Broadcom Inc., Q1 2020 Earnings Call, Mar 12, 2020 - NasdaqGS:AVGO

NasdaqGS:AVGO

Beatrice F. Russotto, the Former Director of Investor Relations for Broadcom Inc., made the following statements during the Q1 2020 Earnings Call:

1. Introduction:

   • "Thank you, operator, and thanks, everyone, for dialing in today."
   • "Joining me on today's call are Hock Tan, President and CEO; and Tom Krause, Chief Financial Officer of Broadcom."

2. Logistics:

   • "After the market closed, Broadcom distributed a press release and financial tables describing our financial performance for the first quarter of fiscal year 2020."
   • "If you did not receive a copy, you may have seen 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. SEC Risk Factors:

   • "Please refer to our press release today and our recent 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 vs. 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 CEO:

   • "I'll now turn the call over to Hock."

Hock E. Tan, the President and CEO of Broadcom Inc., provided a detailed overview of the company's performance and outlook during the Q1 2020 earnings call. Below are the key points he addressed:

Opening Remarks

• Acknowledged living in interesting times, referencing the contrast between the recent successes and the current challenges.
• Reviewed the first quarter results and provided an update on the current business environment and outlook.

First Quarter Results

• Consolidated net revenue for the first quarter was $5.9 billion, a 1% increase from a year ago.
• Semiconductor solutions revenue was $4.2 billion, declining 4% year-over-year.
• Networking, broadband, and storage products collectively grew 6% year-over-year.
• Wireless products were down sharply year-over-year due to an architectural change in touch sensing.
• Infrastructure software segment performed largely as expected, with Brocade stabilizing and CA having a record quarter with $880 million in revenue (5% growth year-over-year).
• Symantec integration resulted in revenue of approximately $400 million, with expectations of stepping up as the year progresses.
• Excluded Managed Security Services business, which is being divested to Accenture.

Full Year Outlook

• Initial full year 2020 guidance was based on two primary drivers:
  • Infrastructure software: Expected to contribute $7 billion from Symantec ($1.8 billion), Brocade (stabilizing), and CA (growing).
  • Semiconductors: Projected recovery from the downturn in 2019, expecting a gradual recovery in the first half and an acceleration in the second half driven by the launch of 5G phones and strong data center spending.
• COVID-19 impact: Uncertainty is high, and visibility is poor, leading to the withdrawal of annual guidance.
• Noted that the fundamentals of the business remain intact, but the high level of uncertainty is eroding confidence.
• Infrastructure software revenue is likely to be more muted due to the high degree of recurring revenue based on multiyear contracts.

Second Quarter Expectations

• Expected second quarter revenue to be $5.7 billion, reflecting typical seasonality in wireless.
• Semiconductor business expected to be virtually flat year-over-year in Q2.
• Infrastructure software revenues expected to sustain sequentially as Symantec integration progresses.

Wireless Business

• Decided to continue investing in and operating the wireless assets, citing the strategic alignment with the largest smartphone customer due to recent multiyear supply agreements.
• Look forward to the continued success of the wireless franchises.

Summary

Hock Tan's remarks covered the company's financial performance, the impact of COVID-19 on the business, and the strategic direction of Broadcom, particularly in the wireless sector. He emphasized the resilience of the infrastructure software segment and the potential impacts of COVID-19 on the semiconductor business, especially in the second half of the fiscal year.

Thomas H. Krause, who is referred to as the Former President of Broadcom Software Group in the transcript, provided several insights and updates during the earnings call. Here’s a detailed summary of his comments:

Opening Remarks

• Financial Performance:
  • Consolidated net revenue for the first quarter was $5.9 billion, a 1% increase from the previous year.
  • Semiconductor solutions revenue was $4.2 billion, representing 72% of total revenue. This was down 4% year-on-year and down 8% quarter-over-quarter.
  • Infrastructure software segment revenue was $1.7 billion, representing 28% of revenue. This was up 19% year-over-year and up 39% quarter-over-quarter.

Detailed Financial Information

• Operating Expenses: Were $1.19 billion and included approximately $80 million of Symantec-related expenses expected to go away over the course of the year.
• Operating Income: From continuing operations was $3.08 billion, representing 52.6% of net revenue.
• Adjusted EBITDA: Was $3.27 billion, representing 55.7% of net revenue. This figure excludes $146 million of depreciation.
• Restructuring and Integration Expenses: Accrued $248 million and made $131 million of cash restructuring and integration payments in the quarter.
• Capital Expenditures: Spent $108 million.
• Free Cash Flow: Represented 37.8% of revenue or $2.21 billion.
• Dividends and Share Repurchases:
  • Returned $1.5 billion to common stockholders, including $1.3 billion of cash dividends.
  • Paid $169 million in withholding taxes due on vesting of employment equity, resulting in the elimination of 0.5 million AVGO shares.
• Balance Sheet:
  • Ended the quarter with $6.4 billion of cash, $44.7 billion of total debt, 399 million outstanding common shares, and 451 million fully diluted shares for the quarter.

Second Quarter Guidance

• Revenue: Expected to be $5.7 billion, plus or minus $150 million.
• Adjusted EBITDA: Expected to be approximately $3.135 billion or 55% of net revenue.

Cash Flow Outlook

• Downside Scenarios: Ran various downside recessionary scenarios regarding cash flow outlook, ability to maintain liquidity, service debt, and return capital to shareholders.
• EBITDA Margins: Believes the company can maintain EBITDA margins comfortably north of 50% even in downside scenarios.
• Dividend and Debt Paydown:
  • Comfortable with the current dividend and ability to generate excess cash beyond the dividend throughout the fiscal year.
  • Capital allocation plan for the year remains unchanged:
    • Plan to pay out approximately $5.5 billion in cash dividends to common and preferred shareholders.
    • Expect to pay down $4 billion of debt, with plans to do so in the second half of the year or once visibility starts to improve.

Additional Comments

• Scenarios Analysis:
  • Ran scenarios where revenues could drop 5% to 10% from the original $25 billion forecast due to the impact of COVID-19.
  • Due to high-margin products and variable operating expense levels, expects EBITDA percentage of revenue to still be comfortably over 50%.
  • In Q2, the company is expected to generate on the order of $2.5 billion of free cash flow.
  • Interest rates have come down dramatically, which helps due to the company's floating-rate debt.
  • Variable compensation structure helps in managing expenses.
  • Maintaining ample liquidity is prudent given the current environment, but the company expects to continue paying down the debt as planned.

Symantec Integration Progress

• Progress: Integration is progressing well. The company is well ahead from an operating expense standpoint.
• Revenue Trajectory:
  • Took a purchase accounting haircut upon acquiring the business.
  • Successfully sold the managed services business and is set to close with Accenture.
  • As bookings continue to come online, the company will progress towards the $1.8 billion run rate articulated last quarter.

M&A Outlook

• Focus: Currently focused on running the business, maintaining liquidity, and capital returns.

• M&A Status: For the time being, M&A is off the table until visibility improves.