Broadcom Inc., Q3 2020 Earnings Call, Sep 03, 2020 - NasdaqGS:AVGO

NasdaqGS:AVGO

Beatrice F. Russotto, the Former Director of Investor Relations at Broadcom Inc., made the following statements during the Q3 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; and Tom Krause, Chief Financial Officer of Broadcom."

2. Press Release and Financial Information:

   • "After the market closed, Broadcom distributed a press release and financial tables describing our financial performance for the third quarter of 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. Forward-Looking Statements:

   • "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 in today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results."

5. Transition to Hock Tan:

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

6. Closing Remarks:

   • "Thank you, operator. So in closing, we did want to note that Hock will be presenting virtually at the Deutsche Bank Technology Conference on Tuesday, September 15."

   • "And with that, that will conclude our earnings call today, and we thank you all for joining. Operator, you may end the call."

Hock E. Tan, President and CEO of Broadcom Inc., provided insights into the company's performance and future expectations during the Q3 2020 earnings call. Here is a detailed summary of his comments:

• Strength of Portfolio: Despite uncertain times, the strength of Broadcom's broad and diversified portfolio of technology franchises led to record third quarter revenue.
• Work-from-Home Environment: The company is well-positioned to address the work-from-home environment, particularly with its networking and broadband products in the cloud and telecommunications sectors.
• Transition to 5G: The company expects to soon benefit from the transition to 5G and new product ramps later in the year.
• Revenue Growth: Despite ebbs and flows in parts of the business linked to enterprise, the highly recurring revenue of infrastructure software divisions offsets this, keeping the company confident in its strategy.
• Third Quarter Results:
  • Net revenue was $5.8 billion, above the midpoint of guidance and up 1% sequentially and 6% year-over-year.
  • Semiconductor solutions revenue was $4.2 billion, declining 4% year-over-year.
  • Infrastructure software revenue was $1.6 billion, up 41% year-over-year, including the contribution from Symantec.
• Semiconductor Solutions Segment:
  • Networking revenue increased 9% sequentially due to healthy demand from cloud customers and the ramp of next-generation Tomahawk 3 and Trident 3 switch products.
  • Broadband revenue increased 7% sequentially, driven by strong demand for next-generation cable modem DOCSIS 3.1.
  • Wireless revenue declined 4% sequentially due to the expected typical ramp being pushed out this year.
  • Server storage connectivity revenue increased 10% sequentially.
  • Industrial resale and revenues declined 3% sequentially.
• Wireless Outlook:
  • Wireless revenue is expected to increase approximately 50% sequentially in Q4.
  • Despite this significant sequential ramp, revenue is expected to be roughly flat year-over-year in Q4 due to fewer units of parts for the next-generation phone being shipped.
  • Q1 wireless revenue is expected to be up sequentially from Q4 with an increase in expected unit shipments.
• Server Storage Connectivity:
  • Revenue is expected to decline in the high single digits quarter-over-quarter in Q4 due to expected softness in enterprise demand.
• Industrial Segment:
  • Revenue is expected to be down double digits quarter-over-quarter in Q4 as the company reduces channel inventory significantly.
• Software Segment:
  • CA revenue was up 6% year-over-year and flat sequentially.
  • Symantec revenue was flat sequentially and contributed over $400 million.
  • Brocade revenue was up 3% year-over-year and down significantly sequentially.
• Fourth Quarter Guidance:
  • Net revenue is expected to be $6.4 billion, up 10% sequentially from Q3.
  • Semiconductor solutions revenue is expected to increase in the mid-teens percentage sequentially.
  • Infrastructure software revenue is expected to increase by a low single-digit percentage sequentially.
• 5G Market:
  • Hock acknowledged the rapid transition to 5G in China but noted that the company does not yet know how fast the 5G ramp will occur globally.
  • Demand is driven by key strategic OEM customers.
• Networking Strength:
  • No signs of weakness in the cloud or telco sectors, with sustained demand for networking products.
• WiFi 6 Uptake:
  • Strong surge of demand for WiFi 6 in access gateways and retail routers due to the work-from-home environment.
  • Content looks strong as the company goes to WiFi 6.
• ASIC Business:
  • Strong growth in compute offload.
  • Competitive strength in the technology and resource allocation.
• Lead Times and Supply Constraints:
  • Lead times are still very extended due to constraints on wafers and substrates.
  • Could have shipped more in Q3 if supply chain constraints were not as tight.
• Wireless Relationship:

  • Hock declined to comment on the company's involvement in the strategic partner's initiative to develop its own baseband modem.

