The semiconductor company is well-positioned to benefit from favorable macroeconomic trends
Dilantha De Silva Sep 05, 2021
Summary
- Broadcom reported better-than-expected earnings for its fiscal third quarter.
- The company issued strong guidance for the next quarter, exceeding analyst expectations.
- The macroeconomic outlook supports strong earnings growth in the next 5 years.
Broadcom Inc. (AVGO, Financial) is an American company that designs, develops, manufactures and distributes a wide range of semiconductor and infrastructure software products globally. Broadcom’s product portfolio includes solutions for data centers, networking, software, broadband, wireless, storage and industrial applications.
The company operates in two business segments: semiconductor solutions and infrastructure software. Under these segments, the company provides many solutions such as Internet protocol licensing, mainframes, BizOps, cyber security software solutions and fiber channel storage area networking.
On Sept. 2, Broadcom announced strong fiscal third quarter results and issued upbeat guidance for the next quarter that exceeded Wall Street expectations. The company reported earnings per share of $6.96 (excluding stock-based compensation), compared to analyst expectations of $6.91 per share. Broadcom expects record demand for its semiconductors resulting from the introduction of 5G technology and the shift to hybrid work models, which is predicted to boost earnings to record highs in the coming quarters.
Broadcom reported revenue of $6.78 billion for the fiscal third quarter, up 17% year-over-year. The semiconductor solutions segment generated $5 billion in revenue in the quarter, accounting for 74% of total revenue, up 19% year-over-year driven by next-generation products in broadband and networking.
By business, networking generated $1.8 billion in revenue, accounting for 36% of semiconductor revenue, driven by the expansion of 5G networks for backhaul, metro and call as well as significant market share gains in ethernet network interface controllers within data centers. The server storage connectivity business generated $673 million in revenue, accounting for roughly 13% of total semiconductor revenue. Broadband revenue of $910 million accounted for 18% of semiconductor revenue, aided by an increase in the deployment of WiFi 6 access gateway as well as next-generation fiber and DOCSIS 3.1 cable modem. Wireless revenue was $1.4 billion for the quarter, and industrial revenue came in at $205 million, accounting for 29% and 4% of the semiconductor segment revenue, respectively.
Exhibit 1: Net Income (USD millions)
Source: Broadcom investor presentation
The infrastructure software segment generated $1.8 billion in revenue and accounted for 26% of total company revenue, up 10% year-over-year. The software segment benefited from the increasing demand for fiber channel networking products, and the company’s introduction of new generation Gen 7 Fibre Channel SAN devices aided the revenue growth of this segment in the most recent quarter.
In the fiscal third quarter, Broadcom reported $3.4 billion in free cash flow and distributed $1.6 billion in cash dividends to shareholders.
Commenting on the quarterly performance and the outlook for the next quarter, CEO Hock Tan said:
“Broadcom delivered record revenues in the third quarter reflecting our product and technology leadership across multiple secular growth markets in cloud, 5G infrastructure, broadband, and wireless. We are projecting the momentum to continue in the fourth quarter.”
Exhibit 2: Dividend growth
Source: Broadcom investor presentation
As the company continues to lead in next-generation product transitions, the management expects double-digit year-over-year revenue growth in broadband and wireless revenue in the next few quarters. Apple Inc. (AAPL, Financial) is one of Broadcom’s largest customers, and the launch of new iPhones later this month can be expected to boost the demand for Broadcom’s products in the coming quarters depending on the initial success of the new iPhone devices.
The company expects to report revenue of $7.35 billion in the next quarter, up 14% year-over-year as the demand for chips remains robust. Answering an analyst’s question regarding the demand and supply equilibrium for chips, Tan said:
“People are building up buffer. There’s a certain level of panic buying. Take that across all segments of semiconductor markets today. You see that kind of behavior unless you — as core key suppliers, we put in careful discipline to manage supply to where demand is really needed as opposed to where OEMs or even end-users are just building up buffers — bucket of buffers everywhere. And that’s pretty much what we spend a lot of our time doing. I cannot necessarily say the same of many other semiconductor companies out there, which is probably why John Pitzer is saying, “Well, why are people showing bigger numbers?” We can show big numbers, but that means we will build up inventory in the wrong places. And we need every one of those wafers in this environment, not just this quarter, but next quarter and the quarter after that to ensure that our strategic customers are able to get what they need to launch, to deploy programs.”
As the global economy recovers from the Covid-19 recession and companies stock up on components, the semiconductor industry is racing to satisfy the massive demand for chips. Broadcom is handling the semiconductor shortage in the market by limiting oversupply and labeling demand coming from certain customers as “unsustainable.”
Answering an analyst’s question regarding the company’s capacity to grow next year, Tan said:
“But as far as our capacity for 2022, I think we have gotten a pretty good supply availability lineup for 2022. And we feel pretty OK about that. I won’t say great, but in this environment, all things considered, we’re feeling quite good.”
Takeaway
Broadcom showed slower growth compared to its competitors in the last quarter, but the company continued to outperform analyst expectations. Broadcom will benefit from the transition to 5G technology, a shift in the working model and the increasing migration to the cloud in the coming years. Based on these macroeconomic developments, Broadcom seems a good pick for both dividend and value investors, in my opinion.