NVIDIA Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 1, 2023

There are 15 speakers on the call.

Operator

Welcome to Broadcom Inc. 2nd Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ji Yu, Head of Investor Relations of Broadcom Inc.

Speaker 1

Thank you, operator, and good afternoon, everyone. Conference Call. Joining me on today's call are Hock Tan, President and CEO Kirsten Spears, Chief Financial Officer and Charlie Kalas, President, Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the Q2 fiscal year 2023. If you did not receive a copy, You may obtain the information from the Investors section of Broadcom's website atbroadcom.com.

Speaker 1

This conference call is being webcast live, Call and an audio replay of the call can be accessed for 1 year through the Investors section of Broadcom's website. During the prepared comments, Hock and Kirsten will be providing details of our Q2 fiscal year 2023 results, Guidance for our Q3 as well as commentary regarding the business environment. We'll take questions after the end of our prepared comments. Please refer to our press release today and our recent filings with the SEC for information on the specific risk Factors that could cause our actual results to differ materially from the forward looking statements made on this call. In addition to U.

Speaker 1

S. GAAP reporting, Broadcom reports certain financial measures on a non GAAP basis. A reconciliation between GAAP and non GAAP measures Call is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non GAAP financial results. I'll now turn the call over to Hock.

Speaker 2

Thank you, Gee, and thank you everyone for joining us So in our fiscal Q2 2023, consolidated net revenue was $8,700,000,000 up 8% year on year. Semiconductor Solutions revenue increased 9% year on year to $6,800,000,000 and Infrastructure Software grew 3% year on year to $1,900,000,000 as the stable growth in core software more than offset softness in the Brocade business. Now as I start this call, I know you all want to hear about how we are benefiting Put this in perspective, our revenue today from this opportunity represents About 15% of our semiconductor business. Having said this, It was only 10% in fiscal 2022 and we believe It could be over 25% of our semiconductor revenue in fiscal 2024. In fact, over the course of fiscal 2023 that we're in, We are seeing a trajectory where our quarterly revenue entering the year And in fiscal Q3 2023, We expect that this revenue to exceed $1,000,000,000 in the quarter.

Speaker 2

But As you well know, we are also a broadly diversified semiconductor and infrastructure software company. And in our fiscal Q2, demand for IT infrastructure was driven by hyperscale, while service providers and enterprise continue to hold up. Following the 30% year on year increases we have experienced over the past 5 quarters, Overall IT Infrastructure demand in Q2 moderated to mid teens percentage Growth Year on Year. As we have always told you, we continue to ship only to end user demand. We remain very disciplined on how we manage inventory across our ecosystem.

Speaker 2

We exited the quarter with less than 86 days on hand, a level of inventory consistent with what we have maintained over the past 8 quarters. Now let me give you more color on our end markets. Let me begin with wireless. As you saw in our recent 8 ks filing, We entered into a multiyear collaboration with a North American wireless OEM on Cutting Edge Wireless Connectivity and 5 gs Components. Our engagement Q2 wireless revenue of $1,600,000,000 represented 23% of semiconductor revenue.

Speaker 2

Wireless revenue declined seasonally, down 24% quarter on quarter and down 9% year on year. In Q3, as we just begin the seasonal ramp of the next generation Phone Platform. We expect wireless revenue to be up low single digits sequentially. We expect, however, it will remain around flattish year on year. Moving on to networking.

Speaker 2

Networking revenue was $2,600,000,000 And was up 20% year on year, in line with guidance, representing 39% of our semiconductor revenue. There are 2 growth drivers here. 1, continued strength in deployments of our merchant Tomahawk Switching for traditional enterprise workloads as well as Jericho routing platforms for telcos And 2, strong growth in AI infrastructure at hyperscalers from compute offload and networking. And speaking of AI Networks, Broadcom's next generation Ethernet switching portfolio consisting of Tomahawk 5 and Jericho 3AI offers the industry's highest performance fabric for Large Scale AI Clusters by optimizing the demanding and costly AI resources. These switches based on an open distributed disaggregated architecture Ethernet fabric as we know it already supports multi tenancy capability and End to End Congestion Management.

