Broadcom Inc., Q2 2020 Earnings Call, Jun 04, 2020 - NasdaqGS:AVGO

NasdaqGS:AVGO

Beatrice F. Russotto, the Former Director of Investor Relations for Broadcom Inc., provided the following information and comments during the Q2 2020 Earnings Call:

1. Opening Remarks:

   • Thanked the operator and welcomed everyone to the call.
   • Introduced Hock Tan, President and CEO, and Tom Krause, Chief Financial Officer of Broadcom Inc.

2. Press Release and Financial Tables:

   • Noted that a press release and financial tables describing the company's financial performance for the second quarter of fiscal year 2020 were distributed after the market closed.
   • Mentioned that anyone who did not receive a copy could obtain the information from the Investors section of Broadcom's website at broadcom.com.

3. Conference Call Webcast and Recording:

   • Stated that the conference call was being webcast live and a recording would be available via telephone playback for one week.
   • Added that the call would also be archived in the Investors section of the company's website.

4. Prepared Comments and Q&A:

   • Indicated that Hock Tan and Tom Krause would provide details of the second quarter fiscal year 2020 results, guidance for the third quarter, and commentary on the business environment during the prepared comments.
   • Announced that the call would take questions after the prepared comments.

5. Risk Factors:

   • Advised listeners to refer to the press release and recent filings with the SEC for information on specific risk factors that could cause actual results to differ materially from the forward-looking statements made on the call.

6. GAAP and Non-GAAP Measures:

   • Mentioned that Broadcom reports certain financial measures on a non-GAAP basis in addition to U.S. GAAP reporting.
   • Noted that a reconciliation between GAAP and non-GAAP measures was included in the tables attached to the day's press release.
   • Clarified that comments made during the call would primarily refer to non-GAAP financial results.

7. Handoff to Hock Tan:

   • Concluded her remarks by turning the call over to Hock Tan.

Hock E. Tan, the President and CEO of Broadcom Inc., provided a comprehensive overview of the company’s performance and outlook during the Q2 2020 earnings call. Here are the detailed points he covered:

Opening Remarks

• Acknowledged and thanked healthcare professionals and essential workers.
• Praised Broadcom’s employees for their dedication and efforts during the challenging times.

Second Quarter Results

• Net revenue of $5.7 billion, down 2% sequentially and up 4% year-on-year.
• Semiconductor solutions revenue was $4 billion, down 2% year-on-year.
• Infrastructure software revenue was $1.7 billion, up 21% year-on-year.
• Semiconductor solutions were down 4% sequentially, while software was up 3%.

Semiconductor Solutions

• Networking:
  • Revenue up 11% sequentially in Q2, reflecting a steady recovery.
  • Demand surged in Q3 for existing and next-generation products.
  • Strong demand for deep learning inference chips for a lead cloud customer.
• Server Storage Connectivity:
  • Revenue declined 14% sequentially in Q2.
  • Demand accelerated in Q3, particularly from enterprise customers and cloud service providers.
• Broadband:
  • Revenue was flat sequentially in Q2.
  • Expected 10% revenue growth in Q3, driven by strong adoption of WiFi 6.
  • Partially offset by a sharp decline in video, particularly in satellite set-top boxes.
• Wireless:
  • Down 14% sequentially in Q2, reflecting typical seasonality.
  • No expected uptick in revenue until Q4 due to product cycle delays.
  • Wireless revenue in Q3 expected to be down sequentially.
• Industrial:
  • Revenue up 13% sequentially in Q2, consistent with recovery in resales.
  • Expected double-digit sequential decline in recognized shipping revenue in Q3 due to aggressive inventory reduction globally.

Supply Chain Challenges

• Extended lead times, especially in leading-edge processes, running at historical highs.
• Significant test capacity repositioning in Malaysia, experiencing intermittent COVID-19 lockdowns and logistical delays.
• Demand exceeds supply in Q3, which may continue beyond.

Semiconductor Solution Forecast

• Despite the product cycle delay in wireless, forecasted revenue to be up 3% sequentially but down 5% year-on-year in Q3.

