When reports first emerged in March that Broadcom (AVGO) was bidding with private equity firm Silver Lake to acquire Toshiba's (TOSYY) massive flash memory unit, more than a few observers did double-takes, given the cost of any deal and how it would change Broadcom's business profile.
Now, whether due to worries about such issues and/or the hardball tactics Toshiba flash partner Western Digital (WDC) is employing to scare off rival bidders, it looks as if Broadcom has had a change of heart. And it's hard to blame the company: As its latest results, guidance and earnings call commentary show, its current strategy is paying off nicely. Especially in the mobile chip market, where sales to top clients Apple (AAPL) and Samsung continue steadily growing.
On Thursday afternoon, Broadcom reported April quarter revenue of $4.19 billion (up 18% annually) and adjusted EPS of $3.69 (up 46%), topping consensus analyst estimates of $4.11 billion and $3.50, respectively. And the company guided for July quarter revenue of $4.375 billion to $4.525 billion, soundly above a $4.26 billion consensus and implying 17% growth at the midpoint.
Shares are up 6.5% to $249.76 as of the time of this article, making fresh highs in the process. Today's gains would be larger still if Broadcom hadn't already risen 33% on the year going into earnings.
Perhaps the largest factor behind Friday's move: On the call, CEO Hock Tan forecast that a pending smartphone ramp by a "large North American customer" -- clearly a reference to Apple's iPhone 8 and 7S ramps -- would feature a 40% increase in the dollar content of the RF and Wi-Fi/Bluetooth combo chips Broadcom is selling, relative to last year's ramp.
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The outlook speaks volumes about how Broadcom's RF offerings -- many of which rely on the company's high-performance FBAR filters -- are needed in larger and larger quantities by high-end and mid-range smartphones as they support more advanced 4G radios and a greater number of frequency bands. To a lesser extent, Broadcom is also benefiting from demand for more advanced Wi-Fi radios; its mobile combo chips are still seen as having a performance edge over rival products from the likes of Qualcomm (QCOM) and Marvell Technology (MRVL) .
Ahead of the iPhone 8/7S ramp, Broadcom's wireless chip sales rose 45% annually in the April quarter to $1.15 billion (28% of revenue), beating a $1.07 billion consensus. Healthy Samsung (SSNLF) Galaxy S8 demand and the content gains Broadcom saw for the S8 relative to the S7 contributed, as did the content gains the iPhone 7 provided relative to the 6S.
Sequential wireless growth is expected to "approach double digits" in the July quarter, with the start of Apple's ramp partly offset by a seasonal slowdown at Samsung. That's less than the sequential growth seen a year ago, due in large part to a slow start to the iPhone 8's production ramp. This fits with reports of iPhone 8 production challenges. Much stronger wireless growth should be seen in the October quarter.
Broadcom's wired chip business, which covers numerous Ethernet, modem, set-top, optical component and network processor products, grew a modest 2% to $2.12 billion (50% of revenue). But mid-single digit sequential growth is forecast for this quarter, due to higher broadband modem demand and strong cloud data center-related sales.
Cloud giants have been avid consumers of networking hardware featuring Broadcom's popular Tomahawk Ethernet switching chips, and have also been warming to its Jericho packet processors, which enable switches that can handle certain routing functions. Broadcom also noted on its call that it's now supplying custom ASICs to unnamed clients that are used for AI/deep learning projects.
Storage chip and hardware sales grew 36% annually to $712 million. Strong demand for Broadcom's hard drive and solid-state drive (SSD) controller chips -- driven by cloud hard drive demand and enterprise/cloud SSD adoption -- was the largest factor. Healthy demand for chips and cards used to control storage subsystems and arrays also helped. Industrial & other revenue rose 23% to $224 million, thanks in large part to an IP licensing deal.
When asked on the call about Broadcom's reported bid for Toshiba's flash unit, which to a large degree operates in a commodity business (albeit a growing one) requiring large capital investments, Tan effectively declared Broadcom to be uninterested in the unit. He insisted Broadcom remains focused on differentiated chip and hardware franchises that produce plenty of free cash flow. "Bottom line, don't believe everything you read out there, please," Tan concluded.
But it's hard to fault those who did believe the Toshiba reports, considering how many of them were out there. Bloomberg reported on May 18 that Broadcom, backed by Silver Lake and three Japanese banks, had bid about $20 billion for Toshiba's flash business.
In addition to worries about the Toshiba unit's competitive environment and capex needs, Broadcom may have been deterred by attempts by recent moves from Western Digital, which also covets the business and especially doesn't want to see it acquired by Broadcom, which has a history of spending conservatively and could use the Toshiba unit to launch data center offerings that compete with Western's.
Two weeks ago, Western filed an arbitration claim seeking to prevent Toshiba from including the valuable interests it has in flash manufacturing and R&D joint ventures it has with Western in a sale. This week, Toshiba tried to counter by removing some of its JV assets from its flash unit. But Western was quick to claim the move changes nothing, since other JV assets are still apparently part of the flash unit, and thus on the block.
With the companies' JV agreements explicitly stating that neither party can transfer their interests without the other's consent, and with a ruling on the claim possibly taking a year to arrive, the arbitration claim gives Toshiba a strong incentive to work out a deal with Western. And it gives Broadcom and others good reason to think twice about bidding.
In addition, even with Silver Lake helping out, Broadcom's purchase of Toshiba's flash unit (assuming it was possible) would significantly increase a net debt balance that's around $9 billion, and stands to grow further due to Broadcom's pending acquisition of storage switch vendor Brocade Communications (BRCD) . The Brocade deal will likely cost around $4.5 billion after accounting for cash on hand and certain asset sales.
At the same time, the tremendous job that Broadcom's management -- originally with Avago, which kept Broadcom's name after merging with the company in early 2016 -- has done to integrate the many acquisitions it has made shows why it may have mulled a Toshiba deal. This execution was on display in the April quarter, as cost synergies related to the Broadcom deal led operating expenses to drop by 1% annually to $799 million, even as revenue grew 18%. They also helped gross margin rise 310 basis points to 63.1%.
Thus, it's not far-fetched to see Broadcom making more acquisitions still once it's done digesting Brocade. Just look for them to cost less than what a Toshiba deal would have, and to involve companies selling high-margin, differentiated products featuring limited competition.
And if the company holds off on making another such move for the near-term, markets might not be too bothered by it. Not as long as its its mobile and cloud data center sales keep seeing healthy double-digit growth.