Broadcom shares have slipped nearly 5% since the company said on Thursday that its core chip business has bottomed out but was unsure when it will start to recover from the slowdown. The San Diego, California-based company, which has been hit hard over the last year by the trade battle between the United States and China, said it was too soon to call a recovery. But at least it doesn't see demand getting any worse.
"Looking at the semiconductor solutions segment, we believe demand has bottomed out but will continue to remain at these levels due to the current uncertain environment," Broadcom's CEO Hock Tan said in a statement. Sales of wired and wireless networking chips and other parts totaled $4.4 billion in the third quarter, down 5% year-on-year and up 6% quarter-over-quarter as the trade war pushed some of its customers to reduce their inventory.
Broadcom in May slashed sales forecast from $24.5 billion to $22.5 billion for the 2019 fiscal year. The company blamed the Trump administration’s sanctions on Huawei—the world’s No.1 telecom equipment manufacturer and No.2 smartphone maker—and the uncertainty caused by the trade conflict with China, which has pushed some of its customers to pause orders. Broadcom said Thursday its $22.5 billion forecast has remained unchanged since May.
Broadcom's semiconductor sales are projected to be $17.5 billion in 2019, a high single-digit decline compared to 2018. The global chip industry has been weathering weak demand over the last year as handset shipments have slowed and spending on cloud data centers has slackened. Global sales slumped from $236.6 billion in the first half of 2018 to $203.7 billion in the first half of 2019, the largest decline in the last decade, according to IHS Markit.
For its third quarter, Broadcom’s revenue rose 9% year-over-year from about $5.06 billion to $5.52 billion, chief financial officer Thomas Krause said. Net income totaled $715 million, or $1.71 per share, compared to $1.2 billion, or $2.71 per share, in the same quarter a year ago. Broadcom said its double-digit sales growth in wired communications chips used in the largest data centers would act as a “buffer” in some of its more challenging, uncertain markets.
Broadcom, which sells Wi-Fi and Bluetooth chips used in Apple’s iPhones and other consumer gadgets, said demand its core chip business has finally stopped declining. “Although the trade conflict continues, we have not seen further deterioration in our business, both specific to China as well as globally,” Tan said on a conference call with analysts Thursday. “We assume the environment is not going to change from what we’re seeing now."
The sanctions imposed on Huawei have dealt a heavy blow to Broadcom, which last year sold $900 million worth of semiconductors to the Chinese electronics giant. Broadcom, which reported annual sales of $20.8 billion in 2018, has also been burned by the trade war between Beijing and Washington. The U.S. has slapped tariffs on some chips and other products imported from China, which is where Broadcom makes more than 50% of its revenue.
Many of the largest vendors in the United States are still selling chips to Huawei despite the Trump administration’s ban on the supply of American technology to the telecommunications giant. Intel, Texas Instruments, Micron Technology and others have restarted shipments of some chips after finding loopholes in the export restrictions. They determined that some of the their chips can continue to be sold without running afoul of export laws.
Many companies are also applying for licenses to resume selling chips subject to the restrictions to Huawei, which boosted its spending on semiconductors to $21 billion in 2018, according to market researcher Gartner. Chips sourced from U.S.-based firm accounted for $11 billion of Huawei's 2018 spending. Last year, Huawei was ranked No.3 on the list of the world’s largest chip buyers, behind Apple and Samsung and ahead of PC giants Dell and Lenovo.
Broadcom has been trying to branch out from its core chip business after President Trump blocked its more than $100 billion bid for Qualcomm. Over the last year, Broadcom has started buying companies that sell critical software that serves as a more stable complement to its core business of selling chips to OEMs such as Samsung and Apple, which has been hammered by the trade war with China and currently accounts for almost 80% of its revenue.
In June 2018, Broadcom agreed to buy software vendor CA Technologies for $18.9 billion. The company is adding to its portfolio of infrastructure software with a $10.7 billion deal for Symantec's enterprise security unit. The deal is expected to close in the first quarter of 2020. Once it does, Broadcom said the deal will add $2 billion to its annual sales and boost its software revenue to $7 billion—30% of its estimated $24.6 billion business in 2020.
Sales of its infrastructure software topped $1.1 billion in the third quarter of 2019. Broadcom said its software revenue will reach $5 billion for the full fiscal year.
"The U.S.-China trade dispute is turning into an extended affair with lots of twists and turns in uncertainty," Tan said on Thursday’s conference call with analysts. He said Broadcom is managing its core chip business as though it will “continue to operate in a very low growth uncertain macro environment for the foreseeable future." Tan cited the lack of “clarity, visibility or certainty yet that any sharp recovery is around the corner."