Technology

Broadcom May Have Just Brought Relief to the Battered Semiconductor Sector

Jon C. Ogg

Published: December 6, 2018 6:40 pm

Last Updated: January 11, 2020 2:02 pm

The semiconductor segment has not exactly been full of great news in recent months. With some supply shortages having turned into surpluses, slower than expected iPhone sales dominating the news almost daily, and in an industry where the next growth leg seems a ways out, apparently not even bad news has to last forever. Broadcom Ltd. (NASDAQ: AVGO) finally may have given the markets some good news, or at least some stabilizing news in the wake of the Huawei executive arrest, for the battered technology and chip sectors.

Along with beating earnings and giving what appears at first glance to be solid guidance, Broadcom remains active in the stock buyback game and delivered a hefty dividend hike to its shareholders now that its merger with CA Technologies quietly closed a month ago.

Broadcom reported that revenue rose 12% to $5.444 billion for its fiscal fourth quarter, and earnings per share rose 27% to $5.85 for the period. Thomson Reuters was calling for $5.58 in earnings per share on revenues of roughly $5.4 billion. The company’s free cash flow for the fourth quarter was up 47% to $2.529 billion. Those quarterly figures did not include the effect of the CA Technologies acquisition.

While posting growth has been good, the reality is that Wall Street doesn’t have much interest in any news looking backward. At least not if it’s good news. It’s the guidance and other pro-shareholder measures that matter now.

Broadcom issued its full fiscal 2019 outlook that was based on current business trends and conditions, and this does include the contribution from its recently acquired CA Technologies: Net revenue of roughly $24.5 billion, operating margin of 20% using GAAP measures and operating margin of 51% using the non-GAAP measures. Thomson Reuters has a consensus estimate of $22.4 billion in revenues, but investors should broadly keep in mind that analysts are often slow to model in mergers, acquisitions and divestitures properly into their combined models.

Broadcom also noted that capital spending in 2019 is expected to be approximately $550 million, with depreciation expected to be $600 million and amortization of approximately $4.700 billion.

The company repurchased 6.4 million shares in the fourth quarter for $1.533 billion, which helped it end the fiscal year having repurchased some 31.9 million shares for a grand total of $7.258 billion. And looking forward, Broadcom has expanded its current buyback plan by $6 billion, which should leave a total of about $10.2 billion for buybacks in the next year or so.

You had been told about a dividend hike as well, and Broadcom’s board approved a quarterly cash dividend of $2.65 per share. That is up handily from a prior $1.75 per share for the prior four quarterly payments.

When you compare the past buyback, the larger buyback still on the books and the solid dividend hike, it’s no wonder that this is providing some support for Broadcom and for a battered chip sector. The buyback compares against a market cap of $93 billion. Its dividend would now be 4.6% based on its $227.24 close.

Broadcom shares were up over 4% in the after-hours session on Thursday. The 52-week trading range is $197.46 to $275.70. The consensus analyst target price from Thomson Reuters was $287.32 ahead of earnings.

Here is how Broadcom’s earnings and guidance news played out among other leading chip-related stocks in Thursday’s after-hours session:

Intel Corp. (NASDAQ: INTC) closed up 1.3% at $48.37, with a $220 billion market cap, and its shares were little changed in Thursday’s after-hours.

Qualcomm Inc. (NASDAQ: QCOM) closed flat at $57.11, with a $69 billion market cap, and its shares were little changed in the after-hours.

Advanced Micro Devices Inc. (NASDAQ: AMD) was up 0.8% at $21.30, with a $21.3 billion market cap, by Thursday’s close. It was up 0.2% more in the after-hours session.

Nvidia Corp. (NASDAQ: NVDA) closed up 0.7% at $158.29, with a $96.5 billion market cap, on Thursday. Its shares were up another 0.4% at almost $159 in the after-hours.

Applied Materials Inc. (NASDAQ: AMAT) closed down 2.1% at $34.69, with a $34.1 billion market cap, and its shares were up 0.2% at $34.80 in after-hours trading indications.

Hock Tan, president and CEO of Broadcom, said of the quarter and looking forward:

Strong operating performance in the fiscal fourth quarter caps a year of solid results that continues to reinforce the sustainability of our business model. Revenues grew 18% to nearly $21 billion on the back of strong demand for our networking, enterprise storage, wireless and industrial products while operating margin continued to progressively expand to 50%. Looking forward to fiscal year 2019, we expect another year of double digit revenue growth. Sustained demand within our semiconductor segment will be augmented by the newly acquired mainframe and enterprise software businesses to our infrastructure software segment. We also expect operating margin to hit another record in fiscal year 2019 driven by improved operating leverage.

Free cash flow from operations grew 50% in fiscal year 2018 to $8.2 billion. As a result, we are raising our target dividend by 51 percent to $2.65 per share per quarter for fiscal year 2019,” said Tom Krause, CFO of Broadcom Inc. “Looking ahead for the year, we expect sustained revenue growth and improving operating leverage to accelerate cash generation from operations. Our capital allocation strategy remains unchanged for fiscal year 2019. We plan to return 50% of our prior fiscal year free cash flows to stockholders in the form of dividends and use the balance of our free cash flows to buy back stock and support additional acquisitions, while remaining focused on maintaining our investment grade credit rating.