Broadcom Q4 2024 Earnings Call Transcript

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Provided by Quartr
December 12, 2024
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Operator

Welcome to the Broadcom Inc. 4th Quarter and Fiscal Year 2024 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.

Ji Yoo
Ji Yoo
Head, IR at Broadcom

Thank you, Sherry, and good afternoon, everyone. Joining me on today's call are Hock Tan, President and CEO Kirsten Spieth, Chief Financial Officer and Charlie Kawaz, President, Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the Q4 fiscal year 2024. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom's website atbroadcom.com. This conference call is being webcast live, and an audio replay of the conference call can be accessed for 1 year through the Investors section of Broadcom's website.

Ji Yoo
Ji Yoo
Head, IR at Broadcom

During the prepared comments, Hock and Kirsten will be providing details of our Q4 fiscal year 2024 results, guidance for our Q1 of fiscal year 2025 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. S.

Ji Yoo
Ji Yoo
Head, IR at Broadcom

GAAP reporting, Broadcom reports certain financial measures on a non GAAP basis. A reconciliation between GAAP and non GAAP measures 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 will now turn the call over to Hock.

Hock Tan
Hock Tan
President and CEO at Broadcom

Thank you, G, and thank you, everyone, for joining us today. Well, this has been a transformative year for Broadcom. Our fiscal year 2024 consolidated revenue grew 44% year over year to a record $51,600,000,000 Now excluding VMware, our revenue grew over 9% organically. So fiscal 2024 operating profit excluding transition costs grew 42% year over year, and we returned a record $22,000,000,000 in cash to our shareholders, up 45% year on year through dividends, buybacks and eliminations. There were 2 significant drivers of this transformation this year.

Hock Tan
Hock Tan
President and CEO at Broadcom

1st, we closed the acquisition of VMware in the early weeks of fiscal 'twenty four and have focused VMware on its technology leadership in data center virtualization. The integration of VMware is largely complete, revenue is on a growth trajectory and operating margin reached 70% exiting 2024. We are well on the path to delivering incremental adjusted EBITDA at a level that significantly exceeds the $8,500,000,000 we communicated when we announced the deal. We're planning to achieve this much earlier than our initial target of 3 years. The second driver in 2024 was AI.

Hock Tan
Hock Tan
President and CEO at Broadcom

Our AI revenue, which came from strength in custom AI accelerators or XPUs and networking, grew 2 20 percent from $3,800,000,000 in fiscal 2023 to $12,200,000,000 in fiscal 20 24 and represented 41% of our semiconductor revenue. This drove semiconductor revenue up to a record $30,100,000,000 during the year. Okay. Now let's move on to the Q4 and give you more color. Consolidated net revenue of $14,100,000,000 was up 51% year on year.

Hock Tan
Hock Tan
President and CEO at Broadcom

Excluding VMware, organic growth was 11% and operating profit of $8,800,000,000 was up 53% year on year. For the details on Infrastructure Software in Q4, this Infrastructure Software segment revenue was $5,800,000,000 up 196% year on year, flat sequentially even as multiple deals slip over into Q1. In VMware, we booked 21,000,000 total CPU costs in the quarter versus 19,000,000 a quarter ago. Of these, about 70% represented VMware Cloud Foundation or VCF, the full software stack virtualizing the entire data center. And this translated into annualized booking value or ABV as we call it of $2,700,000,000 for VMware in Q4, up from $2,500,000,000 in Q3.

Hock Tan
Hock Tan
President and CEO at Broadcom

Since closing the acquisition just over a year ago, we signed up over 4,500 of our largest 10,000 customers for VCF. VCF enabled customers to deploy private cloud environments on prem as an alternative to running their applications in the public cloud. And in doing all this, we continue to drive down spending in VMware. We brought spending down to $1,200,000,000 in Q4, down from $1,300,000,000 in Q3. By reference, VMware spending was averaging over $2,400,000,000 per quarter prior to the acquisition with operating margin less than 30%.

