Skip to main content

Outside of one area, Broadcom (AVGO) - Get Broadcom Inc. Report sees trade tensions and related customer inventory cuts weighing heavily on its near-term chip sales.

On Thursday after the close, Broadcom reported April quarter (fiscal second quarter) revenue of $5.52 billion and non-GAAP EPS of $5.21. Revenue, up 10% annually thanks to last November's CA Technologies acquisition, missed a consensus analyst estimate of $5.68 billion. EPS, which benefited from spending cuts and $1.33 billion worth of stock buybacks, beat a $5.19 consensus.

Perhaps most importantly, Broadcom cut its fiscal 2019 (ends in Oct. 2019) revenue guidance by $2 billion to $22.5 billion. The analyst consensus was at $24.3 billion.

Broadcom's shares finished down sharply in after-hours trading, erasing a good part of their 2019 gains, and were down 6.5% to $263.35 on Friday morning. Many other chip developers, including Skyworks (SWKS) - Get Skyworks Solutions, Inc. Report , Qorvo (QRVO) - Get Qorvo, Inc. Report , NXP Semiconductors  (NXPI) - Get NXP Semiconductors NV Report and Qualcomm (QCOM) - Get Qualcomm Inc Report , have followed Broadcom lower, and The Philadelphia Semiconductor Index  (SOXX) - Get iShares PHLX SOX Semiconductor Sector Index Fund Report  was down 2.7% on Friday. Apple (AAPL) - Get Apple Inc. Report , Broadcom's largest wireless chip client, was down 1.5%.

Here are some notable takeaways from Broadcom's report and earnings call:

1. Broadcom Is Now More Downbeat About Second-Half Chip Demand

Fully responsible for Broadcom's sales guidance cut: The company now expects its Semiconductor Solutions segment to post fiscal 2019 revenue of $17.5 billion, down from a prior outlook of $19.5 billion. In its report, Broadcom said chip clients are "actively reducing their inventory levels," as trade tensions and the import bans recently imposed on Huawei make them more cautious.

On the call, CEO Hock Tan disclosed that Huawei accounted for $900 million of Broadcom's fiscal 2018 revenue, and said that the demand softness his firm began seeing near the start of the current quarter worsened after the Huawei ban was announced in mid-May. On the flip side, he noted that end-user demand for Broadcom's products remains stable in North America and Europe, and that if this demand remains in place in a few months' time, Broadcom's lost Huawei sales will get offset by higher sales to other OEMs.

During the April quarter, Semiconductor Solutions revenue fell 10% annually to $4.09 billion, missing a $4.19 billion consensus.

2. Networking Chip Sales Are a Bright Spot

In spite of its guidance cut, Broadcom still expects its networking business -- it covers products such as Ethernet switching and connectivity chips, packet processors, optical components and ASICs used to accelerate AI, networking, video and security workloads -- to grow at a double-digit clip in fiscal 2019.

Scroll to Continue

TheStreet Recommends

Tan noted Broadcom is seeing strong product cycles for recently-launched switching and routing chips, and also reported continued momentum among cloud giants for its various compute offload ASICs. In comments that Nvidia  (NVDA) - Get NVIDIA Corporation Report is unlikely to object to, Tan said accelerators could account for up to 25% of spending on computing resources at major cloud data centers in 3-to-5 years' time.

Apple and Nvidia are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL or NVDA? Learn more now.

3. Wireless Chip Sales Are Still Soft

Tan said Broadcom's wireless chip sales -- they cover products such as RF, Wi-Fi/Bluetooth and wireless charging chips, and have been pressured by weak smartphone demand and RF share loss to Qorvo within Apple's 2018 iPhone lineup -- saw (as expected) a "sharp decline" last quarter. He added (ahead of an expected sales ramp related to Apple's 2019 iPhone launches) that like other chip businesses, Broadcom's wireless business is being affected by an uncertain demand environment.

On the bright side, Tan, whose company recently inked a new 2-year supply deal with Apple, did say that Broadcom expects its RF content per device to grow about 5% to 10% on average over the next 2-to-3 years. Separately, following Qualcomm's inking of a multi-year chip supply deal with Apple that might include the sale of 5G RF front-end chips for millimeter-wave (mmWave) radios, Tan insisted that Broadcom's RF technology remains unmatched.

4. CA Continues Performing Well

Though it slashed its Semiconductor Solutions outlook and said storage switching demand is softening, Broadcom kept fiscal 2019 revenue guidance for its Infrastructure Software segment, which covers CA's enterprise software business and Broadcom's storage switching business (formerly Brocade), at $5 billion. The segment posted April quarter revenue of $1.41 billion, which is a little above a $1.37 billion consensus.

Tan, who had previously disclosed that CA's sales efforts will now revolve around selling "all you can eat" licensing agreements to large enterprise clients, said CA has seen a "significant uplift in booking dollars" thanks to strong renewal activity. More than 20 large renewal deals were inked in the first six months following the CA acquisition's closing he said, and a larger number is expected over the next six months.

5. Financial Execution Remains Strong

Giving a lift to last quarter's EPS: Broadcom's non-GAAP operating expenses came in at $1.02 billion, down $59 million sequentially and (in spite of the CA deal) up by only $135 million annually.

Also providing a boost: Broadcom's gross margin (GM) rose by 0.6 percentage points sequentially to 72%, in spite of a 5% revenue drop. On an annual basis, GM rose by 5.4 points, thanks to both the CA deal and cost cuts.

Though it cut its full-year revenue guidance by $2 billion, Broadcom is hiking its operating margin guidance by 1.5 points to 52.5%. On the call, CFO Tom Krause said Broadcom expects full-year free cash flow of $9 billion, after accounting for $1.1 billion worth of expected "restructuring and integration charges."

6. Broadcom Remains 'Very Active' in Assessing Chip M&A Opportunities

During Broadcom's last earnings call, Tan said his firm, which has bought plenty of companies over the last several years, is open to making new chip acquisitions. And though trade tensions have raised worries about Chinese approval of transactions involving American suitors, he said on Broadcom's latest call that the company "[continues] to be very interested in opportunities that may present themselves," and is still "very active in assessing those opportunities."