Broadcom (BRCM) Beats on Both Q3 Revenues & Earnings

Premier semiconductor manufacturer Broadcom Corp. BRCM reported relatively strong third-quarter 2015 results, riding high on a healthy demand for high-end smartphone and broadband access products. GAAP net income in the reported quarter increased to $429 million or 69 cents per share from $98 million or 16 cents per share in the year-ago quarter. The year-over-year increase in earnings was largely driven by lower operating expenses.

Non-GAAP net income for the reported quarter aggregated $477 million or 77 cents per share compared with $461 million or 76 cents per share in the year-earlier quarter. The non-GAAP earnings for third-quarter 2015 exceeded the Zacks Consensus Estimate by 4 cents.

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Quarter Details

Revenues for the reported quarter were $2,187 million, down 3.2% year over year. The decrease in revenues was due to higher revenues in the Cellular Baseband segment in third-quarter 2014 that Broadcom is currently winding down. However, revenues for third-quarter 2015 beat the Zacks Consensus Estimate of $2,142 million.

In accordance with the restructuring initiatives, Broadcom presently has two reportable segments: Broadband and Connectivity, and Infrastructure and Networking. Revenues from the Broadband and Connectivity segment improved 1.9% year over year to $1,540 million, driven by sales of wireless connectivity products and other broadband and connectivity technologies. Revenues from Infrastructure and Networking were $644 million, down 1.1% year over year driven by lower sales of other infrastructure and networking technologies.

GAAP gross margin for the reported quarter improved to 53.6% from 52.3% in the prior-year quarter. Non-GAAP gross margin was 55.0% compared with 54.1% in third-quarter 2014.

GAAP operating income increased to $436 million in the reported quarter from $111 million in the year-ago quarter for respective operating margins of 19.9% and 4.9%. The non-GAAP operating income for the reported quarter was $484 million for a non-GAAP operating margin of 22.1% compared with the respective tallies of $473 million and 20.9% in the year-earlier quarter.

Avago Merger Update

The proposed acquisition of Broadcom by rival semiconductor manufacturer Avago Technologies Ltd AVGO is currently on track. The deal is arguably the largest of its kind in the semiconductor chip industry and would create a behemoth with one of the most diversified communications platforms in the semiconductor industry at combined annual revenues of approximately $15 billion. The transaction is expected to be completed by the end of first-quarter 2016.

The transaction has been unanimously approved by the boards of directors of both the companies. Additionally, the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired. The deal is currently awaiting regulatory clearance under certain foreign antitrust laws, including those of China and the European Union, as well as other customary closing conditions.

Although there is little product overlap between the two companies, Avago’s interest in Broadcom signifies that it is now venturing into a business category. The semiconductor chip industry is also witnessing sluggish growth despite healthy strides in the digital and telecommunications markets. Synergistic benefits from the merger is likely to increase profitability through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses. The transaction will likely result in $750 million of annual cost synergies within the first 18 months of operation and is expected to be immediately accretive to non-GAAP earnings and free cash flow.

Balance Sheet & Cash Flow

Net cash from operating activities during the quarter was $483 million compared with $461 million in the prior-year period. The company ended the quarter with cash and cash equivalents of $2,212 million, while long-term debt stood at $1,594 million.

During the reported quarter, Broadcom paid $86 million in dividends and recorded $81 million in capital expenditures.

Moving Forward

Broadcom continues to diversify into new markets such as Internet of Things, automotive, wearables and small cells. In the Internet of Things market, design activity remains high with its current products and the company is in the process of refreshing its portfolio with meaningful products that are optimized specifically for different market segments.

The company envisions significant growth drivers, including emerging markets, new media server architectures and new technologies such as ultra HD and HEVC. Broadcom expects demand for Ultra HD and HEVC products to increase exponentially once they mature from their early-adoption phase. The emerging business of home networking and small cells are also expected to improve.

Broadcom currently has a Zacks Rank #3 (Hold). A couple of stocks that look promising and are worth a look in the industry include Amkor Technology, Inc. AMKR and Applied Optoelectronics, Inc. AAOI, both carrying a Zacks Rank #2 (Buy).

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