Broadcom’s (AVGO) strategy to improve profitability has been driving the company’s profit margins over the past four quarters. On the operations front, Broadcom’s non-GAAP[1. generally accepted accounting principles] operating margin rose from 43.5% in fiscal 1Q17 to 44.1% in fiscal 2Q17, coming closer to its long-term target of 45% margin.
In fiscal 3Q17, Broadcom could report an operating margin of 45.3%, as it expects to reduce its operating expenses 1.5% sequentially and increase its revenues 6% sequentially. There is a possibility that Broadcom could report a higher operating margin if it improves its gross margin above 63%.
Qualcomm (QCOM) improved its operating margin from its chipset business by 130 basis points to 14.2% in fiscal 3Q17.
During the fiscal 2Q17 earnings call, the company’s management stated that they would not revise their long-term targets in the light of current profitability until they are confident that this growth is sustainable.
On the EPS (earnings per share) front, Broadcom’s non-GAAP EPS rose 1.6% sequentially and 46% YoY (year-over-year) to $3.69. The company expects to reduce its net interest expense from $112 million to $100 million in fiscal 3Q17. The company expects to earn higher interest on cash reserves, which would slightly offset interest paid on long-term debt. It expects a tax provision of $86 million for the quarter.
If we deducted all the above expenses from the operating margin and divided it by the total number of outstanding shares, the company should report EPS of $4.03, which is higher than the analysts’ estimate of $3.50.
If Broadcom can improve its gross margin to 63.5% in fiscal 3Q17, it could report EPS of $4.07. If it succeeds in acquiring Brocade Communications Systems (BRCD), its margins and EPS could improve.
Next, we’ll look at the performance of Broadcom’s business segments.