Speaker 2

This lossless connectivity with high QoS performance Has been well proven over the last 10 years of network deployment in the public cloud and Telcos. In other words, the technology is not new and we are As Broadcom very well positioned to simply extend our best in class networking technology into generative AI infrastructure, while supporting standard connectivity, which enables Vendor Interoperability. In Q3, we expect Networking Revenue to maintain its growth year on year of around 20%. Next, our server storage connectivity revenue was 1,100,000,000 17% of semiconductor revenue and up 20% year on year. And as we noted last quarter, With the transition to next generation mega rate largely completed and enterprise demand moderating, We expect service storage connectivity revenue in Q3 to be up low single digits year on year.

Speaker 2

Moving on to broadband, revenue grew 10% year on year to $1,200,000,000 and represented 18% of semiconductor revenue. Growth in broadband was driven by continued deployments by telcos of next generation 10 gs PON and cable operators of DOCSIS 3.1. With high attach rates of WiFi 6 and 6E. And in Q3, we expect our broadband growth 2 moderate to low single digits percent year on year. And finally, Q2 industrial resales of $260,000,000 increased 2% year on year as the softness in China was offset by strength Globally in Renewable Energy and Robotics.

Speaker 2

And in Q3, we forecast industrial resales to be flattish year on year on continuing softness in Asia, offset by strength in Europe. So summary, Q2 Semiconductor Solutions revenue was up 9% year on year and in Q3, we expect semiconductor revenue growth of mid single digit year on year growth. Turning to software. In Q2, infrastructure software revenue of $1,900,000,000 grew 3% Year on Year and Represented 22 Percent of Total Revenue. As expected, continued softness in brocade Relating to core software, consolidated renewal rates averaged 114% over expiring contracts.

Speaker 2

And in our strategic accounts, we averaged 120%. Within the strategic accounts, annualized bookings of $564,000,000 included $133,000,000 or 23 percent of Cross selling of other portfolio products to these same core customers. Over 90% of the renewal value represented Recurring Subscription and Maintenance. And over the last 12 months, Consolidated renewal rates averaged 117% over expiring contracts and among our strategic accounts, We averaged 128%. Because of this, our ARR, the indicator of forward revenue At the end of Q2 was $5,300,000,000 up 2% from a year ago.

Speaker 2

And in Q3, We expect our Infrastructure Software segment revenue to be up low single digits percentage year on year as the Call software growth continues to be offset by weakness in Brocade. On a consolidated basis, we're guiding Q3 revenue of 8,850,000,000 Up 5% year on year. Before Kirsten Tells you more about our financial performance for the quarter, let me provide a brief update on our Pending Acquisition of VMware. We're making good progress with our various regulatory filings around the world. Having received legal merger clearance in Australia, Brazil, Canada, South Africa and Taiwan and foreign investment control clearance Broadcom's Fiscal 2023.

Speaker 2

The combination of Broadcom and VMware is about enabling enterprises To accelerate innovation and expand choice by addressing their most complex Technology Challenges in this multi cloud era. And we are confident that regulators will see this when they conclude their review. With that, let me turn the call over to Kiersten.

Speaker 3

Thank you, Hock. Let me now provide additional detail on our financial performance. Consolidated revenue was $8,700,000,000 for the quarter, up 8% from a year ago. Gross margins were 75 point 6% of revenue in the quarter, about 30 basis points higher than we expected on product mix. Operating expenses were $1,200,000,000 down 4% year on year.

Speaker 3

R and D of $958,000,000 was also down 4% year on year on lower variable spending. Operating income for the quarter was $5,400,000,000 and was up 10% from a year ago. Operating margin was 62 percent of revenue, up approximately 100 basis points year on year. Adjusted EBITDA was $5,700,000,000 or 65 percent of revenue. This figure excludes $129,000,000 of depreciation.

Speaker 3

Now a review of the P and L for our 2 segments. Revenue for our Semiconductor Solutions segment was $6,800,000,000 and represented 78% of total revenue in the quarter. This was up 9% year on year. Gross margins for our Semiconductor Solutions segment were approximately 71%, Down Approximately 120 basis points year on year, driven primarily by product mix within our semiconductor end markets. Operating expenses were $833,000,000 in Q2, down 5% year on year.

