Welcome to Broadcom Inc.'s fourth quarter and fiscal year 2020 financial results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Beatrice Rossano, director of investor relations for Broadcom Inc. Please go ahead, ma'am.
Thank you, operator, and good afternoon, everyone. Joining me on today's call are Hock Tan, president and CEO, as well as the senior leadership team as announced this afternoon, including Tom Krause, president, infrastructure software group, Charlie Kawwas, chief operating officer, and Kirsten Spears, chief financial officer. Broadcom also distributed a press release and financial tables after the market close, describing our financial performance for the fourth quarter and fiscal year 2020. If you did not receive a copy, you may obtain the information from the investor section of Broadcom's website at broadcom.com. This conference call is being webcast live, and a recording will be available via telephone playback for 1 week. It will also be archived in the investor section of our website at broadcom.com. During the prepared comment, Hock, Kirsten, and Tom will be providing details of our fourth quarter and fiscal year 2020 results, guidance for our first quarter, as well as commentary regarding the business environment. We'll take questions after the end of our prepared comment. Please refer to our press release today and our filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. In addition to US GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. And with that, I'll turn the call over to Hock.
Thank you, Beatrice. Before I discuss our results, I do want to highlight the senior leadership appointments we just made around the same time this afternoon, which is all about ensuring continued growth and success of Broadcom. But first and foremost, as you see here, I'm not going anywhere. I'm as committed and engaged as ever. Well, but while you often see me and Tom, we behind us, we have a very strong bench that has gotten us to where we are today. So today, we are elevating some of these deep bench into critical positions that will strengthen our organization going forward. Tom, Charlie, and Kirsten are among the people who sustained the platform and make the phenomenal numbers I'm about to announce happen. And to showcase our deep bench of talent at Broadcom, starting in fiscal year 21, we plan to organize a series of analyst days on the various businesses where you can hear from our respective general managers about their businesses. And to kick this off, the first will occur this January, where Ram Velaga and Alexis Jolly will review our networking franchise. With this, let me now turn to our very strong fourth quarter results. We capped off fiscal 2020 with record quarterly revenue and profitability, despite the ongoing pandemic and macroeconomic uncertainties. We delivered net revenue of $6.5 billion, above the midpoint of our guidance and up 11% sequentially, and 12% year on year. Semiconductor solutions revenue was $4.8 billion, increasing 6% year on year, and most notably, representing a return to year-on-year revenue growth. Infrastructure software revenue was $1.6 billion, up 36% year on year, which of course includes the contribution from Symantec. Let me now turn first to semiconductors. Networking, which represented approximately 35% of our semiconductor solution revenue in the quarter, was up 17% year on year, driven by the continuous strength in cloud data center spending, as well as continuous spending by telcos in upgrading edge and core networks. Moving on to Q1, we expect this trend of double-digit percentage year-on-year revenue growth to continue, even as we expect enterprise campus spending to continue to soften. Turning to broadband, which represented approximately 14% of semiconductor solutions in the quarter, that was up 22% year on year. Growth was driven by the work-from-home environment and the need among service providers, as well as consumers, to upgrade broadband connectivity to, as well as within the home. We experienced strong adoption of Wi-Fi 6 in next-generation access gateways in telcos and consumers. In fact, in this environment, Wi-Fi, where we are very well positioned as a leader, has turned into a substantial and growing business for the company. Beyond Wi-Fi, we also experienced strong investment by service providers in G-PON, that's fiber to the home, and digital subscriber line copper, as well as cable modems among the cable operators. All this more than offset a decline in video. We expect low to mid-teens percentage year-on-year revenue