Hock Tan
Hock Tan
President and CEO at Broadcom

Moving on to Q1 outlook for infrastructure software, we expect Q1 revenue to grow to $6,500,000,000 up 11% sequentially and 41% up year on year. For VMware, ABV is expected to exceed $3,000,000,000 compared to $2,700,000,000 in the preceding quarter. Turning to semiconductors, let me give you more details by end markets. Networking, Q4 revenue of $4,500,000,000 grew 45% year on year. AI networking revenue, which represented 76% of networking, grew 158% year on year.

Hock Tan
Hock Tan
President and CEO at Broadcom

This was driven by a doubling of our AI XPU shipments to our 3 hyperscale customers and 4 times growth in AI connectivity revenue driven by our Tomahawk and Jericho shipments globally. In Q1, we expect the momentum in AI connectivity to be as strong as more hyperscalers deploy Jericho 3AI in their fabrics. Our next generation XPUs are in 3 nanometers and will be the first of its coming to market in that process node. We are on track for volume shipment at our hyperscale customers in the second half of fiscal twenty twenty five. Turning on to server storage, from its bottom 6 months ago, Q4 server storage connectivity revenue has recovered some 20% to $992,000,000 and in Q4, we expect server storage revenue to continue to grow.

Hock Tan
Hock Tan
President and CEO at Broadcom

Turning to wireless, as we expected, seasonal launch by our North American customer drove Q4 wireless revenue to $2,200,000,000 up 30% sequentially. This was up 7% year on year because of higher content. We continue to be very engaged with this customer in multi year roadmaps across various technologies we have leadership in, including RF, Wi Fi, Bluetooth, sensing and touch. In Q1, reflecting seasonality, we expect wireless to be down sequentially, but still be flat year on year. In Q4, broadband reached bottom at $465,000,000 down 51% year on year.

Hock Tan
Hock Tan
President and CEO at Broadcom

We have seen significant orders across multiple service providers during this quarter, and reflecting this trend, we now expect broadband to show recovery beginning in Q1. Finally, on to industrial, which only represents 1% of the total revenues. Measure on resales, Q4 industrial resales of $173,000,000 declined 27% year on year. We only expect a recovery in the second half twenty twenty five. Before I sum up and provide you Q1 fiscal 2025 guidance, let me outline a longer term perspective on how we see our semiconductor business evolving over the next 3 years.

Hock Tan
Hock Tan
President and CEO at Broadcom

On the broad portfolio of non AI semiconductors with its multiple end markets. We saw a cyclical bottom in fiscal 2024 at $17,800,000,000 We expect a recovery from this level at the industry's historical growth rate of mid single digits. In sharp contrast, we see our opportunity over the next 3 years in AI as massive. Specific hyperscalers have begun their respective journeys to develop their own custom AI accelerators or XPUs as well as network these XPUs with open and scalable Ethernet connectivity. For each of them, this represents a multi year, not a quarter to quarter journey.

Hock Tan
Hock Tan
President and CEO at Broadcom

As you know, we currently have 3 hyperscale customers who have developed their own multi generational AI XPU roadmap to be deployed at varying rates over the next 3 years. In 2027, we believe each of them plans to deploy 1,000,000 XPU clusters across a single fabric. We expect this to represent an AI revenue serviceable addressable market, all SEND, for XPUs and network in the range of $60,000,000,000 to $90,000,000,000 in fiscal 2027 alone. We are very well positioned to achieve a leading market share in this opportunity and expect this will drive a strong ramp from our 2024 AI revenue base of $12,200,000,000 Keep in mind though, this will not be a linear ramp, we'll show quarterly variability. To compound this, we have been selected by 2 additional hyperscalers and are in advanced development for their own next generation AI XPUs.