Speaker 3

R and D was $739,000,000 in the quarter, down 4% year on year. Q2 semiconductor operating margins were 59%. So while semiconductor revenue was up 9%, operating profit grew 10% year on year. Moving to the P and L for our Infrastructure Software segment. Revenue for Infrastructure Software was $1,900,000,000 up 3% year on year and represented 22% of revenue.

Speaker 3

Gross margins for infrastructure software were 92% in the quarter and operating expenses were $361,000,000 in the quarter, down 3% year over year. Infrastructure Software operating margin was 73% in Q2 and operating profit grew 8% year on year. Moving to cash flow. Free cash flow in the quarter was $4,400,000,000 and represented 50% of revenues in Q2. We spent $122,000,000 on capital expenditures.

Speaker 3

Day sales outstanding were 32 days in the 2nd quarter compared to 33 days in the 1st quarter. We ended the 2nd quarter with inventory of $1,900,000,000 down 1% from the end of the prior quarter. We ended the Q2 with $11,600,000,000 of cash and $39,300,000,000 of gross debt of which $1,100,000,000 is short term. The weighted average coupon rate and years to maturity of our fixed rate debt is 3.61% and 9.9 years respectively. Turning to capital allocation.

Speaker 3

In the quarter, we paid stockholders $1,900,000,000 of cash dividends. Consistent with our commitment to return excess cash to shareholders, we repurchased $2,800,000,000 of our common stock and eliminated $614,000,000 of common stock for taxes due on the vesting of employee equity, resulting in the repurchase and elimination of approximately 5,600,000 AVGO shares. The non GAAP diluted share count in Q2 was 435,000,000. As of the end of Q2, dollars 9,000,000,000 was remaining under the share repurchase authorization. Excluding the potential impact Of any share repurchases, in Q3, we expect the non GAAP diluted share count to be 438,000,000.

Speaker 3

Based on current business trends and conditions, our guidance for the Q3 of fiscal 2023 is for consolidated revenues of $8,850,000,000 and adjusted EBITDA of approximately 65% of projected revenue. In Q3, we expect gross margins to be down approximately 60 basis points sequentially on product mix. That concludes my prepared remarks. Operator, please open up the call for questions.

Operator

Thank you. Due to time restraints, we ask that you please limit yourself to one question. Please standby while we compile the Q and A roster. Line of Ross Seymore with Deutsche Bank. Your line is open.

Speaker 4

Thanks for letting me ask a question. Hock, I might as well start off with the topic that you started AI these days is everywhere. Thanks for the color that you gave and the percentage of the sales that it was Potentially going to represent into the future. I wanted to just get a little bit more color on two aspects of that. How you've seen the demand evolve during the course of your quarter?

Speaker 4

Has it accelerated, in what areas, etcetera? And is there any competitive implications for quarter. We've heard from some of the compute folks that they want to do more on the networking side, and then obviously you want to do more into the compute side. So I just wondered How the competitive intensity is changing given the AI workload increases these days?

Speaker 2

Okay. Well, on your first part Yes, I mean, last earnings call, we have indicated Yes. There was a strong sense of demand, and we have Seeing that continue unabated in terms of that strong demand search that's coming in. Now, of course, We all realize lead times, a manufacturing lead times on most of these cutting edge products It's fairly extended. I mean, you don't make this manufacture these products under our process Anything less than 6 months or thereabouts.

Speaker 2

And while there is strong demand and a strong urgency of demand, The ability to ramp up will be more measured and addressing Demands That Are Most Urgent. On the second part, no, we're always seeing competition and really even in traditional Workloads in Enterprise Data Centers and Hyperscale Data Centers. Our business, our markets in networking, switching, routing Continues to face competition. So really nothing new here. The competition continues to exist.

Speaker 2

And we all each of us do the best we can in the areas we are best at doing.

Speaker 5

Thank you.

Operator

Thank you. One moment for our next question. That will come from the line of Vivek Arya with Bank of America Securities. Your line is open.

