Leading semiconductor manufacturer Broadcom Corp. (BRCM) reported strong second-quarter 2014 results backed by prudent restructuring initiatives that included the possible divestiture of the cellular base-band business for a renewed focus on the Broadband, Connectivity and Infrastructure markets.
Excluding non-recurring items, non-GAAP net income in the reported quarter stood at $406 million or 65 cents per share compared with $436 million or 70 cents per share in the year-earlier quarter. The recurring earnings for second-quarter 2014 comfortably beat the Zacks Consensus Estimate of 42 cents.
Broadcom reported GAAP loss of $1 million or break-even results on per share basis in the reported quarter compared with a net loss of $251 million or loss of 43 cents per share in the year-ago quarter. GAAP net income for the reported quarter was adversely impacted by asset impairment charges, restructuring costs and inventory write-down to the tune of $187 million or 32 cents per share, and additional impairment charges, settlement costs and other gains of $48 million or 8 cents per share. GAAP earnings in second-quarter 2013 were negatively affected by impairment charge of $501 million or 87 cents per share related to the acquisition of NetLogic Microsystems, Inc.
Revenues
Revenues for second-quarter 2014 were $2,041 million, down 2.3% year over year and at the mid point of the previously guided range of $2.0–$2.1 billion.
In terms of end markets, Broadband Communications revenues were up 12% on a sequential basis to $625 million, primarily driven by higher-than-expected sales of both set-top box and broadband modem solutions. Mobile & Wireless segment revenues decreased 8% sequentially to $781 million owing to lower sales of cellular SOC (system on chip). Revenues from the Infrastructure & Networking segment were up 10% sequentially to $635 million due to continued growth in the switching business, particularly in the service provider and data-center markets.
Margins
GAAP product margin for the reported quarter improved to 50.8% from 49.7% in the prior-year quarter. Non-GAAP product gross margin increased to 55.0% from 52.1% in the year-ago quarter.
During the quarter, Broadcom announced its intention to explore strategic alternatives for its cellular base-band business, including a potential sale or wind down. This is likely to reduce about $700 million in annualized GAAP R&D and selling, general and administrative expenses. The company intends to organically reinvest approximately $50 million of these annualized savings into projects in the Broadband, Infrastructure and Connectivity businesses. Consequently, the strategic move is expected to strengthen Broadcom’s presence in the area of small cells, embedded processing and low-power connectivity.
Balance Sheet & Cash Flow
Broadcom generated $225 million in cash from operations in the reported quarter compared with $334 million in the prior-year period. The company ended the quarter with cash and cash equivalents of $2,364 million and long-term debt of $1.4 billion.
Guidance
Concurrent with the earnings release, management provided its guidance for third-quarter 2014. Total revenue is expected within $2.1 billion and $2.25 billion. Product gross margin on a GAAP basis is expected to be 52.5%, up/down 75 basis points. R&D and selling, general, and administrative expenses (GAAP) are expected to be down $40 million to $60 million sequentially.
Broadcom expects a steady momentum in broadband in the coming quarters, driven by emerging market penetration and new technology adoption in developed markets. The company intends to deliver healthy LTE (Long Term Evolution) revenues in 2014, while focusing on data center innovation and next generation home video products with HEVC (High Efficiency Video Coding).
Broadcom presently has a Zacks Rank #1 (Strong Buy). Other notable companies in the sector that are worth mentioning include Fairchild Semiconductor International Inc. (FCS), ON Semiconductor Corp. (ONNN) and Avago Technologies Limited (AVGO), each carrying a Zacks Rank #2 (Buy).
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