Q3 2020 Broadcom Inc Earnings Call
Ladies and got me thinking if anybody thought that's supposed to be a moment.
I didn't think it might be.
Thanks.
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Welcome to block on Inc. third quarter fiscal year, 2020, <unk> financial results Conference call.
Okay. Thank you Dr. I like to turn the call this to be introduce auto directly but that's when they can a block on <unk>.
Please go ahead.
Thank you operator, and good afternoon, everyone.
Joining me on today's call or Hock, Tan, President and CEO, and Tom crowd, Chief Financial Officer abroad.
After the market close brought on distributed a press release and financial table, describing our financial performance.
For the third quarter fiscal year 2020, if you do not receive a copy you may obtain information from the Investor section a broadcoms website I brought home dotcom.
This conference is being webcast live and a recording will be available via telephone play back for one week. He will also be archives in the Investor section of our website I brought mom dotcom.
During the prepared comments hakan, Tom will be providing details of our third quarter fiscal year 2020 result.
I guess for our fourth quarter as old commentary regarding the business environment.
Well take questions. After the end of our prepared comments.
Please refer to our press release today at our recent filings with the I see see for information on the specific risk factors that could cause our actual results could differ materially from the forward looking statements made on this call.
In addition to U.S. GAAP reporting Broadcom report certain financial measures on a non-GAAP basis.
A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today's press release.
Comments made during today's call will primarily refer to our non-GAAP financial results.
With that I'll now turn the call over the hot.
Thank you be.
Thank you everyone for joining us good day.
I have to say that the strength.
Got it wrong and diversified portfolio of leadership technology franchise has led to record.
Third quarter revenue fell broadcom despite.
Deep unfold and time, we continue to all Brady.
We remain well position to address the work from home environment.
Specially with many of our networking and broadband product in the cloud and telcos.
In addition.
We expect to foods gone from benefiting.
From the transition to Fiveg.
And you brought up rents later this year.
Well they continue to be.
So in the parts all got business linked to end up right.
This is someone said by the highly recurring revenue, okay infrastructure software divisions.
So as a result.
We remain confident in the strategy, we have lead out over the past several years.
Delivery.
Sustainable revenue and significant cash flow margins, while remaining focused on total shareholder return.
Let me now provides further detail.
Oh, no third quarter results.
We delivered net revenue of $5.8 billion.
Above the midpoint know about guidance and up 1% sequentially.
And Sixtyl, saying, yeah when you.
Semiconductor solutions revenue was 4.2 billion declining BOPUS, saying, yeah yeah.
Infrastructure software revenue was 1.6 billion up 41% year on year, which of course.
Does include the contribution from some and thing in 2020.
Nothing but semiconductors.
Outside of semiconductor solutions segment was up 5% sequentially.
Even by continued strength in networking and broadband.
And then working with 9% sequentially due to can you help feed demand from a club customers as we began to ramp for next generation come along three and four I didn't train storage products.
Routing demand.
Also remains strong at Paramount goals launch I would generally cool to India age and called net book.
We expect the strength in networking.
We ethic berens.
Since the beginning of this fiscal year two so they.
In Q4, we continued demand from cloud and Bellcore's driving solid sequential growth.
Turning to broadband, which was up 7% sequentially in Q3.
We continue to see strong demand for the next generation cable modem <unk> cable DOCSIS 3.1.
Which was partially offset by a decline in the satellite the Dol.
Oh so.
We also continued to see strong adoption of white fine.
Next generation excise gateways, Intel goals and consumer.
And even new launch and the prices.
Telecom and consumer had been didn't become little each column driven by work from home environment.
But also strong Q3, we expect the strength in broadband revenue predictable.
And come down on a sequential basis by approximately 10% in Q4 keep in mind. However, this will still be up 20% on a year on year basis.
Moving on.
One last was down 4% sequentially in Q3.
You do do you expect the typical.
Bren been who shop.
This year. This is expected to result in significant uplink. However in wireless revenue of approximately 50% sequentially in Q4.
Despite these significant sequential Ram and nothing if it didn't increase all in our RF content.
We expect revenue to be roughly flat year on year into full no. This is due to fewer units.
