10-QPeriod: Q3 FY2019

Broadcom Inc. Quarterly Report for Q3 Ended Aug 4, 2019

Filed September 13, 2019For Securities:AVGO

Summary

Broadcom Inc. reported strong revenue growth for the three fiscal quarters ended August 4, 2019, up 9% year-over-year to $16.82 billion. This growth was primarily driven by a significant increase in the Infrastructure Software segment, which more than doubled its revenue, largely due to the acquisition of CA Inc. The Semiconductor Solutions segment saw a slight revenue decline of 9%, impacted by a general slowdown in semiconductor demand. Net income attributable to common stock for the nine-month period was $1.88 billion, a substantial decrease from $11.14 billion in the prior year, largely influenced by the prior year's significant tax benefits related to the 2017 Tax Reform Act. The company's balance sheet reflects a substantial increase in goodwill and intangible assets, a direct result of the CA acquisition. Broadcom also announced a pending acquisition of Symantec's Enterprise Security business for approximately $10.7 billion, signaling continued strategic expansion. Financially, Broadcom generated strong operating cash flow of $7.22 billion for the nine-month period. The company significantly increased its long-term debt to $34.03 billion from $17.49 billion, primarily to finance the CA acquisition. Despite the increased debt, Broadcom continued to return capital to shareholders, paying $3.18 billion in dividends and repurchasing $5.00 billion in stock during the period. Investors should note the ongoing customer concentration, with Apple Inc. accounting for approximately 20% of net revenue, and the company's reliance on key distributors and contract manufacturers like TSMC. The pending Symantec acquisition will add further complexity and debt, requiring careful monitoring of integration and financial leverage.

Financial Statements
Beta
Revenue$5.51B
Cost of Revenue$2.48B
Gross Profit$3.03B
R&D Expenses$1.24B
SG&A Expenses$410.00M
Operating Expenses$2.17B
Operating Income$865.00M
Interest Expense$362.00M
Net Income$715.00M
EPS (Basic)$0.18
EPS (Diluted)$0.17
Shares Outstanding (Basic)3.98B
Shares Outstanding (Diluted)4.18B

Key Highlights

  • 1Total net revenue increased by 9% to $16.82 billion for the three fiscal quarters ended August 4, 2019, compared to the prior year period.
  • 2Infrastructure Software segment revenue surged by 212% to $3.96 billion, driven by the CA acquisition, while Semiconductor Solutions revenue decreased by 9% to $12.82 billion.
  • 3Net income attributable to common stock decreased significantly to $1.88 billion from $11.14 billion, primarily due to large tax benefits in the prior year period related to the 2017 Tax Reform Act.
  • 4Total assets grew to $69.77 billion from $50.12 billion, with a substantial increase in Goodwill ($36.69 billion from $26.91 billion) and Intangible Assets ($18.88 billion from $10.76 billion) due to acquisitions.
  • 5Long-term debt more than doubled to $34.03 billion from $17.49 billion, largely to finance the CA Merger.
  • 6The company generated $7.22 billion in cash from operating activities for the nine-month period.
  • 7Broadcom announced a pending acquisition of Symantec's Enterprise Security business for approximately $10.7 billion, further expanding its infrastructure software portfolio.

Frequently Asked Questions

Broadcom's total net revenue increased by 9% to $16.82 billion for the three fiscal quarters ended August 4, 2019. This growth was primarily driven by a substantial 212% increase in the Infrastructure Software segment, largely due to the inclusion of results from the CA Inc. acquisition. While the Semiconductor Solutions segment, Broadcom's largest revenue contributor, experienced a 9% decrease, the strong performance in infrastructure software more than offset this decline.

The acquisition of CA Inc. had a significant impact on Broadcom's financial position. Goodwill on the balance sheet more than doubled to $36.69 billion from $26.91 billion, and intangible assets increased substantially. This was accompanied by a significant increase in long-term debt, which rose to $34.03 billion from $17.49 billion, primarily to finance the acquisition. The acquisition also contributed to the strong revenue growth in the Infrastructure Software segment.

Broadcom's total debt increased significantly following the CA acquisition. For the nine-month period ended August 4, 2019, the company generated $7.22 billion in operating cash flow, demonstrating its ability to generate cash from core operations. The company also paid $3.18 billion in dividends and repurchased $5.00 billion in stock during this period. The announced Symantec acquisition will likely involve further debt financing, so investors should monitor the company's leverage ratios and its ability to service its debt obligations. The company stated it believes it has sufficient liquidity to meet its obligations for at least the next 12 months.

Broadcom highlighted several key risks. A significant risk is its customer concentration, with a large portion of revenue coming from a few customers, including Apple Inc. accounting for about 20% of net revenue, and reliance on key distributors. The company also faces risks associated with its reliance on contract manufacturers, particularly TSMC, and potential disruptions in its supply chain. The ongoing trade tensions, particularly with China, and the inherent cyclicality of the semiconductor industry are also noted as significant concerns. Furthermore, the integration of the CA acquisition and the pending Symantec acquisition present execution risks.