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pww.comBroadcom Inc., Q4 2020 Earnings Call, Dec 10, 2020 - NasdaqGS:AVGO

NasdaqGS:AVGO

Beatrice F. Russotto [Former Director of Investor Relations] 💬

Beatrice F. Russotto, the Former Director of Investor Relations at Broadcom Inc., made the following statements during the Q4 2020 Earnings Call:

  1. Opening Remarks:

    • "Thank you, operator, and good afternoon, everyone. Joining me on today's call are Hock Tan, President and CEO; as well as the senior leadership team as announced this afternoon, including Tom Krause, President, Infrastructure Software Group; Charlie Kawwas, Chief Operating Officer; and Kirsten Spears, Chief Financial Officer."

  2. Introduction to the Call:

    • "Broadcom Inc. also distributed a press release and financial tables after the market closed, describing our financial performance for the fourth quarter and fiscal year 2020. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom's website at broadcom.com."
    • "This conference call is being webcast live, and a recording will be available via telephone playback for 1 week. It will also be archived in the Investors section of our website at broadcom.com."

  3. Risk Factors and Forward-Looking Statements:

    • "Please refer to our press release today and our filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call."

  4. GAAP and Non-GAAP Measures:

    • "In addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results."

  5. Transition to Hock Tan:

    • "And with that, I'll turn the call over to Hock."

  6. Transition to Kirsten Spears:

    • "Thank you, Tom. At this time, we'll open the call for questions. We have Hock, Tom, Kirsten and Charlie available to answer any questions. So operator, please go ahead and kick us off."

  7. Closing Remarks:

    • "Thank you, operator. So in closing, we did want to note that we'll be kicking off the presentation by our General Managers at the JPMorgan Tech Forum on Tuesday, January 12. Hock will be joined by Ram Velaga and Alexis Björlin from our networking division to present at that event."

    • "So thank you. That will conclude our earnings call today. And operator, you may end the call."

Hock E. Tan [President, CEO & Executive Director] 💬

Hock E. Tan, the President, CEO, and Executive Director of Broadcom Inc., provided a comprehensive overview of the company’s performance and strategy during the Q4 and fiscal year 2020 financial results conference call. Below is a detailed summary of his remarks:

Senior Leadership Appointments

  • Hock highlighted recent senior leadership appointments, emphasizing that he remains committed and engaged in his role.
  • He mentioned the elevation of key figures from the company’s deep bench, including Tom Krause, Charlie Kawwas, and Kirsten Spears, to critical positions.
  • Hock announced plans to organize a series of analyst days in fiscal year 2021, starting with a presentation by Ram Velaga and Alexis Björlin on the networking franchise in January.

Fourth Quarter Results

  • Broadcom capped off fiscal 2020 with record quarterly revenue and profitability despite the ongoing pandemic and macroeconomic uncertainties.
  • Net revenue was $6.5 billion, above the midpoint of guidance, up 11% sequentially and 12% year-on-year.
  • Semiconductor solutions revenue was $4.8 billion, up 6% year-on-year.
  • Infrastructure software revenue was $1.6 billion, up 36% year-on-year, including the contribution from Symantec.

Semiconductor Solutions

  • Networking represented approximately 35% of semiconductor solution revenue, up 17% year-on-year, driven by cloud data center spending and telco network upgrades.
  • Broadband represented approximately 14% of semiconductor solutions revenue, up 22% year-on-year, driven by the work-from-home environment and the need for upgraded broadband connectivity.
  • Wireless revenue represented approximately 31% of semiconductor revenue, up 43% sequentially in Q4 due to the launch of a new generation flagship phone by a large North American OEM customer, but down 9% year-on-year due to a one-quarter delay in the production ramp.
  • Server storage connectivity represented approximately 14% of Q4 semiconductor revenue and was down 9% year-on-year, reflecting softness in enterprise demand.
  • Industrial represented approximately 3% of Q4 semiconductor solution revenue, with demand recovery especially out of China.

