Broadcom Inc. (AVGO)
Analysis of Revenues
Revenue Recognition Accounting Policy
Broadcom recognizes revenue related to sales of the products, net of trade discounts and allowances, provided that (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title and risk of loss have transferred, (iii) the price is fixed or determinable and (iv) collectibility is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Broadcom considers the price to be determinable when the price is not subject to refund or adjustments or when any such adjustments can be estimated. Broadcom evaluates the creditworthiness of the customers to determine that appropriate credit limits are established prior to the acceptance of an order. Revenue, including sales to resellers and distributors, is reduced for estimated returns and distributor allowances.
Broadcom recognizes revenue from sales of the products to distributors upon delivery of product to the distributors. An allowance for distributor credits covering price adjustments is made based on Broadcom’s estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions Broadcom has made based on the historical estimates. Broadcom also records reductions of revenue for rebates in the same period that the related revenue is recorded. Broadcom accrues 100% of potential rebates at the time of sale. Broadcom reverses the accrual of unclaimed rebate amounts as specific rebate programs contractually end and when Broadcom believes unclaimed rebates are no longer subject to payment and will not be paid. Thus, the reversal of unclaimed rebates may have a positive impact on Broadcom’s net revenue and results of operations in subsequent periods.
Certain of Broadcom’s product sales are sold in multiple-element arrangements including networking hardware with embedded software products and support, which are considered separate units of accounting. For certain of Broadcom’s products, software and non-software components function together to deliver the tangible products’ essential functionality.
Broadcom allocates revenue to each element in a multiple-element arrangement based upon the relative selling price. When applying the relative selling price method, Broadcom determines the selling price for each deliverable using vendor-specific objective evidence, or VSOE, of selling price, if it exists, or third-party evidence, or TPE, of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, Broadcom uses the best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. Revenue related to support is deferred and recognized ratably over the contractual period.
Broadcom determines VSOE based on the normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, Broadcom requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. For support, Broadcom considers stated renewal rates in determining VSOE.
In most instances, Broadcom is not able to establish VSOE for all deliverables in an arrangement with multiple elements. When VSOE cannot be established, Broadcom attempts to establish the selling price for each element based on TPE. When Broadcom is unable to establish selling price using VSOE or TPE, Broadcom uses best estimated selling price, or BESP, in the allocation of the arrangement consideration. The objective of BESP is to determine the price at which Broadcom would transact a sale if the product or service were sold on a stand-alone basis. Broadcom determines BESP for a product by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices taking into consideration the go-to-market strategy.
Broadcom enters into development agreements with some of the customers and recognizes revenue from these agreements upon completion and acceptance by the customer of contract deliverables or as services are provided, depending on the terms of the arrangement. Revenue is deferred for any amounts billed or received prior to completion or delivery of services. As Broadcom retains the intellectual property generated from these development agreements, costs related to these arrangements are included in research and development expense.
Revenue from upfront payments for the licensing of Broadcom’s patents is recognized when the arrangement is mutually signed, if there is no future delivery or future performance obligation and all other criteria are met. Revenue from guaranteed royalty streams are recognized when paid, or collection is reasonably assured and all other criteria are met. When patent licensing arrangements include royalties for future sales of the licensees’ products using Broadcom’s licensed patented technology, revenue is recognized when the royalty report is received from the licensee, at which time the sales price is determinable, provided that all other criteria have been met.
Source: 10-K (filing date: 2018-12-21).
Revenues as Reported
Broadcom Inc., Income Statement, Revenues
US$ in millions
|12 months ended||Nov 4, 2018||Oct 29, 2017||Oct 30, 2016||Nov 1, 2015||Nov 2, 2014||Nov 3, 2013|
|Industrial & other|
Based on: 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29), 10-K (filing date: 2013-12-20).
|Net revenue||Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss).||Broadcom Inc.’s net revenue increased from 2016 to 2017 and from 2017 to 2018.|