Q2 2020 Broadcom Inc Earnings Call
[music].
Broadcom Inc.'s.
Second quarter fiscal year 2020 financial results conference call.
This time for opening remarks, and introduction I would like to turn the call over to Beatrice Risotto.
Director of Investor Relations abroad comic. Please go ahead Matt.
Thank you operator, and good afternoon, everyone.
Joining me on today's call, our Hock Tan, President and CEO, and Tom crowd, Chief Financial Officer abroad.
After the market close right, Tom distributed a press release and financial tables.
Describing our financial performance.
Second quarter fiscal year 2020.
If you did not receive a copy you may obtain information from the Investor section a broadcoms website at <unk> Dot com.
This conference call is being webcast live in a recording will be available via telephone play back for one week.
Also the archive any investor section of our web site at Broadcom Dotcom.
During the prepared comments talking Tom will be providing details of our second quarter fiscal year 2020 result.
Guidance for a third quarter of all commentary regarding the business environment well take questions. After the end of our prepared comments.
Please refer to our press release today and our recent filings with the FTC for information on the specific risk factors that could cause our actual results could differ materially from the forward looking statements made on the call.
In addition to U.S. GAAP reporting Broadcom report certain financial measures on a non-GAAP based.
A reconciliation between GAAP and non-GAAP measures is included in the table attached to today's press release.
Comments made during today's call will primarily refer to our non-GAAP financial results.
So with that I'll now turn the call over to Huh.
Alright.
Thank you being and thank you everyone for joining us today.
Before I provide quarterly results I do want to take a moment doing knowledge and saying all of the healthcare professionals and essential workers on the frontline swap showing incredible courage viewing this unprecedented tongue.
I think for all abrupt goal when I see we're very grateful for the award.
I also especially one good thing I would team of more than 20000 employees working all over the wall to keep all this dose Ronnie.
Broaden their tireless efforts to preserve and booked like our enterprise.
No more than ever I'll cut.
And communities are counting on those two continues to deliver essentials technologies that enable the continuity of functions critical to daily life.
So now let me turn to our second quarter results and our outlook for the third quarter.
We delivered.
Second quarter in med revenues of $5.7 billion very much in line with our guidance down 2% sequentially.
For the same year on year.
So I mean could muster solutions revenue was $4 billion declining 2% year on year infrastructure software revenue was 1.7 billion up 21 for same year on year, which of course includes contribution from Symantec.
Oh, no sequential basis.
Semiconductors were down 4% Walt software was up 3%.
So with onto more color, starting with semiconductors, we face a very interesting demand environment in the mid.
Over challenging supply chain ecosystem.
Let me provide more color on various semiconductor end markets.
Beginning we've met working.
Q2 reflect the and expected recovery and was up 11% sequentially.
The man was healthy.
As we begin to ramp our next generation Tomahawk, three and tried and three street Stritch brought us.
Ill various go out customers.
And in network routing Jericho to add up telco customers.
These babies recovery, which we saw in Q2.
Now turning into a demand surge in to treat as we are seeing strength for existing generation products.
In addition.
To this next generation frames.
We're also seeing a.
A strong uplift in demand from the bank from the Ram of next generation deep learning infusions chips fall asleep go out customers.
In southern storage connectivity.
We note a similar situation from a 14% sequential revenue decline in Q2.
The man in Q3 has turned around.
And he says seller raising.
The man.
Sorry demand from enterprise customers fall our rate data protection controllers has recovered.
And is showing considerable strength.
Demand from cloud service providers for our PCIA Express switches that drive solid state memory and AI applications has been particularly strong.
Turning onto broadband.
Which was flat sequentially in Q2.
We have put riksbank, approximately 10% revenue growth quarter over quarter into tree driven by strong adoption of why five six in next generation next says gateways not only from enterprises.
But also from telcos and the other service providers.
They also seeing increased demand for broadband DSL and pawn and next generation cable DOCSIS 3.1.
That being said, we expect this to be partially offset.
