Broadcom Inc. (NASDAQ: AVGO) Q1 2021 earnings call dated Mar. 04, 2021
Ji Yoo — Director of Investor Relations
Hock E. Tan — Chief Executive Officer
Kirsten Spears — Chief Financial Officer
Ross Seymore — Deutsche Bank — Analyst
Harlan Sur — JPMorgan — Analyst
Vivek Arya — Bank of America Securities — Analyst
John Pitzer — Credit Suisse — Analyst
Stacy Rasgon — Bernstein Research — Analyst
Craig Hettenbach — Morgan Stanley — Analyst
Timothy Arcuri — UBS — Analyst
Toshiya Hari — Goldman Sachs — Analyst
Blayne Curtis — Barclays — Analyst
C.J. Muse — Evercore — Analyst
Harsh Kumar — Piper Sandler — Analyst
Welcome to Broadcom Inc.’s First Quarter Fiscal Year 2021 Financial Results Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Ji Yoo, Director of Investor Relations of Broadcom Inc. Please go ahead ma’am.
Ji Yoo — Director of Investor Relations
Thank you, operator, and good afternoon everyone. Joining me on today’s call are Hock Tan, President and CEO; Kirsten Spears, Chief Financial Officer; Tom Krause, President, Infrastructure Software Group; and Charlie Collis, Chief Operating Officer. Broadcom also distributed a press release and financial tables after the market closed, describing our financial performance for the first quarter of fiscal year ’21. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom’s website at broadcom.com.
This conference call is being webcast live, and a recording will be available via telephone playback for one week. It will also be archived in the Investors section of our website at broadcom.com.
During the prepared comments, Hock and Kirsten will be providing details of our first quarter fiscal year ’21 results, guidance for our second quarter as well as commentary regarding the business environment. We’ll take questions after the end of our prepared comments. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call.
In addition to US GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today’s press release. Comments made today during today’s call will primarily refer to our non-GAAP financial results.
I’ll now turn the call over to Hock.
Hock E. Tan — Chief Executive Officer
Thank you, Ji, and thank you, everyone, for joining us today. Well, we delivered net revenue of $6.7 billion, up 14% year-on-year. Semiconductor solutions revenue was $4.9 billion, increasing 17% year-on-year. Infrastructure software revenue was $1.7 billion, up 5% year-on-year.
Let me turn first to semiconductor solutions. But before I get into the numbers, perhaps it would be very constructive for me to give you my perspective on the situation today and in fact, what has actually evolved over the past nine months. You may recall in our earnings call Q2 fiscal ’20 around middle of last year that we highlighted supply chain — our supply chain challenges. Since then, we have started extending lead times across our product portfolio. We stretched these lead times further over the past nine months, as we saw demand within end markets continue to increase. So fast forward to today, we see customers accelerating their bookings for early deliveries and attempting to build buffers and creating the demand-supply imbalance you all hear out there.
In anticipation of this phenomenon, we put in place in mid-2020, a very rigorous, disciplined process of carefully reviewing our backlog, identifying real end-user demand and aligning our supply chain to more closely match end user consumption. Of course, not all end markets are behaving the same way. But we believe we have done a very good job of balancing demand and supply in our end markets. And what I’m reporting today does reasonably reflect what’s been consumed by our end users. With that, let me get into the numbers.
In semiconductors, we grew 17% year-on-year organically. Starting with wireless, we hit a seasonal peak in Q1, where wireless was up 52% year-on-year and reached 40% of semiconductor revenue mix. This sharp increase was in large part due to a higher content, FR content was up, and we shipped in high volumes WiFi 6 and WiFi 6E, the next-generation of WiFi 6.
As expected, Q2 wireless revenue will now show a typical seasonal decline sequentially, even as anticipated revenues will be up 30% to 40% year-on-year. And as we look into the second half of the year, we are planning for typical revenue ramp in this space and structuring our in-house wafer capacity appropriately. This should result in sustaining the year-on-year growth trend we now see in Q2 through the second half of the year.
Moving on, networking represented approximately 29% of our semiconductor solution revenue in the quarter and grew 15% year-on-year. Demand is strong, driven largely by data center spend in the cloud and global telcos who continue to upgrade their infrastructure and networks.
Sustainability of this strength is evidenced by bookings as they jump 80% year-on-year and 62% sequentially. Demand for switch and routing platforms, both of the current and as well as next-generation is robust. But as anticipated, our AI TPU business was seasonally down this quarter. Moving on to Q2, we expect networking to be up sequentially and continue the trend of being up year-on-year, driven by continued strength we see in cloud and telcos, offset partially by continued weakness in enterprise.
Turning to broadband, which represented approximately 15% of semiconductor solutions. Revenue was up 8% year-on-year, driven by the work-from-home environment. Multiple telcos in Europe and the US continue to roll out PON and cable DOCSIS. Embedded in this wireline gateways are our next-generation WiFi 6 access points. Softness in enterprise was more than offset by the strong demand from retail home routers even as telcos continue to spend.
Looking at Q2, we are enabling the launch of new WiFi 6-enabled platforms with higher value content for North American and European telcos. As a result, we do see demand accelerating consumption — and consumption increasing, and we expect to generate double-digit year-on-year revenue growth in broadband.