Software Business Model

  • Hock reiterated the company’s focus on the largest enterprise customers and the hybrid model, with approximately 90% recurring subscription revenue.
  • After 2 years integrating CA onto the Broadcom platform, Q4 2020 revenue was up 5% year-on-year.
  • Symantec product revenue of $380 million was up 10% from Q1 fiscal 2020, the first quarter after acquisition.
  • Revenue from core accounts in CA was up double digits, closer to 12% year-on-year, driven by bookings that have continued to grow double digits on an annualized basis.

Outlook

  • For Q1 fiscal 2021, Broadcom expects CA and Symantec software revenue to continue to grow in the mid-single digits.
  • Brocade is expected to decline high single digits, consistent with softness in enterprise markets, resulting in infrastructure software segment revenue to be flat to perhaps up low single-digit percentage year-over-year.
  • Broadcom expects Q1 consolidated net revenue of $6.6 billion, up approximately 13% year-over-year, all derived organically.
  • The company has a record backlog that has grown to over $14 billion, but the timing of its conversion to revenue is constrained by a tight supply chain.

Closing Remarks

  • Hock thanked the team for their hard work during fiscal 2020, acknowledging the challenges faced and the resilience shown by all employees.

  • He emphasized that the company’s mission-critical technologies have never been more relevant than they are today.

Kirsten M. Spears [CFO & Chief Accounting Officer] 💬

Kirsten M. Spears, the CFO & Chief Accounting Officer of Broadcom Inc., provided the following information during the Q4 2020 Earnings Call:

  1. Background and Introduction:

    • She has been a part of Broadcom for more than 6 years.
    • Her history in accounting and reporting roles from legacy companies, Avago and LSI, dates back over 20 years.

  2. Fourth Quarter Performance:

    • Consolidated net revenue for the fourth quarter was $6.5 billion, a 12% increase from a year ago.
    • Semiconductor solutions revenue was $4.8 billion and represented 75% of total revenue this quarter, up 6% year-on-year.
    • Revenue for the infrastructure software segment was $1.6 billion and represented 25% of revenue, up 36% year-on-year due to the inclusion of Symantec.

  3. Gross Margins:

    • Gross margins were 74% of revenue in the quarter, up approximately 370 basis points year-on-year.
    • The expansion in gross margin year-on-year was driven by favorable product mix in semiconductors and a higher percentage of software revenue.

  4. Operating Expenses:

    • Operating expenses were $1.1 billion, up 10% year-on-year due primarily to the addition of Symantec.

  5. Operating Income and Margins:

    • Operating income from continuing operations was $3.6 billion and represented 56% of revenue.
    • Operating margins were up approximately 400 basis points year-on-year.

  6. Adjusted EBITDA:

    • Adjusted EBITDA was $3.8 billion and represented 59% of revenue, excluding $139 million of depreciation.

  7. Semiconductor Solutions Segment:

    • Gross margins for the semiconductor solutions segment were approximately 68% in Q4, up 320 basis points year-over-year, driven by an improved product mix.
    • Operating expenses were $777 million in Q4 or 16% of semiconductor solutions revenue.
    • R&D cost as a percentage of revenue for Q4 was approximately 14%, and SG&A as a percentage of revenue was 2%.
    • Operating margins for the semiconductor solutions segment were 52% in Q4, up 290 basis points year-on-year.

  8. Infrastructure Software Segment:

    • Gross margins for the infrastructure software segment were 90% in Q4, up 130 basis points year-over-year.
    • Operating expenses were $338 million in Q4 or 21% of infrastructure software revenue.
    • R&D cost as a percentage of revenue for Q4 was approximately 12%, and SG&A as a percentage of infrastructure software revenue was 9%.
    • Operating margin was 69% in Q4, up 480 basis points year-over-year.

  9. Cash Flow:

    • Quarterly free cash flow was $3.2 billion, representing 50% of revenue, up 36% year-on-year.

