Broadcom: Fiscal 2Q18 Financial Results

Broadcom Inc. reported financial results for its second quarter of fiscal year 2018, ended May 6, 2018, provided guidance for the third quarter of its fiscal year 2018, and announced a quarterly dividend.

Basis of Presentation
Effective as of the close of trading on April 4, 2018, the company completed the redomiciliation of the parent company of the Broadcom corporate group from a Singapore company to a Delaware corporation. In connection with the redomiciliation, all issued ordinary shares of Broadcom Limited  were exchanged on a one-for-one basis for common stock of Broadcom Inc. and all outstanding exchangeable limited partnership units, which represented the non-controlling interest in Broadcom Cayman L.P., were also exchanged on a one-for-one basis for common stock of Broadcom Inc. eliminating this non-controlling interest.

Broadcom Inc. is the successor to Broadcom Limited for financial reporting purposes. Information provided for fiscal periods following the redomiciliation, beginning with the fiscal quarter ended May 6, 2018, relates to Broadcom Inc. and information provided for prior fiscal periods relates to Broadcom Limited.

The company’s financial results include contributions from Brocade Communication Systems’ continuing operations starting in the first fiscal quarter of 2018. The financial results from businesses that have been classified as discontinued operations in the company’s financial statements are not included in the results presented below, unless otherwise stated.

Due to the company’s 52/53 week reporting cycle, fiscal year 2018 includes an extra week in the first quarter, compared to fiscal year 2017.

Second Quarter Fiscal Year 2018 GAAP Results

• Net revenue was $5,014 million, a decrease of 6% from $5,327 million in the previous quarter and an increase of 20% from $4,190 million in the same quarter last year.
• Gross margin was $2,551 million, or 50.9% of net revenue. This compares with gross margin of $2,628 million, or 49.3% of net revenue, in the prior quarter, and gross margin of $1,976 million, or 47.2% of net revenue, in the same quarter last year.
• Operating expenses were $1,350 million. This compares with $1,685 million in the prior quarter and $1,502 million for the same quarter last year.
• Operating income was $1,201 million, or 24.0% of net revenue. This compares with operating income of $943 million, or 17.7% of net revenue, in the prior quarter, and operating income of $474 million, or 11.3% of net revenue, in the same quarter last year.
• Net income, which includes the impact of discontinued operations, was $3,733 million, or $8.33 per diluted share. This compares with net income of $6,566 million, or $14.62 per diluted share, for the prior quarter, and net income of $464 million, or $1.05 per diluted share, in the same quarter last year. Net income attributable to ordinary shares was $3,718 million. Net income attributable to the LP Units’ noncontrolling interest was $15 million.
• Cash and cash equivalents at the end of the second fiscal quarter was $8,187 million, compared to $7,076 million at the end of the prior quarter.
• During the second quarter, the company generated $2,313 million in cash from operations and spent $347 million in repurchasing an aggregate of 1.5 million shares and $189 million on capital expenditures.
• In addition, in the first four weeks of the third quarter of fiscal year 2018, the company spent an additional $1,155 million on stock repurchases.
• On March 29, 2018, the company paid a cash dividend of $1.75 per ordinary share, totaling $727 million. On the same date, the Partnership paid holders of LP Units a corresponding distribution of $1.75 per LP Unit, totaling $39 million.

2FQ18  Non-GAAP Results From Continuing Operations

• Net revenue from continuing operations was $5,017 million, a decrease of 6% from $5,331 million in the previous quarter, and an increase of 19% from $4,201 million in the same quarter last year.
• Gross margin from continuing operations was $3,342 million, or 66.6% of net revenue. This compares with gross margin of $3,454 million, or 64.8% of net revenue, in the prior quarter, and gross margin of $2,652 million, or 63.1% of net revenue, in the same quarter last year.
• Operating income from continuing operations was $2,455 million, or 48.9% of net revenue. This compares with operating income from continuing operations of $2,571 million, or 48.2% of net revenue, in the prior quarter, and $1,853 million, or 44.1% of net revenue, in the same quarter last year.
• Net income from continuing operations was $2,243 million, or $4.88 per diluted share. This compares with net income of $2,345 million, or $5.12 per diluted share last quarter, and net income of $1,666 million, or $3.69 per diluted share, in the same quarter last year.
• Free cash flow, defined as cash from operations less capital expenditures, was $2,124 million in the quarter. 

“Our business continues to be very robust and sustainable. This is validated through our strong execution in the second quarter which drove gross margin to a record 66.6% and free cash flow to 42.3% of net revenue,” said Hock Tan, president and CEO, Broadcom Inc. “Reflecting our commitment to our return of capital program and our belief that stock repurchases can generate attractive returns on our earnings capability, we bought back 6.4 million shares in the six weeks ended June 1, 2018 returning $1.5 billion to stockholders.” 

• Non-GAAP net revenue includes $3 million of licensing revenue not included in GAAP revenue, as a result of the effects of purchase accounting for acquisitions;
• Non-GAAP gross margin includes the effects of $3 million of licensing revenue, and excludes the effects of $765 million of amortization of intangible assets, $25 million of stock-based compensation expense, $1 million of restructuring charges, and $1 million of acquisition-related costs;
• Non-GAAP operating expenses exclude $295 million of stock-based compensation expense, $65 million of amortization of intangible assets, $15 million of acquisition-related costs, and $15 million of restructuring charges;
• Non-GAAP tax provision is $126 million higher than GAAP due to the tax effects of the projected reconciling items noted above; 
• Non-GAAP diluted share count excludes the impact of stock-based compensation expense expected to be incurred in future periods and not yet recognized in the company’s financial statements, which would otherwise be assumed to be used to repurchase shares under the GAAP treasury stock method; and
• Diluted share count outlook does not include the impact from any stock repurchases which may occur after June 1, 2018.   
  
Capital expenditures for the third fiscal quarter are expected to be approximately $125 million. For the third fiscal quarter, depreciation is expected to be $135 million and amortization is expected to be approximately $835 million.

The company’s board of directors has approved a quarterly cash dividend of $1.75 per share.

The dividend is payable on June 29, 2018 to stockholders of record at the close of business.