Broadcom, Inc. (NASDAQ: AVGO) has reported better-than-expected results for the second quarter ended May 1, 2022. The technology company offers semiconductor and infrastructure software solutions. Alongside earnings, the company has announced the acquisition of VMware, Inc. (VMW).
Results in Detail
The company’s adjusted earnings for the quarter stood at $9.07 per share, up 37% year-over-year. Further, the figure surpassed the consensus estimate of $8.73 per share.
Broadcom reported quarterly net revenues of $8.1 billion, up 23% from the same quarter last year. The upside can be attributed to the growth witnessed in revenues from Semiconductor solutions (up 29% year-over-year) and Infrastructure software (up 5% year-over-year) to $6.2 billion and $1.9 billion, respectively.
Meanwhile, Broadcom reported an adjusted EBITDA of $5.1 billion at the end of the quarter, up from $4 billion a year ago. Free cash flow also witnessed a rise of 20.8% year-over-year to $4.2 billion.
Capital Deployment Activities
Broadcom has announced a new buyback program of up to $10 billion of its common stock. The new program, which will expire on December 31, 2023, is in addition to the existing program that was authorized in December 2021.
Further, the company’s board of directors has approved a quarterly cash dividend of $4.10 per share. The dividend is payable on June 30, 2022, to the stockholders of record at the close of business on June 22, 2022.
Outlook
For the third quarter, the company anticipates revenues of $8.4 billion, up 24% from the prior-year quarter. Adjusted EBITDA is projected to be about 63.5% of projected revenues.
VMware Acquisition
Meanwhile, Broadcom has agreed to acquire VMware in a stock and cash deal worth $61 billion. As per the terms of the deal, 50% of VMware’s shares will be exchanged for cash and the remaining for Broadcom’s common stock. VMW’s shareholders will have an option to choose between $142.50 in cash and 0.2520 shares of Broadcom common stock for each VMW share held.
Upon completion of the deal, which is expected in the next fiscal year, Broadcom shareholders will own nearly 88% of the combined company. Also, Broadcom will rename its Software Group as VMware.
The company expects the deal to boost its pro forma EBITDA by $8.5 billion within three years after the completion of the deal. Further, software revenue is expected to account for about 49% of the total Broadcom’s revenues.
Stock Rating
Following the news, Rosenblatt Securities analyst Hans Mosesmann reiterated a Buy rating on the stock with a price target of $775, which implies upside potential of 40.7% from current levels.
The analyst said, “Adding to an already growing enterprise software business, the acquisition of VMware highlights another move to a hybrid semi/software business that is highly predictable, profitable and less cyclical.”
Consensus among analysts is a Strong Buy based on 15 unanimous Buys. Broadcom’s average price target of $705.71 implies upside potential of 28.2% from current levels.
Hedge Funds’ Activity
TipRanks’ Hedge Fund Trading Activity tool shows that confidence of hedge funds in Broadcom is currently Very Positive, as the cumulative change in holdings across all 21 hedge funds that were active in the last quarter was an increase of 301,800 shares.
Takeaway
The company has shown decent performance in the recently reported quarter. The new share repurchase program is likely to lift investors’ sentiments. Also, its deal with VMware to strengthen the software division seems to be encouraging, as demand in the software market is slowly gaining pace.
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