I thought park for the next generation phone being shipped in the fourth quarter this year relative to last year.
To this product delays that been said, we currently expect Q1 revenue in wireless to be up sequentially from Q4, we've been increase in expects it union shipments of upon.
The next generation phone compared to Q1 last year.
In other words.
The long trend this year.
Thanks.
Only in Q1.
Well right, where I see that normally been completed in Q4 previous years.
In server storage connectivity, where the majority of the revenue is tied to enterprise.
Q3 was up 10% sequentially.
However.
Like the so nothing enterprise demand will likely lead resolved instead of the storage revenues declining in high single digits.
Quarter over quarter youthful.
Turning rasco industrial refills in revenue were both down 3% sequentially.
And into tree.
In Q4, so we think resales the continue to hold off however.
We are thinking the opportunity.
To further reduce our channel inventory significantly and is the result, we thank industrial revenues to be down double digits quarter over quarter in Q4.
So in summary.
Oh same semiconductor solutions segment was up 5% sequentially in Q3.
And given the continuing virtual demand in networking.
And expect that fight jeez phone rang in wireless.
We expect and me he.
Percentage sequential increase no fault fiscal quarter.
We should know on a year on year Pcs.
You fall, well moving well monk a return to growth.
Okay semiconductor segment overall.
Retreats thing, it's a key inflection point for broad gone.
Which we think.
Sustain into Q1.
Now turning to software.
Hey, what's up 6% year on year.
But sequentially bookings and I'll call accounts continues to grow double digit year on year.
And has offset the expected reduction in the services business.
The main thing was flat sequentially and contribute to over 400 million in the quarter.
So not to see a booking pent up demand thing cornerstones outgrowing offsetting the transition out of the smaller commercial accounts as we continue to rationalize the business brocade was up 3% year on year and its expected was down significantly sequentially.
Looking ahead to next quarter on a sequential basis.
We expect revenues from sea to sustain and expect the main thing that there needs to be up 4%.
When dissipate brocade revenues to be relatively flat on a sequential basis.
And it's a resolved.
Revenue from the software segment is expected to be up by low.
Digit percentage.
Quench, Italy in the fall water.
So in in summary.
We expect all fourth quarter net revenue to be $6.4 billion.
10% sequentially from Q3.
These three slate.
An approximate mid teens percentage sequential projected revenue increase in the semiconductor solutions side and a low single digit the same percentage sequential revenue increased 18 infrastructure itself.
With that I'll turn it over to Tom.
Thank you Hawk.
Ill provide some additional detail our financial performance.
First on the piano gross margins were a record 74% of revenue.
At quarter end up approximately 110 basis points from Q2.
Approximately 220 basis points year on year.
The year on year increase in software as a percentage of our overall revenues with a large part of the increase.
Operating income from continuing operations was 3.2 billion.
Presented 55% of net revenue.
Operating margins were up approximately 180 basis points quarter over quarter.
The year on year, primarily due to a decrease in operating expenses and better gross margin due to mix.
Operating expenses were 1.1 billion, which was down 25 million compared to Q2. Adjusted EBITDA was 3.3 billion and represented 57% of net revenue. This figure excludes 138 million a depreciation.
Looking at cash flow, we had record quarterly free cash flow of $3.1 billion, representing 53% of.
This is up a little more than 33% year on year.
Turning to capital allocation in the quarter.
Paid our common stockholders 1.3 billion of cash dividends. We also paid 192 million withholding taxes due on best employee equity, resulting in elimination of approximately 700000 biggio shares.
We ended the quarter with 404 million outstanding common shares and 450.
Fully diluted shares nor do we expect the fully diluted share count to stay at 451 million in Q4.
On the financing and balance sheet front, we reduced total debt by 1.9 billion.
As we discussed on our last earnings call. We executed an 8 billion dollar bond refinancing and 3.9 billion exchange offering.
Through the refinancing and liability management activities. We've undertaken this year, we've been able to push out our weighted average debt maturity to approximately six years and reduce our weighted average interest rate to approximately 3%.
All told we ended the quarter 8.9 billion, a cash and currently have 13.9 billion of liquidity, including EUR 5 billion dollar.