Buying a sharp decline in video, particularly in satellite set top boxes, given the current constraints on line sporting event.
Then moving on to wireless.
Wireless soft typical seasonality in Q2 was down 14% sequentially.
Much like last year.
In Q3, we would normally expect to see a double digit sequential uplift in revenue from the Ram of next generation phone as our launch North American mobile phone customer.
However, this year.
We do not expect to see this uptick in revenue until our fall fiscal quarter.
So accordingly, we expect we expect our wireless revenue in Q3 will be down sequentially.
I see it was down in Q2.
Turning last two industrial.
We began to see recovery in Q2 and revenue was up 13% sequentially consistent recovery in re sales to end market.
Even as we expect read sales in Q3 to be flat given the current market uncertainty arising from the current the Covidien Nitin damning, we are aggressively moving to bring down channel inventory globally, especially in Europe and Japan.
As a result.
We expect a double digit sequential decline in could recognize shipping revenue in the third quarter.
I would note re sales in Asia Pacific in particular, China.
Our expected to be up quarter over quarter, while other regions. All other regions are expected to be done.
So that's the demand picture.
Now on the supply chain site.
We have experience and continue to do so some challenges.
Some of which are unique to us.
Lead times, especially in leading edge processes.
I have extended and not running at historical highs coupled with these.
We have significant test capacity, we're positioned significant as capacity.
In Malaysia, where we also have a central centralize warehouse and this is a location which has experience into median intermittent coven 19 lockdowns.
Any significant logistical delays.
Bottom line in Q3.
We really have much more demand then we can supply and this may very well continue beyond Q3.
In summary, we clearly see Signets significant puts and takes on the positive sign.
So each of the main in networking storage and broadband.
On the name because they sign supply chain constraints and the product cycle delaying in wireless.
Therefore, we forecast our semiconductor solution revenue to be up 3% sequentially.
Only down 5% year on year for the third quarter, despite the major product cycle delay in wireless.
Right now turning to software.
See was up 2% year on year and flat sequentially bookings in our core accounts grew double digits annually, which was offset by the expected reduction in services revenue.
Cement that grew 2% sequentially and contributed over $400 million in the quarter.
After two quarters, we have successfully integrated cementing onto the Broadcom platform and have largely contributed that are completed the transition.
As mentioned bookings in our core accounts are growing at more than offsetting the transition other smaller commercial accounts.
As we continue to rationalize the business, while brocade was down 21% year on year.
It was up 11% sequentially in Q2 and was that in.
There was the third quarter in the role of sequential growth for brocade.
Following the.
The Q3 bottom last year.
Looking ahead to next quarter, we expect revenues from seeing cement take of cost to sustain on a sequential basis.
However, very consistent with our distribution strategy in semiconductors.
We are reducing channel inventories significantly for brocade and I. Thank brocade revenue will be down significantly quarter on quarter.
In Q3, so as a result, we expect revenue from the software segment to be down approximately 7% sequentially in the debt in the third quarter. So in some.
We expect our consolidated third quarter net revenue to be $5.75 billion roughly flat from Q2. This reflects a 3% sequential projected revenue increase in semiconductors, and a 7% sequential expected.
Revenue decline in software.
With that I'll turn it over to Tom.
Thank you arc.
Let me now provide additional detail on our financial performance.
First on the piano gross margins were 73% of revenue in the quarter and relatively flat with Q1, but up approximately 100 basis points year on year the increase in software as a percentage of our overall revenue.
Drove the increase.
Operating income from continuing operations was 3 billion.
Represented 53% of net revenue operating margins were effectively flat quarter over quarter put down year on year by approximately 70 basis points, primarily due to the stranded cost for Symantec, we carried in the quarter.
In fact operating expenses were 1.2 billion, which was down 28 million compared to Q1, but still included approximately 35 million Symantec related expenses that we expect to go away over the remainder of the year.
Adjusted EBITDA was 3.2 billion and represented 56% of net revenue.
This figure excludes 147 million of depreciation.
