Chen Fuyang (Hock Tan), chief executive of Broadcom (Broadcom Inc.), the world's leading wired and wireless semiconductor company, gave a surprising reason for lagging behind some of its peers in its third-quarter results on Thursday: it was deliberate.
Founded in 1991, Broadcom is one of the world's largest semiconductor companies and the world's largest manufacturer of WLAN chips. The company's wireless connection chips are used in Apple's iPhone and other smartphones. Its switch chips and custom designs are an important part of data centers owned by cloud computing giants such as Alphabet Inc's Google and Amazon's AWS.
Broadcom is also a major supplier of chips for set-top boxes and home networking equipment.
Quarterly results beat expectations but lagged behind their peers
Thanks to strong demand for chips, large US chipmakers have had "bumper harvests" in their quarterly results. Qualcomm's (Qualcomm Inc.) sales rose 65% in the fiscal third quarter ended June 27, while Nvidia (Nvidia Corp.) 's sales rose 68% in the fiscal second quarter ended July.
Broadcom, by contrast, grew at a slower rate, but still beat Wall Street expectations. Excluding some recurring items, Broadcom earned $6.96 a share in the fiscal third quarter ended Aug. 1. Revenue rose 16% to $6.78 billion. Analysts had expected earnings per share of $6.85 and sales of $6.76 billion.
Broadcom also expects fourth-quarter revenue of about $7.35 billion, compared with analysts' estimates of $7.23 billion.
Chen Fuyang said the latest results reflect the strength of markets such as cloud services, 5G infrastructure, broadband and wireless technology. But investors clearly reacted calmly to the results: the stock was little changed in after-hours trading on Thursday. By the close, the company's shares were up 12 per cent this year.
Why is the sales growth of Broadcom not as good as that of its peers?
Chen Fuyang said on a conference call after the results that despite the surge in demand for its chips, the company was still strictly controlling orders. The idea is to sacrifice some immediate sales to avoid oversupply in the future.
"We can sell more, but that means we will build inventory in the wrong place," Mr Chen said. He said the company was "restraining supply" and focusing on where it was really needed.
It is unusual for Broadcom, one of the world's largest chipmakers, to deliberately depress profits, in the latest sign of turmoil in the $400 billion semiconductor market. As the economy recovers from the epidemic and companies compete to hoard parts, the auto industry is struggling to meet the surge in demand.
Chen Fuyang points out that some of these requirements are "unsustainable". In other words, if he sells too many chips to some customers now, demand will collapse later.
Chen Fuyang reshaped the chip industry through a series of acquisitions, making Broadcom one of the largest manufacturers of key electronic components. From smartphones to powerful computer network equipment, the breadth of Broadcom's products means that the company has become a bellwether of the needs of the economy as a whole.
Like many of its peers, Broadcom relies heavily on outsourced production of chips and is one of TSMC's biggest customers. The surge in demand has led to a shortage of many chips across the industry. Chen Fuyang was one of the first leaders in the industry to point out this problem, converting customer orders into long-term, irrevocable orders.
The company had previously said it had largely sold out for the rest of the year and assured investors that the policy of not canceling orders meant customers would not hoard inventory, which is often a harbinger of collapsing demand.
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