Hock Tan
Hock Tan
President and CEO at Broadcom

We have line of sight to develop these prospects into revenue generating customers before 2027 and could therefore expand this SEM significantly. So the reality going forward for this company is that the AI semiconductor business will rapidly outgrow the non AI semiconductor business. Recognizing this, we will now shift to guiding our semiconductor business by AI and non AI revenue segments. So summarizing Q4, semiconductor revenue of $8,200,000,000 grew 12% year on year and 13% sequentially. Q4 AI revenue grew a strong 150% year on year to 3,700,000,000 dollars Non AI Semiconductor revenue declined by 23% year on year to $4,500,000,000 but still a 10% recovery from the bottom of 6 months ago.

Hock Tan
Hock Tan
President and CEO at Broadcom

Now moving on to our outlook for Q1. We expect semiconductor revenue to grow approximately 10% year on year to $8,100,000,000 AI demand remains strong and we expect AI revenue to grow 65% year on year to $3,800,000,000 We expect non AI semiconductor revenue to be down about mid teens percent year on year. And so in total, summing this all up, we're guiding consolidated Q1 revenue to be approximately $14,600,000,000 up 22% year on year, and we expect this will drive Q1 adjusted EBITDA to approximately 66% of revenue. With that, let me turn this call over to Kiersten.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

Thank you, Hock. Let me now provide additional detail on our Q4 financial performance. Consolidated revenue was $14,100,000,000 for the quarter, up 51% from a year ago. Excluding the contribution from VMware, Q4 revenue increased 11% year on year. Gross margins were 76.9 percent of revenue in the quarter, up 2 60 basis points from the year ago quarter.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

R and D was $1,400,000,000 and consolidated operating expenses were $2,000,000,000 up year on year primarily due to the acquisition and consolidation of VMware. Q4 operating income was $8,800,000,000 and was up 53% from a year ago with operating margin at 63 percent of revenue. Adjusted EBITDA was $9,100,000,000 or 65 percent of revenue. This figure excludes $156,000,000 of depreciation. Now a review of the P and L for our 2 segments, starting with semiconductors.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

Revenue for our semiconductor solutions segment was $8,200,000,000 and represented 59% of total revenue in the quarter. This was up 12% year on year. Gross margins for our Semiconductor Solutions segment were approximately 67%, down 2 20 basis points year on year, driven primarily by a higher mix of AI XPUs. Operating expenses increased 11% year on year to $914,000,000 on increased investment in R and D, resulting in semiconductor operating margins of 56%. Now moving on to infrastructure software.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

Revenue for infrastructure software was $5,800,000,000 up 196% year on year primarily due to the contribution of VMware and represented 41% of revenue. Gross margins for infrastructure software were 91% in the quarter and operating expenses were $1,100,000,000 in the quarter, resulting in infrastructure software operating margin of 72%. Excluding transition costs, operating margin was 73%. Moving on to cash flow. Free cash flow in the quarter was $5,500,000,000 and represented 39 percent of revenues.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

Excluding cash used for restructuring and integration of $506,000,000 free cash flows of $6,000,000,000 were up 22% year on year and represented 43% of revenue. Free cash flow as a percentage of revenue has declined from the same quarter a year ago due to higher cash interest expense from debt related to the VMware acquisition, higher cash taxes due to a higher mix of U. S. Taxable income, the continued delay in the reenactment of Section 174 and recent proposed regulations on corporate AMT. We spent $122,000,000 on capital expenditures.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

Day sales outstanding were 29 days in the Q4 compared to 31 days a year ago. We ended the 4th quarter with inventory of 1,800,000,000 down 7% sequentially. We continue to remain disciplined on how we manage inventory across the ecosystem. We ended the 4th quarter with $9,300,000,000 of cash and $69,800,000,000 of gross principal debt. During the quarter, we replaced $5,000,000,000 of floating rate debt with new senior notes.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

