Dipping right into the second quarter results, earnings of $4.88/share were indeed ahead of market views. However, revenues were in line with the semiconductor company’s pre-announcement from April 30 that sales were up 19.4% to $5.02 bln.
Gross margin from continuing operations were 66.6% of net revenue. This compares with gross margin of 64.8% of net revenue last quarter, and gross margin of 63.1% a year ago. The company also announced solid free cash flow of $2.124 bln.
The core business was solid as Wired infrastructure sales grew 9% year/year to $2.295 bln. The wired results reflect a strong sequential increase in demand from cloud data centers and a seasonal recovery in broadband access. Solid year-on-year growth was driven by robust increase in networking and compute offloading in cloud data centers and strong growth in spending by enterprise IT. Broadcom also highlighted a benefit from an increase in spending on broadband capacity expansion by service providers. In contrast, however, spending on video access and in the China optical markets remains sluggish.
In the quarter, Broadcom noted Q2 wireless revenue fell 41% sequentially to $1.29 bln. The Q2 sequential decline in wireless revenues was deeper than usual as shipments to Broadcom’s North American smartphone customers – think Apple (AAPL 190.26, -3.20, -1.7%) here – reduced sharply from the atypically exaggerated first quarter. The company did partially offset this decline by increasing in its product shipments to its large Korean smartphone customers – think Samsung (SSNLF 2210.00, flat) here – as they supported their new product launch.
The company noted on the conference call that in the third quarter, Broadcom expects to see the beginning of seasonal second half ramp in demand from its large North American smartphone customers as it expands to transition to its next generation platform.
As a caveat, Broadcom noted that it expects the strength to be offset by a decline in shipments to its large Korean customer. As a result, the company expects its overall wireless revenue to be flat, maybe even slightly decline on a sequential basis for Q3.
Commenting on the ZTE (ZTCOF 2.26, flat) ban, Broadcom management stated that in Q3, the company expects growth in wired revenues to continue notwithstanding the ban on shipments to ZTE. Management expects demand to remain healthy from cloud data centers and enterprise IT while broadband access remains robust.
Looking ahead then Broadcom sees third quarter revenues between $4.975-5.125 bln on gross margins between 65.5-67.5%. Further, capital expenditures for the third quarter are expected to be around $125 mln, a slight decline from Q2 CapEx of $189 mln.
As such, it speaks to the strength of the Broadcom brand that the company could manage a quarterly earnings beat in a period when mega-cap handheld name Apple was such a drag. What’s more, the company’s cash pile skied above $2 bln, potentially freeing up come space to perhaps raise the dividend, expand the share repurchase program or invest in M&A.
Today's move takes a bite out of the semi sector as peers MKSI -6.50%, CRUS -4.07%, SWKS -3.71%, MRVL -3.60%, TER -2.71%, TSM -2.44%, XLNX -2.35%, KLAC -2.33%, ON -2.18%, INTC -2.14% also move lower following AVGO's print. For its part, the PHLX Semiconductor Index (SOXX 190.62, -3.01) slides about 1.6% at this juncture.