Broadcom improves EPS by reducing interest expense
Broadcom (AVGO) is looking to improve its profit margins, and the effect will be visible in fiscal 2017. Meanwhile, the company is also improving its EPS (earnings per share) by reducing its debt burden.
Broadcom reduced its interest expense from $256 million in fiscal 2Q16 to $139 million in fiscal 3Q16 by repaying $1.3 billion in debt and restructuring a certain portion of its long-term debt. This increased the company’s non-GAAP (generally accepted accounting principles) EPS by 14% sequentially to $2.89, beating the consensus estimate of $2.77.
Broadcom’s debt repayment strategy
In fiscal 3Q16, Broadcom repaid $1.3 billion worth of its $25.4 billion long-term debt using the $630 million in cash proceeds it had received from the sale of its IoT (Internet of Things) and infrastructure backhaul businesses to Cypress Semiconductor (CY) and MaxLinear (MXL), respectively.
The company will continue to reduce its debt by channeling its free cash flow toward debt repayment after the payment of its dividend.
At the start of fiscal 4Q16, Broadcom refinanced a certain portion of its debt, thereby reducing its interest rate from 3.5% to 2.9%. Note that the company’s debt has a floating rate of interest, and it’s therefore exposed to changes in short-term interest rates.
Broadcom’s strategy to improve EPS in long term
Broadcom will continue to improve its EPS in the long term.
- It will improve its gross margin by optimizing its product portfolio.
- It will improve its operating margin by realizing cost savings from the Avago merger.
- It will lower its interest expense by repaying debt.
The company’s current priority is to reduce its net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) multiple from 4.5x to 2x before it looks for any further acquisitions.
Many analysts believe that Xilinx (XLNX) is a lucrative acquisition target for Broadcom and could generate equivalent synergies for Broadcom. We’ll look into this in the next part of the series.