We used cash on hand to pay a mix of senior notes, which came due in Q4 and additional floating rate debt reducing debt by 2,500,000,000 dollars Following these actions, the weighted average coupon rate and years to maturity of our $56,000,000,000 at fixed rate debt is 3.7% and 7.6 years respectively. The weighted average coupon rate and years to maturity of our $14,000,000,000 in floating rate debt is 5.9% and 3.2 years respectively. We expect to repay approximately $495,000,000 of fixed rate senior notes coming due in Q1. Now let me recap our financial performance for fiscal year 2024. Our revenue hit a record $51,600,000,000 growing 44% year on year including VMware and 9% organically excluding VMware.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

Semiconductor revenue was $30,100,000,000 up 7% year over year. Infrastructure software revenue was $21,500,000,000 up 181% year on year and up 19% year on year excluding VMware. Fiscal 2024 adjusted EBITDA was $31,900,000,000 and represented 62% of revenue. Free cash flow grew 10% year on year to $19,400,000,000 and up 22% year on year to $21,900,000,000 excluding restructuring and integration costs. Turning to capital allocation.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

For fiscal 2024, we spent $22,200,000,000 consisting of $9,800,000,000 in the form of cash dividends and $12,400,000,000 in share repurchases and eliminations. Aligned with our ability to generate increased cash flows in the preceding year and off of a larger share count base from the acquisition of VMware, we are announcing an increase in our quarterly common stock cash dividend in Q1 fiscal 2025 to $0.59 per share on a split adjusted basis, an increase of 11% from the prior quarter. We intend to maintain this target quarterly dividend throughout fiscal 2025 subject to quarterly Board approval. This implies that our fiscal 2025 annual common stock dividend to be a record $2.36 per share on a split adjusted basis, an increase of 12% year on year. I would like to highlight that this represents the 14th consecutive increase in annual dividends since we initiated dividends in fiscal 2011.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

Now moving on to guidance. From a year on year comparable basis, keep in mind that Q1 of fiscal 2024 was a 14 week quarter and Q1 of fiscal 2025 is a 13 week quarter. As we are now past 1 year following the close of VMware acquisition, starting in Q1 of fiscal 2025, we will no longer break out VMware revenue and costs on a standalone basis. We will continue to report Infrastructure Software segment revenue and profitability, which includes Brocade Fibre Channel SAN, CA Mainframe, Enterprise Security and VMware. Our guidance for Q1 is for consolidated revenue of $14,600,000,000 with semiconductor revenue of $8,100,000,000 up approximately 10% year on year and infrastructure software revenue of $6,500,000,000 up 41% year on year.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

We expect Q1 adjusted EBITDA to be a record 66% and Q1 non GAAP diluted share count to be approximately 4,900,000,000 shares. For modeling purposes, we expect Q1 consolidated gross margins to be up 100 basis points sequentially on the higher revenue mix of infrastructure software and product mix within semiconductors. Note the consolidated gross margins through the year will be impacted by the revenue mix of infrastructure software and semiconductors and product mix within semiconductors. We expect the non GAAP tax rate in fiscal year 2025 to be approximately 14.5% as tax deductions related to interest expense are reduced as we pay down and refinance debt under more favorable interest terms. GAAP net income and cash flows in Q1 will be impacted by higher taxes, restructuring and integration related cash costs due to the VMware acquisition.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

That concludes my prepared remarks. Operator, please open up the call for questions.

Operator

Thank And our first question will come from the line of Blayne Curtis with Jefferies. Your line is open.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

Hey, thanks so much for taking my question. It's kind of a clarification on a question. I thought I heard you say that AI networking revenue was 76% of networking. I just couldn't get that math right, but maybe the broader question is you've seen growth off that low point in April in AI. Can you just talk about ASIC strength versus networking, the trends you're seeing in kind of October into January?