growth in broadband for Q1, as demand continues to remain strong. Moving on, wireless revenue, which represented approximately 31% of semiconductor revenue in this quarter, was up 43% sequentially in Q4, with the launch of new generation flagship phone by our large North American OEM customer. Still, this was down 9% year on year, given the one-quarter delay in the ramp of production of that program. Accordingly, we expect Q1 fiscal 21 to now be the peak quarter of this seasonal ramp, and revenue will compare extremely favorably with the same quarter a year ago. And we expect that to be up over 50% year on year. Turning to server storage connectivity, that represented approximately 14% of Q4 semiconductor revenue, and was down 9% year on year, as expected, reflecting softness in enterprise demand. Turning to Q1, we expect revenue to continue to decline, and given a strong Q1 compare in fiscal 20, we expect this to be down double digits, even as much as perhaps 20%. Last, turning to industrial, which represented approximately 3% of Q4 semiconductor solution revenue, we're seeing demand recovering, especially out of China, and consolidated resales, and here we sell through distributors, of course, were up 4% year on year, and we forecast such resales in Q1 to start to accelerate to mid-teens year-on-year growth, as the recovery in industrial and auto continues. So in summary, our semiconductor solutions segment was up 6% year on year in Q4, driven primarily by the ramp in wireless, as well as continued strength in networking and broadband. Forecasting Q1, we expect this ramp in wireless to peak, and while broadband and networking demand to remain strong. This will drive revenue in the semiconductor segment to increase in Q1 by high-teens percentage year on year. Turning to software, let me reiterate our business model here. We focus, as we have said many times, only on the largest enterprise customers and seek to increase the adoption of our software products to a hybrid model, about 90% of which are recurring subscription revenue. We step up investment in R&D, focus on just these core customers, and we are able to do that by spending much less on our go-to-market outside of our large core enterprise customers. Unlike, obviously, the other software companies who are chasing every last dollar of revenue, no matter how much it costs. So, let me tell you with 2 years of CA under our belt, let me tell you how we have done. Revenue-wise, after 2 years integrating CA on to our platform, Q4 20, revenue was up 5% year-on-year. For Symantec, if you exclude services and hardware, Q4 product revenue of 380 million was up 10% from Q1 fiscal 20, which was our, obviously, our first quarter after acquisition. But, if we just look at revenue from our core accounts in CA, this was, in fact, up double digits, closer to 12% year-on-year, driven by bookings, which have continued to grow double digits on an annualized basis. This growth in core accounts has, obviously, more than offset the plain decline in services and attrition of accounts outside our core enterprise customers. That's how we expect to sustain our core software business long-term, albeit at low to mid single-digit percentage revenue growth. But, we intend to drive to a financial outcome that is consistent with the Broadcom model. You'll hear more on that from Kirsten when she talks about our financial model. So, looking ahead to next quarter on a year-on-year basis, we expect CA and Symantec software revenue to continue to grow in the mid single digits. However, in Q1 fiscal 21, we expect Brocade to decline high single digits, consistent with softness in enterprise markets, resulting in our infrastructure software segment revenue to be flat to perhaps up low single-digit percentage year-over-year. In summary, we expect Q1 consolidated net revenue of $6.6 billion, up approximately 13% year-over-year, all derived organically. Today, we are in a unique situation. We started fiscal 2021 with record backlog that has now grown to over $14 billion today. But, the timing of this conversion of backlog to revenue won't be driven by a supply chain, which continues to be tight. Finally, I want to take the opportunity here to thank our team for all their work in fiscal 2020. This has, undoubtedly, been a challenging year, and through it all, all of our employees have demonstrated unwavering focus and resilience. Because of their hard work, our mission-critical technologies have never been more relevant than they are today. And with that, let me turn you over to Kirsten.