  10. Capital Allocation for Q4:

    • Paid $1.3 billion of cash dividends to common stockholders.
    • Paid $185 million in withholding taxes due on vesting of employee equity, resulting in the elimination of approximately 500,000 AVGO shares.
    • Ended the quarter with 407 million outstanding common shares and 451 million diluted shares.
    • Reduced total debt by $3 billion in the quarter.
    • Ended the quarter with $7.6 billion of cash and currently have $12.6 billion of liquidity, including a $5 billion revolver.
    • Total debt was $41.1 billion, of which approximately $800 million was short-term.

  11. Diluted Share Count:

    • Expected the diluted share count to be 450 million in Q1.

  12. Financial Model:

    • The company focuses on the largest enterprise customers and increases its share of their wallet in terms of its software portfolio.
    • The model enables the company to focus its R&D investments on a strategic group of customers and reduce costs primarily on go-to-market, allowing for an operating margin of about 69% that can be sustained.

Kirsten's comments provided a detailed overview of Broadcom's financial performance, highlighting the growth in revenue, margins, and cash flow, as well as the company's capital allocation strategy and financial model.

Thomas H. Krause [Former President of Broadcom Software Group] 💬

Thomas H. Krause provided insights into the company’s financial performance for fiscal year 2020 and discussed aspects of capital allocation and the company's strategy for the upcoming fiscal year. Below is a detailed summary of his comments:

  • Fiscal Year 2020 Performance:

    • Thomas recapped the company's financial performance for fiscal year 2020, highlighting that revenue reached a new record of $23.9 billion, growing 6% year-on-year.
    • Semiconductor solutions revenue was $17.3 billion, down 1% year-over-year.
    • Infrastructure software revenue was $6.6 billion, which included:
      • $1.5 billion from Brocade, down 17% year-on-year,
      • $3.5 billion from CA, up 4% year-on-year,
      • $1.6 billion from the addition of Symantec.

  • Gross Margin Expansion:

    • Gross margin for the year was a record high of 73.5%, up from 71% a year ago.
    • The expansion in gross margin was driven by the addition of Symantec and a beneficial mix in semiconductor product sales.

  • Operating Expenses and Income:

    • Operating expenses were $4.6 billion, which included the addition of Symantec.
    • Operating income from continuing operations was $12.9 billion, up 8% year-over-year and represented 54% of net revenue.
    • Adjusted EBITDA was $13.6 billion, up 8% year-over-year and represented 57% of net revenue.

  • Restructuring and Integration Expenses:

    • The company accrued $644 million of restructuring and integration expenses and made $583 million of cash restructuring and integration payments in fiscal 2020.

  • Capital Expenditures and Free Cash Flow:

    • The company spent $463 million on capital expenditures, and free cash flow represented 49% of revenue or $11.6 billion, growing 25% year-over-year.

  • Capital Allocation:

    • For the year, the company returned $6 billion to its common stockholders, consisting of:
      • $5.2 billion in the form of cash dividends,
      • $800 million for the elimination of 2.6 million AVGO shares.
    • The company also paid $299 million in dividends to its preferred stockholders.
    • Through refinancing and liability management activities, the company's weighted average debt maturity is now approximately 6 years with a weighted average interest rate of approximately 3.5%.

  • Fiscal 2021 Commitments:

    • The company remains committed to returning approximately 50% of its prior year normalized free cash flow to stockholders in the form of cash dividends.

    • Based on approximately $12 billion of free cash flow in fiscal year 2020, the company is increasing its target quarterly common stock cash dividend starting this quarter to $3.60 per share.

    • This constitutes an increase of 11% and assumes a basic outstanding share count of 413 million shares at the end of fiscal 2021.

    • The company plans to maintain this dividend payout throughout the year, subject to quarterly Board approval.

    • The dividend will be reassessed this time next year based on the fiscal '21 free cash flow results.

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