Hock Tan
Hock Tan
President and CEO at Broadcom

Well, that's a very interesting question. Both were growing not at the same rates, but we've been shipping, I believe, a lot more of network AI connectivity, networking components in the back half of this year compared to the first half of this fiscal year. And we suspect a lot of that will continue in the first half of next fiscal year before more XPUs, as I indicated, more on the new generation of 3 nanometer XPUs will start ramping very much in the back half of 2025.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

Very clear. Thanks, Hanh.

Operator

Thank you. One moment for our next question. And that will come from the line of C. J. Muse with Cantor Fitzgerald.

Operator

Your line is open.

CJ Muse
Senior Managing Director at Cantor Fitzgerald

Yes, good afternoon. Thank you for taking the question. I guess, Hock, I wanted to hit on the $60,000,000,000 to $90,000,000,000 revenue range for fiscal 'twenty seven for AI. I was hoping you could speak to the mix you see there between XPU and networking. And within that construct, are you including all kind of the customers that you see out there in hyperscale and vertically integrated consumers or any sort of help in terms of what you're including in that potential mix will be very helpful?

CJ Muse
Senior Managing Director at Cantor Fitzgerald

Thank you.

Hock Tan
Hock Tan
President and CEO at Broadcom

Thank you. Well, thanks for the question. Give me an opportunity here to clarify and be very specific. 1st, on the total dollars, this nonrevenue by the way is a revenue opportunity for us is what I call serviceable addressable market as we all term SEM, not TAM, SEM and it's serviceable addressable market for 3 of our hyperscale customers. That's it.

Hock Tan
Hock Tan
President and CEO at Broadcom

It's a very narrow serviceable addressable market we're talking about and we're talking about XPUs and AI connectivity at that scale, AI connectivity could probably estimate to run approximately close to 15% to 20% of the dollar content.

Operator

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

Joseph Moore
Joseph Moore
Analyst at Morgan Stanley

Great. Thank you. I wonder if you could talk to the XPU market. How are your customers sort of reacting to some of the rack scale products from your is a merchant, competitor from NVIDIA? How do they sort of get the connectivity to multiple xPUs inside the rack?

Joseph Moore
Joseph Moore
Analyst at Morgan Stanley

Just how does that present a competitive dynamic for you? Thanks.

Hock Tan
Hock Tan
President and CEO at Broadcom

Well, everybody is trying to figure out when you start when you connect a cluster on a single fabric of 10,000 XPUs or GPUs, say GPU, and scale it up to 100,000 and on to 500,000 and 1,000,000 is a whole new game in terms of architecture. And so you guys hear the differences of when you do these racks, you have what you call scale up and then you have joining reg to reg because you have no joint, you can't get to 1,000,000 or for them at 100,000 otherwise, you call it scale out. And that's a continuing evolving architecture, but I think each of these hyperscale customers of ours have, at this point kind of figured out how to get there. Hence, a roadmap that will keep growing from 100,000 to a 1000000 XPU cluster on pretty much similar architecture basis over the next 3, 4 years.

Joseph Moore
Joseph Moore
Analyst at Morgan Stanley

Okay. 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.

Harlan Sur
Executive Director - Equity Research at JP Morgan Chase & Co

Hi, good afternoon. Thanks for taking my question. Hocken, I know the team isn't putting out an AI guide for fiscal 2025 and I appreciate the multiyear sort of SAM opportunity outlook. But for this year, can we look at what your customers on the networking and custom accelerators are thinking about from a data center CapEx spending perspective? So for example, our latest roll up is that the top 4 cloud and hyperscalers are going to grow their CapEx 35%, 40% in fiscal 2025.

Harlan Sur
Executive Director - Equity Research at JP Morgan Chase & Co

I would expect that your AI business would sort of closely mirror this trend, maybe even think about it as a base case when we think about Ethernet taking share from InfiniBand, ASICs going faster than merchant GPUs, maybe the profile of your AI business can go even faster than the CapEx trends, either way plus or minus, is that how we should think about the growth in the AI business roughly in line with CapEx growth trends of your large cloud and hyperscale customers?

