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Factors Setting the Tone for Broadcom's (AVGO) Q3 Earnings

Broadcom AVGO is scheduled to release third-quarter fiscal 2020 results on Sep 3.

For third-quarter fiscal 2020, the company anticipates revenues of $5.75 billion (+/- $150 million). The Zacks Consensus Estimate is currently pegged at $5.78 billion, indicating an improvement of 4.8% from the year-ago quarter.

We note that the Zacks Consensus Estimate for earnings has been stable in the past 30 days at $5.23 per share. The figure suggests growth of 1.4% from the prior-year reported figure.

Notably, the company surpassed the Zacks Consensus Estimate in the trailing four quarters by 0.58%, on average.

Factors Likely to Have Influenced Q3 Performance

Momentum in the enterprise business and substantial customer base are expected to have aided Broadcom in expanding presence in the infrastructure software space. This, in turn, is likely to have driven Infrastructure software revenues in the fiscal third quarter.

Moreover, the coronavirus crisis-induced work-from-home trend is expected to have driven the adoption of cloud-based infrastructure software solutions, which is likely to have contributed to the top line in the to-be-reported quarter.

Broadcom Inc. Price and EPS Surprise


Broadcom Inc. price-eps-surprise | Broadcom Inc. Quote

Further, synergies from the acquisitions of CA and Symantec’s enterprise security business are anticipated to have aided Broadcom’s fiscal third-quarter performance. Markedly, Symantec’s enterprise security business contributed more than $400 million to revenues in second-quarter fiscal 2020.

Notably, the Zacks Consensus Estimate for the Infrastructure Software segment revenues for the fiscal third quarter is pegged at $1.596 billion. In second-quarter fiscal 2020, Infrastructure software revenues improved 21% year over year to $1.715 billion.

In the fiscal second-quarter earnings conference, management projected sequential growth in revenues across the broadband end market for the fiscal third quarter, driven by the robust adoption of Wi-Fi 6 in next-generation access gateway, with solid demand from enterprises, telcos and other service providers.

Increasing demand across server storage connectivity, and the robust adoption of data protection controllers from enterprise customers are expected to have bolstered growth in the fiscal third quarter.

However, the company anticipates a decline in semiconductor revenues in the wireless domain for the fiscal third quarter, as its “large North American mobile phone customer”, likely indicating Apple AAPL, delays the ramp of its next-generation smartphone.

The company is striving to reduce channel inventory globally, especially in Europe and Japan, amid market uncertainty led by the COVID-19 pandemic. This is expected to have led to a “double-digit sequential decline” in recognized shipping revenues in the fiscal third quarter.

Management anticipates resales in the Asia Pacific, particularly China, to have been up sequentially, while remaining regions are expected to have declined.

Notably, a solid uptick of DSL and PON and next-generation cable DOCSIS 3.1 products, and the latest enterprise and residential suite of Wi-Fi 6E-compliant solutions is expected to have aided the segmental performance.

Incremental adoption of SmartNIC adapters, which enable cloud players to accelerate dynamic workloads in a cost-effective manner in a secure infrastructure, is also anticipated to have contributed to Semiconductor solutions’ revenues in the fiscal third quarter.

However, growth is likely to have been limited by a sharp decline in video, particularly in satellite set-top boxes, amid the coronavirus pandemic-led constraints on live sporting events. Further, increasing lead times, particularly in leading-edge processes, is an overhang.

Notably, the Zacks Consensus Estimate for the Semiconductor solutions segment’s revenues for the fiscal third quarter is pegged at $4.158 billion. Notably, in second-quarter fiscal 2020, Semiconductor solutions’ revenues totaled $4.027 billion, down 2% on a year-over-year basis.

Nevertheless, growing expenses on product development and debt financing for acquisitions amid stiff competition from peers, including Qorvo QRVO and Xilinx in the semiconductor market, are expected to have limited the fiscal third-quarter margins.

Strategic Developments in Q3

The coronavirus crisis has compelled companies globally to alter their spending strategies. Broadcom isn’t immune to the trend.

In fact, during the fiscal third quarter, the company inked a definitive agreement to sell its IoT business to Synaptics Incorporated SYNA for $250 million. Per the agreement, Synaptics will also gain manufacturing rights to Broadcom’s wireless IoT products and certain rights to its Wi-Fi, Bluetooth and GPS/GNSS products.

Likewise, Broadcom expanded the partnership with HCL Technologies. Per the terms, HCL will be able to expand portfolio with Symantec Enterprise Division (SED) consulting services, which was part of Broadcom’s enterprise security offerings.

Broadcom currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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