Broadcom (AVGO) Beats On Q1 Earnings & Revenues; Shares Up

Broadcom Limited AVGO reported impressive first-quarter fiscal 2017 results. Earnings (excluding stock-based compensation) surged almost 60% from the year-ago quarter and 4.8% sequentially to $3.63 per share.

Earnings (including stock-based compensation) were $3.19 per share in the reported quarter, which beat the Zacks Consensus Estimate by 17 cents.

Non-GAAP revenues from continuing operations were $4.149 billion, which soared a massive 132.8% from the year-ago quarter but remained almost flat on a sequential basis. The figure was roughly in line with management’s guidance and slightly better than the Zacks Consensus Estimate of $4.061 billion.
 

Broadcom Limited Price, Consensus and EPS Surprise

 

Broadcom Limited Price, Consensus and EPS Surprise | Broadcom Limited Quote

Shares rose 4% in after hour trading following the earnings release. Notably, Broadcom has underperformed the Zacks Electronics-Semiconductors Industry in the last one year. The company’s gain of 62.4% is lower than the industry’s return of 70.0%.

Nevertheless, we believe that the strong first-quarter results and positive long-term guidance will help the stock to rebound going ahead.

Segment Revenues

Wired Infrastructure revenues (50.3% of total revenue) were $2.087 billion as compared with $386 million in the year-ago quarter. Sequentially, revenues increased 0.5% better than management’s guidance of flat revenue growth.

Revenues were driven by strong demand for Ethernet switching and routing products from cloud data center operators. This was partially offset by continual seasonal decline in demand for the company’s broadband carrier access and set-top box products.

Wireless Communications (28.3%) revenues were up 103.3% year over year but declined 12.7% quarter over quarter to $1.175 billion. Per management, the sequential decline was primarily due to anticipated seasonal decline in demand from a major North American customer.

Enterprise Storage (17%) increased 4.3% from the year-ago quarter and 26% sequentially to $707 million. Revenues benefited from strong demand for the company’s SAS, RAID and Fiber Channel products.

Industrial & other (4.3%) increased 28.6% year over year and 11.1% sequentially to $180 million in the reported quarter.

Operating Details

Gross margin (including stock-based compensation) expanded 130 basis points (bps) on a year-over-year basis and 160 bps sequentially to 62.1% (within management’s guidance that excluded stock-based compensation) due to favorable product mix.

Operating expenses as percentage of revenues (including stock-based compensation) increased 250 bps from the year-ago quarter driven by higher research & development expense (up 450 bps), partially counteracted by lower selling, general & administrative expense (down 200 bps).

Sequentially, operating expenses decreased 40 bps reflecting benefits of the cost saving synergies from the Avago acquisition. While research & development remained flat, selling, general & administrative expenses declined 40 bps.

As a result, operating margin (including stock-based compensation) contracted 210 bps from the year-ago quarter but expanded 220 bps from the previous quarter.

Liquidity

As of Jan 29, 2017, cash & cash equivalents were $3.536 billion as compared with $3.097 billion in the previous quarter. Total debt was $14.301 billion at the end of the first quarter up $659 million from the previous quarter.

Broadcom generated cash flow from operations of $1.353 billion, up $1 million from the prior quarter. Capital expenditures were $325 million, up from $193 million in the previous quarter. Free cash flow was almost $1 billion (25% of net revenues).

Acquisition

Broadcom continues to proceed with the acquisition of Brocade, which is anticipated to be complete in third-quarter fiscal 2017. Management expects Brocade’s Fibre Channel SAN Switching business to generate approximately $900 million in EBITDA in fiscal 2018.

Guidance

For second-quarter fiscal 2017, Broadcom forecasts non-GAAP revenues of almost $4.100 billion (+/- $75 million). The revenue figure reflects almost 15% year-over-year growth, which management believes is not sustainable going ahead. The company continues to assume mid-single digit annual revenue growth over the long term.

Moreover, management reiterated long-term operating margin target of 45% and free cash flow margin above 35% of net revenue. Management expects long-term capital expenditure of about 3% of net revenues, which is consistent with the fabless business model.

Management anticipates Wired Infrastructure business revenues to be a little bit stronger than the first quarter, driven by strong continuous momentum in demand from cloud data centers, and improving demand for broadband access and set-top box products.

Wireless Communications revenues are expected to decline in the single digit percentage range as the weak demand from the North American customer is partially mitigated by ramp up of the next generation phone from the company’s large Korean smartphone customer.

Broadcom expects flat revenues at the Enterprise Storage segment due to seasonality. Industrial revenue is anticipated to increase sequentially in the high-single digits.

Gross margin is anticipated to be 62% (+/- 1%), while operating expenses are expected to be approximately $789 million.

Interest expense and other and provision for income taxes are anticipated to be $106 million and $74 million, respectively. The company expects capital expenditures to be approximately $290 million.

For the second quarter, depreciation is anticipated to be $112 million and amortization is expected to be approximately $1.078 billion.

For fiscal year 2017, Broadcom expects capital expenditure of approximately $1.2 billion, which is higher than previous-year expenditure levels.

Zacks Rank & Key Picks

Currently, Broadcom has a Zacks Rank #3 (Hold). Better-ranked stocks are Applied Optoelectronics AAOI, Dialog Semiconductor DLGNF and NVE Corporation NVEC. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for the current year has jumped 76.4% and 18.5% for Applied Optoelectronics and Dialog Semiconductor, respectively, in the last seven days. However, NVE estimates have remained stable over the same period.
 

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