© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day ladies and gentlemen and welcome to the Q2 2019 Broadcom Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to introduce your host for today's call, Ms. Beatrice Russotto, Director, Investor Relations. Ms. Russotto, you may begin.
Thank you, operator and good afternoon everyone. Joining me today are Hock Tan, President and CEO; and Tom Krause, Chief Financial Officer of Broadcom. After the market closed today, Broadcom distributed a press release and financial table describing our financial performance for the second quarter of fiscal year 2019. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom's website at broadcom.com.
This conference call is being webcast live and a recording will be available via telephone playback for one week. It will also be archived in the Investors section of our website at broadcom.com.
During the prepared comments section of this call, Hock and Tom will be providing details of our second quarter fiscal year 2019 results, guidance for fiscal year 2019, and commentary regarding the business environment. We will take questions after the end of our prepared comments.
Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call.
In addition to U.S. GAAP reporting, Broadcom reports 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.
So, with that, I'll turn the call over to Hock.
Thank you, Bea, and thank you everyone for joining in today. Let me touch on the second quarter results after which I will update you on the current environment and our outlook for the second half of the year.
Looking at the second quarter just passed, it really went as planned. Networking continued to perform very well, and our broadband business started to recover. This was offset by the anticipated sharp decline in wireless and the ongoing softness in storage.
On the other hand, the infrastructure software business delivered solid topline results, benefiting from sustained enterprise demand for our mainframe and distributed software as well as SAN switching products.
The integration of CA is progressing well. Just last week, we reached a major milestone with day two, which is the integration of the CA business processes onto Broadcom's IP platform.
We remain confident that we can meet, if not exceed, the long-term revenue and profitability targets that we laid out for CA to you last year. Renewals in our CA business are strong, and the dollar commitments from our core customers continue to grow.
Now, let me address the current business environment and our outlook for the remainder of the year. We have, as I indicated, performed very much to plan in the first half of fiscal 2019. And in the second half, we had expected a recovery. However, while enterprise and mainframe software demand remained stable, particularly in North America and Europe, with respect to semiconductors, it is clear that the U.S./China trade conflict, including the Huawei export ban, is creating economic and political uncertainty and reducing visibility for our global OEM customers.
As a result, demand volatility has increased and our customers are actively reducing inventory levels to manage risks. This leads us to believe the second half of 2019 will be more in line with the first half as opposed to the previously expected recovery. We now anticipate fiscal 2019 semiconductor solutions segment revenue of $17.5 billion, which translates into a year-over-year decline in the high single-digits.
CA software continues to perform above our original expectations while SAN switching is slowing down after a very strong first half. As a result, we are maintaining our fiscal 2019 infrastructure software outlook at $5 billion.
While this scenario has been playing out, I should emphasize the fundamentals of our business remains very much intact. We continue to execute on the very rich roadmap for next-generation network switching and routing in the cloud and enterprises, including the leading-edge Trident 4 software-defined network switch just recently announced this week. We've also secured the next two generations of RF front-end at a large North American OEM, which positions us very well for the transition into 5G.
We continue to win increasing numbers of compute off-load accelerators in the hyper cloud operators across AI, video transcoding, encryption, and networking. We are pleased with the ramp of our new-generation Wi-Fi 802.11ax, otherwise called Wi-Fi 6, in enterprise gateways and carrier access [PONs][ph]. All this leaves us confident that we will able to continue to drive sustained long-term revenue growth and increasing free cash flow.
Let me now turn it over to Tom who will provide you with more color.
Thank you, Hock. Consolidated net revenue for the second quarter was $5.5 billion, a 10% increase from a year ago and EPS came in at $5.21, a 7% increase from a year ago off of a 448 million weighted average fully diluted share count. In addition, we have record free cash flow of $2.54 billion or 46% of revenue. Free cash flow grew 20% year-over-year.
The semiconductor solutions segment revenue was $4.1 billion and represented 74% of our total revenue this quarter, which was down 10% as expected year-on-year on a comparable basis. Our infrastructure software segment revenue was $1.4 billion and represented 26% of revenue.
Let me now provide additional detail on our financial performance. Operating expenses were $1.02 billion. Operating income from continuing operations was $2.95 billion and represented 53.5% of net revenue. Adjusted EBITDA was $3.11 billion and represented 56.4% of net revenue. This figure excludes $142 million of depreciation.
Receivables in the quarter decreased $193 million, and inventory decreased $40 million from the prior quarter. I would also note that we accrued $136 million of restructuring and integration expenses and made $218 million of cash restructuring and integration payments in the quarter. Finally, we spent $125 million on capital expenditures.