Thomas H. Krause, who is referred to as the Chief Financial Officer instead of the President of Broadcom Software Group in the document, provided additional detail on Broadcom’s financial performance during the Q3 2020 earnings call. Below are the detailed points he addressed:

• Gross Margins: Gross margins reached a record 74% of revenue in the quarter, up approximately 110 basis points from Q2 and up approximately 320 basis points year-on-year. The increase was largely driven by the higher proportion of software in Broadcom's overall revenue mix.

• Operating Income: Operating income from continuing operations was $3.2 billion, representing 55% of net revenue. Operating margins increased approximately 180 basis points quarter-over-quarter and year-on-year, primarily due to a decrease in operating expenses and improved gross margins due to the mix.

• Operating Expenses: Operating expenses were $1.1 billion, a decrease of $25 million compared to Q2.

• Adjusted EBITDA: Adjusted EBITDA was $3.3 billion, representing 57% of net revenue. This figure excluded $138 million of depreciation.

• Cash Flow: Broadcom achieved record quarterly free cash flow of $3.1 billion, representing 53% of revenue, up more than 33% year-on-year.

• Capital Allocation:

  • Paid common stockholders $1.3 billion in cash dividends.
  • Paid $192 million in withholding taxes on vesting employee equity, resulting in the elimination of approximately 700,000 AVGO shares.
  • Ended the quarter with 404 million outstanding common shares and 451 million fully diluted shares. Expected the fully diluted share count to remain at 451 million in Q4.

• Financing and Balance Sheet:

  • Reduced total debt by $1.9 billion in the quarter.
  • Executed an $8 billion bond refinancing and a $3.9 billion exchange offering.
  • Pushed out weighted average debt maturity to approximately 6 years and reduced weighted average interest rate to approximately 3%.
  • Ended the quarter with $8.9 billion in cash and $13.9 billion in liquidity, including a $5 billion revolver.
  • Total debt was $44 billion, with approximately $800 million classified as short term.
  • Planned to pay down an additional $3 billion of debt in the fiscal fourth quarter.

• Q4 Guidance and Outlook:

  • Expected Q4 net revenue to be $6.4 billion, up 10% sequentially from Q3.
  • Expected a mid-teens percentage sequential projected revenue increase in the semiconductor solutions segment and a low single-digit percentage sequential revenue increase in infrastructure software.
  • Expected the fully diluted share count to stay at 451 million in Q4.

• Dividend Policy:

  • Confirmed that Broadcom's policy is to allocate approximately half of its free cash flow back to shareholders in the form of dividends.
  • Noted that the company would assess the dividend at the end of the year, considering the economic uncertainties related to the recession, COVID-19, and upcoming elections.
  • Indicated that the company would continue to manage the balance sheet, paying down debt and looking at options for total shareholder return through M&A and/or buybacks.

• Margin Expansion:

  • Highlighted the semiconductor business turning the corner and returning to growth.
  • Noted the increasing diversification from software and the scale it affords, along with the margins it brings.
  • Mentioned the synergy on the go-to-market that Broadcom is driving.
  • Saw a path to 30% to 60% EBITDA margins over the horizon.
  • Acknowledged the incremental margin improvement driven by R&D investments and content increases.

• Networking Segment Growth:

  • Confirmed that cloud continues to grow for Broadcom.
  • Noted a strong product cycle in telcos, particularly in the routing side.
  • Acknowledged that the enterprise segment is slowing down, but there are indications that it's stabilizing at lower levels.

These points summarize the detailed contributions made by Thomas H. Krause during the Q3 2020 earnings call.