Looking at cash flow, we had record quarterly cash free cash flow of 3.1 billion, representing 53% of revenue.
This is up a little more than 20% year on year.
Collections were quite strong and is worth noting that our software businesses are seasonal with December end to a lesser extent March being particularly strong bookings months as a result, our fiscal Q2 is the peak collections period for software.
In addition, we strictly managed working capital to improve liquidity, but also at an out of an abundance of caution given the continuing lack of visibility.
Notably we move most of our business to build to order during the quarter and are continuing to operate this way.
However, the downside to our conservative approach is our ability to respond to short lead time orders is very limited.
Overall, we are going to continue to operate and plan for challenging conditions going forward given the uncertain environment.
Turning to capital allocation in the quarter, we paid our common stockholders $1.3 billion cash dividends, we also paid $219 million in withholding taxes due to.
Investing of employee equity, resulting in the elimination of approximately 900000 Avi Geo shares we ended the quarter with 402 million outstanding common shares and 452 million fully diluted shares note that we expect the fully diluted share count the stayed at 452 million in Q3.
On the financing and investing front, we de risk our balance sheet with over $18 billion of debt refinancing, including 2 billion of commercial paper.
This allowed us to push out average debt maturities. The six years from four years or average cost of debt increased by just above 50 basis points. Note. These figures are inclusive of the 8 billion financing and $3.8 billion 3.9 billion excuse me exchange offering that we executed in the first month of our third fiscal quarter.
All told we ended the quarter with 9.2 billion of cash and currently have $14.2 billion liquidity, including EUR 5 billion revolver.
No we did draw down 3 billion on our revolver earlier in the quarter all of which we have repaid as part of our refinancing activity. We ended the quarter with 45.8 billion of total debt of which approximately 800 million.
Short term.
In closing given our strong free cash flow generation healthy balance sheet and enhance liquidity position, we remain committed to maintaining our dividend while we navigate this uncertain environment.
That concludes my prepared remarks during the Q and a portion of today's call. Please limit yourselves to one question. Each so we can accommodate as many analysts as possible operator, please open the call for questions.
Thank you, saying again to ask a question you will need to press star one on your touched on telephone to withdraw your question press the pound cake.
Our first question.
Comes from a line of does that ARIA of Bank of America. Your line is open.
Alright, Thanks for taking my question how the question is on wireless.
Starting early you see some of that growth in Q see from a seasonal perspective, and then a larger growth. Thank you for.
This time, you're saying, it's going to be shifted by quarter and then I think in the passion Walter mentioned strong I think 30% kind of content growth when it comes to Fiveg. So the question is how should we think about the wireless recovery in Q4, it and if you could help us kind of a line, but then it can be appear.
Tony.
This year on year, just give us some more color around how we should think about the wireless.
Spectra recovery into Q4, thank you.
I'll answer it this way of event.
With that we're definitely as you know and we reaching rejoined flying through in your question.
We're designing.
Obviously, we in dose flagship big flagship phones in a large north American OEM phone maker Wayne. That's all question. The question is the timing.
And you're right.
In the past years seasonally the business seasonal and the trough.
Of every fiscal year is has been Q2.
We believe because of product cycle delays the trough for our fiscal year will be Q3.
This this coming quarter.
And.
And Thats why we reflected in our forecast that's reflected in a number aim the way where we are forecast guiding Q3.
Nothing has changed in terms of design nothing has changed in terms of the content, you indicated and and you're right. The content has been up for Fiveg for.
Over 30% of way over 30% more.
More closer to 40% from where we were lost here.
Just a timing.
When we have we're guiding Q3, and I don't mean to be route, but we're not guiding Q4 at this point.
Thank you. Our next question comes from Craig Hettenbach of Morgan Stanley. Your line is open.
Thank you have just a question on software with CA and now Symantec just wanted to ask about how you. How the strategy is really taking hold in particular, how these businesses are performing today versus.
You are doing due diligence and ahead of the deals closing just kind of what you're seeing in this business in anything incremental would be helpful.