In the second quarter, we returned $2.4 billion to stockholders consisting of $1.1 billion in the form of cash dividends and $1.3 billion for the repurchase and elimination of 4.7 million AVGO shares. We ended the quarter with $5.3 billion of cash, $37.5 billion of total debt, 399 million outstanding shares, and 447 million fully diluted shares outstanding.
We also refinanced our $18 billion of term loans that we put in place at the beginning of fiscal 2019 to finance the CA acquisition. Via a combination of $11 billion of investment grade bonds and a new term loan, we're able to extend our average debt maturity to approximately five years and substantially reduce the quantum of debt due in any one year. As of today, our average cost of borrowing stands at approximately 3.7%.
Turning to our fiscal year 2019 guidance, as Hock discussed, we are updating our full year revenue guidance to $22.5 billion, including approximately $17.5 billion from semiconductor solutions and approximately $5 billion from infrastructure software. IP licensing is not expected to generate a material amount of revenue.
On a non-GAAP basis, operating margins are expected to be approximately 52.5%, an increase of approximately 150 basis points from our prior guidance. Net interest expense and others are expected to be approximately $1.3 billion. We do not contemplate any debt pay down in fiscal year 2019.
The tax rate is forecast to be approximately 11%. Depreciation is expected to be approximately $600 million. CapEx is expected to be approximately $500 million. As a result, free cash flow is expected to be approximately $9 billion, which takes into account projected restructuring and integration charges of approximately $1.1 billion.
Stock-based compensation expense is expected to be approximately $2.2 billion. And finally, we expect weighted average diluted share count to be 444 million for Q3 and 443 million for Q4 and this excludes any impacts from share buybacks and eliminations.
Now, on to capital allocation, our capital allocation strategy remains the same. We plan to maintain the current quarterly dividend payout of $2.65 per share throughout the year subject to quarterly Board approval, which means we plan to pay out over $4 billion in cash dividends in fiscal 2019.
In addition, we remain committed to buying back and eliminating a total $8 billion of stock in fiscal 2019. In the first half of the fiscal year, we have spent $4.8 billion for the repurchase and elimination of shares.
That concludes my prepared remarks. During the Q&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-up the call for questions.
Thank you. [Operator Instructions]
Our first question comes from Vivek Arya with Bank of America.
Thanks for taking my question. Hock, in the $2 billion or so reduction in the semiconductor outlook for the next two quarters, can you give us some sense how much of that is Huawei, how much is outside of Huawei and just any segment level impact so we can calibrate our models? Thank you.
Well, it's an interesting way to figure that out because in terms of full disclosure, Huawei represented last year about $900 million of revenues for this company by itself. But the other part of the picture I should add is that guide down that we're providing, as you put it, of $2 billion obviously extends beyond just one particular customer.
We're talking about uncertainty in our marketplace, uncertainty because of the -- of demand in the form of order reduction as the supply chain out there constricts -- compressed, so to speak.
And because we do see, to some extent, end users in the U.S., particularly North America and Europe, continuing to be there. But what we do see in between is the uncertainty of the environment has put in place a concern about placing additional orders and actively a reduction of inventory out there. Basically, compression of supply chain is what's driving this reduction more than anything else and it's broad based.
Thank you. Our next question comes from Blayne Curtis with Barclays.
Hey guys, thanks for taking my question. Maybe I could just follow-up on to that question, Hock. Just kind of curious, as you look, I mean I think markets were soft and you saw a lot of revisions last quarter. You guys kind of maintained your forecast. I'm kind of just trying to figure out when you saw this slowdown, if you can give us any idea of that.
And then if there's just any more color you can add for end market, is there any end markets that you're not seeing this weakness? And if you can point to any particular product, that would be helpful.
Well, we started seeing this softness as we -- basically, the beginning of this quarter, like Q3, very much so a dramatic reduction, and it particularly accelerated with [denial] [ph] order that was imposed on Huawei.
Thank you. Our next question comes from Harlan Sur with JPMorgan.
Good afternoon. Thanks for taking my question. On the networking side specifically, that's been a strong area for the team, growing double digits year-over-year for the past few quarters. And it's an area where you guys actually do have some pretty strong product cycles like Tomahawk 3, Jericho 2, some of the compute offload ASICs.
In the revised outlook ex-Huawei, how is the macro uncertainty impacting this segment and some of these programs? And again, ex-Huawei, would you expect the networking business to grow second half over first half?
Harlan, very good question. Our networking business, which I think is what you're referring to, continues to be a very strong business. Year-on-year, we expect our networking -- total networking business, to grow double-digits year-on-year. It's strong, particularly with new product ramps and new product cycles that we've seen both in switching, routing related to that. It is one of the brightest areas in our portfolio in this environment and continuous to be strong notwithstanding the export ban on Huawei.