Thank you, Hock. By way of background, while I've been a part of Broadcom for more than 6 years, my history in accounting and reporting roles from legacy companies Avago and LSI dates back over 20 years. I'm proud of the strong financial organization that Broadcom has built, and I look forward to working together. I know Hock just gave you the details on revenue, which I'll recap before moving down the P&L to discuss our fourth quarter performance, which clearly demonstrates our strong foundation for future growth. Consolidated net revenue for the fourth quarter was $6.5 billion, a 12% increase from a year ago. Semiconductor solutions revenue was $4.8 billion and represented 75% of our total revenue this quarter. This was up 6% year-on-year. Revenue for the infrastructure software segment was $1.6 billion and represented 25% of revenue. This was up 36% year-on-year, given the inclusion of Symantec. Continuing down the P&L, gross margins were 74% of revenue in the quarter, up approximately 370 basis points year-on-year. The expansion in gross margin year-on-year was driven by favorable product mix in semiconductors and a higher percentage of software revenue. Operating expenses were $1.1 billion, up 10% year-on-year, due primarily to the addition of Symantec. Operating income from continuing operations was $3.6 billion and represented 56% of revenue. Operating margins were up approximately 400 basis points year-on-year. Adjusted EBITDA was $3.8 billion and represented 59% of revenue. This figure excludes 139 million of depreciation. Gross margins for our semiconductor solutions segment were approximately 68% in Q4, up 320 basis points year-over-year, driven by an improved product mix. This mix included more networking products and less wireless. As you know, wireless carries around 10 points less margin on product profitability than the rest of our semiconductor portfolio. Operating expenses were $777 million in Q4, or 16% of semiconductor solutions revenue, compared to $727 million in the prior year period, as we continue to invest in our business. R&D costs as a percentage of revenue for Q4 was approximately 14%, and SG&A as a percentage of revenue was 2%. Operating margins for our semiconductor solutions segment were 52% in Q4, up 290 basis points year-on-year. All told, in semiconductor solutions, revenue was up 6% and operating profit grew 12%. Gross margins for our infrastructure software segment were 90% in Q4, up 130 basis points year-over-year. Cost of revenue primarily includes cost of product support, hosting for our SaaS products, professional services, and hardware. Operating expenses were $338 million in Q4, or 21% of infrastructure software revenue, compared to $290 million, or 24% of revenue in the prior year period, as we generate scale through the acquisition of Symantec. R&D costs as a percentage of revenue for Q4 was approximately 12%, and SG&A as a percentage of infrastructure software revenue was 9%. Operating margin was 69% in Q4, up 480 basis points year-over-year. Our operating margins reflect our model, which is about focusing on the largest enterprise customers and increasing our share of their wallet in terms of our software portfolio. Given this model, we are able to focus our R&D investments on a strategic group of customers, and by doing so, reduce costs primarily on go-to-market. This is how we get to operating margin of about 69%, which we believe we can sustain. Looking at cash flow, we had quarterly free cash flow of $3.2 billion, representing 50% of revenue. This is up 36% year-on-year, as we managed our working capital more tightly during this pandemic. Moving on to capital allocation for Q4, we paid our common stockholders $1.3 billion of cash dividends. We also paid $185 million in withholding taxes due on vesting of employee equity, resulting in the elimination of approximately 500,000 AVGO shares. We ended the quarter with 407 million outstanding common shares and 451 million diluted shares. Note that we expect the diluted share count to be 450 million in Q1. On the financing and balance sheet front, we reduced total debt by $3 billion in the quarter. All told, we ended the quarter with $7.6 billion of cash and currently have $12.6 billion of liquidity, including our $5 billion revolver. We ended the quarter with $41.1 billion of total debt, of which approximately $800 million is short-term. I'll now turn the call over to Tom.
Thank you, Kirsten. Let me now recap our financial performance for fiscal year 2020. Our revenue hit a new record of 23.9 billion, growing 6% year-on-year. Semiconductor solutions revenue was 17.3 billion, down 1% year-over-year. Infrastructure software revenue was 6.6 billion, which included 1.5 billion from Brocade, which was down 17% year-on-year, 3.5 billion from CA, which was up 4% year-on-year, and the addition of Symantec, which is 1.6 billion. Gross margin for the year was a record high of 73.5%, up from 71% a year ago. The addition of Symantec, as well as a beneficial mix in semiconductor product sales, drove the gross margin expansion. Additionally, operating expenses were 4.6 billion, which included the addition of Symantec. Operating income from continuing operations was 12.9 billion, up 8% year-over-year, and represented 54% of net revenue. Adjusted EBITDA was 13.6 billion, up 8% year-over-year, and represented 57% of net revenue. This figure excludes 570 million in depreciation. We accrued 644 million of restructuring and integration expenses, and made 583 million of cash restructuring and integration payments in fiscal 2020. We spent 463 million on capital expenditures, and free cash flow represented 49% of revenue, or 11.6 billion. Free cash flow grew 25% year-over-year. Now on the capital allocation. For the year, we returned $6 billion to our common stockholders, consisting of 5.2 billion in the form of cash dividends, and 800 million for the elimination of 2.6 million AVGO shares. We also paid 299 million in dividends to our preferred stockholders. I would also note through the refinancing and liability management activities we've undertaken this year, our weighted average debt maturity is now approximately 6 years, with a weighted average interest rate of approximately 3.5%. Looking ahead to fiscal 2021, we remain committed to returning approximately 50% of our prior year normalized free cash flow to stockholders in the form of cash dividends. With that on the dividend, based on approximately 12 billion of free cash flow in fiscal year 2020, we are increasing our target quarterly common stock cash dividend starting this quarter to $3.60 per share. This constitutes an increase of 11%, and assumes a basic outstanding share count of 413 million shares at the end of fiscal 2021. We plan to maintain this dividend payout throughout this year, subject to quarterly board approval. Consistent with our capital allocation policy, we will reassess the dividend this time next year based on our fiscal 21 free cash flow result. With that, I'll turn the call back over to Bee.
