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Broadcom Inc. (AVGO) Down 6.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Broadcom Inc. (AVGO). Shares have lost about 6.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Broadcom Inc. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Broadcom Q3 Earnings & Revenues Surpasses Estimates

Broadcom delivered third-quarter fiscal 2019 non-GAAP earnings of $5.16 per share outpacing the Zacks Consensus Estimate by 5 cents and improving 3.6% from the year-ago quarter.

Non-GAAP revenues from continuing operations were $5.515 billion, up 8.9% from the year-ago quarter. The figure surpassed the Zacks Consensus Estimate of $5.501.

Tepid Guidance

The company maintained outlook for fiscal 2019. Broadcom continues to anticipate non-GAAP revenues of almost $22.5 billion.

Segmental Revenues

Semiconductor solutions’ revenues (79% of total net revenues) totaled $4.353 billion, down 5% from the year-ago quarter owing to soft demand in broadband and storage domains. Nonetheless, robust demand for networking solutions, including routing and switching platforms, and seasonal uptick in wireless vertical, mitigated the decline.

Infrastructure software revenues (21%) soared 132% year over year to $1.14 billion. The company is benefiting from synergies from the CA and Brocade buyouts. Moreover, management is banking on contribution from the acquisition of Symantec’s enterprise security business.

Management believes Symantec’s strength in enterprise business and substantial customer base are anticipated to enable Broadcom explore the cyber security market and expand its addressable TAM by $160 billion. However, the company noted soft demand in SAN switching vertical.

Revenues for Intellectual property licensing were $22 million during the reported quarter compared with $3 million in the year-ago period.

Operating Details

Non-GAAP gross margin expanded 370 bps on a year-over-year basis to 71%. The increase can be attributed to higher revenue base and improving contribution from infrastructure software vertical.

Non-GAAP operating expenses increased 15.1% year over year to $1.006 billion. Operating margin expanded 270 bps from the year-ago quarter to 52.8%.

Balance Sheet & Cash Flow

As of Aug 4, 2019, cash & cash equivalents were $5.462 billion, up from $5.328 billion reported at the end of the previous quarter. Long-term debt (including current portion) was $37.565 billion at the end of the fiscal third quarter compared with $37.548 billion in the prior quarter.

Broadcom generated cash flow from operations of roughly $2.419 billion compared with $2.667 billion in the previous quarter. Capital expenditure totaled $112 million, down from the last reported quarter’s $125 million. Free cash flow during the quarter was $2.307 billion, down from $2.542 billion reported in fiscal second quarter.

During the reported quarter, the company repurchased approximately 2.6 million shares for $736 million. Additionally, Broadcom returned $1.057 billion in form of dividends to shareholders during the fiscal third quarter.

The company declared a quarterly dividend of $2.65 per share, payable on Oct 1, 2019, to shareholders as on Sep 23, 2019.

Guidance

Semiconductor solutions and infrastructure software are expected to contribute $17.5 billion and $5 billion, respectively, to total revenues.

Management notes stability in demand for mainframe and enterprise software across Western Europe and North America. Demand for SAN switching is anticipated to be down, even as OEMs work down on inventories.

Uncertainty concerning U.S. China trade war is compelling management to stay cautious. Nonetheless, the company anticipates seasonal demand for smartphone parts from “large North American OEM customer” likely referring to Apple. Notably, Apple’s iPhone 11 is scheduled to go on sale on Sep 20.

Non-GAAP operating margin is now anticipated to be 52.5% (previously 51%).

The company continues to project capital expenditure of $550 million for fiscal 2019.

Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months.

VGM Scores

Currently, Broadcom Inc. has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Broadcom Inc. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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