Speaker 6

Thanks for taking my questions. Hawkeye, I just wanted to first clarify, I think you might have mentioned it, but I think last quarter you gave very specific numerical targets of $3,000,000,000 in ASICs $800,000,000 in switches for fiscal 2023. I just wanted to make sure if there is any Specific update to those numbers, is it more than $4,000,000,000 in total now, etcetera? And then my question is, longer term, What do you think the share is going to be between kind of general purpose GPU type solutions versus ASICs? Do you think that share shifts towards ASICs?

Speaker 6

Do you think it shifts towards general purpose solutions? Because if I look outside of the compute offload opportunity. You have generally favored right more the general purpose market. So I'm curious, how do you see this share between general purpose versus ASICs play out in this AI processing opportunity longer term.

Speaker 2

On the first part of your question, you guys love your question in 2 parts. Let's do the first part first. We guided or we indicated that for fiscal 2023 that the revenue we are looking In this space, it's $3,800,000,000 There's no reason nor are we trying to do it now in the middle of the year To change that forecast at this point. So we still keep to that guide that forecast we've given you in fiscal 'twenty three. We're obviously giving you a sense of trajectory in my remarks on what we see 2024 to look like.

Speaker 2

And that again is a broad trajectory of the guidance, nothing more than that. Just to give you a sense for the accelerated move from 2022, 2023 and headed into 2024, nothing more than that. But in terms of specific number that you indicated we gave, it's We stay by our forecast of fiscal 23, 3.8 percent, frankly, because My view is a bit early to give you any revised forecast. Then beyond that, on your most broad specific questions, ASIC versus Merchant. You know, I always favor Merchant.

Speaker 2

Whether it's in Compute, Whether it's in networking, it's to in my mind, long term Merchant will eventually, my view, have a better shot at prevailing. But what we're not talking what we're talking about today is obviously a shorter term Issue versus a very long term issue. And the shorter term issue is, yes, compute offload exists. But again, The number of players in compute offload ASICs is very, very limited and that's what we continue to see.

Speaker 7

Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Harlan Sur with JPMorgan. Your line is open.

Speaker 8

Hi, good afternoon. Thanks for taking my question. Great to see the strong and growing ramp of your AI compute offload and networking products. On your next generation, Hock, on your next generation AI and compute offload programs that are in the design phase now, you've got your next gen switching and routing platforms that are being qualified. Like are your customers continuing to push the team to accelerate the design funnel, pull in program ramp timing?

Speaker 8

And then I think you might have addressed this, but I just want to clarify. All of these solutions use the same type of very advanced packaging like stacked die, HBM memory, COOS packaging and not surprisingly this is the same architecture used by your AI GPU peers, which are Driving the same strong trends, right. So is the Broadcom team facing or expected to face like advanced packaging, advanced substrate supply constraints? And How is the operations team going to sort of manage through all of this?

Speaker 2

Well, you're right in that This AI product this leading and this generative AI products, next generation, current generation, All using very leading edge technologies in wafers, silicon wafers and substrates and packaging, Including Memory Stacking. And but it's From consumption, it's still there's still products There's still capacity out there, as I say. And this is not something you want to be able to Ship or deploy right away. It takes time. And we see it as a measured ramp over that has started In fiscal 2023 and will continue its pace through to 2024.

Speaker 8

And on the design wins funnel, are you seeing customers still trying to pull in all of their designs?

Speaker 2

Well, it's we are our basic opportunity still lies in Obviously, to put in place this disaggregated distributed disaggregated architecture, which of Ethernet Fabric on AI. And yes, that's a lot of obvious interest and lots of design That exists out there.

Speaker 8

Thank you, Hock.

Operator

Thank you. One moment for our next question. And that will come from the line of Timothy Arcuri with UBS. Your line is open.

Speaker 9

Thanks a lot. Hock, I was wondering if you can Sort of help shed some light on the general perception that, all this AI spending is sort of boxing out, traditional compute. Can you talk about that or is it that just CapEx budgets are going to have to grow to support all this extra AI CapEx. I mean, the truth is probably somewhere in between, but I'm wondering if you can help shed some light on just the general perception that All of this is coming at the expense of the traditional compute and the traditional infrastructure. Thanks.