Thank you, Tom. At this time, we'll open the call for questions. We have Hock, Tom, Kirsten, and Charlie available to answer any questions. So, operator, please go ahead and kick us off.
Thank you so much. Ladies and gentlemen, to ask a question, you will need to press star one on your telephone. We ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question will come from Craig Hettenbach with Morgan Stanley. Please go ahead.
Yes, thank you. Question for Hock. I think on the call a year ago, you talked about an increase in R&D investment in those areas in cloud, photonics, I think wireless infrastructure. So, just wanted to get an update on how that's progressing, and the visibility into kind of revenue from that R&D investment.
Okay, that's a very good question, and the cadence of the investment we're doing continues in areas that we see as very strategic in our various businesses, and you've seen some of that coming out as we continue to do so. For instance, last week, we announced the introduction and availability of our 800 gig platform for switching, routing, and the basic device retainers and all that that goes hand-in-hand with it. So, all about launching an 800 gig platform, and that comes in the form of our new product, Tomahawk 4. And it's pretty interesting that we're launching it now because our previous generation, which is at 400 gig platform, Tomahawk 3, which we introduced over a year ago, almost a year and a half ago, is just starting to ramp with any high in terms of into a larger market. And we're already launching an 800 gig. So, the speed and the regularity and the speed at which we are pushing these products is definitely something we intend to keep where we're coming out with a newer generation, probably that is probably 2x throughput capacity, and the regularity of 18 months to 2 years on a consistent basis. Because that's what our hyper cloud customers want. And it makes sense because we need to scale up data centers as CPUs start to hit the limitations of Moore's law. Now, that's one example. As part of that, as we indicated a year ago, we're stepping our investment in areas of silicon photonics, basically to enable interconnects at very high throughput, at very high bandwidth. And that's been going very well. Well, it's a multi-year investment, and as we indicated from the last time we talked about it, we're now only on the second year. But, we expect to have something that will make sense that will be out to the marketplace within a generation or two of our platforms in switching and routing. And that's that aspect of it. In terms of further investment, we have stepped up our investment, as I indicated in my report, on Wi-Fi, on connectivity of basically 802.11ax now. And we launched that platform two years ago, and very successful. And we're already working on the next generation Wi-Fi 7, successor to this Wi-Fi 6. In between, we're putting out 6 GHz Wi-Fi, that's Wi-Fi 6E, which is the spectrum bandwidth recently was approved by the FCC not that long ago. And we already have our first product certified by the FCC recently. We're the first out there. So, we intend to be in the lead for instance in this wireless connectivity, which by the way today, as I indicated, represents a very substantial and growing part of our business. And it's a testimonial to the level of investment and success we've gotten in this area. And so, these are some of the things that we have, and most of these investments are multi-year, but you do start to see some of the products, some of the launches, some of the revenue starting to come in with this level of investments we are making in here.
Thank you. Our next question will come from Vivek Arya with Bank of America Securities. Please go ahead.
Thanks for taking my question, and good luck to Tom and Kirsten and Charlie in your new roles. Hock, the question is for you on supply constraints that several of your peers in semiconductors have mentioned, whether it's in substrates or wafers or foundry capacity. I'm curious, where does Broadcom stand on this? Is supply a factor in your reported results, or your Q1 outlook, or something that you think can constrain the growth in fiscal 21? Just what steps are you taking to make sure it doesn't constrain growth? And also, on the other side, make sure customers are not double ordering because of all these supply issues. Thank you.