Revolver.
We ended the quarter with 44 billion of total debt.
Of which approximately 800 million short term.
Finally, given our strong free cash flow generation and as we look to further deleverage the balance sheet, we plan to pay down an additional $3 billion debt.
Fiscal fourth quarter.
That concludes my prepared remarks during that portion of today's call. Please limit yourselves to one question. Each so we can't accommodate as many analysts as possible.
Operator, please open up the call for questions.
Thank you.
Ladies and gentlemen, like that's a question. Please press Star then one when you touched on telephone again, if you would like asked the question. Please press Star then one.
One moment for first question.
Our first question is.
A bank of America.
Okay.
Thanks, very much actually just a quick clarification and the question codification I just wanted to make sure your outlook kind of excludes order flex.
If that any restrictions on shipment do any Chinese customers and then my real question is on Fiveg.
That's very good color on on the near term trend.
What do you have seen in the first market for Fiveg, even just shy nice the competition happened very quickly you know the majority of phones. There are no fiveg do you see back do either case for you want exposure at all so in that you know bigger percentage of the phones, you're shipping into can be a five g. So you'll see the content of benefits fostered then you might have talked.
Before thank you.
[laughter].
By the wait times My first question, Oh, <unk> I will cover run out low cost was all aspects, including wondering what your hit what you indicate that with regard to export restrictions and everything else all those are comprehend.
And as such as regards to Fiveg.
Uh huh.
We see that you know the beyond this we don't know.
<unk> you'd be talking about devices phones.
Is that that's an interesting question is very consumer driven.
And right now to be honest about this we don't know how fast the ran on Fiveg you walk I missed then what you said about China.
And understand how operators, Mike post to make that happen in terms of incentive.
A way we spend at this point or.
Oh, we are seeing the demand more coming from our OE and key strategic OEM customers.
And.
And what will be flat is that the men that has being shared with us trauma or you haven't custom.
Thank you.
Thank you.
Next question comes from Ross Seymore of Deutsche Bank. Your line is okay.
Hi, guys. Thanks for all the detail on the end markets on the semiconductor side Hock I wanted to dive a little bit into the networking portion for you said the cloud side and the telecom side is strong there's been some fear in the end market as a whole that were potentially entering a digestion phase from the cloud cited that equation and then a very recently one of your.
Pseudo competitors talked about some service provider lull in demand there as well it doesn't seem like you're seeing that is it is the end market difference in your view.
Is it weakening or not or are you just overcoming that with a company specific new product launches and ramps.
Well days, that's clearly are.
We have clearly been help might affect that a lot we aren't.
Quite a few new program you brought about next generation products I wish they are being launched and do thought leadership products as.
Hi, it's always indicated so in that sense, we stand in a fairly unique position of being able to Oh, how have those all gone to a lot of huge share in that business, but.
Based on what we're saying, we're not seeing any weakness in the CLO knowing that telcos. We are in fact couldn't seeing a continue.
During the May.
For the products will fall in networking products, even just seconds.
Thank you.
Question comes from John could sort of credit Suisse. Your line is open.
Yeah. Good afternoon Hot Thanks, Let me ask the question not for obvious reasons that investors focus a lot of attention on the wireless handset cycle and your content growth. There I'm wondering if you could spend just a few minutes talking about the lifelike six uptake you clearly new prepared comments, so that that's being a strong tailwind right now.
I understand what inning about upgrade cycle you think we're in how does your content look as we go to why five six and do you think that this work from home phenomenon.
Lets put enough attention on the consumer that there was a big installed base upgrade cycle coming or not I could you help us characterize huh.
Okay, well good yeah, that's a very interesting question because on Wi Fi six because.
With regard to wife fine.
That's a key franchise, we invest a lot of resources into say with broken by investing conservable dollars R&D dollars.
In the space.
Yes, we need.
Two areas.
Thank you as you probably know we supply a wife flying the length of leadership products.
The flagship phones.
Typically, particularly in our strategic North American know yet we provide all those wife I do to come to combo chips, which provides the late this features in bills.
And that's one area, where we had such a strong leadership position.
We also have a.
Very strong leadership position why sites like <unk> and the Korean it'll do double 11, he acts a in generation.