Software Segment

• CA: Up 2% year-on-year and flat sequentially.
• Symantec: Grew 2% sequentially and contributed over $400 million.
• Brocade: Down 21% year-on-year but up 11% sequentially in Q2, marking the third consecutive quarter of sequential growth.
• Expect revenues from CA and Symantec to sustain sequentially in Q3.
• Significant reduction in channel inventory for Brocade, expecting a significant sequential decline in Q3 revenue.
• Overall, software segment revenue expected to be down approximately 7% sequentially in Q3.

Consolidated Third Quarter Outlook

• Expected consolidated third quarter net revenue of $5.75 billion, roughly flat from Q2.
• Reflects a 3% sequential projected revenue increase in semiconductors and a 7% sequential expected revenue decline in software.

Wireless Recovery in Q4

• Confirmed that Broadcom is designing in flagship phones for a large North American OEM.
• Content growth for 5G phones over 30%, closer to 40%.
• Timing of product cycles delayed, affecting Q3 but not guiding for Q4 yet.

Software Strategy

• CA acquisition performance exceeded regional plan.
• Successful in expanding and growing bookings by focusing on large enterprises.
• Similar strategy applied to Symantec, focusing on core customers.

Supply Constraints

• Demand has not been seen to be perishable.
• Customers are willing to work with Broadcom through supply chain challenges.

Sustainability of Cloud Demand

• Uncertainty about the sustainability of demand for cloud products.
• Extremely strong bookings continued up to the time of the call.

Wireless Business Tracking

• Content up 40%.
• Shift in when products will be delivered.
• Supply chain constraints.
• Product roadmap and content remain on track.

Content Growth

• Content growth inclusive of all wireless products, including RF, custom, and WiFi.
• Mix of 5G versus non-5G phones to transition over several years.
• High single-digit growth rate for wireless over the next several years.

Big Picture Demand

• Strong direct demand from cloud customers and telcos.
• Aggressively reducing channel inventory to manage exposure.
• Orders are largely direct from end-users, not accumulated as inventory.

Networking Equipment Clients

• Similar trends with networking equipment clients, buying for enterprises.
• Not seeing weakness, but not the same strength as seen with direct purchases from cloud customers or telcos.

Lead Times Situation

• Lead times have been long for several months, especially in leading-edge processes.
• Improvement expected over time.
• Building only to orders, not to forecast, to mitigate risk.

These points summarize the detailed commentary provided by Hock E. Tan during the Q2 2020 earnings call.

Thomas H. Krause provided details on Broadcom's financial performance, which included the following points:

• Gross margins were 73% of revenue in the quarter, relatively flat with Q1 but up approximately 100 basis points year-on-year due to the increase in software as a percentage of overall revenue.
• Operating income from continuing operations was $3 billion, representing 53% of net revenue. Operating margins were effectively flat quarter-over-quarter but down year-on-year by approximately 70 basis points, primarily due to the stranded costs for Symantec carried in the quarter.
• Operating expenses were $1.2 billion, down $28 million compared to Q1 but still included approximately $35 million of Symantec-related expenses that are expected to go away over the remainder of the year.
• Adjusted EBITDA was $3.2 billion, representing 56% of net revenue, excluding $147 million of depreciation.

Regarding cash flow, Krause mentioned:

• Record quarterly free cash flow of $3.1 billion, representing 53% of revenue, up more than 20% year-on-year.
• Strong collections and strict working capital management to improve liquidity.
• Moving most of the business to build-to-order during the quarter and continuing to operate this way, limiting the ability to respond to short lead time orders.

Capital allocation details included:

• Paid common stockholders $1.3 billion in cash dividends.
• Paid $219 million in withholding taxes due on vesting of employee equity, eliminating approximately 900,000 AVGO shares.
• Ended the quarter with 402 million outstanding common shares and 452 million fully diluted shares.
• Expected the fully diluted share count to stay at 452 million in Q3.

Krause also discussed refinancing activities:

• Derisked the balance sheet with over $18 billion of debt refinancing, including $2 billion of commercial paper.
• Pushed out average debt maturities to 6 years from 4 years, with the average cost of debt increasing by just above 50 basis points.
• Ended the quarter with $9.2 billion of cash and currently has $14.2 billion of liquidity, including a $5 billion revolver.
• Drew down $3 billion on the revolver earlier in the quarter, all of which was repaid as part of refinancing activity.
• Ended the quarter with $45.8 billion of total debt, of which approximately $800 million is short term.

Lastly, Krause commented on the company's commitment to maintaining its dividend while navigating the uncertain environment.