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How Broadcom Beat Fiscal Q3 Earnings Expectations

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Broadcom beat expectations

Broadcom (AVGO) reported its fiscal third quarter of 2018[1. Fiscal Q3 2018 ended on August 5, 2018.] on September 6. The chipmaker posted better-than-expected earnings but missed the revenue estimates. It has beaten analysts’ earnings an average of 1.9% in the last two quarters.

In the third quarter, Broadcom’s earnings of $4.98 per share topped estimates by 3.1%. Its revenues of $5.06 billion missed the estimate of $5.07 billion.

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High-margin products boost profits

Broadcom’s earnings not only beat expectations in the third quarter but also increased 2% sequentially and 21.5% YoY (year-over-year). Robust revenue growth, driven by higher data center demand, the acquisition of Brocade, and an improved mix of high-margin wired products, helped the company ride on its profits. The launch of new Apple iPhone models is anticipated to fuel the company’s wireless business in the fourth quarter.

The company also repurchased shares, which lowered its share count, thus fueling earnings growth in the quarter. Broadcom initiated a $12 billion share buyback plan in April to compensate shareholders for its failed Qualcomm (QCOM) merger.

The company’s adjusted gross margin was 51.7% in the third quarter, which expanded 80 basis points (or bps) from 50.9% in the prior quarter and increased 350 bps from 48.2% in Q3 2017.

Its adjusted operating margin also expanded sequentially and YoY. In the third quarter, it was 26.4%, which increased significantly from the preceding quarter’s margin of 24% and the prior year’s quarterly operating margin of 14.5%. Higher top-line growth and lower operating expenses led to higher margins in the quarter. Revenues grew 13.5% YoY, and the company significantly reduced its operating expenses by 14.7% YoY.

Outlook

For the fourth quarter of fiscal 2018, Broadcom expects an adjusted gross margin of 66%–68%, excluding any results from the ~$19 billion pending the acquisition of CA Technologies (CA), an enterprise software company.

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