Broadcom Limited Q1’16 Earnings Review: Wired & Wireless Business To See A Significant Jump After The Inclusion Of Broadcom Results

Broadcom Limited, the successor to Avago Technologies Limited, reported its Q1 2016 earnings on March 3rd. Avago completed its acquisition of Broadcom on February 1st this year, and the combined company was named Broadcom Limited. This is the first release of financial results following the acquisition and relates solely to Avago, for the fiscal periods prior to the acquisition. However, the guidance that Broadcom Limited provided (mentioned below) is for the combined entity (Broadcom plus Avago).

Due to the lack of requisite data, we are yet to update our model for erstwhile Broadcom (NASDAQ:BRCM). We will update our model once Broadcom Limited releases the combined results of the two companies in Q2 2016.

Quick Snapshot of Avago’s Q1’16 Earnings (Non-GAAP)

At $1.78 billion, Avago’s Q1 2016 revenue declined 4% sequentially but was up 8% on a year-over-y basis. Enterprise Storage, Wireless Communications, Wired Infrastructure, and Industrial and Other segment accounted for 38%, 32%, 22% and 8% of Avago’s total revenue, respectively. Q1 2016 revenue was in line with company guidance. Tight operating expense control helped keep the operating margins flat sequentially, at 44%. Net income and diluted EPS stood at $710 million and $2.41, respectively.

Growing by 6% quarter over quarter and 40% year over year, the Enterprise segment performed better than company expectation, driven by strong growth in enterprise, hard-disk drive, server and storage connectivity products. Broadcom Limited expects a seasonal decline in the hard-disk storage business and server storage connectivity in Q2 2016. The Wireless business declined by 15% quarter over quarter and 13% year over year as the segment returned to normal seasonality. (Unusually high demand from a North American customer had offset normal seasonality in Q1 2015.)  Seasonality from the North American customer will continue to impact revenue in Q2 2016, but Broadcom Limited expects the quarter to be a trough for the wireless business.

The Wired Infrastructure business saw a 2% quarter-over-quarter and 11% year-over-year growth in Q1 2016, driven largely by broad strength in the fiber optic business largely offset by decline in ASIC products (reflecting weakness in the data center offering). In Q2 2016, Avago expects to see good strength in multiple sub-segments, including growth in the AISC business. In light of the lingering uncertainty in the industrial end markets, the company decreased shipments into its distribution channel, which led to a 10% quarter-over-quarter and 13% year-over-year decline in Industrial revenue. The company will continue to manage channel inventory and expects a more moderate increase in shipments into the channel Q2 2016, which will have a similar impact on revenue.

Broadcom Limited (Avago & Broadcom) Is Now A Global Diversified Leader in Wired and Wireless Communication Semiconductors

Avago Limited is a leading designer, developer and global supplier of a broad range of analog semiconductor devices, with an extensive portfolio in four key markets: wireless communications, enterprise storage, wired infrastructure, and industrial and other. Broadcom is a global leader and innovator in digital CMOS semiconductor solutions for wired and wireless communications. The company is best known for its connectivity chips, which are used widely in smartphones made by Apple (NASDAQ:AAPL)  and Samsung Electronics (OTC:SSNLF) and wireless connectivity devices.

The combination of Avago and Broadcom has created a global diversified leader in wired and wireless communication semiconductors. The transaction brings together Avago’s offering of analog devices for Wireless and Optical applications and Broadcom’s great strengths in digital Ethernet, cable and Wireless connectivity products. As such, there is notably little overlap in their respective product offerings, though they to a degree serve shared markets. There are thus synergies to be had in sales and marketing, as well as operations. Broadcom Limited claims that it is making good progress on the integration of the two companies, and expects to achieve $700 million in annualized cost synergies.

The Q2 2016 segment result of the wired and wireless segments will see a significant jump as a result of inclusion of the erstwhile Broadcom results.

Non-GAAP Q2 2016 Outlook (Broadcom Limited)

– Revenue of $3.55 billion, +/-$75 million. This quarter revenue to be a trough for the rest of the fiscal 2016.

– Wired, Wireless, Enterprise, and Industrial segments to account for 55%, 23%, 17% and 5% of total revenue from continuing operations. The Wired segment will become the biggest business for Broadcom Limited.

– Gross Margin of 59%, +/-1%.

– Operating expenses, Interest and Other, and Tax Provision of $832 million, $161 million, and $50 million respectively.

– Diluted share count of 443 million.

See Our Complete Analysis for Broadcom Here

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