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CA Technologies Acquisition to Help Broadcom Outperform in 2019

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Broadcom–CA Technologies deal

Broadcom’s (AVGO) last few years’ worth of earnings have been driven by M&As (mergers and acquisitions). While all of Broadcom’s other acquisitions were in sync with its core portfolio of communications and networking chips, its acquisition of enterprise software company CA Technologies was a shift away from the hardware business. 

Broadcom stock dipped ~14% on July 12, 2018, one day after it announced the CA Technologies acquisition.

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Broadcom’s CEO, Hock Tan, wanted a stable revenue stream that could generate high cash flows in order to reduce the company’s exposure to the slowing smartphone market—especially to Apple, from which it earns 25% of its revenue. Tan revised CA Technologies’ perpetual licensing model to a subscription-based model, which would fetch the company regular cash flows.

Broadcom expects CA Technologies to drive its earnings in fiscal 2019 at a time when other semiconductor companies expect slow or no growth.

Broadcom’s fiscal 2019 guidance

For fiscal 2019, which ends on November 4, 2019, Broadcom expects its revenue to grow 17.5% YoY (year-over-year) to $24.5 billion, whereas analysts expect it to see revenue of $24.3 billion, a growth of 17%. On the other hand, analysts expect Texas Instruments’ (TXN) and Qualcomm’s (QCOM) fiscal 2019 revenues to fall 5.3% YoY and 10.7% YoY, respectively, amid a weak demand environment.

Broadcom hasn’t provided EPS guidance, but analysts expect the company’s fiscal 2019 EPS to rise 9.6% YoY, whereas they expect Texas Instruments’ EPS to fall 8% YoY. Analysts expect Qualcomm’s EPS to rise 4% YoY in fiscal 2019 largely driven by its accelerated $30 billion stock buyback program. Broadcom expects CA Technologies to add $1.8 billion in annual cash flows in fiscal 2019.

Broadcom’s earnings are likely to outperform those of its peers largely because of its integration of CA Technologies. The company’s latest acquisition will not only boost its earnings but also change its business segments. We’ll look into Broadcom’s new business segments next.

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