Hock Tan
Hock Tan
President and CEO at Broadcom

Harlan,

Hock Tan
Hock Tan
President and CEO at Broadcom

no, it doesn't. I mean, I think the hyperscalers tend to give you an overall CapEx numbers. I'm not sure they really break out between what's AI and what's non AI out there. And clearly, the spend in AI outstrips the spend in non AI even on the CapEx. And so no, I won't necessarily stop at that.

Harlan Sur
Executive Director - Equity Research at JP Morgan Chase & Co

Okay. No, thank you,

Operator

Thank you. One moment for our next question. And that will come from the line of Stacy Rasgon with Bernstein. Your line is open.

Stacy Rasgon
Analyst at Bernstein

Hi, guys. Thanks for taking my question. I have a more tactical question. So you have software push outs into Q1, which is elevating it. Should we think about that, those push outs are rolling off as we get into Q2 and the back half of the year?

Stacy Rasgon
Analyst at Bernstein

And like what are the implications on the shape of software for the year as well as gross margins? Because I guess maybe in the back half you'll have like software a little weaker versus Q2 as well as the XPU stronger. So should we be thinking about the gross margin trajectory off the core and elevated base kind of like easing as we get in the back half? So just anything you can tell us around the shape of the software around the push outs and implications for revenues and gross margins?

Hock Tan
Hock Tan
President and CEO at Broadcom

Well, number 1, it's a slip and I think you're overthinking this whole project. It's just a slip, pick it up and you see the differences between Q4 growth and Q1 reacceleration. That's all it is. 1,000,000 I'm asking,

Stacy Rasgon
Analyst at Bernstein

should Q2 be lower because you had push out into Q1 is what I'm asking?

Hock Tan
Hock Tan
President and CEO at Broadcom

No, it doesn't. Not Q2, no. I don't it won't have material impact on the rest of the fiscal 2025.

Stacy Rasgon
Analyst at Bernstein

Do you think software can kind of hold at these levels or even grow off of these like $6,500,000,000 levels as we go through the year?

Hock Tan
Hock Tan
President and CEO at Broadcom

I'm not giving you guidance. I might remind you for the rest of the year. I'm just giving you guidance for Q1, but I'm just telling you your analysis is kind of defective.

Stacy Rasgon
Analyst at Bernstein

I've been told that before.

Stacy Rasgon
Analyst at Bernstein

Okay. Thank you, Hock.

Hock Tan
Hock Tan
President and CEO at Broadcom

Thank you.

Operator

Thank you. And one moment for our next question. And that will come from Benjamin Rizzo with Melius. Your line is open.

Ben Reitzes
Managing Director – Head of Technology Research at Melius Research LLC

Hey, thanks a lot and nice quarter there Hock. I wanted to ask you about the $60,000,000,000 to $90,000,000,000 with a little more clarity. Previously, you've talked about a cumulative TAM from your customers. So and that is this a run rate TAM or a cumulative TAM kind of meaning do we take the 12.2% then add some growth for the next 2 years and then think of it that way? Or do we think of we take a share of like a $75,000,000,000 TAM and what your revenue yield is?

Ben Reitzes
Managing Director – Head of Technology Research at Melius Research LLC

And then I just also was hoping you could clarify, you're not including those 2 new customers. Do those two customers have the same 20,000,000,000 to 30,000,000,000 TAM each that the current 3 do? Or do you think they're smaller or bigger? Sorry about the multipart question there.

Hock Tan
Hock Tan
President and CEO at Broadcom

No, I think you asked the first part was very similar to an earlier question, but I'd be pleased to clarify. No, the $60,000,000,000 to $90,000,000,000 is not we are not talking cumulative SEM or TAM anymore. We are putting for you a destination, so to speak, a milestone, which happens to be 3 years hence, 2027, possibly slip a bit part of 'twenty eight, but 2027. We are seeing a destination 2027 or milestone, better one, where the deployment of those large scale AI clusters, each on single fabric, pretty much to run those large LLM models will come to $60,000,000,000 to $90,000,000,000 in that 1 year period and collectively all 3 of them.

