Main takeaways from Broadcom’s (AVGO) Q3 2023 earnings report

Semiconductor company Broadcom, Inc. (NASDAQ: AVGO) has been resilient to the recent tech downturn to a large extent, amid stable demand for its products and services despite careful enterprise spending due to economic uncertainties. Like most others in the tech space, the company is busy positioning itself to tap into AI opportunities.

The Stock

The tech firm’s stock dropped last week following the earnings announcement, after making steady gains in recent months and hitting an all-time high. The not-so-impressive sales growth and management’s cautious guidance seem to be the reason behind the market’s negative reaction to the announcement. In the past twelve months, the value has more than doubled, making AVGO one of the best-performing Wall Street stocks.

Big companies are scaling out and networking the AI clusters of their data centers, which bodes well for Broadcom considering its leadership in networking for generative AI. Favorable pricing and efficient inventory management enabled the company to deliver revenue growth in recent quarters, outperforming other network technology companies.

Results Beat

In the third quarter, revenues came in at $8.88 billion, which is up 5% from $8.46 billion the company reported a year earlier. That translated into an increase in adjusted profit to $10.54 per share from $9.73 per share in the prior year period. Unadjusted net income was $3.30 billion or $7.74 per share in the July quarter, vs. $3.07 billion or $7.15 per share last year.

Both earnings and revenues topped Wall Street’s expectations, continuing the trend seen since the second half of fiscal 2020. During the quarter, the company repurchased around three million common shares for $2.2 billion. It also paid a total of $1.9 billion in dividends during the period.

“What drives gross margin largely for us as a company is, frankly, product mix. It’s product mix. And as I mentioned earlier, we have a broad range of products, even as we try to make order out of it from a viewpoint of communication and segment them or classify them into multiple end markets. Within in each end market, you have products, and they all have different gross margins, depending on the — on where they’re used and the criticality and various other aspects.”

Guidance

Anticipating the positive momentum to continue, the management is looking for revenues of around $9.27 billion for the fourth quarter, which represents a modest increase from the prior-year period but falls short of analysts’ forecast. Adjusted EBITDA, as a percentage of revenue, is expected to be around 65 in the October quarter.

After staying on the growth path consistently in recent months, AVGO is sharply above its 52-week average. However, the stock traded slightly lower on Wednesday morning.