Broadcom (AVGO) Q4 Earnings, Revenues Beat Estimates

Broadcom Limited (NASDAQ:AVGO) reported impressive fourth-quarter fiscal 2016 results. Earnings (excluding stock-based compensation) surged 38.2% from the year-ago quarter and 19.8% sequentially to $3.47 per share.

Earnings (including stock-based compensation) were $3.00 per share in the reported quarter, which beat the Zacks Consensus Estimate by 11 cents.

Earnings (excluding stock-based compensation) were $11.45 per share in fiscal 2016 as compared with $8.98 reported in fiscal 2015.

Based on the strong result, Broadcom not only doubled its existing dividend to $1.02 per share but also raised its long term operating margin target of 40% to 45%. Long-term revenue growth is anticipated to be 5% per year. The company expects full realization of acquisition-related cost synergies from the Broadcom acquisition to drive operating margin expansion.

Shares surged 6.5% in after hour trading following the earnings release. Notably, Broadcom has underperformed the Zacks Elec-Semiconductors Industry on a year-to-date basis. The company’s gain of 16.12% is lower than the industry’s return of 44.76%.

Nevertheless, we believe that the strong fourth-quarter results and positive long-term guidance will help the stock to rebound going ahead.

Revenues

Non-GAAP revenues from continuing operations were $4.146 billion, which jumped a massive 124% from the year-ago quarter and 9% from the previous quarter. Further, the figure was better than the Zacks Consensus Estimate of $4.118 billion.

Although the year-over-year growth results were highly skewed, the sequential improvement reflected robust performance from Wireless Communications and Enterprise Storage.

Wired Infrastructure (50.1% of total revenue) revenues were $2.077 billion as compared with $378 million in the year-ago quarter. Sequentially, revenues increased 0.6%. Revenues were driven by increased demand for networking ASICs into data centers as well as strong fiber-optic shipments into access and metro networks.

Strong adoption of Jericho product was observed in the quarter. Further, Broadcom has been successful in solving the supply chain constraints related to its set-top box business, which positively impacted results.

Wireless Communications (32.5%) revenues were up almost 98% year over year and 33.5% quarter over quarter to $1.346 billion. Growth was primarily driven by the full ramp of the new phone generation at the company’s North American smartphone customer. Moreover, the revenue growth was driven by increase in Broadcom’s cellular RF content and Wireless connectivity content in this new generation of phones.

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Enterprise Storage (13.5%) declined 12.2% from the year-ago quarter but increased 6.5% sequentially to $561 million. Revenues benefited from strong demand for the company’s HDD and RAIDCore’s box adaptive products.

Industrial & other (3.9%) increased almost 4% year over year but declined 5.3% sequentially to $162 million in the reported quarter.

In fiscal 2016, net revenues of $13.292 billion soared 92% from fiscal 2015.

Margins

Gross margin (including stock-based compensation) contracted 110 basis points (bps) on a year-over-year basis but expanded 50 bps sequentially due to operational efficiency.

Operating expenses as percentage of revenues increased 280 bps from the year-ago quarter driven by higher research & development expense (up 390 bps), partially counteracted by lower selling, general & administrative expense (down 110 bps).

Sequentially, operating expenses decreased 240 bps reflecting benefits of the cost saving synergies from the Avago acquisition. Both research & development and selling, general & administrative expenses declined 200 bps and 40 bps, respectively.

As a result, operating margin contracted 390 bps from the year-ago quarter but expanded 290 bps from the previous quarter.

Liquidity

As of Oct 30, 2016, cash & cash equivalents were $3.097 billion as compared with $1.961 billion in the previous quarter. Total debt was $13.642 billion at the end of the quarter.

Broadcom generated cash flow from operations of $1.352 billion as compared $963 million in the prior quarter. Capital expenditures were $193 million, up from $232 million in the previous quarter.

Acquisition

Broadcom recently announced the acquisition of Brocade, which is anticipated to be complete in second-half fiscal 2017. Management expects Brocade’s Fibre Channel SAN Switching business to generate approximately $900 million in EBITDA by fiscal 2018.

Guidance

For first-quarter fiscal 2017, Broadcom forecasts non-GAAP revenues of almost $4.075 billion (+/- $75 million). Management anticipates Wired Infrastructure business revenues to remain flat sequentially due to weakness in broadband carrier access and set-top box businesses, mitigated by continuing growth in fiber optics and strong demand from several cloud data center operators.

Wireless Communications revenues are expected to decline at least in the mid-teens percentage basis due to seasonal decline in demand.

For the first quarter, Broadcom expects strong storage end market to drive Enterprise Storage revenue growth to 20% on a sequential basis. Industrial revenue is expected to increase sequentially in the mid-single digits.

Gross margin is anticipated to be 61.5% (+/- 1%), while operating expenses are expected to be approximately $785 million.

Interest expense and other and provision for income taxes are anticipated to be $101 million and $73 million, respectively. The company expects capital expenditures to be approximately $330 million.

For the first quarter, depreciation is expected to be $116 million and amortization is expected to be approximately $999 million.

Cash taxes expected to be paid during fiscal year 2017 are approximately $400 million.

Zacks Rank & Key Picks

Currently, Broadcom has a Zacks Rank #2 (Buy). Some other similarly-ranked stocks are Applied Optoelectronics (NASDAQ:AAOI) , Cirrus Logic (NASDAQ:CRUS) and NVE Corporation (NASDAQ:NVEC) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see

Long term earnings growth for Applied Optoelectronics, Cirrus and NVE are pegged at 18.33%, 17.50% and 25%, respectively.