Well, interesting question. By the way, we reported on the supply constraint at least 3 months ago when we did our earnings call. In fact, probably even earlier than that. We have seen probably even two quarters ago. We have seen that supply constraint. And we were one of the first to report on it. And that supply constraint continues from when we first touched on that 6 months ago, and in some area, it just seems to revolve in different specific areas. Where we talk about wafers then since then, as you correctly pointed out and we hear here in the news, substrate is a concern consideration and believe me beyond that wire bonding is even a possible constraint depending on whether like more and more automotive legacy products coming. So we operate in an environment and I mentioned in my remarks that is fairly unique. Here we are in the middle of a pandemic. Here we are where there are winners and losers even in the product lines even in the industry we're in where there are some businesses where demand is just booming and we touched on that in networking and broadband and some areas particularly in the enterprise where they're not so strong but what we also see is a supply capacity from our supply chain that is tight. That's what we're doing and we've seen that for months and we've taken a lot of actions to address it and we continue to do that. We are also one of the largest consumers of those third party manufacturers in semiconductors out there. Be they wafers, be they substrates, be they back end assembly or test capacity. We are all in there and we've been seeing it for 6 months. So best answer is we're managing that. Having said that we have the backlog in place and we have also very early on in our fiscal 20 stretched out our supply chain not only based on what we've seen but based on what we anticipate happening and that has also enabled for us to be able to in a more orderly manner in what I consider in a more appropriate manner put products in the hands of end users who need it at appropriate times. We've done very well and having said all that even as we do it our backlog continues to grow. Give you a sense I mentioned we're over 14 billion of a backlog today. When we started the quarter our backlog and we're shipping in between since then beginning of the quarter our backlog was 12. So it's accelerating but having said that please don't get carried away in the other aspect. As you know wireless business that we have is seasonal. So we are saying obviously wireless backlog is a significant part of our total backlog but given the seasonality of it we obviously have seen deceleration in the bookings that are coming in from our wireless business but we are seeing on the other side acceleration and continuous strength in orders coming in from the other parts of our business. Networking as far as remains strong, broadband continues to be very strong and now we start to see the smaller part of our business, industrial, coming in very very strong. So one side is offsetting the other and we continue to see this strong backlog which in a way makes our planning in our supply chain but in some way poses other challenges of making sure we're delivering products to the right consumer customers at the right time.
Thank you. Our next question will come from Harlan Sur with JP Morgan. Please go ahead.
Good afternoon. Great job on the quarterly execution and congratulations to all on the executive appointments. Hock, you know we're still at the very start of the 400 gig networking upgrade cycle with your hyperscale customers but it seems like telco service providers are also starting to adopt the white box switching routing model which is good for your Tomahawk and Jericho chipsets and then you guys are also benefiting from the optical connectivity that goes along with your switching solutions. Beyond this quarter do you see sustainability of the networking upgrade and spending cycle through next year and then given the wafer and substrate constraints are your lead times in networking expanding beyond 6 months now?
Very good question Harlan and thank you for your kind words. To answer the first part, yeah, our new product generation, you know, in 400G platform as I mentioned earlier is starting to ramp up in a big way this coming fiscal 21. It started in 20 with a couple large hyperscale customers and it's ramping up with many more in fiscal 21 and I'm sure it goes on to 22 and we do not see a slowdown in the demand and you're correct operator service provider and operators are also adopting this merchant silicon routing platforms on your networks as I mentioned particularly in core as well as edge and we're seeing very very good demand and success as evidenced by the backlog and orders we're getting from service providers and not just hyper cloud particularly service providers on our merchant silicon Jericho family. So that's good. Do I see that continuing? Probably as far as I can see 21. Our lead times go is now beyond 6 months to answer your question. So and just to add a further thought we have a policy in this company that we adhere to very very strictly follow both because of financial governance any orders placed on us we do not allow to be cancelled. All our customers know that. All our partners know that. So we actually seeing real demand out there at least 6 months. And that brings us pretty close to the second half of fiscal 21 at that point and I guess as many of you will know just in time for the beginning of a seasonal ramp of the next generation wireless products. So our 21 our visibility appears to be remarkably better than we usually have at this point in the beginning of our fiscal year.
Thank you. Our next question will come from Stacy Rasgon with Bernstein Research. Please go ahead.
