Broadcom signaled strong quarterly sales ahead as customers swamp it with orders for chips used in data centers and smartphones during a chip shortage that is unlikely to end for the foreseeable future.
CEO Hock Tan said that its core semiconductor business surged by more than 20% year on year to $4.8 billion in the second quarter of 2021, driven by strong demand for chips used in networking, storage, and other gear for the data center. He said that it had been flooded with orders in recent months amid rising concerns that supply shortages will hurt its customers' ability to build products. Broadcom, which also sells infrastructure software to corporate buyers, said its total sales increased 14% to $6.61 billion.
The San Diego, California-based company reported net income of $1.49 billion, or $3.30 a share, in the fiscal second quarter of 2021, compared to $563 million, or $1.17 per share, in the same quarter a year ago. Broadcom said the gross margins in its semiconductor division came out to 69%, up from 66.1% a year ago, buoyed by increased silicon content in 5G smartphones and networking gear for data centers.
Broadcom rolls out radio frequency (RF), WiFi, Bluetooth, GPS, and other wireless chips used in Apple’s iPhone, Samsung’s Galaxy, and other smartphones. It also sells server chips for networking switches and storage gear essential to the huge data centers run by technology giants like Google and Amazon. It also builds chips used in set-top boxes and routers as well as special-purpose chips used in 5G base stations.
Looking ahead, Broadcom said that it foresees sales of $6.75 billion in its current fiscal quarter. "Due to the strength in demand for semiconductors across our multiple end markets, we delivered a 20% year-over-year increase in semiconductor revenue," Tan said in a statement. "Our third-quarter outlook projects this year-over-year growth to sustain, as we continue to see strong demand from service providers and hyper cloud."
In March, Broadcom said that more than 90% of its 2021 supply of chips had already been ordered by its customers, who are pressuring it for chips to meet booming demand for consumer electronics such as 5G smartphones and servers used in the world's largest hyperscale data centers. In contrast, most semiconductor vendors tend only to have 25% of their chip supply reserved by customers at any point.
"We intend to meet such demand, and in doing so, we will maintain our disciplined process of carefully reviewing our backlog, identifying real end-user demand, and delivering products accordingly," Tan said on a conference call with investors and analysts last week.
Broadcom has been working to allocate the chips it can get manufactured by TSMC and other foundry partners to customers who actually need them rather than companies stockpiling chips for future use. "We are trying to identify and go through a process of rigorously understanding real end demand,” Tan said. “So what you see today is the true growth rate we're representing.”
Broadcom has been assessing its order backlog to ensure orders match the actual demand for products with its chips inside, including networking switches and 5G phones. While many industries are grappling with the ongoing chip shortage, Broadcom said it has enough supply from its foundries to fill anticipated order levels. The company said it contracts out the vast majority of its silicon wafer production to TSMC.
The average lead time for semiconductors spiked to more than 15 weeks at the end of the first quarter, according to the ECIA, a trade group for electronics components manufacturers. That has raised fears customers are purposely ordering more chips than they think they need to hedge against future supply shortages. But double ordering can lead to canceled orders as electronics manufacturers want to avoid building up their inventory of high-priced chips, some of which can become obsolete in less than a year.
Broadcom is using its heft in the industry to defend against double ordering. The company previously said that it forbids customers from canceling orders, which discourages them from stockpiling chips.
Broadcom said average lead times—how long it takes for customers to get chips after placing orders for them—have largely not changed over the last quarter. But at the same time, its bookings have continued to grow. Broadcom said that the surging orders it experienced in the second quarter, even with protracted lead times, signaled that the demand is valid and not the result of anxieties about the global IC shortage.
“It's a pretty decent reflection of what end-demand is out there,” Broadcom's CEO said. “We try to fulfill what customers want in a timely basis. The volume of bookings we get every week continues to grow.”
He said that channel inventory continued to deplete as shipments to its distributors grew by only 23%.
Broadcom said sales in its networking chip business increased by 10% year over year, driven by demand from technology giants and telecom firms with cloud and corporate on-premise data centers. In addition, sales of its networking-switch chips soared by about 30% from a year ago, largely propelled by its Trident 4 and Tomahawk 3 switch chips that are targeted at 400 Gbps Ethernet networks in cloud data centers.
The vendor is also a leading player in chips used by telecom firms for networking routers, base stations, and other 5G infrastructure gear, where sales improved by 35% in the quarter. As the global rollout of 5G ramps up, Broadcom is also taking advantage of bolstered demand for wireless chips used in 5G mobile phones. The firm counts Apple and Samsung as top customers of its wireless semiconductor business.
On a conference call with investors and analysts, Broadcom said demand in its wireless IC business was stronger than expected in the second quarter, with sales improving by 48% annually. Tan said he expects wireless sales growth to be about 30% in its current quarter. Broadcom's bottom line tends to get a boost in the third quarter as Apple ramps up its production levels for the latest iPhone launch later in the year.
In early 2020, Broadcom landed a major long-term supply agreement with Apple, its largest client in the smartphone market. Under the terms of the deal, Broadcom said it would supply a wide range of radio-frequency ICs and other wireless components such as WiFi chips to Apple, giving it guaranteed slots in the iPhone for years to come. Broadcom said the contract would pay out more than $15 billion by 2024.
While Broadcom sells a wide range of power amplifiers and other radio-frequency chips, the crown jewel of its product portfolio is the FBAR filter. FBARs are widely used in smartphones and base stations in 5G to filter out stray signals from radio transmissions. Tan said that the Apple deal and long-term supply pacts give it more clarity around its technology roadmap and position it to invest more in the segment.
"We have the confidence to invest in R&D to make capacity investments,” Tan added. “And, in return, we deliver the best leading-edge technology in specific areas in a timely manner to our critical customers.”