Broadcom Inc. 10-Q Summary: Fiscal Q2 2019
Business Context and Reporting Period
This report covers the fiscal quarter ended May 5, 2019, and the two fiscal quarters ended May 5, 2019. Broadcom operates as a global technology leader in semiconductor and infrastructure software solutions. Following the November 2018 acquisition of CA, Inc., the company reorganized into three reportable segments: Semiconductor Solutions, Infrastructure Software, and IP Licensing. The period reflects the integration of CA, Inc., significant debt refinancing activities, and the adoption of new revenue recognition standards (Topic 606).
Key Financial Metrics
| Metric (in millions) | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Total Net Revenue | $5,517 | $5,014 | $11,306 | $10,341 |
| Gross Margin | $3,089 (56%) | $2,551 (51%) | $6,297 (56%) | $5,179 (50%) |
| Operating Income | $970 | $1,201 | $1,525 | $2,144 |
| Net Income (Attributable to Common Stock) | $691 | $3,718 | $1,162 | $9,948 |
| Diluted EPS | $1.64 | $8.33 | $2.77 | $22.99 |
| Operating Cash Flow (YTD) | $4,799 | $3,998 | $4,799 | $3,998 |
| Total Debt (Principal) | $37,859 | $17,609 | $37,859 | $17,609 |
| Cash and Equivalents | $5,328 | $8,187 | $5,328 | $8,187 |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenue increased 10% year-over-year for the quarter and 9% year-over-year for the two fiscal quarters. This growth was driven by the Infrastructure Software segment (up 216% for the quarter), which includes CA, Inc. contributions. Conversely, the Semiconductor Solutions segment declined 10% due to lower demand for wireless content in mobile handsets and server storage connectivity.
- Profitability: While gross margin percentage improved to 56% (from 51% in Q2 2018), operating income decreased 19% year-over-year. This decline is primarily attributed to increased amortization of acquisition-related intangible assets ($473 million in Q2 2019 vs. $67 million in Q2 2018) and restructuring charges ($76 million vs. $53 million).
- Net Income Volatility: Net income decreased significantly compared to the prior year. The prior year period included a one-time tax benefit of approximately $2.6 billion related to the U.S. Tax Cuts and Jobs Act and the Redomiciliation Transaction, which is not present in the current period.
- Debt Structure: Total debt principal more than doubled to $37.9 billion. The company issued $11 billion in senior notes and utilized commercial paper to repay $12 billion of term loans incurred for the CA acquisition.
Guidance, Outlook, and Risks
- Outlook: Management expects export restrictions on a major customer (Huawei) to adversely impact revenue in the second half of fiscal year 2019. Capital expenditures for fiscal 2019 are expected to be lower than fiscal 2018.
- Restructuring: The company expects to incur additional restructuring charges in future periods related to the CA Merger integration.
- Capital Returns: As of May 5, 2019, $6.5 billion remained available under the $18 billion stock repurchase program. The company repurchased approximately 3 million shares in Q2 2019. A quarterly dividend of $2.65 per share was declared.
- Risks: Key risks include customer concentration (top five customers accounted for ~36% of YTD revenue), supply chain dependence on TSMC (85% of wafers), integration challenges with CA, Inc., and potential impacts from global trade tensions and regulatory changes.
Investor Verification Checklist
- CA Integration Progress: Verify the realization of synergies and revenue retention rates for the newly acquired CA, Inc. software business.
- Huawei Exposure: Assess the specific financial impact of the U.S. Department of Commerce export restrictions on revenue in the second half of the fiscal year.
- Debt Servicing: Monitor interest expense trends given the increased debt load ($37.9 billion) and the mix of fixed vs. floating rate instruments.
- Amortization Impact: Track the run-rate of amortization expenses related to CA intangible assets, which significantly impacts operating income.
- Customer Concentration: Review the stability of the top five customers, particularly Apple Inc. and major distributors, given the high concentration risk.