What to Watch When Broadcom Reports Earnings

By Markets Fool.com

Image Source: Broadcom.

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Semiconductor company Broadcom (NASDAQ: AVGO) is set to report its fiscal third-quarter results after the market close on Thursday, Sept. 1. Revenue is expected to more than double year over year thanks to the merger of Avago and Broadcom, which closed earlier this year. The company is exposed to the slowing smartphone market, selling a variety of chips that find their way into mobile devices. But Broadcom is well diversified, and the company expects another strong quarter.

The new Broadcom

Following the merger with Avago, Broadcom competes in a wide variety of areas. The company sells RF frequency and wireless combo chips that are used in smartphones and other mobile devices, networking chips found in data centers, chips used in enterprise storage products, and chips that power broadband devices like modems, to name just a few.

During the second quarter, here's how each of Broadcom's four segments contributed to the company's revenue:

Segment

Q2 Revenue

Wired infrastructure

$2,060 million

Wireless communications

$792 million

Enterprise storage

$525 million

Industrial and other

$164 million

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Data Source: Broadcom Q2 earnings report.

During the second quarter of 2015, prior to the Avago merger, wired infrastructure accounted for just $382 million of revenue. That segment is now overwhelmingly the largest for Broadcom.

A strong quarter expected

While the merger throws off year-over-year comparisons and pollutes Broadcom's GAAP figures with one-time merger-related costs, the company expects to report a solid third quarter. "We are expecting a robust third quarter, led by strong growth in wireless revenue, and continued strength in wired networking, and remain confident in our ability to leverage earnings growth as we work toward full integration and achievement of our operating model," said CEO Hock Tan in the company's second-quarter earnings release.

Broadcom expects to produce third-quarter non-GAAP revenue of $3.75 billion, up about 5% sequentially. Non-GAAP gross margin is expected to be 60%, plus or minus 1%, with non-GAAP operating expenses of $809 million expected. If Broadcom hits its guidance, investors can expect non-GAAP EPS of around $2.76 per share, right in line with the average analyst estimate of $2.77 per share.

What to watch

One weak spot for Broadcom during the second quarter was the enterprise storage segment. Sales slumped 23% sequentially, driven by weak demand for hard disk drives, as well as seasonal weakness in the enterprise storage connectivity market. Broadcom expects sales to slide sequentially again during the third quarter, this time by a low-single-digit percentage, before picking back up again in the fourth quarter. The company also expects to continue to gain share in its hard drive business.

The wireless business, which is dependent on popular mobile devices like the iPhone, is expected to grow during the third quarter, driven by new device launches later this year. Apple's much-anticipated iPhone 7, expected to be announced in September, will be a major driver of Broadcom's wireless performance. Tan stated during the company's second-quarter conference call that a new device from a major North American smartphone customer, presumed to be the iPhone 7, will feature a substantial increase in RF content, which will help drive sequential wireless growth in the mid-20% range.

Investors will have a lot to process when Broadcom reports on Thursday, and ongoing charges related to the merger will make the company's numbers more complicated. Backing out all of the noise, Broadcom expects to grow revenue and earnings sequentially, driven by steady performance in its networking and broadband businesses and a resurgence in wireless revenue.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Broadcom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.