Speaker 2

Your guess is as good as mine actually. I can't tell either. I mean, you're right, Des, and there's this AI Networks And this budget that are now allocated more and more by the hyperscale towards this AI networks, But not necessary, particularly in enterprise at the expense of traditional workloads and traditional data centers. I think there's going to be a and there's definitely coexistence and a lot of the large amount of spending on AI today that we see For us, that is very much on the hyperscale. And so enterprise are still focusing a lot of their budget As they have on their traditional data centers and traditional workloads supporting x86.

Speaker 2

And but it's just maybe too early to really for us to find to figure out Whether that is that cannibalization.

Speaker 6

Thank you, Hardik.

Operator

Thank you. One moment for our next question. And that will come from the line of Ambrish Srivastava with BMO Capital Markets. Your line is open.

Speaker 10

Hi. Thank you very much, Hock. I have a less sexy topic to talk about, but obviously very important in how you manage the business. Can you talk about lead times and especially in the light of demand moderating, manufacturing cycle times coming down, Not to mention the 6 months that you highlighted for the cutting edge. Are you still staying with the 52 week Can I lead quoting to customers or has that changed?

Speaker 10

Thank you.

Speaker 2

By the way, it's 50. Yes, my standard lead time for our products is 50 weeks and we are still staying with it because it's not about as much lead time to manufacture the product as Our interest and frankly, our mutual interest between our customers and ourselves to Take a hard look at providing visibility for us in ensuring we can And supplying in the right amount at the right time the requirements. So yes, we're still sticking to 50 weeks.

Speaker 10

Got it. Thank you a lot.

Operator

Thank you. One moment for our next question.

Speaker 7

And that will come from

Operator

the line from Harsh Kumar with Piper Sandler.

Speaker 11

Yes. Hey, Hock. I was hoping you could clarify something for us. I think earlier in the beginning of the call when you gave your AI commentary, you said that Gen AI revenues are 15% odd today, they'll go to 25% by the end of 2024. That's practically all your growth.

Speaker 11

That's the $4,000,000,000 $3,000,000,000 $4,000,000,000 that you will grow. So looking at your commentary, I know your core business is doing really well. So I I know that I'm probably misinterpreting it, but I was hoping that maybe there's not so many hoping that there's no cannibalization going on in your business, but maybe you could clarify for

Speaker 2

Answered from an earlier question by a peer of yours, we do not seek Obviously, we do not see cannibalization, but these are early innings, relatively speaking, And budgets don't change that rapidly. If there's cannibalization, obviously, it comes from where the spending goes in terms of priority. It's not obvious to us there is that clarity to be able to tell you there's cannibalization, none in the list. And by the way, if you look at the numbers that all the growth is coming from it, perhaps you're right, but As we talk we sit here in 2023 and we still show some level of growth. I would say We still show growth in the rest of our business, in the rest of our products Augmented perhaps that growth is augmented with the growth in our AI revenue in delivering an AI product, but it's not entirely all our growth.

Speaker 2

I would say at least half the growth It's still on our traditional business, the other half maybe out of generative AI.

Speaker 8

Thank you so much.

Operator

Thank you. One moment for our next question. And that will come from the line of Karl Ackerman with BNP Paribas. Your line is open.

Speaker 9

Yes. Thank you for taking my question. Hock, you rightly pointed to the custom silicon opportunity that supports your cloud AI initiatives. However, your AI revenue that's not tied to custom silicon appears to be doubling in fiscal 2023. And the outlook for fiscal 2024 implies that it will double again.

Speaker 9

Obviously Broadcom has multiple areas of exposure to AI Really across PCIe switches, Tomahawk Jericho and Ramon ASICs and Electro Optics. I guess what sort of opportunity do you see your electric Optics Portfolio Playing a Role in High Performance Networking Environments for Inferencing and Training AI Applications.

