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Broadcom Blames Trade Tensions in $2 Billion Forecast Cut

June 17, 2019
Broadcom Blames Trade Tensions in $2 Billion Forecast Cut

Broadcom's earnings never tell the whole story. As one of the largest producers of networking chips used in data centers, Broadcom is seen as a bellweather for spending on servers. Since the Silicon Valley company also sells the Wi-Fi and Bluetooth chips used in Apple's iPhone, the company's results are also used to sniff out potential slowdowns in the global smartphone market.

But the company's latest results brought something bigger into focus: how trade tensions between the United States and China are weighing on the chip industry. On Thursday, the company slashed its 2019 sales forecast from $24.5 billion to $22.5 billion, blaming severe new restrictions on supplying Huawei—the world's No.1 vendor of telecommunications gear and No.2 smartphone maker—and the uncertainty caused by the broader trade war.

"We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers”, Hock Tan, Broadcom’s chief executive, said in a statement. “As a result, our customers are actively reducing their inventory levels," he added, "and we are taking a conservative stance for the rest of the year."

Broadcom’s shares have slipped nearly 5% since the announcement Thursday.

The Trump administration's ban on supplying Huawei is a significant blow to Broadcom. Sales in the company's semiconductor unit slipped 10% in the second quarter compared to a year ago. Huawei accounted for $900 million—or around 4%—of the company's overall sales in 2018. “We will see a sharp impact simply because no purchases are allowed and there is no obvious substitution in place,” Tan said on an analyst conference call.

But the world's fifth largest seller of semiconductors said the guidance “obviously extends beyond just one particular customer.” The uncertainty underscored by the Huawei ban has pushed its customers to reduce inventory and delay additional orders. Trade tensions have caused a “compression of the supply chain," Broadcom said. Around 50% of Broacom’s revenue in 2018 came from China, which imports more chips than any other country in the world.

The San Jose, California-based company's sales came to $5.52 billion, up 10% from $5.01 billion in the same quarter last year. But compared to the first quarter of 2019, Broadcom's ales slipped 5% from $5.79 billion. Net profit improved from $471 million, or $1.12 per share, in the first quarter to $691 million or $1.64 per share in the second quarter. Gross margin came to 56%, an increase of 1% quarter over quarter and 5% year over year.

Banning Huawei from buying American software and hardware is part of the broader trade clash between the United States and China. The Trump administration has also added tariffs to hundreds of billions of dollars of Chinese goods as part of its plan to reduce the trade imbalance between the U.S. and China. But the financial repercussions of the trade conflict have so far been hard to determine. That has changed over the last month.

Most American chip makers, including Intel, Broadcom and Qualcomm, have stopped selling to Huawei in the wake of the Huawei ban. Micron Technology, the largest American memory chip producer, has also halted shipments to Huawei, which accounted for around 13% of its sales in the first half of 2019. But Broadcom's new forecast is one of the first times the trade war's damage to the semiconductor industry has been spelled out.

Other companies are being punished by the Huawei ban. Skyworks, which sells radio frequency components to Huawei, reduced its revenue forecast in the third quarter by $60 million to between $755 million and $775 million. Another radio frequency chip vendor, Qorvo, sees sales falling from $790 million to $740 million in the first quarter since it paused shipments to the Chinese giant, which made more than $100 billion in revenue in 2018.

The trade conflict is part of a broader problem for Broadcom. The global chip industry has been grappling with slowing demand since the second half of last year. The smartphone market has started to slow down, while a spending surge in data centers has also slackened. Demand for chips used in factories and cars have yet to make up the difference. Texas Instruments warned in April that the broader slowdown could persist into 2020.

For Broadcom, the Huawei ban "is creating economic and political uncertainty and reducing visibility for our global customers." Broadcom's semiconductor sales will total $17.5 billion in 2019, a high single-digit decline compared to 2018. “This leads us to believe the second half of 2019 will be more in line with the first half as opposed to the previously expected recovery."

The "environment is very, very nervous," Tan added.

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