Broadcom Retrenches 1,100 Employees Post Brocade Buyout

Broadcom Inc. (NASDAQ:AVGO) has laid off around 1,100 employees post its buyout of Brocade Communication Systems. The acquisition worth $5.5 billion was completed in November 2017. Notably, the deal bolstered Broadcom’s position in the storage area networking space.

Further retrenchment may be in order after the company evaluates its resources. The San Jose, CA based chipmaker might restructure the company’s business accordingly and bring about the desired reduction in costs.

Per Reuters, Broadcom has spent $143 million in its first two fiscal 2018 quarters in restructuring charges, majorly comprising employee termination costs. The company is likely to pay a significant amount of its employee termination costs in its current quarter.

Shares of Broadcom have returned 15.7% in the past year, underperforming the industry’s rally of 18.7%.



Recent Developments

Broadcom recently strengthened its partnership with Hewlett Packard Enterprise (NYSE:HPE) in server storage. The companies will collaborate to demonstrate U.3 reference platform, SFF-TA-1001 at HPE Discover. The U.3 universal drive cage will feature Toshiba U.3 facilitated SAS, SATA and NVMe drives.

Broadcom also announced that it has developed the approved SFF-TA-1005 Universal Backplane Management (“UBM”) specification. The company developed the platform co-sponsored by HPE, Dell EMC (NYSE:EMC) and 19 other members. The platform will enhance simplicity and provide clarity to the management of SATA, SAS and NVMe drives.

We believe Broadcom’s collaborations poise it well to expand data center server storage capabilities. We believe an expanding portfolio bodes well for Broadcom in the long run.

Upbeat Q2, View Positive

Broadcom put up an impressive second-quarter fiscal 2018 show, in the past week. Both earnings and revenues surpassed estimates. The company delivered earnings of $4.88 per share beating the Zacks Consensus Estimate by 11 cents. The figure improved 32.2% from the year-ago quarter.

Non-GAAP revenues from continuing operations came in at $5.014 billion, up 20% from the year-ago quarter. Moreover, the figure came ahead of Zacks Consensus Estimate of $5.003 billion.

The company also provided promising revenue guidance. For third-quarter fiscal 2018, Broadcom forecasts non-GAAP revenues of almost $5.05 billion (+/- $75 million). The Zacks Consensus Estimate for revenues is pegged at $5.06 billion, representing year-over-year growth of 13.3%.

Impact of the Restructuring Processes on Margins

Broadcom’s focus on networking products from cloud and data centers as well and broadband access products is helping it to accelerate gross profit. In second-quarter 2018, gross margin increased 330 basis points (bps) on a year-over-year basis to 66.6% in the quarter.

We believe the company’s cost minimizing initiatives are likely to positively impact margins going forward.

Northbound Revisions

Broadcom is witnessing positive revisions. In the past seven days, third-quarter fiscal 2018 estimates witnessed 10 upward revisions against merely one in the other direction, resulting in the Zacks Consensus Estimate rising from $4.61 to $4.83 per share. The figure represents a year-over-year earnings growth of 17.8%.

To Conclude

Broadcom is benefiting from robust demand of its wireless solutions and expanding product portfolio. Increasing collaborations as well as initiatives in reducing costs hold promise.

However, customer concentration woes and intensifying competition witnessed across most of the markets in which the company operates remain concerns.

Zacks Rank & Key Picks

Broadcom currently carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader technology sector are Western Digital Corporation (NASDAQ:WDC) and Micron Technology, Inc. (NASDAQ:MU) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Western Digital and Micron have a long-term expected EPS growth rate of 19% and 10%, respectively.

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Western Digital Corporation (WDC): Free Stock Analysis Report

Hewlett Packard Enterprise Company (HPE): Free Stock Analysis Report

Broadcom Limited (AVGO): Free Stock Analysis Report

Micron Technology, Inc. (MU): Free Stock Analysis Report

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