Broadcom’s Q2’15 Earnings Review: Takeover By Avago Will Make Broadcom A Stronger Company

Leading semiconductor provider for wired and wireless communications Broadcom (NASDAQ:BRCM) reported its Q2 2015 earnings on July 30th.  ((See Broadcom’s Earnings Release Materials)) While the company saw continued growth momentum in the quarter, its revenue and earnings per share (EPS) came in slightly below analysts’ expectations. As expected, Broadcom’s operating performance continued to improve on account of tight operating expense discipline and strong margins. Acknowledging that Broadcom’s Q3 2015 guidance came in below Wall Street estimates, we believe the company will continue to grow in the future, driven by product cycles and new launches from key customers. Additionally, the takeover by Avago will make the combined entity (to be known as Broadcom) the third largest U.S. semiconductor supplier, with a much broad circuit offering.

In light of Broadcom’s pending transaction with Avago, Broadcom did not conduct a conference call with analysts and investors to discuss its financial results.

A Quick Snapshot of Q2 2015 Earnings

At $2.10 billion, Broadcom’s Q2 2015 revenue was up 1.8% quarter on quarter and 2.7% year on year, driven by growth in high-end smartphones, broadband access, and networking markets. Gross margin improved to 55.2% compared to 52.8% in Q1 2015 and 50.8% in Q2 2014. GAAP net income came in at $386 million (diluted EPS of $0.63), compared to $209 million in Q1 2015 and a net loss of $1 million in Q2 2014. Non-GAAP net income of $445 million (diluted EPS of $0.72) increased 14% quarter on quarter and 53% year on year.

We are in the process of updating our price estimate of $44 for Broadcom to incorporate Q2 2015 earnings.

See Our Complete Analysis for Broadcom Here

Avago-Broadcom Will Be The 3rd Largest U.S. Semiconductor Maker By Revenue; The Deal Is Expected To Close By Q1 2016

Last month, Broadcom entered into a definitive agreement with Avago Technologies, where the latter will acquire the former in a cash and stock transaction that is structured such that the combined company will have an enterprise value of  $77 billion. Under the terms of the definitive agreement, Avago will acquire Broadcom for $17 billion in cash consideration and the economic equivalent of approximately 140 million Avago ordinary shares, valued at close to $20 billion. The transaction is expected to close by the  end of the first calendar quarter of 2016 and is subject to regulatory approvals in various jurisdictions.

Avago Limited is a leading designer, developer and global supplier of a broad range of analog semiconductor devices, with an extensive portfolio in four key markets:  wireless communications, enterprise storage, wired infrastructure, and industrial and other. Broadcom is a global leader and innovator in digital CMOS semiconductor solutions for wired and wireless communications. The company is best known for its connectivity chips, which are used widely in smartphones made by Apple (NASDAQ:AAPL)  and Samsung Electronics (OTC:SSNLF) and wireless connectivity devices.

The combination of Avago and Broadcom will create a global diversified leader in wired and wireless communication semiconductors.  The combined company, to be based in Singapore and known as Broadcom, will be the third-largest U.S. semiconductor supplier, behind Intel (NASDAQ:INTC) and Qualcomm(NASDAQ:QCOM), and the sixth largest in the world according to final annual semiconductor market shares.

The transaction brings together Avago’s offering of analog devices for Wireless and Optical applications and Broadcom’s great strengths in digital Ethernet, cable and Wireless connectivity products. As such there is notably little overlap in their respective product offerings, though they to a degree serve shared markets. There are thus synergies to be had in sales and marketing, as well as operations.

Q3 2015 Guidance

– Net revenue of $2.135 billion, +/- $75 million.

– GAAP and non-GAAP gross margin of 53.8% and 55.3%, +/- 75 basis points, respectively.

– R&D and S,G&A expenses to be down $10 million sequentially, +/- $10 million.

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