Gain access what what that called mentioned excise gateways basically it's almost.
Like home infrastructure.
Connectivity in the home connectivity in the offices and the prices in offices.
And connectivity that's provide that now as stuff is provide doesn't tell goals.
[laughter] bring signals bring a basically beach.
Being bring.
Data video signals into how's that into your homes and <unk> in this environment not wolf from home.
We are seeing.
Strong search of demand from health goals. So these providers.
As they expand.
This is why fly service as part of broadband due to homes.
Because those those are termination whether it is.
Oh cable.
Fiber I'll call, but DSL, Oh, very often terminates in why flying excise gateways that allows the signals to be into home.
Also we also seeing that many homes many consumers.
Themselves up grading.
What kind of what connectivity homes buying going out and buying a retail route is as we all know him why five retail relative the latest generation, which we are very well featured in.
For the older homes, and that's creating a very strong search of demand.
What I called broadband and what is a lot what a lot of it comprises wifely things.
Thank you.
Our next question comes from Craig Hettenbach of Morgan Stanley Your line is something.
Yes. Thank you hock wants to ask about the basic business in the building blocks you had there I know you've seen strong growth in compute offload. There was a story out last week, you might be working with Tesla basic design.
Just talk about the competitors trying to has benefited technology and importantly, how you allocate resources because I'm sure there might be more opportunities in terms of how you allocate.
Commit to.
But it's like basis is something we've been doing for many many years and we'd go is gone through various evolution, but.
No way and in many ways Red gone from strength to strength simply because all the breath and portfolio overall portfolio.
I P.
Calls in Silicon, obviously E cigarettes. Despite the silicon we have lot of it we have lots of intellectual property capabilities and they've been doing it for long time.
Huh.
Yeah I'll be honest.
You make a lot more money is among much most sustainable model Ronnie merchant silicon.
Dan <unk>.
It's a broader market you create products that can be more you know basis in many ways. Because you we include.
So what weve many of a merchant silicon.
So I'll switch, where they it's I'll Uh huh broadband chips, why flagships would provide SDK, we provide interface software driven mix it programmable.
Oh that gives it flexibility I think it's still a very cool part of a business and we do very well by it.
And it's a business, though we see that has spoken limitations.
Thank you. Our next question comes from safety record and I Bernstein Research. Your line is open.
Hi, guys. Thanks for taking my question I wanted to ask about lead times I know you talked a lot about supply constraints last quarter constraints that were potentially extending into the second half can you give us some feeling of where your lead times were maybe entering the quarter and now what are some exiting the quarter have been coming in and what's the stayed about the supply constraints.
Good question, and especially follow up following up from our <unk> last earnings call three months ago in the midst of course didnt like in rent a.
Situation at that time, SVR feel by the way, but it's you know pre Kobin nice thing as we get going as we go out into fiscal 20.
And the semiconductor industry starts to improve.
We had indicated and you all are but there was something called strays, a supply chain constraints, particularly in regard to wafers, but especially leading edge wafers.
Leaving no.
Most advanced node, leading edge wafers and even then.
Upstream.
The piccolo substrates that needed to package or semiconductors.
Kobin I think shows up just creates a layer of complexity on supply chain and the reason was as we indicated three months ago, Oh, depending on where you all.
Outflows packed away factories are especially in Asia parts of Asia.
Face situation also lockdowns.
Operating on a under capacity and we face that we face that no for several months.
Dan has normalized somewhat.
Themselves the backend way, we had passed assemblies factories that a lot that were locked down or running below capacity. Most of that has been resolved having said that.
The constrain on a supply chain constrain away from.
It's substrates.
Continue.
And that's what we still face today.
And so lead to be honest I'll lead times I feel very extended.
Based on the technology nodes and but the good product.
Dan or we produce and sell and given the kind of products we do.
We see some of that constraint.
And I've been doing we could ship mall in Q3.
He's presque on screens will not as type.
Thank you.
Our next question comes from Hollister of Jpmorgan. Your line is open.
