Broadcom CEO defends CA purchase

Broadcom CEO Hock Tan said the acquisition, which was widely panned by analysts, boils down to customers, revenue and future growth.
Written by Natalie Gagliordi, Contributor

It's been two months since Broadcom announced it was buying CA Technologies for $18.9 billion in cash as part of a major pivot into the enterprise software market. Broadcom, a semiconductor and storage company, said the deal would add recurring revenue and bolster its position as an enterprise player and ultimately a company focused on infrastructure technology.

Analysts, however, panned the deal almost immediately and Broadcom's stock price fell 19 percent in the days following the announcement. The skepticism stemmed from financial engineering, a lack of strategic rationale and cost synergies that seemed unrealistic.

For the most part Broadcom left the skepticism unaddressed -- until the company's third quarter earnings call with analysts on Thursday, when Broadcom CEO Hock Tan delivered a passionate defense of the purchase.

In short, it's all about customers, revenue and future growth.

"We're buying CA because of their customers and their importance to these customers," Tan said. "CA sells mission-critical software to virtually all of the world's largest enterprises. In other words, these guys are deeply embedded."

He continued:

"When you look at the largest enterprises, which comprise CA key customers, these guys really have limited direct access to our mission-critical technology. In that lies what we think is a new and huge opportunity. Just as we have done with hyper cloud players, we believe we can bring our compute offload solutions, our Tomahawk switchers, Jericho routers, fiber optics and our server storage connectivity portfolio directly to these same large enterprises that are buying CA software. These large end users invest tens of billions of dollars on IT infrastructure every year."

Later on in the call, Tan was pressed by an analyst questioning Broadcom's M&A track and how the CA purchase was not, in fact, a purely financial deal. The analyst also questioned the stickiness of CA's technologies given their legacy nature and Broadcom's tendency to slash SG&A and cut R&D.

Tan appeared a bit irked by the question, which he called "wrong on so many levels," but went on to rebuff the notion that mainframes -- a core CA business -- are on their way out. Tan said the mainframe business "is alive and well" with continued growth and investment.

"To put it in simple terms, transactions, online transactions, a lot of them in the largest enterprises in the world cannot run without mainframe, with hardware or the software tools that drive it. So that's basically all I say to that. But obviously, ours is an operating model and a business model, and the financials is what comes out of a very strong, sustainable and secure business model."

As for its Q3 financials, Broadcom reported quarterly revenues of $5.06 billion, up 13 percent year over year, and non-GAAP EPS of $4.98. Wall Street was expecting revenue of $5.06 billion with earnings of $4.83 per share.

Wired infrastructure continued to contribute the bulk of the sales, with $2.3 billion attributed to that segment. The company's storage kit business brought in $1.253 billion, up 70 percent from the previous year.

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