Well very good question. So let me spend a few minutes to.
Respond to that and give you a little more color, we now at CA under our belt and see a comprises.
Mainframe and.
Distribute that software as well, especially on a whole range from debt faults to business operation platform.
And then sort the only given that we have almost a year and a half of see another under our belt, we're very very pleased with that acquisition.
Yeah.
Performance financial performance.
All CA has exceeded even our regional plan when we did the deal.
18 months ago.
And it's evidence in the sense that as I say.
Able to expand and grow our bookings.
By focusing on the largest enterprises.
But who who buying which by a lot of this software.
Out there in the world and as I indicated in my prepared remarks, we have been successful in selling more capacity mall adjacent products to this large enterprises, which have enable us to both.
And to expand bookings in this call accounts.
Over 20%.
Annually.
Over the past 18 months and so that to US has been a great success, we're trying to do the same.
We cement that same playful the same focus on the call customers, who happens to be very similar set of call customers with two quarters I know about now and we are quite.
Please with the way this thing has been known.
Thank you. Our next question comes from John Pitzer of Credit Suisse.
I am is open.
Yeah. Good afternoon, guys. Thanks for me ask questions pockets wondering about your comments about some of the supply constraints you saw in the fiscal second quarter and expect to see in the fiscal third quarter is there anyway to quantify the revenue impact and I guess, specifically why I'm asking while the sequential growth in network up 11 in the fiscal second quarter is solid at least.
Yeah, our math on a year over year basis, it's it's only up about kind of mid to high teens, which is kind of significantly underperforming a lot of the other cloud semi guys that have reported its I'm, just trying to square that circle and well the supply constraints more dominated in a certain part of the business.
Yes, you're right, we sell a fairly broad.
Range of products, even into data centers and as I indicated we sell known networking products switching we we also sell no server storage combo components.
Server storage connectivity and we also sell.
Some of this components into hard drives that goes into those near line cloud data centers.
It's always a broad diversity and the impact the challenges since constraints on the supply chain cuts.
Across some of this products non all non all consistently.
And the but believe but we basically see very very strong demand and our challenge is to be able to opt in mind.
How we met our supplying in those situations.
Very Fortunately now view.
Our products are very strong franchises in your own rights and so I would say, we see our customers.
Uh-huh very very willing enable administrations too.
To work with us as we work through our supply chain challenges.
In other words, the demand has not been seem to be perishable.
Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is open.
Hi, guys. Thanks for let me ask a question as well I want to piggyback off John's question, and maybe look a little further forward on the supply side with the constraint hockey you mentioned that that was going to be a limitation in third quarter and also could even go into the fourth quarter is there specifics of it enough the away from wireless that if you're pushing out the wireless business in your.
Still shortage short of supply that when that wireless business comes back are you going to have even bigger problems and have to make sacrifices elsewhere or those supply chains sufficiently differentiated that.
You can have the wireless I'd come back and not have to have make any sacrifices on the rest of the business. When we look into fiscal Fourq you.
Gross loans, we love your daily Youre Overanalyzing [laughter] things are improving week by week in now in some of those unique constraints. We have because they are Malaysia is gradually opening up our way how's that gradually expanding.
They have capacity, our operating capacity and so on the best capacity ESI ability to shift test.
By 52 other locations, where we have backend assembly capacity. So we're working to cost step by step increases and and well we will overtime get there and improve as we go along as I say.
We're working through Q3 now very vigorously.
And though.
Well, what Airbus Q4, when we get them at which time for sure we would have improved the situation considerably.
Thank you. Our next question comes from Harlan sur of JP Morgan Your question. Please.
Good afternoon. Thank you for taking my question you know given the sharp covidien cumulated, increasing computing data traffic I can understand the strength in the cloud data center business and obviously the requirements to add more networking capacity not sure that just dynamic actually goes away, even as global geography start to open back up and then.