Hock Tan
Hock Tan
President and CEO at Broadcom

And to answer your question,

Hock Tan
Hock Tan
President and CEO at Broadcom

possibly, yes. At least one of them, we believe, yes. But you know what, I don't want you adding 1 +1 equals 2 here. Those are not validated in our view under our model as customers. So please don't do your addition to that $60,000,000 to $90,000,000 same that I have postulated in my remarks.

Hock Tan
Hock Tan
President and CEO at Broadcom

Thank you so much.

Operator

And one moment for our next question. And that will come from the line of Ross Seymore with Deutsche Bank. Your line is open.

Ross Seymore
Ross Seymore
Managing Director at Deutsche Bank

Hi, thanks for letting me

Ross Seymore
Ross Seymore
Managing Director at Deutsche Bank

ask a question. I want

Ross Seymore
Ross Seymore
Managing Director at Deutsche Bank

to talk about the cash return side of things. Great job on the dividend increase. The other 50%, is fiscal 2025

Ross Seymore
Ross Seymore
Managing Director at Deutsche Bank

a year where you're going to still

Ross Seymore
Ross Seymore
Managing Director at Deutsche Bank

be paying down debt, share repurchases in the mix? Or Hock, you mentioned that VMware, the integration is largely now behind you. Usually that puts you on the prowl looking for deals. Is that something we should in general think about or is there regulatory issues that are still a concern? Just trying to figure out what that other 50% is going to go towards this year.

Hock Tan
Hock Tan
President and CEO at Broadcom

Well, to start with, yes, the other 50% of cash that is will be generated that will not use that is beyond dividends. We only want useful 2 uses for it, we've always said. 1 is pocket on balance sheet for the opportunity to buy someone else. But in reality, we're buying big enough companies. You almost say that 50% cash is sitting there, it's not adequate.

Hock Tan
Hock Tan
President and CEO at Broadcom

So the likely use of that 50% cash is, as Kirsten indicated in her prepared remarks, pay down debt. We do intend to use part of that 50% free cash flow that's not used for dividends to go and de lever ourselves, given the size of the debt load we are taking on or we have taken on since we acquired VMware.

Kirsten Spears
Kirsten Spears
CFO at Broadcom

Yes, Ross, it's Kirsten. We want to focus on reducing interest expense. So we'll go after those term loans. So yes, the focus will be on paying down debt.

Ross Seymore
Ross Seymore
Managing Director at Deutsche Bank

Thank you.

Operator

And one moment for our next question. That will come from the line of Vivek Arya with Bank of America. Your line is open.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

Thanks for taking my question. Hop back to AI, what do you think is the SAM in 2024, so we can get a baseline view of what your $12,200,000,000 in sales represent? And is your assumption that you maintain the share, right, you grow it or what happens to that share over time? And then sort of related question to that is what happens to your semiconductor gross margins as AI grows right to such an extent? Because you gave us a mid single digit for non AI.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

And I'm wondering if AI gets to be such a big part of semis, what happens to gross margin? So both kind of the baseline of what SAM was this year and what happens to your share and margins over time?

Hock Tan
Hock Tan
President and CEO at Broadcom

Okay. That's a fair very insightful question on the first one, which on the first one anyway, where we are saying what is the baseline on the $60,000,000,000 to $90,000,000,000 in 3 years' time, where we are specifying down to these 3 customers of ours. And I would estimate this 2024 for that to be about less than $20,000,000,000 $15,000,000,000 to $20,000,000,000 at this point. In 2024, dollars 15,000,000,000 to $20,000,000,000 going to $60,000,000,000 to $90,000,000,000 All right. And in terms of margins, well, don't get too hung up on gross margin, please, Vivek, because you're not wrong.

