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How Seasonal Demand Affects Broadcom’s Fiscal 2H17 Revenues

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Broadcom’s revenues

Broadcom’s (AVGO) acquisition of Brocade Communications Systems (BRCD) is uncertain given the current regulatory challenges. However, this is not stopping Broadcom from increasing its earnings. 

In fiscal 2Q17,[1. fiscal 2Q17 ended April 30, 2017] Broadcom’s revenues rose 18% YoY (year-over-year) to $4.2 billion. Its revenues were driven by strong growth in all four business segments—Wired, Wireless, Enterprise Storage, and Industrial. This 18% growth rate was well ahead of the company’s long-term growth rate target of mid-single digits.

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On a sequential basis, Broadcom’s revenues grew 1%, which is better than expected given the fact that fiscal 2Q is its weakest quarter. In fiscal 2Q, demand bottoms out in the Wireless segment, which accounts for 30% of the company’s revenues. In fiscal 2Q17, low demand from Apple (AAPL) was partially offset by strong demand from Samsung (SSNLF).

Apple’s assembly partner Foxconn accounted for more than 10% of the company’s revenues.

Fiscal 3Q17 revenue estimates

Broadcom expects its fiscal 3Q17 revenues to grow 6% sequentially (19% YoY) to ~$4.5 billion as seasonal demand picks up in the Wireless segment and demand in other markets remain strong. Rival Qualcomm (QCOM) reported 10% sequential growth in chipset revenues during the same quarter, driven by strong demand from Samsung and Chinese handset makers.

Broadcom’s guidance is close to the analysts’ estimates of $4.46 billion. Over the past eight quarters, the company has beaten analyst estimates by an average of 1.8%. If the company maintains this trend, it could report revenues of $4.53 billion in fiscal 3Q17.

Is Broadcom’s strong growth sustainable in the long term?

Looking at Broadcom’s double-digit revenue growth, Wall Street analysts anticipate that the company could grow at a CAGR[2. compound annual growth rate] of 7%. This growth rate is higher than the company’s long-term guidance of 5% CAGR.

During the company’s fiscal 2Q17 earnings call, Broadcom’s chief executive officer, Hock Tan, stated that the company would not revise its long-term guidance. The company believes that the current high growth could not be sustained over the next five years. 

The current 18% growth was largely driven by two factors: the launch of Samsung Galaxy 8 in early 2017 and unusually strong demand in the infrastructure space. Because this growth could slowly fade over time, the company presented cautious guidance for the long term. 

Next, we’ll look at the company’s profitability.

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