Earnings Preview: Can Broadcom (AVGO) overcome demand woes in Q4?

Broadcom (NASDAQ: AVGO) seems to have ended the fiscal year on a relatively low note amid the continuing market volatility and weak demand. The chipmaker is scheduled to publish its fourth-quarter earnings Thursday after the closing bell.

On average, Wall Street analysts predict earnings of $5.36 per share, which represents an 8% decline. Meanwhile, revenues are seen rising by 5.2% annually to $5.73 billion.

For its third quarter, Broadcom reported higher profit and revenues, defying the slowdown in the market. Earnings beat the Street view while the top-line missed. The company also reaffirmed its full-year 2019 guidance.

Mixed Scenario

While the rapid expansion of the product portfolio is estimated to have translated into sales growth this time, the muted demand for network switches and memory chips might be a drag on growth. Going by the management’s claims about demand recovery, the top-line should benefit from fresh orders form the smartphone and data-networking firms.

Recovery Hopes

Statistics show that the sector is emerging from the slowdown and witnessing a rebound, which bodes well for Broadcom. However, the prospects of semiconductor firms remain weak due to the trade-war related uncertainties, given the high level of China exposure, and the recent ban on network device maker Huawei.

In Expansion Mode

Earlier this year, Broadcom acquired the enterprise security business of Symantec (SYMC) for about $11 billion. While the transaction is expected to result in cost synergies of about $1 billion a year after completion, it will also add to the company’s debt burden and further weaken its balance sheet.

Also see: Broadcom Q3 2019 Earnings Conference Call Transcript

This week, Broadcom announced the delivery of what it calls the fastest Ethernet switch. With a whopping 5.6 Terabits/sec switching performance, the Tomahawk-4 switch series offers double the bandwidth of similar products currently available in the market.

The Industry

Rival chipmaker Qualcomm (QCOM) last month said its fourth-quarter earnings and revenues declined in double digits to $0.78 per share and $4.8 billion, respectively. Among others, Intel (INTC) reported a modest increase in third-quarter earnings on flat revenues, amid efforts to reposition the portfolio so as to take advantage of the steady growth of the data center business.

Related: Is the semiconductor industry finally recovering?

After retreating from an all-time high a few months ago, Broadcom shares bounced back and traded close to the peak this week. The stock rose 32% so far this year and 24% in the past twelve months.

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