Server storage connectivity represented approximately 12% of Q1 semiconductor revenue. This segment is largely driven by enterprise demand, as we know. And not surprisingly, service storage revenue was down 22% year-on-year, reflecting continued softness in end-user demand as well as OEMs, original equipment manufacturers, depleting their inventory in this space. While bookings have improved, these are largely for demand in the second half. And accordingly, we expect revenue in Q2 to continue to be down year-over-year by double-digit percentage. However, we do expect some recovery based on our bookings received in the second half.
And finally, industrial represented approximately 4% of Q1 semiconductor solution revenue. Resales grew 13% year-over-year in Q1, driven by a recovery of multiple economic factors in China. Turning to Q2, we expect resales to grow at roughly the same level as we see recovery now occurring as well in Japan and Europe. Inventory in the channel for us continues to deplete, and we may have to increase shipments and revenues to replenish channel inventory this quarter.
So in summary, semiconductor solution revenue — segment revenue was up 17% year-on-year in Q1. Q2, we expect this year-over-year percentage revenue to continue at a similar — around a similar amount in spite of a seasonal decline in wireless. The way it looks now, this relatively strong trend appears to be sustaining through most of 2021. However, in our view, this very high and unusual secular growth rate merely highlights an accelerated adoption of our connectivity platforms during this pandemic.
Turning to our other segment, software. Q1 2021 was our first quarter that on a year-on-year basis provides an organic comparison following the Symantec acquisition. In Q1, infrastructure software revenue growth was 5% year-on-year. In dollar terms, bookings averaged 122% over expiring contracts, while core accounts averaged 137%. Now over 90% of these bookings represented recurring subscription and maintenance.
Our strategy of focusing on core accounts continues to perform well as we cross sell our portfolio of software tools. In other words, our software portfolio continues to perform as we had planned and continues to be on track with our long-term financial model for organic software revenue growth of around mid-single digit percentage year-over-year. And that’s something we expect to continue to see in Q2.
So in summary, our Q1 consolidated net revenue grew 14% year-on-year. We expect a similar growth trajectory in Q2, which could bring revenue to $6.5 billion or a 13% year-on-year growth.
So with that, I will now turn the call over to Kirsten.
Kirsten Spears — Chief Financial Officer
Thank you, Hock. Let me now provide additional detail on our financial performance. Net revenue was a record $6.7 billion for the quarter, up 14% from a year ago. Gross margins were 73% of revenue in the quarter and up approximately 30 basis points year-on-year. Operating expenses were $1.1 billion, down 8% year-on-year, reflective of the full benefit of the completed Symantec integration.
Operating income from continuing operations for the quarter was $3.8 billion and is up 23% from a year ago. Operating margin was 57% of revenue, up 420 basis points year-on-year. Adjusted EBITDA was $3.9 billion or 59% of revenue. This figure excludes $138 million of depreciation.
Now a review of the P&L for our two segments. Revenue for semiconductor solutions was $4.9 billion and represented 74% of total revenue in the quarter. This was up 17% year-on-year. Gross margins for semiconductor solutions were approximately 67% in the quarter, up to 20 basis points year-on-year, notwithstanding the higher mix of lower-margin wireless revenue. Operating expenses were $750 million in Q1, down 3% year-on-year as we invested in R&D and streamlined SG&A. Because of this, operating margins increased to 52% in Q1, up 350 basis points year-on-year. So, while semiconductor revenue was up 17%, operating profit grew 25%, all organic.
Moving to the P&L for our infrastructure software segment. Revenue for infrastructure software was $1.7 billion and represented 26% of revenue. This was up 5% year-on-year. Gross margins for infrastructure software were 90% in the quarter, up 190 basis points year-over-year. Operating expenses were $346 million in the quarter, down 18% year-on-year as we’ve completed the integration of Symantec. Operating profit was up 17% year-on-year on top line growth of 5%. Operating margin was 70% in Q1, up 740 basis points year-over-year.
Moving to cash flow. Free cash flow in the first quarter was approximately $3 billion, representing 45% of revenue. This is up 35% year-over-year as we carefully manage working capital. Days sales outstanding were 35 days in the first quarter compared to 57 days a year ago. We ended the quarter with inventory of $952 million, a decrease of $51 million or 5% from the end of the prior quarter. We should also note in Q1, we spent $114 million on capital expenditures.
On the financing front, we extended our weighted average debt maturity to approximately nine years from six years by issuing new notes that we use to refinance and redeem existing debt. Our weighted average coupon increased about 23 basis points to 3.8%. We ended the quarter with $9.6 billion of cash and $41.9 billion of debt, of which $843 million is short term.
Turning to capital allocation. In the quarter, we paid our common stockholders $1.5 billion of cash dividends. We also paid $225 million of withholding taxes due on vesting of employee equity, resulting in the elimination of approximately 521,000 AVGO shares. We ended the quarter with 408 million outstanding common shares and 450 million diluted shares. Note that we expect the diluted share count to be 450 million in Q2.
Based on current business trends and conditions, our guidance for the second quarter of fiscal ’21 is for consolidated net revenues of $6.5 billion and adjusted EBITDA of approximately 59% of projected revenue.
That concludes my prepared remarks. Operator, please open up the call for questions.
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