A month has gone by since the last earnings report for Broadcom Inc. (AVGO). Shares have added about 8.7% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Broadcom Q4 Earnings and Revenues Beat Estimates
Broadcom Inc. reported fourth-quarter fiscal 2020 non-GAAP earnings of $6.35 per share, which beat the Zacks Consensus Estimate by 1.4%. Moreover, the bottom line improved 17.8% from the year-ago quarter and 17.6% sequentially.
Net revenues were $6.467 billion, up 12% from the prior-year quarter. Moreover, the top line beat the Zacks Consensus Estimate by 0.8%. On a quarter-over-quarter basis, revenues inched up 11.1%.
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 segments — Semiconductor solutions and Infrastructure software.
Semiconductor solutions’ revenues (75% of total net revenues) totaled $4.83 billion, up 6% from the year-ago quarter. The upside can be attributed to higher demand for wireless solutions and continued momentum in networking and broadband solutions.
The company witnessed strength in networking end market with revenues up 17% year over year. The improvement in networking revenues came on the back of increased spending by telecommunication companies in modernizing Edge and core networks, and higher cloud spending by data centers.
In broadband end-market, revenues were up 22% year over year, courtesy of robust adoption of Wi-Fi 6 in next-generation access gateway with solid demand from large enterprises, telcos and other service providers. Telecom and consumer end-markets continue to benefit from favorable work-from-home trends.
Revenues from wireless vertical was down 9% year over year. However, on a sequential basis, revenues from wireless vertical were up 43% driven by launch of new generation phone by one of its North American OEM clients.
In server storage connectivity domain, revenues were down 9% year over year, on soft demand from enterprise customers. Meanwhile, industrial and resales revenues were both up 4%.
Infrastructure software revenues (25%) surged 36% year over year to $1.637 billion. The company is well-poised to gain from synergies from acquisitions of CA and Symantec’s enterprise security business.
Notably, Symantec’s product revenue (excluding hardware and services) came in at $380 million. Moreover, revenues CA improved 5% on a year-over-year basis.
Non-GAAP gross margin expanded 370 basis points (bps) on a year-over-year basis to 73.6%. The improvement was owing to favorable mix of infrastructure software sales.
Total operating expenses on a non-GAAP basis increased 9.6% year over year to $1.12 billion. As a percentage of net revenues, the figure contracted 40 bps to 17.2%.
Non-GAAP operating margin expanded 400 bps from the year-ago quarter’s figure to 56.3%, due to expansion in gross margin.
Adjusted EBITDA (excluding $139 million of depreciation) was $3.827 billion, accounting for 59.2% of net revenues in the fiscal fourth quarter.
Balance Sheet & Cash Flow
As of Nov 1, 2020, cash & cash equivalents were $7.618 billion compared with $8.857 billion reported as of Aug 2, 2020. The company also has access to $5 billion of untapped revolver capacity.
Broadcom stated that due to refinancing and liability management endeavors undertaken in the fiscal 2020, the company’s weighted average debt maturity is now nearly six years. The weighted average interest rate stands at 3.5%.
As of Nov 1, 2020, long-term debt (including current portion) was $41.062 billion compared with $44.023 billion as of Aug 2, 2020. The company paid down $3 billion of its total debt in the fiscal fourth quarter.
Broadcom generated cash flow from operations of $3.348 billion compared with $3.178 billion in the previous quarter. Capital expenditure totaled $102 million compared with the last reported quarter’s figure of $105 million. Free cash flow during the quarter was $3.246 billion compared with 3.073 billion in the prior quarter.
During the reported quarter, Broadcom returned $1.3 billion in form of dividends to shareholders during the fiscal fourth quarter. The company paid an additional $185 million for elimination of 500,000 of company’s shares.
Broadcom is committed to returning half of the normalized free cash flow generated in the previous year to shareholders as cash dividends. As part of this strategy, the company announced an 11% hike in its quarterly dividend to $3.60.
Quick Look at Fiscal 2020 Performance
Broadcom reported revenues of $23.888 billion in fiscal 2020, up 6% over fiscal 2019 tally. The Zacks Consensus Estimate was pegged at $23.86 billion.
Segment wise, Semiconductor revenues were down 1% year over year to $17.267 billion while Infrastructure revenues improved 28% to $6.621 billion.
Within Infrastructure segment, revenue contribution from Brocade stood at $1.5 billion, reflecting a decline of 17% year over year. Revenues from CA were $3.5 billion, indicating year-over-year growth of 4%. Revenue contribution from Symantec was $1.6 billion.
Non-GAAP earnings per share was $22.16 compared with $21.29 reported for fiscal 2019.
Non-GAAP gross margin expanded 250 bps to 73.5% while non-GAAP operating margin expanded 140 bps to 54.2%.
For fiscal 2020, Broadcom generated cash flow from operations of $12.061 billion compared with $9.697 billion in the previous year. Capital expenditure totaled $463 million compared with the prior-year figure of $432 million. Free cash flow during fiscal 2020 was $11.598 billion compared with $9.265 billion in fiscal 2019.
The company paid aggregate cash dividends of $5.2 billion in fiscal 2020 and paid another $800 million towards reduction of shares amounting to 2.6 million.
For first-quarter fiscal 2021, the company anticipates revenues of $6.6 billion. Adjusted EBITDA is anticipated at $3.9 billion in the fiscal first quarter.
Management expects to witness 50% uptick in wireless revenues, on a year over year basis, driven by seasonal ramp.
In broadband end-market, management projects low to mid-teens percentage year-over-year growth in revenues backed by robust adoption of Wi-Fi 6 in next-generation access gateway with solid demand from enterprises, telcos and other service providers. In networking domain, the company expects revenues to increase in double digits on a year-over-year basis despite moderating enterprise campus spending.
Nevertheless, sluggishness in enterprise demand is likely to result in decline in server storage revenues in double digits compared with year-ago quarter. Notably, the company is optimistic regarding the recovery witnessed in industrial and auto segments and expects revenues from resales to register growth in mid-teens year over year in first-quarter fiscal 2021.
Management projects Semiconductor Solutions business to register year-over-year growth in high teens percentage sustained by strong demand seen across networking, broadband and wireless verticals.
For fiscal first quarter, revenues from CA and Symantec are expected to be up in mid-single digits on a year-over-year basis. However, revenues from Brocade are expected to witness decline in high single digits compared with year-ago quarter due to sluggish enterprise spending. Subsequently, revenues from Infrastructure segment are expected in the range of flat to increase in low single digits percentage on a year-over-year basis in first quarter of fiscal 2021.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
At this time, Broadcom Inc. has a nice Growth Score of B, a grade with the same score on the momentum front. 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Broadcom Inc. has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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