Speaker 2

What you said is very, very insightful. It's A big part of our growth now in AI comes from the networking components That we're supplying into creating this Ethernet fabric for AI clusters. In fact, a big part of it you hit on. The rate of growth there is probably faster than our offload computing can grow. And that's 2nd Quarter Fiscal Year 2nd Quarter Fiscal Year 2nd Quarter Fiscal Year 2nd Quarter Fiscal Year 2nd Quarter, where we are focused on, as I say, our networking products are merchant, standard products, Supporting the very rapid growth of generative AI clusters out there in the compute side.

Speaker 2

And for us, this growth in the networking side is really the faster part of the growth.

Speaker 8

Thank you.

Operator

Thank you. One moment for our next question. That will come from the line of Joseph Moore with Morgan Stanley. Your line is open.

Speaker 2

Great. Thank you. I wanted

Speaker 11

to ask about the renewal of the wireless contract. Can you give us a sense for How much sort of concrete visibility you have into content over the duration of that? And just you mentioned it's both RF and Wireless Connectivity. Just any additional color you can give us would be great.

Speaker 2

Okay. Well, I don't want to be what's Smithview or Nitpicky. It's an extension, I would call it, of our existing long term agreement And it's an extension it's in the form of a collaboration And strategic arrangement is the best way to describe. It's not really a renewal. But the characteristics are similar, which is we supply technology, we supply products in a bunch of very Specific products related to 5 gs components and wireless connectivity, which is our strength, Which is the technology we keep leading in the marketplace and it's multiyear.

Speaker 2

And beyond that, I truly would refer you to our 8 ks and not provide any more specifics Simply because of sensitivities all around.

Speaker 5

Okay. Thank you.

Operator

Thank you. One moment for our next question.

Speaker 7

And that will come from

Operator

the line of Christopher Rolland with Susquehanna. Your line is

Speaker 2

open.

Operator

Mr. Roland, your line is open. Okay, we'll move on to the next question.

Speaker 7

And that will come from

Operator

the line of Toshiya Hari with Goldman Sachs. Your line is open.

Speaker 5

Hi. Thank you so much for taking the question. Hock, I'm curious how you're thinking about Your semiconductor business long term, you've discussed AI pretty extensively throughout this call. Could this be something that drives higher growth for your semiconductor business on a sustained basis? I think historically you've given relatively subdued or muted growth rates for your business vis a vis many of your competitors.

Speaker 5

Is this something that can drive sustained growth acceleration for your business? And if so, how should we think about The rate of R and D growth going forward as well, because I think your peers are growing R and D faster than what you guys are doing today. Thank you.

Speaker 2

Very, very good question, Toshio. Well, we are still a very broadly diversified semiconductor company, As I pointed out, we've multiple we're still multiple end markets beyond just AI, Most of which AI revenue happened to sit in my networking segment of the business as you all noted and you see. So we still have plenty of others. And even as I mentioned for fiscal 2024, our view is that it could hit over 25% of Semiconductor Revenue. We still have many large number of underpinnings for the rest of our semiconductor business.

Speaker 2

I mean, our wireless business, for instance, has a very strong lease of life for multi years and that's a big chunk of business. Just as the AI business appears to be trying to catch up to it in terms of the size, But our broadband service storage enterprise business continues to be very, very sustainable. And when you mix it all up, I don't know. We haven't updated our forecast long term. And so, Toshio, I Really have nothing more to add than what we have already told you in the past.

Speaker 2

Would it have to make a difference in our long term growth rate? Don't know. We haven't thought about it. I leave it to you to probably speculate before I put anything on paper.

Speaker 5

Appreciate it. Thank you.

Speaker 7

And that will come from

Operator

the line of William Stein with Jewett Securities. Your line is open.

Speaker 12

Great. Thank you. Hock, I'm wondering if you can talk about your foundry relationships. I know you've got a very strong relationship with TSM and of course Intel has been very vocal about winning new customers potentially. I wonder if you can talk about your flexibility and openness in considering new partners and then maybe also talk about pricing From foundry and whether that's influencing any changes quarter to quarter.

Speaker 12

There have been certainly Price Increases that we've heard about recently, and I'd love to hear your comments. Thank you.

