Broadcom's (AVGO) cautious wireless chip sales outlook is overshadowing a dividend hike and more upbeat views for the company's networking chip and enterprise software businesses, for now.
After the bell on Thursday, Broadcom reported October quarter results that were nearly in-line with expectations: Revenue of $5.78 billion (up 6% annually, aided by the Nov. 2018 CA Technologies acquisition) and non-GAAP EPS of $5.39 versus consensus estimates of $5.77 billion and $5.39.
Hock Tan's company also guided for fiscal 2020 (ends in Oct. 2020) revenue of $25 billion, plus or minus $500 million. Officially, that's above a $23.9 billion consensus. However, it looks as if some analyst estimates weren't yet adjusted to account for Broadcom's $10.7 billion deal to buy Symantec's enterprise security business, which closed in early November.
Broadcom sess the Symantec business contributing $1.8 billion worth of fiscal 2020 revenue. For comparison, Broadcom's fiscal 2020 revenue consensus had risen by less than $300 million since the Symantec deal closed.
Also: Broadcom hiked its quarterly dividend by 23% to $3.25 per share. At current levels, that's good for a 4% forward yield.
Though it initially moved higher after its earnings report was released, Broadcom's stock finished after-hours trading down 1.5% to $323.02, with shares dipping in response to earnings call commentary about Broadcom's wireless chip business.
Broadcom's Fiscal 2020 Expectations
On the call, CFO Tom Krause said Broadcom expects its giant Semiconductor Solutions segment, which posted fiscal 2019 revenue of $17.4 billion amid a chip industry downturn, lower iPhone-related sales and Huawei export restrictions, to post fiscal 2020 revenue of about $18 billion.
Broadcom's Infrastructure Software segment, which posted fiscal 2019 revenue of $5.2 billion, is expected to produce fiscal 2020 revenue of more than $7 billion thanks to the Symantec deal.
Tan and Krause indicated the segment's Brocade storage switching business remains under pressure, but also suggested that CA Technologies enterprise software business is doing well, as Broadcom pushes ahead with a strategy of focusing on growing sales to CA's biggest customers and de-emphasizing smaller accounts. Collectively, CA and Brocade revenue is expected to be flat to up slightly.
Broadcom's operating margin, which was 52.8% in fiscal 2019, is expected to be "relatively flat" in fiscal 2020 amid several one-time expenses and spending increases. However, Broadcom is aiming for it to grow to 55% by fiscal 2022.
'Mixed-Signal Custom' Pressures
The Semiconductor Solutions segment's "core" businesses, which cover its networking, broadband and storage chip offerings, are expected to see revenue grow 7% to about $12 billion. And its industrial chip sales are forecast to stabilize following a rough fiscal 2019 and total about $1 billion.
However, wireless chip sales, the lion's share of which are believed to involve Apple (AAPL) and Samsung, are expected to drop. Though RF chip sales (set to benefit from 5G iPhone launches) are expected to grow by a high-single digit percentage from a fiscal 2019 level of $2.2 billion, Wi-Fi/Bluetooth combo chip sales are expected to drop by a low-single digit percentage from a fiscal 2019 level of $2.2 billion, as the ASP boost provided by Apple and Samsung's adoption of Wi-Fi 6 radios is offset by the phasing out of Broadcom's "non-core, lower-margin, legacy Wi-Fi business."
More importantly, Broadcom's "mixed-signal custom" chip business, which was indicated to "almost exclusively" involve Apple (like most other Apple suppliers, Broadcom almost never mentions Apple by name), is expected to see revenue drop to less than $500 million from a fiscal 2019 level of $1.1 billion. Krause attributed the guidance to "a change in architecture" at Apple, as well as Broadcom's "decision to reduce our investment in this area and focus our engineering resources" on "core" chip businesses.
The mixed-signal custom outlook comes after the iPhone 11 and 11 Pro launched without 3D Touch support, and after an iPhone 11 Pro teardown turned up an STMicroelectronics (STM) wireless charging chip. Broadcom supplied both a wireless charging chip and a 3D Touch controller chip for Apple's 2018 iPhones.
Tan said on the call that networking was the only Broadcom chip business to see positive annual growth last quarter. Krause added that the business' "custom silicon" sales -- they include custom ASICs developed with cloud giants, such as Google's Tensor Processing Units -- rose sequentially.
Broadcom also forecast fiscal 2020 would be a good year for the networking chip business. Though cautious about enterprise data center spending (clearly under pressure right now), Tan joined many others in suggesting cloud capital spending is picking up, and forecast upcoming 200-gig and 400-gig network upgrades would give Broadcom's large Ethernet switching chip business a lift.
When asked about Cisco Systems' (CSCO) plans (announced on Wednesday) to start selling switching/routing processors a la carte, Tan was diplomatic, calling Cisco "one of our very good customers" and declaring its move to be a validation of an industry trend towards disaggregating networking silicon and software. But he also insisted that Broadcom's existing Jericho switch/router processors and Tomahawk switching chips are quite competitive with the first Cisco processor to be sold to third parties (the Silicon One Q100).
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long AAPL and CSCO.