Thank you. Our next question comes from Ross Seymore with Deutsche Bank.
Hi Hock, thanks for letting me ask the question. I wanted to go into the wireless side. I know you just signed a supply agreement with a large North American customer. They typically have positive second half seasonality. And most of us believe you actually were reaping in some share.
So, if I put that all into the mix, how are you getting -- especially given what you just said in networking growing double-digits, how are you getting the second half to be relatively flat with the first half? Is there some offsets in other areas or are some of our assumptions in wireless incorrect?
Well, I don't know what the assumptions are, Ross, on wireless. But networking is about really the -- is about the only area of strength in this current environment, and that's because it coincides with very strong product cycles we are seeing. In just about broadly any of the end market segments, we do not see, in terms of year-on-year, improvement from 2018.
Thank you. Our next question comes from Timothy Arcuri with UBS.
Hi. Hock, I actually just had a question about the competitive environment for your RF front-end business as we kind of move into 5G and particularly around a large modem maker now that's talking about having a complete RF package and sort of being able to sweep that in with their modem. So, can you kind of talk about the competitive environment and your position as you can get into 5G? Thanks.
That's a very interesting question. We continue to believe we are very, very strongly positioned. And it's in many ways validated by some of the data points I just mentioned. We have, by far, the best technology and products out there in RF front-end components. They're typically the filters and the integrated front-end modules. We are, by far, the furthest ahead technology-wise and in terms of capabilities. And we continue to believe we are still very much in front.
And as I said, it's been validated and continues to be validated by the value we give to our very critical customers and the fact that they continue to be very supportive of our business.
Thank you. Our next question comes from Toshiya Hari with Goldman Sachs.
Hi guys. Thanks for taking the question. I had a question on RF as well. Hock, can you remind us what kind of content growth are you expecting or assuming into the back half, both on the RF side as well as the Wi-Fi side of your business within wireless?
And then you also talked about 5G or rather how the recent win positions you well into 5G. As of today, what you know based on what you heard from your customers, what kind of content growth on the RF side are you expecting as we transition to 5G over the next couple of years? Thank you.
Thank you. Well, asking year-on-year is actually very difficult, so I appreciate you asking me what do I see over the next two, three years on content growth. And I mean the best way to describe content growth in RF, and we have seen that and we have empirical evidence of that for the last five years, even longer and not the same every year, is that, annually, we probably see in the 5% to 10% range content growth and with -- in terms of the products we ship.
Now, for the entire, I guess, our further available market, our -- yes, the further available market, it's probably a smaller growth percentage.
Thank you. Our next question comes from John Pitzer with Credit Suisse.
Yes, good afternoon guys. Hock, I just want to go back to Ross' question about the wireless guide for the balance of the year. I'm just curious, relative to 90 days ago when you guys were kind of guiding the overall semi business well above normal seasonality for the balance of the year, now you're talking about a flat half-to-half.
To what extent did your content expectations come down to the back half of the year versus just this really being a unit issue on the wireless side of the business?
Well, that's an interesting question that lays out that -- keep in mind; we're taking a very conservative stance here. And very frankly, even as we see the ramp-up and we do see the ramp-up, we are -- we've also been forecasting a fairly dramatic set of numbers before. And when you -- and that is more than offset by the fact that for the rest of the broader markets, we're just seeing a demand environment that is extremely uncertain.
Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley.
Yes, thanks. Hock, just coming back to the compute offload you talked about at hyperscale. I know a little while back, you guys talked about some initial traction in ASICs. Just wanted to get an update in terms of the breadth of that particular hyperscale is and how -- to the extent that you're extending that to multiple customers as we look forward.
Well, I have mentioned before in previous calls -- earnings calls about our focus in increasing traction in what we call compute offload engines or I call it, compute offload accelerators in multiple areas, including AI, of course, and virtualization, orchestration from the compute servers, and expanding that now to video transcoding and encryption. And we continue to see that and it is an emerging space from our perspective.
But nonetheless, it's a space that seems to be growing very steadily and continuing to trend up very significantly. And this is a space we believe at the end -- in a matter of three to five years could be a significant percentage of the total compute spend within any large scale data center.
And we're talking about potentially getting to perhaps even as high as 25% or more of total spend in the computing environment of a large scale cloud data center.
Thank you. Our next question comes from Chris Danely with Citi.
Hey thanks guys. Just looking at the overall environment, Hock, do you think your guidance incorporates the proposed next round of $300 billion in tariffs, i.e., if that thing does go through, do you still feel good about your guidance? Or do you think there could be more downside if that does go through?
