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Broadcom Delivers Solid Results Despite Slowing Growth

By Shane NeagleStock MarketsDec 08, 2023 09:36AM ET
www.investing.com/analysis/broadcom-delivers-solid-results-despite-slowing-growth-200644257
Broadcom Delivers Solid Results Despite Slowing Growth
By Shane Neagle   |  Dec 08, 2023 09:36AM ET
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  • Semiconductor giant Broadcom provided a revenue forecast for the year that fell short of Wall Street estimates
  • The company cited subdued enterprise spending and intensified competition as the reason
  • The chipmaker recently concluded its acquisition of VMware, a move that positions it in the competitive cloud-computing landscape

Broadcom (NASDAQ:AVGO) reported a mixed set of results for its fiscal fourth quarter and the slowest growth pace in the last three years. Shares were down about 1% in early Friday trade.

The chipmaker, which is seen as a major beneficiary from the GenAI theme and whose shares are up 65% year-to-date, recently finalized the acquisition of VMware after it managed to remove the last key hurdle for closing the deal – getting China’s green light.

Growth is Slowing Amid Chip Slump

Broadcom reported an adjusted EPS of $11.06, which was enough to beat the average analyst estimate of $10.93. Adjusted EBITDA came in at $6.05 billion while the operating income of $5.75 billion came in just ahead of the expected $5.73 billion.

AVGO also reported adjusted net revenue of $9.295 billion, up 8% year-over-year, matching analyst expectations. The company generated $7.33 billion from its core business – Semiconductor Solutions – while Infrastructure Software added another $1.97 billion.

The company said it keeps investing in accelerators and network connectivity for AI by hyperscalers, where it is also seeing great demand. Broadcom anticipates mid to high-single-digit percentage growth in semiconductors for the upcoming year, which suggests deceleration compared to the growth witnessed in the preceding two years.

"In fiscal year 2023 we achieved a record adjusted EBITDA margin of 65%, generating $17.6 billion in free cash flow or 49% of revenue, demonstrating our stable and diversified business model," said Kirsten Spears, CFO of Broadcom.

Revenue generated from networking semiconductors dedicated to supporting AI systems currently constitutes 15% of the company's overall chip sales. The company’s projections indicate that this specific segment's contribution will rise over 25% of the total chip sales in fiscal year 2024.

In the fourth quarter, the company generated $4.83 billion in cash from operations. The free cash flow amounted to $4.72 billion, representing 51% of revenue.

Looking forward, Broadcom said it sees its FY24 revenue at “approximately $50 billion” with the adjusted EBITDA guidance seen at 60% of projected revenue. This outlook likely disappointed investors as they were looking for full-year revenue of $52.5 billion, according to the analyst consensus. The offered outlook includes contributions from VMware. For the fourth quarter, the adjusted EBITDA represented 65% of revenue.

‘Transformational’ VMware Acquisition

Earlier this year, Broadcom and Apple (NASDAQ:AAPL) announced a new multibillion-dollar deal, which is focused on the development of 5G radio frequency components in the U.S. Apple is one of Broadcom’s major customers for high-end chips.

This partnership will facilitate Broadcom's ongoing investments in essential automation initiatives and workforce development for technicians and engineers. On the other hand, the new contract aligns with Apple’s 2021 commitment to inject $430 billion into the U.S. economy within a five-year span.

A couple of months later, Broadcom delivered another positive news – it finally managed to finalize the acquisition of VMware (NYSE:VMW) for more than $60 billion, a major player in cloud infrastructure and digital workspace technology. Broadcom’s CEO Hock Tan said this acquisition is “transformational.”

“In fiscal year 2024 we expect semiconductor to sustain its mid to high single digit revenue growth rate, with the contribution of VMware driving consolidated revenue to $50 billion, and adjusted EBITDA to $30 billion," he said.

Broadcom is planning to spin off two VMware units, which account for about $2 billion in annual revenue. This could be one of the reasons why Broadcom decided to offer a more conservative guidance, which missed analyst estimates. The VMware integration is expected to cost $1.3 billion through fiscal 2025.

Over the remaining 11 months of fiscal year 2024, VMware is expected to contribute approximately $12 billion to the total revenue. Although the integration process with VMware is anticipated to take about a year, the company is projecting growth to accelerate as the company shifts its focus towards higher-value products.

Broadcom said it will continue investing in the acquired businesses to foster sustainable growth, indicating a strategic partnership to enhance VMware's capabilities in ensuring security and resilience in cloud computing.

With the VMware acquisition, the chipmaker has strategically aligned itself to support its enterprise clients in building and upgrading their private and hybrid cloud infrastructures. The primary focus of Broadcom's investment will be on VMware Cloud Foundation, the company said, which is a comprehensive software stack serving as the basis for private and hybrid clouds.

In conjunction with Broadcom's commitment, VMware will provide an extensive array of services to modernize and optimize cloud and edge environments. This includes offerings like VMware Tanzu for expediting application deployment, Application Networking (Load Balancing), and Advanced Security services, and VMware Software-Defined Edge tailored for both Telco and enterprise edges.

CFO Spears said that the deal finalization allowed Broadcom to increase its quarterly dividend by 14% to $5.25 per share for FY24.

"The target fiscal 2024 annual common stock dividend of $21.00 per share is a record, and the thirteenth consecutive increase in annual dividends since we initiated dividends in fiscal 2011."

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

Broadcom Delivers Solid Results Despite Slowing Growth
 

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Broadcom Delivers Solid Results Despite Slowing Growth

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