It has been about a month since the last earnings report for Broadcom Inc. (AVGO). Shares have added about 1.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Broadcom Inc. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Broadcom Q3 Earnings & Revenues Top Estimates
Broadcom reported third-quarter fiscal 2020 non-GAAP earnings of $5.40 per share, which surpassed the Zacks Consensus Estimate by 3.1%. Moreover, the bottom line improved 4.7% from the year-ago quarter and 5.1% sequentially.
Net revenues were $5.821 billion, up 6% from the prior-year quarter. Moreover, the top line beat the Zacks Consensus Estimate by 0.7%. On a quarter-over-quarter basis, revenues inched up 1%.
Beginning first-quarter fiscal 2020, the company clubbed reporting of revenues from Intellectual property licensing with Semiconductor solutions segment. The company now reports in two reporting segments — Semiconductor solutions and Infrastructure software.
Semiconductor solutions’ revenues (72% of total net revenues) totaled $4.219 billion, down 4% from the year-ago quarter’s level. The downside was due to coronavirus-induced supply chain constraints and product cycle delay across wireless vertical. Moreover, increasing lead times limited shipments and remained a headwind.
Nonetheless, Semiconductor solutions segment was up 5% on a quarter-over-quarter basis, driven by robust demand for high storage capacity drives in enterprise vertical, networking, and broadband products. However, wireless and industrial verticals declined sequentially.
The company witnessed strength in networking end market with revenues up 9% sequentially, driven by uptick in demand for latest Tomahawk 3 and Trident 3 switch products across cloud customers. In network routing, growing clout of Jericho 2 across telco customers was noteworthy.
In broadband end-market, revenues were up 7% sequentially, courtesy of robust adoption of Wi-Fi 6 in next-generation access gateway with solid demand from large enterprises, telcos and other service providers.
Also, solid uptick of next-generation cable DOCSIS 3.1 modem products aided segmental performance. However, growth was limited by sharp decline in video, particularly in satellite set-top boxes, amid the existing constraints on live sporting events. Telecom and consumer end-markets benefited from favorable work-from-home trends.
Revenues from wireless vertical, was down 4% sequentially, owing to significant push of wireless revenue recognition in the fiscal fourth quarter on account of product delay. In the fiscal second-quarter earnings conference, management had noted that it estimates semiconductor revenues in wireless domain to decline in fiscal third quarter, as its “large North American mobile phone customer”, likely indicating Apple, delays ramp of its next-generation smartphone.
In server storage connectivity domain, revenues were up 10% sequentially, on robust adoption of data protection controllers from enterprise customers. Meanwhile, industrial and resales revenues were both down 3%.
Infrastructure software revenues (28%) increased 41% year over year to $1.602 billion. The company is benefiting from synergies from acquisitions of CA and Symantec’s enterprise security business.
Notably, Symantec’s enterprise security business contributed more than $400 million to revenues in the reported quarter. Moreover, revenues from Brocade and CA improved 3% and 6%, respectively, on a year-over-year basis.
Non-GAAP gross margin expanded 220 basis points (bps) on a year-over-year basis to 74%. The increase can be attributed to improving mix of infrastructure software sales.
Total operating expenses on a non-GAAP basis increased 13.3% year over year to $1.14 billion. As a percentage of net revenues, the figure expanded 140 bps to 19.6%.
Non-GAAP operating margin expanded 180 bps from the year-ago quarter’s figure to 54.6%, due to expansion in gross margin.
Adjusted EBITDA (excluding $138 million of depreciation) came in at $3.342 billion, representing 57% of net revenues in the fiscal third quarter.
Balance Sheet & Cash Flow
As of Aug 2, 2020, cash & cash equivalents were $8.857 billion compared with $9.207 billion reported as of May 3, 2020. The company also has access to $5 billion of untapped revolver capacity.
Broadcom has executed an $8 billion bond refinancing and $3.9 billion exchange offering, which aided it in extending weighted average debt maturity to nearly six years and reducing weighted average interest rate to roughly 3%.
As of Aug 2, 2020, long-term debt (including current portion) was $44.023 billion compared with $45.863 billion as of May 3, 2020.
Broadcom generated cash flow from operations of $3.178 billion compared with $3.213 billion in the previous quarter. Capital expenditure totaled $105 million compared with the last reported quarter’s figure of $148 million. Free cash flow during the quarter was $3.073 billion compared with 3.065 billion in the prior quarter.
During the reported quarter, Broadcom returned $1.386 billion in form of dividends to shareholders during the fiscal second quarter.
On Sep 3, the company announced a quarterly dividend of $3.25 per share. The quarterly dividend is payable on Sep 30 to shareholders as on Sep 22.
For fourth-quarter fiscal 2020, the company anticipates revenues of $6.4 billion (+/- $150 million). Adjusted EBITDA is anticipated at $3.744 billion (+/- $75 million) in the fiscal fourth quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 9.92% due to these changes.
At this time, Broadcom Inc. has a strong Growth Score of A, a grade with the same score on the momentum front. However, 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, 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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