenue from the prior quarter, while growing chip revenue 34%.
Nonetheless, this wasn't enough to incite fear. This is even though Qualcomm stole some market share in one of Broadcom's most important businesses -- mobile/wireless -- which comprises almost 50% of Broadcom's revenue. And although the 16% year-over-year increase was impressive, it shed 1% from Q3. In comparison, Infrastructure and networking was the company's strongest segment, growing 21% year over year.
This has been one of the reasons that I've always considered Broadcom an attractive buyout candidate. Its infrastructure and networking segment, which makes up 22% of the company's gross revenue, should appeal to a company like Cisco, which has struggled lately with its own hardware segments. And although the Broadcom's broadband segment was up only 1% sequentially, it was nonetheless the only segment that grew from the prior quarter. Then again, 10% annual growth was soft by the company's own standards.
However, I had a mixed view about profitability. Even though non-GAAP gross margin was up 1.7% year over year, it was 25 basis points short of Street estimates. But management did well offsetting this deficiency in operating expenses, which arrived $10 million lower sequentially. Likewise, non-GAAP operating income grew 16% year over year.
Soft guidance arrived with strong demand
Aside from Qualcomm, which issued its typical "beat-and-raise" quarter, there's been broad weakness within the entire sector, including lowered guidance from Texas Instruments. So investors were chewing their nails in anticipation of what Broadcom had to say. Management expects Q1 revenue to arrive at $1.9 billion. There was also the famous "give or take" caveat at 4%.
My math says that the low-end would arrive at $1.82 billion, or flat year over year. The high-end would be $1.97 billion, and would represent 8.2% year-over-year growth. But it also suggest a 5% sequential drop. In that regard, management said it expected all segments to trend lower from Q4. Plus, with Broadcom being one of Apple's (NASDAQ:AAPL) component suppliers, analysts had ample time to make adjustments, given that Apple's Q1 unit shipments fell short of expectations by more than 2 million.
Leading up to Apple's earnings report, there were concerns that the company had cut orders by as much as 50%. Such a move would have weakened Broadcom. And, given Broadcom's "so-so" Q4 numbers, coupled with the soft guidance, there was some correlation there, especially in mobile/wireless. Naturally, the Street was bracing for a disastrous report and guidance. Instead, what Broadcom issued was "less bad" than expected, at least in aggregate.
The soft guidance notwithstanding, better performances are on the way. For instance, according to published reports, not only is Apple ramping up iPhone distribution in China, but the company plans to release a cheaper version. This coincides with anticipation for an iPhone 5S. Meanwhile, there's Samsung's Galaxy S IV, which is expected to be released next month. Broadcom should be a beneficiary of all of this pent-up demand.
Thanks for your patience
The quarter was no calamity. But management acknowledged there's plenty of work to be done. This came after it announced a 10% dividend increase. Guidance wasn't strong, either. But the tone of the explanation was reassuring. This is what separates strong companies from those considered mediocre. The stock is not cheap, but it's hard not to like at this level.