Good afternoon, congratulation on a solid execution strong free cash flow if I look at the free cash flow for the first nine months into fiscal year in your EBITDA guidance for Q4, So that's what the envelope I'm coming up less free cash flow growing year over year to around 11 in the half billion dollars for this fiscal year, which we didn't.
But the team should be in a position to raise the dividend Tas niece $14 are probably more come December of this year number one is I am I in the ballpark in Tom anything that we should be aware of in terms of working capital or collections that could impact a normalized free cash flow this fiscal quarter.
No I think your your math is it's fairly spot on I think we clearly are going to assess the dividend to be ended the year, but keep in mind, we aren't a recession, we still dealing with coded we've got an election coming.
And so I think we want to wait and obviously until we get to the end of the year talked in the board.
Look at the outlook for for 21.
Before we jumped any conclusions, but you're right I mean, our capital allocation policy is allocated approximately half of our free cash flow back to shareholders in the form of the dividends. We've had in place now for several years, we think thats the right approach.
We're going to continue to take the other 50% manage the balance sheet. As we are this year, we pay down a considerable amount of debt by the how this year, you know $5 billion, which were happy with the balance sheets in a very good places we exit fiscal 2000, and then you know we're back to sort of I think a normal.
Behavior in terms of looking at how to drive towards shareholder return above and beyond the dividends allocating.
Capital, either M&A and order or to buybacks and so we'll address you know the dividend question as we always do with the ended the fiscal year, but look forward to executing this quarter posting you know results and then having that discussion.
Thank you next question comes into she are hard at Goldman Sachs Goldman Sachs. Your line is open.
Hi, guys. Thanks, so much for taking the question I wanted to ask about margins long term I'm sure. Your aspirations, specifically, you're clearly executing really really well in the near term, but at the gross margin level as well the operating margin level, Tom I guess historically you've talked about.
Product mix and business picks being the key driver for gross margins is that still the case or are there specific levers that you can pull to potentially improved gross margins further I guess more importantly, how should we think about a go forward opex leverage given the current mix between some even software. Thank you.
Let me think the first spot bummed and give you a second but as it put in software.
On semiconductors, particularly.
And this is long Oh philosophy I'll just on a model that we just coming out with its always been day its nature Oh.
Thank knowledge GE and nature of the semiconductor technology markets.
As as you know we have a broad portfolio this franchise leadership products.
And we come out with them come up with next generation products in the very steady cadence product lifecycle for instance in wireless I'll products come out every 12 18 months and your generation of products you know saw networking two three years storage.
Full five years industrial anywhere from fall to say eight years, but it comes home and that's why we put into R&D to make sure product.
Great value for customers, each new generation, adding more value and weve each generation that we add value.
We have the opportunity to extract at ratchet up the valley.
Well financial value for delivering on this much better higher performance product, it's a natural cycle and so with every new generation.
Your margins improve.
Being abolish with a range of about 16 17.
Range of products in various end markets with different product cycles, you do the go through that model what we've seen.
Empirically over the last 10 years.
The gross margin of this mix of products rules naturally expands naturally 5200 basis points each year.
I come through the nature of the business.
Yeah. So I think when you take that you look at and we highlighted in the prepared remarks, the semiconductor business, turning the corner and now returning to growth, which I think is important.
You layer in increasing diversification from software in the scale that affords us and of course the margins it brings especially with the synergies on the go to market that we're driving.
Thank you know over over the horizon here I think we see a path frankly to do to 60% EBITDA margins I think thats. The next stop but I think Hawks right. You know we have consistently over many many years by driving more content increase.
Through R&D investments been able to drive margins up incrementally and I will contribute to the overall success.
Of the margin increases that we see coming.
Thank you. Our next question comes on Blayne Curtis of Barclays. Your line is open.
Hey, guys. Thanks for that question for asking the networking segment and thanks for all the detail on that segment I guess, if you put all that in there it looks like networking growth would actually accelerate I mean at double digit. So I'm just kind of curious you look three segment.
Service Rider data center and enterprise some comments I know your product cycles that are driving a lot of the growth, but just kind of curious your your thoughts on the market embedded in that guidance.
Yeah. So when I mean, I think I've talked about it but I think it's clear cloud continues to grow for us.
I think we've a very strong product cycle, and telcos, which probably gets.
