Broadcom’s Q1 2023 Earnings Call – Profitable Growth at Reasonable Price

Broadcom (NASDAQ:AVGO) did not disappoint with its first quarter 2023 earnings report on March 2, 2023. The semiconductor and infrastructure software solutions company ramped up its revenues, increased its margins, piled on its profits, and gave exciting guidance for the future.

Prior to the earnings announcement, AVGO had outperformed the semiconductor sector over the previous 12 months, with its shares 2% higher versus a 9% decline in the price of the iShares Semiconductor ETF (SOXX), which tracks the ICE Semiconductor Index.

The earnings report pushed the shares even higher, closing at $632.76 on March 3 ─ around 5.8% higher than the previous day’s close.

Here’s what we learned from the Q1 2023 earnings call.

Strong revenues and earnings growth

AVGO reported consolidated net revenue of $8.9 billion, up 16% on the same quarter last year. The company has experienced increased technology spend from its customers across majority of its business sectors. Highlights include:

  • Networking revenue was up 20% year-on-year at $2.3 billion
  • Semiconductor revenue increased by 21% year-on-year to $7.1 billion
  • Core software grew by 5%

The CFO, Kirsten Spears, added a little more detail, saying that:

  • Gross margins were 74% of revenue in the quarter, about 10 basis points higher than we expected.
  • Operating expenses were $1.1 billion, down 1% year-on-year.”
  • R&D of $929 million was also down 1% year-on-year, primarily from streamlined project and other variable spending, offset in part by higher people costs resulting from increased headcount as we are hiring.”
  • Operating margin was 61% of revenue, up approximately 50 basis points year-on-year.”

The result? Operating income for the quarter was $5.4 billion and was up 17% from a year ago, with earnings per share of $10.33.

Core business streams are performing

AVGO operates across two business streams: Semiconductor Solutions and Infrastructure Software.

Semiconductor Solutions is currently the star performer. Revenues of $7.1 billion represent 80% of total revenue – an increase of 21% year-on-year. Gross margins in this part of the business were 69% in the first quarter. The business is managing costs effectively – operating expenses and R&D spend were marginally down, and operating profit grew by 23%.

Revenues in the Infrastructure Software business dipped by 1% year-on-year, to $1,8 billion for the quarter. However, growth margins of 91% and a good handle on operating expenses (down 1% at $346 million) helped to deliver stable operating profits.

Should the revenue dip in Infrastructure Software be a cause for concern?

President and CEO Hock Tan believes not:

From our view, infrastructure spending continues to be up particularly in service providers, even as hyperscale and enterprise sustain. Spending in technology for infrastructure has been strong, showing double-digit growth for nine consecutive quarters. We continue to be booked for fiscal ‘23 and our lead times and visibility on semiconductors remain largely at 50 weeks.”

An outlook for slowing growth, but no hard landing

Broadcom gave guidance for Q2, and provided some color (what Hock Tan termed “conceptual trend”) for the rest of the year, too. And while the company believes its rate of growth will slow, it is forecasting that there will be no crash in its earnings.

For the second quarter, it has increased its guidance to revenues of $8.7 billion – up 8% on Q2 2022. It expects to increase its gross margins by 150 basis points, predominantly because of a more favorable product mix. However, it has also pointed to increased spending on hiring of engineers and seasonal payroll tax step-ups.

Tan said:

We’re kind of getting rather hopeful that it would be a soft landing. That will be moderation as we are indicating this future ─ in this Q2 quarter moderating growth. But we see nonetheless, as probably leading to a soft landing of still a year-on-year improvement in the second half.”

AI will be a driver of growth

AVGO is one of the businesses that are well positioned to fare well from AI (artificial intelligence). It provides a lot of key components needed by companies around the world to ensure they have the computer capacity on which to run their AI models.

Generative AI requires larger and deeper networks. As the use of AI grows, networks become more constrained. Tan explained that Broadcom is seeing an increase and excitement within its customers because of the possibilities of AI – and this is translating into urgency in its hyperscale customers to secure products and ability to embed low latency networks that can scale.

Committed to return excess cash to shareholders

Broadcom has a great history of paying and increasing its dividends. Indeed, since 2013, its quarterly dividend has increased from $0.21 to the $4.60 announced for Q1 2023.

Broadcom announced a further increase in cash flow in the quarter, rising to $3.9 billion – 16% higher than a year earlier. Free cash flow represents 44% of revenues.

Consequently, it was able to pay a total of $1.9 billion in cash dividends as well as repurchase $1.2 billion of common stock. It still has the authority to repurchase $11.8 billion of shares.

The company is committed to continue rewarding shareholders through dividends and share repurchases.

The bottom line for income investors

Let’s return to the two questions we asked in the introduction to this article:

Should investors expect AVGO to continue to outperform?

We think they should. The company is being managed well, and is benefiting from its position as one of the world’s largest chipmakers. AI could be the icing on the cake. It’s got good control over its costs, a full order book, and a decent level of inventory. As Hock Tan said:

Broadcom’s first quarter performance reflects continued strength in infrastructure demand across all our end markets. Looking ahead, we are confident our growth will be driven by sustained leadership in next-generation technologies across all of our core markets, and strong partnerships with our customers.”

Do the shares represent good value for income investors?

The shares are trading on a PE multiple of around 21. That’s not overly expensive. And with a record of strong dividend growth, a dividend yield of 2.91%, and a payout ratio of around 54%, there is certainly scope for the company to continue to deliver to its commitment of rewarding shareholders through cash dividends and share repurchases.

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