Speaker 2

Thank you. We tend to be very loyal To our suppliers, the same reason we look at customers the same in that same manner, It cuts both ways for us. So there's a deep abiding loyalty to all our key suppliers. And having said that, We also have to be very realistic of the geopolitical environment we have today. And so we are also very open Looking at in certain specific technologies to broaden our supply base.

Speaker 2

Continue to want to be very loyal and fair to our existing base. So no and so we continue that way. And because of that Partnership and Loyalty. For us, price increase is something that is a very long term thing. It's part of the overall relationship.

Speaker 2

And put it simply, we don't move Just because of prices. We stay put because of support, Service and abiding sense of a very abiding sense of commitment mutually. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Edward Snyder with Charter Equity Research. Your line is open.

Speaker 13

Thank you very much. Hock, basically a housekeeping question. It sounded like your comments in the press release on the wireless deal Did not include mixed signal, which is part of your past agreement. And everything you've seen or said today doesn't suggest that may not be the next You mentioned wireless and RF, but you're also doing a lot of mixed signal stuff too. So if you can provide some clarity on that.

Speaker 13

And now also why shouldn't we expect the increased AI to increase the prospects, if not orders immediately for the electro optic products that are coming out fiscal. I would think that The much greater demand given the clusters and the size of these arrays that people are trying to put together, it would provide enormous benefits, I think, in power, wouldn't it? Can you give us some color on that? Thanks.

Speaker 2

All right. You have two questions here, Jon, don't you?

Speaker 13

Well, it was a 2 part question. I was going to do a 3, but cut off one.

Speaker 2

Thank you. I love you guys with your multipart questions. Let's do the first one. You're right. Our long term collaboration agreement that we recently announced It includes, as it indicated, wireless connectivity and 5 gs components.

Speaker 2

It does not include the high performance analog components, mixing of components That we also sell to that North American OEM customer. All right. That doesn't make it any less, I would add strategic non deeply engaged with each other. I would definitely hasten to add. And on the second part, Ed, if you could indulge me, Could you repeat that question?

Speaker 13

Yes. So you're talking about generative AI and the increase in demand that you're seeing from hyperscale guys. And we've already seen how big these clusters can get and it's really putting, I don't want to say stress on your networking assets. But I would think Given the size of the laser facing with the electro optic products that you're releasing next in Tomahawk 5 that you're releasing next year That puts Photonics right on the chip. It would become more attractive because it significantly reduces the power requirements.

Speaker 13

I know no one's used the ESOP and deployed, but I would think that interest in that should increase. Am I wrong?

Speaker 2

You're not wrong. All this as I indicated upfront in my remarks, yes, we see our next generation Coming up, Tomahawk 5, which will have silicon photonics, Which is co packaging as a key part of the offering and not to mention that it's going up to 51 Terabit Per Second Cut Through Bandwidth is exactly what you want to put in place for very high demanding AI Networks, especially if those AI networks start running to 30 over to 32,000 GPU clusters running at 800 gigabit per second, Dan, you really need a big amount of switching because those kind of networks, as I mentioned, have to be very low latency, Virtually Lossless. Ethernet Lossless calls for some interesting science And technology in order to make Ethernet losses because by definition, Ethernet tends to have it traditionally, But the technology is there to make losses. So all this fits in with our new generation of products and not to mention our Jericho 3AI, which as you know, the router has a unique a differentiated technology That allows for very, very low tail latency. And In terms of how it transmits and reorder packets so that there's no loss and very little latency.

Speaker 2

And that exists in network routing in telcos, which we now apply to AI Networks in a very effective manner. And that's our whole new generation of products. So yes, we're leaning into this opportunity With our networking technology and next generation products very much so. So you hit it right on And which is what makes it very exciting for us in AI is in the networking area, networking space that we see most interesting opportunities.

Speaker 7

And that will come from

Operator

the line of Anton Chekaiben with New Street Research. Your line is open.

Speaker 13

Hi, thank you very much for the question. I'll stick to a single part question. Can you maybe double click on your compute offload business? What can you maybe tell us about how growth could split between revenues from existing customers

Speaker 2

Thank you. Good question. And I will I'll reiterate the answers in some other ways I've given to certain other audience who have asked me This question, we really have only 1 rail customer, 1 customer. And in my forecast, in my remarks so far in offload computing, It's pretty much very, very largely around one customer. It's not very diversified, it's very focused.