I think at this point, we try to capture everything including that proposed next round into the picture. We have the belief that things are -- environment is very, very nervous. And that's why we see a very, very sharp and rapid contraction of supply chain and orders out there from our customers, especially our global OEM customers even as we believe, as I mentioned in North America and Europe, end demand hasn't reflected that. So, we are seeing a very reactive mood here. And so I got to believe that includes the sense that this $300 billion of next round of potential tariffs could be in place.
Also keep in mind, something I should add is that even as we see some -- there are two parts to this. One part is what's the impact of the Huawei ban on a company like us selling components and technology?
Well, short-term, keep in mind, we'll see a very sharp impact simply because there are no purchases allowed, and there's no obvious substitution in place from other OEMs replace -- taking over end demand, which may exist, which may continue to exist.
Give it a few months, give it six months, if those end demand still remains out there, mostly other OEMs qualified to take over those, to replace Huawei on those demand and other OEMs will come in, and those OEMs will continue to buy our products. And so we have a rebalancing and readjustment in demand from our side. But short-term, we do not expect to see that.
Thank you. Our next question comes from William Stein with SunTrust.
Great. Thanks for taking my question. On a brighter note, I'd like to ask about CA a little bit. Last quarter, Hock, I think you talked about at least one proof point with regard to sort of deeper engagements with CIOs around a deal that might involve both sides of the business. Anything similar to that? Were you seeing more proof points around traction in sort of the strategic approach in that acquisition? Thank you.
Well, yes. One of the things we are doing is -- as we said last time, is as we focus on core accounts -- as I said, these are the largest enterprises in the world who buys a lot of software infrastructure and infrastructure software.
And given the broad portfolio of products CA has that we bring to bear between mainframes, and these largest companies mostly runs a lot of mainframe capacity and distributed software infrastructure, and our ability to offer this as an enterprise and portfolio-wide transaction, we have been very, very successful in securing such enterprise-wide contracts with significant uplift in booking dollars in the form of larger amount of renewals with, right now, over 20 large accounts in the six months since we've taken over and closed on this transaction.
And we foresee that rate being even higher over the next six months. So, that's working. And that's working very well, which allows us to give you a fairly positive tone to how the CA business has been trending as far as we are concerned.
In a nutshell, and I said that earlier, the amount of dollar commitments we've been able to achieve compared to what expires has increased quite significantly.
Thank you. Our next question comes from Matt Ramsay with Cowen.
Thank you very much. Good afternoon. Hock, wanted to ask a little bit about -- obviously, we talked about the demand environment and the trade environment a bit, but I wanted to ask a little bit about the M&A environment as you see it.
Obviously, CA took the company in a little bit of a different direction, but we've seen some semiconductor mergers announced here very recently. I wonder if you might give us a little bit of a view on the M&A environment as you see it right now on the semiconductor side. Thank you.
You are saying the M&A environment in the semiconductor space? Yes. I see what you see there, which is some level of activity that seems to go on. And it's quite interesting, in a way quite encouraging, for us to see that the direction we have taken, a large part of this industry seems to be making sense to a lot of our peers, too. And from our point of view, we welcome it.
And as I've indicated before in previous earnings call, for us, it's what's makes sense, what's actionable in terms of businesses that are franchises that we see as very sustainable and that are -- that we are able to acquire.
And -- but right now, we see a lot of movements, but we -- and we continue to be very interested in opportunities that may present themselves and we continue to be very active in assessing those opportunities.
Thank you. And our final question will come from Chris Caso with Raymond James.
Yes, thank you. Hock, I just wanted to return to some of your questions -- some of your comments rather regarding inventory, and you talked about the customers reducing inventory. Do you think that the inventory levels at the customers were elevated coming into the quarter or is this just a situation where the customers are reducing inventory proactively because of the uncertainty? I guess the question is how much of the weakness you see here is driven by inventory reduction as opposed to demand.
I think what we are seeing a lot here -- because overall demand weakness or uncertainty probably started even before this quarter began, but the sharpness in terms of demand contraction -- demand reduction, I should say, is coming from the fact that customers are even more aggressively now trying to reduce inventory out there and a lot of it is customer inventory that we're talking about directly.
As you noticed, on our balance sheet, our inventory has been very well-managed, tightly managed and we continue to be very, very consistent through all this, in the range of 65 days of inventory.
So, this reduction is very much the action of the supply chain of the end user, which really reflects on our direct customers where there's been a sharp reduction of inventory out there. And are we talking significant? Yes. We believe it is -- what we've seen is very significant and we anticipate that to continue, which reflects in our revised guidance for the rest of this year, which is the next less than six months out there. Beyond that, who knows?
Thank you. Ladies and gentlemen, thank you for participating in today's Q&A session as well as today's conference call. This concludes the program. You may all disconnect and have a wonderful day.