Broadcom cut $2 billion off its 2019 revenue forecast — and it highlights broader issues plaguing the industry (AVGO)

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US semiconductor manufacturer Broadcom warned in its Q2 2019 earnings that its 2019 revenue will be $2 billion less than previously expected, according to Reuters.

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The $2 billion revision represents an 8% decline from the $24.5 billion originally predicted for FY 2019. The pressures that led to Broadcom’s revision are not unique to the company, but widespread across the semiconductor industry.

Here’s how Broadcom’s problems extend to the industry as a whole:

Globally, the semiconductor industry is in the midst of a multi-quarter demand slowdown. Semiconductor manufacturing equipment billings for Q1 2019 dropped 8% quarter-over-quarter and 19% year-over-year to reach $13.8 billion, according toelectronics design and manufacturing trade association SEMI. Market bellwether Texas Instruments believes this slowdown in demand is likely to continue for at least two more quarters.
The drop in demand is due to stagnating smartphone sales as well as a cooling of previously hot anticipation for other segments to take off, such as autonomous cars or 5G chips. For example, smartphone sales plateaued for the first time ever in 2018, with market leaders Samsung and Apple experiencing declining smartphone sales.
Like many other industries, the semiconductor industry can’t escape the fallout of US-China trade tensions. Broadcom’s revised guidance was influenced by the loss of its customer Huawei, which spent $900 million with the company last year. US suppliers can no longer sell to the Chinese telecom equipment manufacturer following a ruling by the US Commerce Department. Other semiconductor companies, such as Intel and Qualcomm, are reportedly lobbying the US Commerce Department to ease restrictions on doing business with Huawei, according to inside sources cited by Reuters. These companies are likely looking to make sure they don’t miss out on their share of the billions of dollars Huawei spends with its US suppliers — Huawei spent $11 billion on US products in 2018.

The bigger picture: Given that semiconductor demand is expected to stay low for at least the next few quarters, firms in the space should reinforce other business segments to overcome slowing demand.

Semiconductor companies should expand other segments of their companies, like Nvidia did when demand for its graphics cards fell flat.US-based Nvidia, which makes graphics processing units (GPUs) that were especially popular with cryptocurrency miners, was forced to turn to its other business segments to pick up the slack after the crypto mining industry collapsed due to a crash in the crypto market earlier in 2018.

To cope with the falling demand for its GPUs and subsequent revenue drop, the company has pivoted toward its high-performance computing segment, headlined by the massive $7 billion acquisition of data center chipmaker Mellanox as well as signing a deal to support high-performance computing hardware from British semiconductor company Arm.

Companies struggling in the semiconductor space need to follow Nvidia’s lead and identify existing business segments that they can scale up in the face of uncertain future revenues. Broadcom, for instance, would do well to more aggressively build up its infrastructure software business, a smaller segment that has, according to CEO Hock Tan on the company’s Q2 earnings call, benefited in recent quarters from sustained demand.

Diversifying its revenue by building up this segment could help Broadcom overcome global slowdowns. Currently, the infrastructure software segment is forecasted to account for 22% ($5 billion) of Broadcom’s fiscal year 2019 revenue, and growing that segment, even if it incurred expenses from investments in the short term, could provide the company with a larger, independent revenue source to better weather the ups and downs of the semiconductor market.

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