Broadcom To Report Earnings As VMware Deal Pressure Mounts: 5 Things To Know

From how Broadcom is navigating macroeconomic pressures on sales and supplies to what is happening with the company’s protracted regulatory fight with global powers over its $61 billion buyout of VMware, here are five things analysts will be looking to hear on the company’s earnings call Thursday.

Following its earnings presentation Thursday, Broadcom Software CEO Hock Tan will be heading into a high-stakes question-and-answer period.

Analysts will want to hear how the company is navigating macroeconomic pressures on sales and supplies, as well as what is happening with the company’s protracted regulatory fight with global powers over its $61 billion buyout of VMware.

Last quarter the San Jose, Calif-based chipmaker surprised analysts with stronger-than-expected earnings of $8.93 billion, up 21 percent, as well as news that its deal with Palo Alto, Calif.-based VMware had cleared regulators in Brazil, Canada and South Africa.

Thursday’s earnings call follows news that days ago, VMware said in a U.S. Securities and Exchange Commission filing that it had pushed the “inside date”—the date to walk away from the deal—out by 90 days to May 26. On the day of the filing, the deadline was a week from expiring.

The U.S. Federal Trade Commission has been conducting a “second request” investigation of the deal since July. The intense 30-point probe can produce thousands of pages of evidence, however, many second request investigations take 90 days to complete. The FTC’s investigation of the Broadcom-VMware deal is now in its seventh month.

Christopher Wall, HaystackID data protection officer, special counsel, global privacy and forensics, who worked as a lawyer in anti-trust and trade regulation for years before becoming a forensics investigator, has experience in the documentation process involved.

He said longer-than-expected timelines are one way to measure if a deal is in peril.

“The most obvious sign is that the parties are taking longer than normal (significantly more than 90 days or so) to substantially comply with the second request,” Wall wrote to CRN in an email. “The longer they take to comply, the more negotiations can happen with the FTC, so the length of time it takes for substantial compliance isn’t necessarily a bad sign—just that it’s more complicated than a plain vanilla deal.”

In a statement to CRN, the U.S. Federal Trade Commission declined to provide an update on the investigation.

Here are five things to know ahead of Broadcom’s earnings call.

Solid Revenue Expectations

Broadcom said it expects revenue this quarter to reach $8.9 billion for the period ended Jan. 31. That would be up from $7.70 billion at the same time last year, an increase of 15 percent year over year.

Last quarter, the company’s strong infrastructure sales buoyed revenue against some of the global conditions in its business with hyperscalers, leading it to beat what analysts thought could be a tough quarter.

Rival chipmaker Intel saw revenue shrink last year, and while AMD grew revenue last year 44 percent its net income was down 58 percent and earnings per share were off 67 percent.

The Data Center Market

Last quarter, Broadcom’s data center business made up for a spending slowdown in other areas of the chip market. Broadcom cited growth among hyperscalers as a major driver and, with data center expansion showing no slowdown, Broadcom has products across the infrastructure stack and would be well positioned to receive tailwinds from the market.

The company’s software products make up slightly less than 25 percent of its overall sales, with semi-conductor products such as those in networking, servers, storage, wireless and broadband contributing the bulk of the company’s revenue.

VMware Deal Pressure

Broadcom has repeatedly said it expected a deal the size of its $61 billion merger with VMware to take more time than the other transactions that have grown the mega-size chipmaker.

But the two largest competition authorities have not given any signal that they plan to greenlight the deal. The FTC has been involved in a seven-month investigation of the merger, while the European Commission has said it has concerns that Broadcom could kill competitors by shutting off access to VMware.

Broadcom is currently under a form of corporate probation with the FTC and the European Commission after years of illegal sales practices in the U.S. and Europe, whereby it forced customers to purchase a percentage of their overall supplies from Broadcom in order to qualify for discounts. Broadcom must regularly submit sales records to regulators to ensure it is not running afoul of the law.

In addition, Broadcome said there is an ongoing probe by the Korean Fair Trade Commission “into certain of our contracting and business practices, which may evolve into legal or other administrative” issues.

If Broadcom fails to win regulatory clearances it could be forced to pay VMware a $1.5 billion breakup fee.

Broadcom Proxy Statement

The company’s annual vote to elect the nine members of its board of directors and to take an advisory vote on the compensation of its executives will be in April.

One of the interesting items in this report dealt with former Broadcom Software Group President Tom Krause (pictured), who abruptly departed the company in July after co-announcing the purchase of VMware with Tan in May.

Broadcom’s proxy filing mentions Krause multiple times, disclosing along the way that when he left suddenly to take the CEO job at Citrix/Tibco he abandoned several forms of cash compensation.

“Mr. Krause did not receive any severance or bonus payments and forfeited all outstanding, unvested equity awards in connection with his resignation,” Broadcom wrote. In addition, Krause walked away from performance bonuses that would have at least doubled his $715,000 salary in 2022. Citrix/Tibco became Cloud Software Group once it was taken private.

VMware Partners Feeling More Optimistic

When the $61 billion takeover of VMware was announced last year, longtime VMware partners wished for Broadcom to do one thing: “Don’t screw VMware up.”

After a year of Tan talking with the market, VMware partners such as VirtuIT and CEO Gary McConnell are taking him at his word that he plans to “embrace the channel’ as he said when the deal was unveiled. Partners told CRN they expect to see more sales opportunities and services work as Broadcom focuses on the top accounts and lets partners assume more control of smaller deals.