Tuesday, December 24, 2024

Nothing says “Christmas present” to Calcbench like a complicated non-GAAP net income disclosure, replete with adjustments just begging to be analyzed — and sure enough, Broadcom ($AVGO) delivered the other day with its 2024 annual report!

We can start with a look at the earnings release, filed on Dec. 12. The semiconduct giant reported $51.57 billion in revenue, up 44 percent from the prior year; operating income of $13.46 billion, a decline of 17 percent; and net income of $5.89 billion, down 58 percent. 


Except, those are the boring old GAAP numbers. Read further down the earnings release and you arrive at adjusted, non-GAAP numbers, and they tell quite a different tale. See Figure 1, below. 



Broadcom booked so many adjustments, of such large size, that its GAAP net income of $5.89 billion transformed into non-GAAP net income of $23.73 billion — up 29 percent from $18.79 billion in non-GAAP net income for the prior year. 


One can see the line-item adjustments driving that non-GAAP change:


  • $9.27 billion for amortization costs

  • $5.67 billion for stock-based compensation

  • $1.79 billion for restructuring costs


OK, companies make those adjustments to arrive at non-GAAP net income all the time — but these are huge numbers. What, specifically, is driving them at Broadcom? 


To answer that question, we opened the Footnotes and Disclosure tool and searched for the word “amortization” in Broadcom’s 10-K report, which the company filed on Dec. 20. This resulted in matches all over the report, but one match caught our eye immediately: the Management Discussion & Analysis. 


We went there, and found our answer: Broadcom’s acquisition of VMWare! That deal, which closed in November 2023, was valued at $61 billion; and the financial reporting consequences are visible all over the income statement. Consider these excerpts from the MD&A:


Selling, general and administrative expense increased $3,367 million, or 211%, in fiscal year 2024, compared to the prior fiscal year. The increase was primarily due to higher compensation, including higher stock-based compensation, as a result of an increase in headcount from the VMware Merger… 


Restructuring and other charges recognized in operating expenses were $1,533 million and $244 million in fiscal years 2024 and 2023, respectively. The fiscal year 2024 charges primarily included employee termination costs from cost reduction activities related to the VMware Merger…


Amortization of acquisition-related intangible assets recognized in operating expenses increased $1,850 million, or 133%, in fiscal year 2024, compared to the prior fiscal year primarily due to higher amortization of customer-related intangible assets from the VMware Merger…


We could continue, but you get the picture. Broadcom swallowed a whale when it acquired VMWare, and that whale will take some time to digest.


Actually, that brings up another question. What might future amortization costs be? After all, Broadcom acquired a lot of intangible assets from VMWare, and those assets are amortized on a straight-line basis until they reach zero. So you can model out future amortization of intangibles, and Broadcom provides a table listing those costs! It’s right there in the Goodwill & Intangibles footnote disclosure. See Figure 2, below.



Broadcom even discloses how many years it will be amortizing the various intangible assets it has. We can’t say for sure that all of the amounts above relate directly to the VMWare deal, but clearly that deal accounts for a substantial portion of things. 


That’s all just one example of how you can study non-GAAP disclosures in Calcbench to understand where they come from and what they mean for the company’s overall operations. The data is all there; you just need the right tools to pull it out! Happy holidays!





FREE Calcbench Premium
Two Week Trial

Research financial & accounting data like never before. Get features designed for better insights. Try our enhanced Excel Add-in. Sign up now to try the Premium Suite.