Broadcom Inc. 10-Q Summary: Fiscal Q2 2018
Business Context and Reporting Period
This filing covers the quarterly period ended May 6, 2018, representing the second fiscal quarter of Broadcom Inc.'s 53-week fiscal year 2018. This is the company's first 10-Q following its Redomiciliation Transaction on April 4, 2018, which moved the ultimate parent company from Singapore to Delaware. The financial statements reflect the consolidation of Broadcom-Singapore and the mandatory exchange of limited partnership units into common stock. The company operates four segments: Wired Infrastructure, Wireless Communications, Enterprise Storage, and Industrial & Other.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | YTD 2018 (2 Quarters) | YTD 2017 (2 Quarters) |
|---|---|---|---|---|
| Net Revenue | $5,014 million | $4,190 million | $10,341 million | $8,329 million |
| Gross Margin | $2,551 million (51%) | $1,976 million (47%) | $5,179 million (50%) | $3,977 million (48%) |
| Operating Income | $1,201 million (24%) | $474 million (11%) | $2,144 million (21%) | $980 million (12%) |
| Net Income (Attributable to Common) | $3,718 million | $440 million | $9,948 million | $679 million |
| Diluted EPS | $8.33 | $1.05 | $22.99 | $1.63 |
| Cash and Equivalents | $8,187 million | $4,254 million (End of Q2 2017) | Cash Flow from Operations (YTD): $3,998 million | |
| Total Debt (Carrying Value) | $17,598 million | $17,548 million | Total Debt Principal: $17,727 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 20% year-over-year for the quarter and 24% year-over-year for the two fiscal quarters. Growth was driven by the Brocade acquisition (contributing to Enterprise Storage), increased wireless content in handsets, and higher demand for networking ASICs.
- Profitability Surge: Net income and EPS increased dramatically (over 700% for the quarter). This is primarily attributable to a $2,637 million benefit from income taxes in the quarter (and $8,423 million YTD) resulting from the 2017 Tax Reform Act and the Redomiciliation Transaction. These benefits are largely non-cash.
- Segment Performance:
- Enterprise Storage: Revenue up 63% (Q2) and 52% (YTD) due to Brocade FC SAN contributions.
- Wireless Communications: Revenue up 13% (Q2) and 51% (YTD) due to higher content per handset.
- Wired Infrastructure: Revenue up 9% (Q2) but flat YTD.
- Balance Sheet: Cash decreased by $3.0 billion from the prior year-end due to the Brocade acquisition ($4.8 billion), debt repayments, dividends, and stock repurchases, partially offset by operating cash flow.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the successful integration of Brocade and the impact of the Redomiciliation. The company expects cash tax costs to increase in future periods due to the Redomiciliation and the 2017 Tax Reform Act. Capital expenditures for fiscal 2018 are expected to be lower than 2017 due to the completion of campus construction.
Capital Allocation: The Board authorized a $12 billion stock repurchase program in April 2018. The company repurchased $347 million of stock in Q2 and paid $1.52 billion in dividends/distributions YTD.
Risks and Contingencies:
- Tax Uncertainty: Significant judgment is required regarding the final determination of income tax liabilities under the 2017 Tax Reform Act and the Redomiciliation. The company has recorded provisional benefits that may be adjusted within 12 months.
- Customer Concentration: Sales to the top five end customers accounted for approximately 38% of revenue in Q2 and 43% YTD. Apple Inc. accounted for approximately 17% of Q2 revenue and 25% of YTD revenue.
- Supply Chain: The company relies heavily on TSMC for wafer fabrication (approx. 75% of wafers) and a limited number of suppliers for critical materials.
- Legal Proceedings: Ongoing litigation related to the acquisitions of PLX and Emulex, though management believes outcomes will not have a material adverse effect. Intellectual property disputes remain a risk.
Investor Verification Checklist
- Tax Provision Finalization: Verify the finalization of the $8.4 billion tax benefit related to the 2017 Tax Reform Act and Redomiciliation, as adjustments could materially impact future earnings.
- Brocade Integration: Monitor the realization of synergies and revenue growth from the Brocade acquisition, specifically in the Enterprise Storage segment.
- Customer Concentration: Track order volumes from top customers (Apple, Foxconn) given the high concentration risk (25% of YTD revenue from Apple).
- Debt Servicing: Assess the ability to service $17.7 billion in debt principal amidst potential increases in cash tax costs.
- Stock Repurchase Execution: Monitor the pace of the new $12 billion buyback program relative to cash flow generation.