Speaker 2

That's our computer offload business.

Operator

Thank you. One moment for our next question.

Speaker 7

And that will come from

Operator

the line of C. J. Muse with Evercore ISI.

Speaker 5

Hey, thank you. This is Kurt Swartz on for C. J. Wanted to touch on software gross margins, which continue to tick higher alongside softness in Brocade. Curious what sort of visibility you may have into Brocade stabilization and how we should think about software gross margins Okay.

Speaker 2

Well, our core Our software segment comprises, you hit it correctly, 2 parts. That's our core software Products Revenues and sold directly to enterprises. And these are your typical infrastructure software products. And they are multiyear contracts And we have done we have a lot of backlog, something like $17,000,000,000 of backlog averaging over almost 2.5, 3 years. And every quarter a part of that renews and we give you the data on it.

Speaker 2

It's very stable spending consumption of our core group of customers. We tend to drive that in a very stable manner And the growth rate is very, very predictable, and we're happy with that. Then we overlay on it a business that is Software, but also very appliance different, the fiber channel sand business of Brocade. And that's very enterprise driven, very, very much so. You're only used by enterprises, obviously, And Large Enterprises at that.

Speaker 2

And it is fairly cyclical business. And last year was a very strong up cycle. And this year, not surprisingly, The cycle are not as strong, especially compared year on year to the very strong numbers last year. So that's Well, this is the phenomenon this the outcome of the combining the 2 is what we're seeing today. But Given another my view next year, the cycle could turn around and brocade would go on.

Speaker 2

And then instead of a 3% year on year growth in this whole segment, we could end up with high single digits Year on Year Growth Rate. Because the core software revenue, as I've always indicated to you guys, you want to plan long term on mid single digit year on year growth rate. And that's the very predictable part of our numbers.

Operator

Thank you. And today's final question will come from the line of Vijay Rakesh with Mizuho. Your line is open.

Speaker 14

Yes. Hi, Hock. Just a quick I'll keep it a 2 part question for you to wrap up. So just wondering what the content uplift for Broadcom is on an AI server versus a general compute server. And if you look at generative AI, What percent of servers today are being outfitted for generative AI as you look, you have the dominant share there?

Speaker 14

And where do you see that uptake ratio for generative AI any year out if you look at fiscal 2024, 2025?

Speaker 2

I'm sorry to disappoint you on your 2 parts, but it's too early for me to be able to give you a good answer or a very Definitive answer on that. Because By far, the majority of servers today are your traditional servers, Driving X86 CPUs and your networking today Very, very still running Ethernet traditional data center networking Because most enterprises, if not virtually all enterprises today are very much Still running their own traditional servers on X86. Generative AI It's something so new and in a way so where the limits of it is so extended What we largely see today are at the hyperscale guys in terms of deploying at scale Dose Generative AI Infrastructure. Enterprises continue to Deploying and operate standard x86 servers and Ethernet networking in the traditional data centers. And so that's still so what we're seeing today may be early part of the whole cycle.

Speaker 2

That's the question, which is why I cannot give you any definitive view, opinion How what the tax rate, what the ratio will be or if there's any stability that could be achieved anywhere in the near term. We both we see both running and co interesting very much together. All

Operator

right. Thank you.

Speaker 5

Thanks.

Operator

Thank you. I would now like to turn the call over to Ji Yu for any closing remarks.

Speaker 1

Thank you, operator. In closing, we would like to highlight that Broadcom will be attending the BofA Global Technology Conference on Tuesday, June 6. Broadcom currently plans to report its earnings for the Q3 of fiscal 2023 after close of market on Thursday, August 31, 2023. A public webcast of Broadcom's earnings conference call will follow at 2 p. M.

Speaker 1

Pacific. That will conclude our earnings call today. Thank you all for joining. Operator, you may end the call.

Operator

Thank you all for participating. This concludes today's program. You may now disconnect.

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Earnings Conference Call
NVIDIA Q2 2023
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