Because you mentioned you know on top of that you guys are ramping Tomahawk three Joe Cole to some of your continued acceleration a six so given all of this do you see sustainability as demand for your cloud products into the second half of the year, because there seems to be a view out there that post call with 19.
Hi customers are going to take a pause in the second half of the year.
Yes, I wasn't that's an extremely good question and it's a question that we keep.
That goes far ahead constantly and the bottom line is.
Go no the answer I mean, I'll be honest revealed that you asked me that question for weeks ago, five weeks ago, I would really have high degree of doubt that you will sustain it doesn't mean I agree that it will sustain but we have been seeing right.
Up to now about 11 weeks and we track this very closely of extremely strong bookings.
And it continues as we sit here right now as the thing doesn't mean, you will sustain don't know.
We don't know the answer.
Thank you. My next question comes from Stacy Rasgon Bernstein Research your line is open.
Hi, guys. Thanks for taking my question I wanted to go back to wireless in the press release use the word expected substantial reset so does that means that the products delay was expected always unexpected a reference to the semi custom business that we knew was rolling off that you told US a couple of quarters ago. I think is going from 1.1 billion last year like five.
On the new even this year.
And more generally two quarters ago, you gave some wireless growth targets for the I think it was down about 10% the full year I assume you're tracking below that now given what's going on but can you give us some order of magnitude idea of how the wireless business is actually tracking leno versus the color that you had given us two quarters ago for what to expect business.
Thanks.
This is Tom I think there's there's no correlation between what we talked about earlier this year and where we are today the.
The reality is what we see is contents of this talk talked about.
40%.
There's been a shift in terms of when product is going to.
Be delivered there are some supply chain constraints of course on top of that so when you put that altogether comparing anything what we talked about I think two quarters ago is difficult and the key point as we remain very much on track.
From a from a product road map standpoint, and from a content standpoint, consistent we talked about in the past my thing.
That bodes well obviously for later this year, but also in the future.
Thank you. Our next question comes from Blayne Curtis of Barclays. Your question. Please.
Thanks for your question it new just follow up on wireless Theres. One understanding you said 30, almost 40% content gains fiveg, assuming you're talking just stay there and that's just some portion of the mix and then.
So I'm assuming that that will slow in model next couple of years. Maybe you can just gives a perspective on Wi Fi as well as kind of composite content story of next couple of years model.
Sure.
Well.
I assume your question is more on content.
Yes.
Got it.
No Blaine I think I think first of all on the content side. It's it's inclusive of all of our products in that area. So it's not just RF, but it's also custom and it's why fly.
And so I think what you're referring to is what's the mix of fiveg versus non fiveg phones that how does that play out over time I think what we've talked about in the past is going to take several years for that to transition obviously, we don't control that.
But thats our expectation, we talked about the growth rates of wireless overtime.
Over the next several years being high single digits, that's what ties into the content growth plus the expectations could take several years ago of Fiveg.
Thank you. My next question comes from Timothy Arcuri of GBS. Your line is open.
Hi, Thanks, I guess I had a question on just big picture.
And it's obviously quite odd to have such big slipped by constraints amid a global economic downturn and you're definitely talking about demand across your end markets being strong I think hockey use the word a surge.
Recently, so how do you handicap the demand strength is sellthrough sufficient to support the orders or are we maybe robbing firms in future quarters, given that the customers know that there's some supply constraints and.
Maybe running from the end of the year into 2021, I guess sort of asking if you can bridge sell in and what you're hearing from your customers on shelter. Thanks.
Well.
Let me turn to answer that first and foremost.
Most of our disorders, all this big demand constrain the talking about about.
Direct I've customer orders directly from the end users both of them.
This on a lot of it is what you all have heard about strength in the May I in the CLO Mega scale cloud vendors are buying it straying in broadband from directly from.
The telco service providers.
We are getting the most a lot of this customers we deal with directly.
And even if they go through all we end.
Not distribute those Oems, we have visit clear visibility on pools from end users, which are the customers of the Oems like the telcos the cable companies service providers. So these are all luxury direct.
