Broadcom's Stock Drops 10% as Its Non-AI Business Struggles: An Earnings Report Deep Dive – Yahoo Finance

Stock Broadcom (NASDAQ: AVGO) Shares fell 10.4% on Friday after the semiconductor and infrastructure software maker reported financial results for its third quarter of fiscal 2024 (ended Aug. 4) the previous afternoon.

The decline was likely due in large part to the company's fourth-quarter earnings guidance being slightly lower than Wall Street had expected. artificial intelligence (AI) When stock prices rise significantly, meeting or slightly beating Wall Street expectations is often not enough to prevent the stock price from falling after the earnings announcement. These companies often have to report earnings and provide guidance that significantly beats Wall Street expectations to satisfy investors.

Some investors may have also been frustrated by Broadcom's third-quarter results, in which both revenue and profit beat analysts' expectations, but by only a small margin.

Moreover, Broadcom's stock price decline is likely not influenced by broader market trends. On Friday, major stock indexes tumbled after the company's August jobs report came in weaker than expected.

Broadcom Key Figures

Data source: Broadcom. YOY = year-over-year. GAAP = generally accepted accounting principles. Q3 fiscal 2024 ended August 4th.

Broadcom's revenue growth was driven almost entirely by its acquisition of VMware in November 2023. Excluding the contribution from this acquisition, revenue increased just 4% year over year.

Generally, investors should primarily focus on adjusted operating and net income figures, which exclude one-time items, although GAAP figures should also be taken into consideration.

The GAAP net loss includes a one-time discrete non-cash tax provision of $4.5 billion due to the impact of the intra-company transfer of certain IP. [intellectual property] “Supply chain restructuring may result in rights being transferred to the United States,” the company said.

Wall Street had expected adjusted EPS of $1.22 on revenue of $12.98 billion, so Broadcom slightly beat both expectations.

During the quarter, Broadcom generated $4.96 billion in cash from operations, up 5% from the same period last year. Free cash flow (FCF) was $4.79 billion, or 37% of revenue, up 4% from the year ago. Excluding restructuring and the VMware integration, FCF was $4.44 billion. $5.3 billionUp 14% from the previous year.

The story continues

The company ended the quarter with cash and cash equivalents of $10 billionup 1% from the previous quarter, and long-term debt of $66.8 billion.

How much revenue have you generated from AI-related products?

Broadcom did not specify how much total revenue it generated from its AI-related products.

Above Earnings ReportCEO Hock Tan said, “We expect fourth-quarter AI revenue to exceed $3.5 billion, up 10% sequentially.” Therefore, we can estimate third-quarter AI revenue to be roughly $3.1 billion to $3.2 billion, or about 24% of total revenue.

Segment performance and details

Data source: Broadcom. YOY = year-over-year change.

According to metrics management provided on the earnings call, growth in the infrastructure software segment was driven entirely or almost entirely by the acquisition of VMware, which was focused on virtualization and cloud services.

During the earnings briefing, Tan presented the following data about the semiconductor division:

• Networking revenue grew 43% year over year to $4.0 billion, representing 55% of division revenue. Growth was driven by strong demand from hyperscale customers for AI networking and custom AI accelerators.

• Non-AI networking revenue was down 41% year over year but up 17% quarter over quarter, indicating it has bottomed out.

• Revenue from custom AI accelerators grew 3.5x year over year. The company makes custom AI chips (application-specific integrated circuits, or ASICs) for three major customers, the first and largest of which is Facebook's parent company. Meta Platform. Google parent company alphabet is another customer, but Broadcom has not identified any new large tech customers.

• Server storage connectivity market revenues of $861 million were down 25% year over year but up 5% quarter over quarter, indicating it has bottomed out.

• Wireless market revenue was $1.7 billion, up 1% year over year.

• Broadband market revenue was $557 million, down 49% year over year.

• Industrial market revenue was $164 million, down 31% year over year.

guidance

For the fourth quarter (ending November 3), management expects the following:

• Revenue was $14 billion, representing 51% growth year over year.

• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) is 64% of projected revenue. For comparison, in the recently reported third quarter, this metric was 63%.

Ahead of the report, Wall Street had been forecasting fourth-quarter revenue of $14.11 billion, so the company's revenue outlook was slightly below expectations.

Broadcom now expects revenue from AI products to reach $12 billion this year, up from a previous outlook of more than $11 billion.

There are good and bad points

In other words, Broadcom's revenue growth is being driven entirely by demand for AI products, specifically Ethernet networking products and custom chips that speed up AI workload processing. While the company's non-AI business continues to struggle, parts of this business appear to have bottomed out and are beginning to recover.

Additionally, Broadcom's revenue growth was almost entirely driven by its VMware acquisition, with organic growth coming in at just 4% year over year.

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Broadcom shares fall 10% on non-AI struggles: Earnings report deep dive Originally published on The Motley Fool