Underappreciated, especially in the routing side and then look we have a lot of different angles into enterprise, obviously with the software portfolio with brocade on the fiber channel side things, we do within the server market I mean, it's it's clear that slowing down we saw that we ended the third quarter, we're seeing that as we get into the end of the year.
There's some some indication given the lead times, we have to that you've got stabilizing at these lower levels and it's a little bit too early to tell you know what's going to happen as we go into the you know into the beginning of the calendar year, but it's it's obvious to us at least right now its cloud and telco driving that growth.
Thank you. Our next question comes from harsh Kumar of Piper family. Your line is open.
Yeah, Hey, guys first of all congratulations on strong execution Hock I wanted to ask about when I look at your software businesses I see sometimes bookings in double digits, but the revenue growth is a lot lower than that and I wanted to understand that mechanism why the revenues are always lagging.
Order growth rate and then are you done with the accretion of customers in Symantec allegedly expected timeframe for that.
Okay.
The way you will end the first part of that question, it's pretty interesting yeah. That's almost the simplest way to look at it is.
We signed you know software contracts.
Whether it's on subscription or even on a license and maintenance fall three than country. Three years. So at any point in time and any one year, you're really seeing only roughly one third of our outstanding that contract backlog coming up for renewal.
And so we and so as true so for those one third contract you look we are seeing that double digit booking growth as we renewed those contract bookings being referred to as renewals of this contract. So when you take that bond and keep in mind you still.
The other two thirds bank loans that continues at we recognize revenue ratably.
Very much. So every contract we sign up every new will we raised the <unk>, we recognize revenue ratably over three years. So you have to do that in and that's why what happens is that double digit bookings rate increase translates when these dilute that we get the rest of the backlog that is chugging along.
Oh stated leave fled to effectively a mid single digit growth rate in revenue.
That's the way the math works.
And we've been able to do that very very well and especially in our call income.
Thank you next question comes from Atlas Nighter charity equity you are trying to equity line is open.
Thanks.
Obviously on the side you release largest customer, but maybe we can talk about longer term.
So sequel customers largest initiative is to do there won't be spend modem and I mean, that's a job onto itself you interface. The entire RF front end has usually be designed by.
Somebody other than the baseband guys. So that's the case for all baseband providers now in fact, most they spend for Mediatek the Qualcomm.
Turning to.
Income and the large or semi companies to do the actual architecture design itself. Since you are strategic partner for the largest portion of that is it fair to assume that.
You know.
Really involved in this it does that change the nature of the relationship in terms of.
Margins.
Because the once.
Company history event for your largest customers and get it works.
So how does this affect the margin profile and more revenue growth.
Over the next two three years.
Carlos Thanks.
And.
I Love. The fact that you know so much about this business and equally you will know I can comment on that.
Sorry.
Thank you.
Our next question comes from see them use of Evercore. Your line is open.
Yeah. Good afternoon. Thank you for taking the question I guess, just a a follow up you talked about extended lead times, you talked about wireless growing into fiscal Q1.
And you also highlighted with semiconductor solutions sustaining into Q1. So you know as we put all that together and obvious strength.
Particularly the networking side is it fair to say that semiconductor should grow again into January.
Yes, Yeah, I mean, I think what we what we wanted to highlight.
Was given the the shift in the product launch for.
The big phone customer we wanted to give some color on on how that translates into Q1 since that doesn't happen very often I got going to call. It having a couple of years ago. It doesn't happen very often in I think we also wanted to be clear given the lead times that we do have reason of visibility, especially into some of the growth areas like networking that we talked about and so.
We do feel we do feel comfortable because the first quarter in awhile, where we're certainly got there's going to be up year over year and as you look into Q1, we feel comfortable that we can sustain that.
Thank you I would now I turn the call back over to Mr. settle for any closing remarks.
Thank you operator.
Clothing, we did wants to know that hock, we'll be presenting virtually I think Deutsche Bank Technology conference on.
On Tuesday September 15.
And with that that will conclude our earnings call today and we thank you all for joining.
Operator, you may end the call.
Thank you ladies and gentlemen does that include today's conference. Thank you participating you may disconnect have a great.
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