An earnings beat and a forecast for a second-half chip sales rebound are overshadowing a revenue miss for Broadcom (AVGO) .
After the bell on Thursday, Broadcom reported January quarter (fiscal first quarter) revenue of $5.789 billion and non-GAAP EPS of $5.55. Revenue was up 8.7% annually thanks to the November closing of Broadcom's $18.9 billion deal to buy enterprise software firm CA Technologies, but missed a consensus estimate of $5.815 billion. On the other hand, EPS, which benefited from CA cost cuts and $3.5 billion worth of stock buybacks, topped a $5.22 consensus.
And in spite of the revenue miss, Broadcom reiterated guidance (issued in December) for fiscal 2019 (it ends in Oct. 2019) revenue of $24.5 billion, which (in a sign of how low near-term expectations have been) is above a consensus of $24.33 billion. Full-year, non-GAAP, operating margin guidance of 51% was also reiterated.
Broadcom shares rose in after-hours trading Thursday and were up 5% in pre-market trading on Friday. The fact that near-term sales expectations were fairly low due to soft smartphone demand and a cloud capital spending pause is helping Broadcom out, as is the fact that shares went into earnings trading for just 12 times Broadcom's fiscal 2019 EPS consensus.
Here are some takeaways from Broadcom's earnings report and call.
1. Broadcom Expects Chip Sales to Bottom This Quarter
Broadcom's "Semiconductor Solutions" revenue, which covers its many chip businesses, fell 12% annually last quarter to $4.37 billion (76% of total revenue) due to lower wireless and (to a lesser extent) storage chip sales.
However -- echoing comments from chip peers such as Skyworks (SWKS) and Microchip Technology (MCHP) -- Broadcom sees its chip sales bottoming this quarter. And notably, the company expects the business to resume seeing "very meaningful growth" during the second half of fiscal 2019 thanks to "strong product cycles" for Broadcom's wireless and networking chip businesses and a rebound for its broadband chip business. The company is reiterating guidance for full-year Semiconductor Solutions revenue of roughly $19.5 billion.
2. The Networking Chip Business Was a Standout
Though firms such as Intel (INTC) , Nvidia (NVDA) and Western Digital (WDC) have been stung recently by a slowdown in cloud capital spending, Broadcom's networking chip business -- it supplies products such as Ethernet switching and connectivity chips, optical components and server ASICs used to handle AI workloads -- grew by a double-digit percentage last quarter.
On Broadcom's call, CEO Hock Tan suggested -- ln line with comments made by client Arista Networks (ANET) on its Q4 call -- that spending by cloud giants on networking gear remains healthy. He also noted that Broadcom's optical component business is benefiting from investments by cloud giants in 400-gig connections, and that the company is in the early stages of ramping sales for its powerful Tomahawk 3 switching chip and Jericho2 packet processor.
3. Broadcom Still Expects a Second-Half Wireless Rebound
Wireless chip sales, hurt by recent iPhone sales declines as well as RF chip share losses to Qorvo (QRVO) within Apple's (AAPL) 2018 iPhone lineup, are said to have been "down sharply" last quarter. Wireless sales are also expected to be soft this quarter, but are forecast to subsequently pick up. New iPhone launches will naturally help, but so will RF share gains and the adoption of Wi-Fi/Bluetooth combo chips supporting the new Wi-Fi 6 standard. Samsung's Galaxy S10 line uses Broadcom combo chips supporting Wi-Fi 6, and it's likely that Apple's 2019 iPhones will do the same,
At the same time, with Apple not expected to launch its first 5G iPhones until 2020, Tan indicated Broadcom won't see major 5G RF sales in either 2019 or 2020. However, he forecast 5G will be a strong tailwind for the RF business beyond 2020, as it leads to more of Broadcom's high-performance FBAR filters going inside of smartphone RF subsystems.
4. Management Got Some Tough Questions About Expected CA Revenue
Broadcom's "Infrastructure Software" segment, which in spite of its name covers both CA Technologies and the company's storage networking hardware business, posted revenue of $1.4 billion, soundly above a $1.2 billion consensus. However, on the call, Broadcom forecast Infrastructure Software sales would "sustain" over the rest of fiscal 2019, but reiterated guidance for full-year segment revenue of roughly $5 billion, which implies average quarterly revenue of only about $1.2 billion for the remaining three quarters.
When asked about this outlook, CFO Tom Krause suggested the outlook is conservative, and that Broadcom is pleased with the deal pipeline it has for CA. The company has outlined a strategy for CA that involves halting efforts to land new customers and developing new products, and instead focusing on growing revenue at CA's top 500 clients by getting them to embrace "all-you-can-eat" software subscriptions.
Tan asserted Broadcom is confident it can "meet or exceed" its long-term targets for CA, which have included growing CA's annual operating income to over $2.5 billion on revenue of over $3.5 billion. At the same time, he admitted CA is still going through a transition period. Broadcom is four months removed from striking a deal with India's HCL Technologies to outsource much of CA's services business.
5. Broadcom Is Open to New Chip Acquisitions
"[We] have done quite a [lot] of acquisitions [of] very strong assets in the semiconductor space, and it's obviously something we continue to look at because obviously semiconductor is a core area for us," said Tan when asked if Broadcom is willing to make new semi acquisitions in the wake of Nvidia's $6.9 billion deal for Mellanox Technologies. However, he added that Broadcom is also open to acquisitions in other tech areas, and that any purchases will be made "at a very measured pace."
Tan's remarks contrast a little bit with ones made in 2018, when suggested that any future chip acquisitions will be relatively small deals and later indicated that Broadcom is now interested in driving consolidation in the infrastructure software space.