Broadcom Reports This Week Amid an Escalating Trade War

Timothy Green, The Motley Fool

Semiconductor company Broadcom (NASDAQ: AVGO) will report its fiscal second-quarter results after the market closes on Thursday, June 13. The trade war between the U.S. and China has escalated since Broadcom reiterated its full-year guidance in March, putting a second-half rebound for the company's wireless business in jeopardy. A guidance cut may be in the cards, although that's far from a sure thing.

What happened last time

Broadcom felt some pain in the first quarter from the ongoing slump in the smartphone market. A decline in wireless revenue led the semiconductor solutions segment, the largest of the company's two segments, to post a 12% year-over-year revenue decline. But the acquisition of mainframe software provider CA Technologies boosted revenue enough to produce growth overall.

Metric

Q1 2019

Change (YOY)

Versus Average Analyst Estimate 

Revenue

$5.79 billion

8.7%

Missed by $40 million

Non-GAAP earnings per share

$5.55

8.4%

Beat by $0.32

Data source: Broadcom.

Broadcom was seeing some weakness in China back in March when it reported its first-quarter results, but the company had already accounted for that in its full-year guidance. Its guidance also assumes that strong product cycles for both the wireless and networking businesses will drive growth in the second half.

Share buybacks helped boost per-share earnings in the first quarter. Non-GAAP net income rose by just 3.9% year over year, but heavy spending on buybacks more than doubled that growth rate on a per-share basis. The company spent roughly $3.5 billion on buybacks in the first quarter alone.

What the expectations are 

Analysts expect faster revenue growth but slower earnings growth in Broadcom's fiscal second quarter:

Metric

Average Analyst Estimate

Change (YOY)

Revenue

$5.69 billion

13.4%

Non-GAAP earnings per share

$5.18

6.1%

Data source: Yahoo! Finance.

For the full year, the company expects to produce revenue of $24.5 billion, up from $20.85 billion in fiscal 2018. Revenue growth will be driven primarily by CA technologies, which produced $4.2 billion of annual revenue as a stand-alone company prior to its acquisition by Broadcom.

Its guidance also implies full-year non-GAAP earnings per share of about $23.87 based on the share count at the end of the first quarter.

Shipping containers painted with U.S. and Chinese flags.

Image source: Getty Images.

The first-quarter report came before the U.S. increased the tariff rate on $200 billion of Chinese goods in May. It also came before the U.S. blacklisted Chinese tech giant Huawei, a move that led Broadcom and other U.S. chip companies to stop supplying Huawei. Broadcom counts on Huawei for 5.3% of its revenue, according to Bloomberg. Given these developments, a full-year guidance cut wouldn't be surprising.

Beyond the first-order effects on Broadcom, the trade war between the U.S. and China could have second-order effects on the company's results. Weaker-than-expected sales of Apple's iPhones in China, or any policy from the Chinese government that directly targets Apple, would make a second-half rebound in the wireless business much less likely.

The macroeconomic environment has become more complex since Broadcom last reported earnings. The company will need to convince investors that it will be able to navigate increasingly choppy waters when it reports its second-quarter results on Thursday.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.