And as I pointed out to if anything else distribution we are.
Bringing down.
Bookings channel inventory at distributors bank through our thumbs view of.
Managing our exposure all day and in this environment, a very strong end demand.
Last thing we need to do is get distracted with a channel inventory. So we are.
Very aggressively bringing down channel inventory buying reducing ship into distributors. Even if they are SDR resale is maintained as I mentioned, depending on end markets at a fairly decent level.
So these are coming direct and from a from customers mainly a lot of it cloud customers a bunch of probably Oems. This big Oems, who sell two large enterprises and I thing a lot of these guys are not holding aside sail away they are not pull.
Adding it fall inventory.
Doesn't mean, we know that fall say, but as far as we can see they have been deployed or they've been quickly deployed.
So we have we do not have clear sense.
On.
How much inventory are been accumulate that if any.
Thank you. Our next question comes from alignment Pierre Ferragu of New Street. Your question. Please.
Thank you. Thank you saw the here my question so.
Hockey fans to just like you saw this demand.
Oh, your direct and customers in cloud and telcos and I was wondering if you so similar trends they use trending differently.
Sure.
Good question equipment clients.
You're talking about I assume though original equipment manufacturers the Oems now most of the Oems.
Non on buying from US 10 tools as you probably.
I think I.
I see.
Implying here.
Buying a lot for enterprises loaned the traditional enterprise site.
And.
And as soon as well as we see over the past 12.
13 weeks, which represents a one quarter of bookings dressing.
Lot of their Oems are also by followed those enterprises, so I saw and on the basis that which we do skirt scrutinise, where those orders come from and a lot. This all those also fall demand from fairly large enterprise customers that these guys safe.
Not to the scale of strength.
That we see among clout mega scale players.
All from Telcos and service providers at this point, especially in broadband, but certainly we do not see weakness there.
But we've not the strength that we see in front of direct purchases from cloud guys all from telcos women.
Thank you. Our next question comes from Chris Bagley of Citigroup. Please go ahead.
Hey, guys. Thanks for.
Let me ask the question.
I guess im not try for like a series of.
So the confirmation.
On the lead time situation. So can you just talked about a little more color on lead times, what's normal and what they are now do you see them getting worse or getting further extended and then also if you could tell us what sort of percentage of revenues are impacted by the extended lead times, then do you see any signs of double ordering.
Well.
Lead times in thing has been pretty long four wall, especially in a leading edge processes. When you talk about wafer foundries, leading edge processes.
This is not something that just showed up read recently is over the past many several months lead times and the major foundries for leading edge processes has always been very very extended.
And.
As it is long lead times for not just wafers I would and also fall spus specialize material components like substrates. So for message a long lead time because of capacity limitations.
It's something like that happened more than a year ago on M. Lccs for banks in this case is wafers and all that.
I think that and I think you will improve.
It will improve and we're starting to see some improvement it will improve as times progress over this.
What really makes a difference.
Maybe from the way, we had dressing and Tom highlights that it is.
Many of our for many companies out there when they buy the.
When they try to manufacture that chips, perhaps.
Buying order those from the supplies on.
Forecasts.
I would anticipate the anticipation that their forecasts are good and they can you know and therefore have a head start on already pre building a lot of that prob inventory and therefore, they can supply but for building to forecast obviously carries with it highlights some low.
Couple of risk that you could be forecasting a demand that doesn't materialize.
And that's why the enables you to do to lead to deliver men if I can deliver the chips.
Final product in period last than a normal spend that lead time, which would be what your take to span from the beginning of a wafer to the end products.
And that is whats happening denholm lead time from beginning to end is probably longer today.
And it has been that way for months now.
It's much longer than normal lead times, many of my peer group companies in the semiconductor industry gave.
To their customers.
We have chosen now to bill the cost of risk mitigation purposely.
Bill only into orders not to forecast that.
Might be what is the biggest difference here.
Right.
That will conclude our call today. Thank you all for joining.
Good day.
[noise].