Company Overview
Broadcom Limited (NASDAQ: AVGO) is a designer, developer, and global supplier of semiconductor devices, with a focus on complex digital and mixed signal complementary metal oxides semiconductor (CMOS) devices and analog III-V based products. The company’s end products are used in a variety of applications, including data center networking, home connectivity, set-top boxes, broadband access, telecommunications equipment, smartphones, servers and storage systems, factory automation, power generation, alternative energy systems, and electronic displays.
Broadcom is the successor company of the business combination between Avago Technologies Limited and Broadcom corporation completed on February 1, 2016. The company is headquartered in Singapore.
Products and Services
Broadcom consists of four reportable segments which are detailed below:
Wired Infrastructure primarily comprises semiconductor products that are designed for set-top boxes and broadband access. Within this segment, the company also offers semiconductors for ethernet switching and routing, data center and enterprise networking, and physical layer devices.
Wireless Communications consists of products designed for smartphone and tablets. These include radio frequency (RF) semiconductor devices that selectively filter and amplify RF signals, connectivity solutions that support Wi-Fi and Bluetooth functionality, and custom touch controllers that process signals from touch screens.
Enterprise Storage includes products that enable the secure movement of digital data to and from host machines such as servers, personal computers, and storage systems to underlying hard disk drives (HDDs) and solid-state drives (SSDs). These include controllers and adapters for server and storage original equipment manufacturers (OEMs) and fibre channel products for networks dedicated to storage traffic.
Industrial & Other consists of a variety of products sold to the general industrial and automotive markets. It also houses Broadcom’s intellectual property revenues. The primary offerings are optical isolators (which provide electrical insulation for systems that are susceptible to interference), industrial fiber optics, motion encoders, and LEDs.
For the fiscal year ended October 30, 2016, Broadcom the Wired Infrastructure segment contributed 50 percent of net revenue. Wireless Communications, Enterprise Storage, and Industrial & Other contributed 28 percent, 17 percent, and 5 percent, respectively.
As discussed above, Broadcom’s customers consist of OEMs or their contract manufacturers. During the 2016 fiscal year, the company’s largest customer was Foxconn Technology Group, which accounted for 14 percent of net revenue. The company also noted that the company’s 10 largest customers collectively accounted for 50 percent of net revenue.
Market Overview
The global semiconductor market is highly competitive. Participants range from international companies offering a wide range of products to smaller firms that are highly specialized. The prevailing trend within the industry has been consolidation (through mergers/acquisitions or collaboration agreements), and the company expects this to continue. Since 2014, more than $100 billion worth of transactions have been completed.
Recent Developments
- On November 17, 2017, Broadcom announced that it had completed the acquisition of Brocade Communication Systems announced in November 2016. The company paid $12.75 per share for Brocade, which represented a nearly 50 percent premium to Brocade’s closing price shortly before the transaction was announced. Including the assumption of $400 million of net debt, the transaction was valued at $5.9 billion. Brocade’s assets are expected to help Broadcom expand the Enterprise Storage segment.
- On November 6, 2017, Broadcom made an unsolicited bid to acquire Qualcomm for $70 per share, comprised of $60 in cash and $10 in stock. The offer represents a 28 percent premium to Qualcomm’s closing price of $54.84 prior to media reports of the deal circulated. If completed, it would be the largest ever acquisition of a technology company. It should be noted that Qualcomm is currently in the process of acquiring rival NXP Semiconductors, and Broadcom intends to pursue the deal whether or not Qualcomm completes the NXP transaction.
- On November 2, 2017, the company announced its intention to redomicile in the United States. Broadcom also stated that the redomiciliation will occur whether or not corporate tax reforms currently being considered by Congress are passed; however, the company also noted that the timing and final form of the plan will be determined by the outcome of this legislation.
Third Quarter Earnings Review
Revenue for the third quarter ended July 30, 2017, increased seven percent year-over-year to $4.5 billion. The most robust growth came from the Enterprise Storage and Wireless Communication segments, totaling 39 percent and 27 percent, respectively. Wired Infrastructure remained the company’s largest segment, generating 50 percent of net revenue. Gross margin increased 120 basis points year-over-year to 48 percent.
Broadcom’s operating expenses totaled $1.5 billion, flat from the immediately preceding quarter but 27 percent lower than the same period one year ago. Accordingly, the company’s net income was $481 million ($1.14 per share), as compared to a net loss of $298 million ($0.75 per share) in the fiscal third quarter of 2016.
Cash flows from operating activities for the third quarter totaled $1.7 billion, up from $963 million in the same period one year ago. At July 30, 2017, the company reported a cash balance of $5.2 billion and net working capital of long-term debt of $7.7 billion. Broadcom’s listed long-term debt of $13.6 billion and shareholders’ equity of $22.7 billion, yielding a debt-to-equity ratio of 0.6.
Stock Influences
- Better than expected performance from the Brocade unit and Enterprise Storage Segment;
- Further developments regarding the bid for Qualcomm;
- Further developments regarding Qualcomm’s acquisition of NXP; and
- Corporate tax reform legislation.
Risk Factors
- The majority of the company’s sales come from a small number of customers;
- The company depends on contract manufacturing and supply chain disruptions could have a material impact on the company’s business;
- The company could incur significant expenses defending its intellectual property; and
- The semiconductor industry is highly cyclical and subject to significant downturns.
Stock Performance
On November 27, 2017, shares of Broadcom were at $284.47, up on the day, yielding a market capitalization of $115 billion. The stock has climbed steadily since it began trading early last year. Due to the recent announcements regarding redomiciliation and the Qualcomm bid, the stock is up more than 15 percent in the past month. The stock pays a quarterly dividend of $1.02 per share, which translates to a current yield of 1.4 percent.
| Analyst | Firm | Rating | Price Target | Date |
| Srini Pajjuri | Macquarie | Outperform | $300 | 11/17/2017 |
| Amit Daryanani | RBC | Top Pick | $315 | 11/17/2017 |
Summary
With the Brocade acquisition now completed, Broadcom is continuing on the consolidation theme and turning its focus to Qualcomm. Management for QCOM has already rejected the offer, but many analysts believe there is room to negotiate further. A proxy battle is also possible. If consummated (along with Qualcomm’s pending acquisition of NXP), the deal would make Broadcom the third-largest chipmaker behind Intel and Samsung and rearrange the competitive landscape for semiconductors.
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