Late last week, Broadcom reported an outstanding set of numbers for its fiscal second quarter and provided better-than-expected guidance for the current quarter ending in July.
Broadcom reported earnings of $3.69 per share on revenues of $4.2 billion for the April quarter. Wall Street expectations going into the earnings event were $3.50 per share and $4.1 billion, respectively.
For the July quarter, Broadcom guided revenues to $4.45 billion (+ or - $75 million) versus Street expectations of $4.1 billion, which is impressive given seasonality.
Shares of Broadcom popped by 8.50% as of close of trading this past Friday, as the sell side came out with their plaudits and pom-poms ablaze. Going into the report, options were pricing in a 6.4% move.
Critical takeaways from Broadcom's earnings report are as follows:
There is no slowdown in any of the company's segments as evidenced by the significant beat on estimates and the fact that the company was able to raise guidance for the current quarter, despite Wall Street expectations of a flat sequential quarter.
The current guidance is probably still conservative, given management comments that they are increasing their component supply to Apple (iPhone 8/X). Some Wall Street sell-siders are expecting almost 40% more in business with Apple for the iPhone 8 versus the iPhone 7.
The company is scheduled to close the Brocade acquisition by the end of next month which will more than likely lead to increased synergies and increasing margins going forward as the integration of Brocade takes effect. Increasing margins and better synergies almost always leads to increased cash flow and better earnings leverage. Thus, current guidance could (more than likely) turn out to be conservative, despite the raise last week.
Not only is Broadcom seeing increased wins in the iPhone segment but the company has won additional business from Samsung (S8) and is also seeing a ramp in its networking segment to boot.
Despite the pop on Friday, shares of Broadcom are currently valued at 16.5 times estimates of $15.20 per share (and rising) for the year ending in October 2017 versus a S&P 2017 multiple of roughly 20 times.
Just an aside, Broadcom's expected ramp in earnings and revenues bodes very well for Apple as well, just like it has the last couple of times and pointed out on these very pages to all of you.
There is also chatter that the high-end iPhone 8 (OLED) could be delayed, however, that will only lead to increasingly pent-up demand (if at all true) as far as I am concerned, like it did with the Apple AirPods.
Broadcom CEO Hock Tan said the following on the company's post-earnings conference call (in parentheses are my comments):
"The sequential decline was driven by the bottom of the annual product cycle transition at our major North American customer (Apple transitioning away from the iPhone 7 and getting ready for the iPhone 8/X), offset by the ramp of the next generation phone (S8) and our large Korean smartphone customer (Samsung)."
Tan added, "Moving on now to the third quarter. We expect to see the beginning of the second half seasonal growth in our Wireless segment revenue. We expect this growth to be driven by the start of a ramp from enough large North American smartphone customer (Apple) as they transition to the next generation platform (iPhone 7 to iPhone8/X). On top of this, we are also expecting a substantial increase in our total dollar content from the eight Broadcom products, we will be supplying into this new platform (iPhone 8/X)."
Finally, he added, "The national ramp of this next generation platform (iPhone 8/X) however, appear slower this year, compared to prior year. But we believe, this will likely accelerate in our fourth quarter." (October quarter for Broadcom and in time for Apple's traditional fall launch).
I had entered a long position on Broadcom (via calls) two weeks or so ago in anticipation of a stellar earnings report, which I sold on Friday (for a triple almost) but have re-entered a position this morning as Wall Street sell-side estimates are still going higher making shares in Broadcom even cheaper going forward.
Shares of Broadcom closed this past Friday at $254.53 per share while Apple shares closed at $155.45.
(Long aapl, long and short aapl and avgo options)