Broadcom (AVGO) Beats On Q4 Earnings, Long-Term Outlook Up

Broadcom Limited (NASDAQ:AVGO) reported impressive fourth-quarter fiscal 2017 results. Earnings of $4.59 per share beat the Zacks Consensus Estimate by 9 cents. The figure improved 32.3% from the year-ago quarter and 11.8% sequentially.

Non-GAAP revenues from continuing operations were $4.85 billion, which increased 16.9% from the year-ago quarter and 8.5% on a sequential basis. The figure was almost in line with management’s guidance and higher than the Zacks Consensus Estimate of $4.82 billion.

The company ended fiscal 2017 with earnings of $16.02 on revenues of $17.67 billion. Based on the strong results, Broadcom raised long-term target operating model.

Annual revenue growth is still targeted at 5%. However, non-GAAP gross margin is now expected at 65% compared with the previous outlook of more than 60%. Operating margin is now expected to be 47.5%, up from previous outlook of 45%. Broadcom also raised long-term free cash flow target from 35% to 40% of net revenues.

The company also approved a quarterly interim cash dividend of $1.75 per ordinary share that reflects a 72% increase.

Notably, the stock has returned a massive 44.3% year to date, substantially outperforming the 26.3% rally of its industry.

Segment Revenues

Wired Infrastructure revenues (44.3% of total revenues) were $2.15 billion, up 3.5% from the year-ago quarter. Per management’s anticipation, revenues declined 2.8% sequentially, primarily due to seasonal weakness in demand for broadband access and set-top box products.

Broadcom stated that a slowdown in demand for optical products from access and metro networks hurt the top line. However, demand from data centers was strong in the quarter.

Wireless Communications (37% of total revenues) were up 33.4% year over year and 40% quarter over quarter to roughly $1.80 billion. The strong growth was driven by the ramp up in shipments of next-generation platform from the company’s large North American smartphone customer. Higher dollar content in this platform also drove top-line growth.

Enterprise Storage (13% of total revenues) increased 15% from the year-ago quarter but plunged 12.2% sequentially to $645 million. The sequential decline was due to lower hard-drive disks (HDDs).

However, servers and storage connectivity business reported strong results driven by an increase in demand from Intel Corporation’s (NASDAQ:INTC) Purley server launch cycle.

Industrial & other (5% of total revenues) soared 58.6% year over year and 8% sequentially to $257 million. The strong growth was driven by a significant increase in IP licensing revenues. Industrial resale continued to grow at a double-digit rate.

Operating Details

Gross margin expanded 250 basis points (bps) on a year-over-year basis but was flat sequentially to 63.3%.

Operating expenses declined 3.5% year over year but inched up 0.9% to $775 million, lower than management’s guidance of approximately $780 million.

Operating expenses, as percentage of revenues, declined 340 bps from the year-ago quarter, thanks to lower research & development expenses (down 250 bps) and selling, general & administrative expenses (down 90 bps). Sequentially, operating expenses fell 120 bps.

Operating margin expanded 580 bps from the year-ago quarter and 120 bps from the previous quarter to 47.3%.

Liquidity

As of Oct 29, cash & cash equivalents were $11.2 billion compared with $5.5 billion in the previous quarter. Long-term debt was $17.4 billion at the end of the fourth quarter, up $3.8 billion from the previous quarter.

Broadcom generated cash flow from operations of roughly $2 billion, up $303 million from the prior quarter. Capital expenditures were $233 million, slightly down from $255 million in the previous quarter.

Acquisition

Broadcom completed the long-delayed Brocade acquisition early in the first quarter. The company completed the divesture of Brocade's campus WiFi and switch business to Arris for 800 million in cash. Moreover, it sold Brocade's headquarter building in Santa Clara for approximately 225 million in cash.

Broadcom is committed to pursue the recently proposed acquisition of Qualcomm (NASDAQ:QCOM). On Nov 6, the company offered $70 in cash and stock, which Qualcomm’s board rejected.

On Dec 4, Broadcom notified Qualcomm of its intention to nominate 11 individuals for election to the Qualcomm’s board at the 2018 annual meeting of stockholders which the company will host on Mar 6, 2018.

Broadcom has also stated its intention to redomicile in the United States that will help it pursue the Qualcomm acquisition more aggressively. The move will also smoothen regulatory hurdles.

Guidance

For first-quarter fiscal 2018, Broadcom forecasts non-GAAP revenues of almost $5.30 billion (+/- $75 million).

The seasonal decline in demand for set-top box and broadband access products are expected to negatively impact Wired Infrastructure revenues in the first-quarter. However, the downside trend is projected to improve beyond the quarter, primarily driven by increasing traction of 10G technology to support broadband video delivery.

Wireless Communications revenues are projected to grow sequentially owing to strong demand from the large North American customer. For the rest of 2018, Broadcom expects significant increase in FBAR content driven by the need for additional filtering at the antenna.

Moreover, the upcoming launch of the next generation WiFi products is expected to be a growth driver for the segment.

Management stated that Enterprise Storage segment results in the first-quarter of fiscal 2018 will benefit from the Purley product cycle and recovery in HDD demand. The segment will also include Brocade Fiber Channel SAN business that is expected to generate a partial quarter revenue contribution of $250 million.

Broadcom believes that the storage business will benefit from strong adoption of All-Flash arrays in storage appliances infrastructure that uses the company’s PCI Express and NVMe technology.

Management expects IP licensing revenues to decline sequentially. However, industrial shipments and resale are likely to grow which will drive segmental revenues in the first quarter. For the rest of 2018, strong adoption and ramp up of the company’s optical isolation product will continue to drive growth from electric vehicles.

Gross margin is anticipated to be 64% (+/- 1%), while operating expenses are expected to be approximately $900 million.

Broadcom expects total operating expenses including Brocade to be within the target of 17.5% of net revenues.

The company expects capital expenditures of approximately $210 million for the first quarter of fiscal 2018. Over the long term, Broadcom targets capital expenditure to be 3% of revenues.

Zacks Rank & Other Key Picks

Currently, Broadcom carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the broader sector are NVIDIA Corporation (NASDAQ:NVDA) and Texas Instruments (NASDAQ:TXN) . Both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings estimates for NVIDIA and Texas Instruments are currently pegged at 11.2% and 9.6%, respectively.

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