Hock Tan
Hock Tan
President and CEO at Broadcom

Gross margin in semiconductors will dilute you aren't saying that. But see, the gain here is the revenue will leverage so much on the spending we have to do to generate it that the operating margin will improve from where we are today.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Harsh Kumar with Piper Sandler. Your line is open.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Yes. Hey, first of all, guys, huge congratulations on successfully integrating VMware so much ahead of your timeframe. And Hock, I had a 2 part question. Is there a simple dollar metric that we can think of for network attached to XPUs, for example, is $1 of networking to $1 of XPUs? And then for my question, in one of your posts, you talked about sovereign data centers and VMware.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

I guess my question is, is there a play for Broadcom outside of the software piece? In other words, are you noticing that Sovereign guys are wanting to use XPUs or are they sticking to merchant silicon?

Hock Tan
Hock Tan
President and CEO at Broadcom

Let me answer your question backwards, easiest one first. Sovereign guys are like most of the enterprise it's pretty much like enterprise market, which is simply merchant. Sovereign guys do not have the capability necessarily to create, 1st, the hardware, but more importantly, the software stack to enable transistors in hardware to translate itself into high level language, which then the LLM and AP large language models and AI application can operate on.

Hock Tan
Hock Tan
President and CEO at Broadcom

So let's stick to what's available, which is merchant silicon and available ecosystem of software layers that allow that translation. So it will be that very much that way on XPUs. Then on your first question of what's the ratio between AI connectivity, networking, that is you're saying, to XPUs, the compute, well, it's a changing number as the cluster expands, though there are some ratios to be looked at. And the simple ratio to look at is there is scale up and there is scale out. And as we expand into a single fabric cluster of XPUs or GPUs that grows bigger and bigger, guess what is more important, scale up becomes more and more important.

Hock Tan
Hock Tan
President and CEO at Broadcom

And the ratio we are talking about as we move up increases almost exponentially, which is why I'm saying from probably networking as a percent of AI content in silicon today of between 5% to 10%, you're going up to 15% to 20% by the time you hit 500,000 to 1,000,000 XPU, GPU clusters.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Thank you.

Operator

One moment for our next question. And that will come from the line of Toshiya Hari with Goldman Sachs. Your line is open.

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

Hi, good afternoon. Thank you so much for taking the question. The $60,000,000,000 to $90,000,000,000 Sam forecast for fiscal 'twenty seven, Hock, I'm curious if you guys have a view on the TAM. So just want to know how big the SAM is as a percentage of the total opportunity set. And then my main question is, you talked about going for leading market share within your sandwich, which makes sense.

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

I assume you're not assuming 100% share. So the value of that $60,000,000,000 to $90,000,000,000 that you won't be capturing, is that a function of some of your hyperscale customers wanting to capture value internally? Or is it always having a backup or a second source? Is there a low margin business that you just simply won't pursue? How should we think about the part of the $60,000,000,000 to $90,000,000,000 that you won't be going after or won't be capturing?

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

Thank you.

Hock Tan
Hock Tan
President and CEO at Broadcom

Okay. First, to answer with a bigger overarching question, I don't know the TAM. I don't make any pause too hard. I don't think too far and hard about them. We don't think in macro approaches.

Hock Tan
Hock Tan
President and CEO at Broadcom

We're looking at line of sight here. So I got customers, I try to figure out how much volume the customer where the road map of the customers, not just product, technology, but what they are building out, what is their consumption pattern like. That's how we create our SaaS. Actually, in a way, bottoms up and tops down. So I have no idea what the TAM is beyond customers we are serving closely, collaborating closely.

Hock Tan
Hock Tan
President and CEO at Broadcom

So let's make it clear. In terms of market share, don't know, but as you all can see, it's a very large substantial market opportunity. There's room for many players. All we're going to do is gain our fair share. We're just very well positioned today having the best technology, very relevant in this space.

Hock Tan
Hock Tan
President and CEO at Broadcom

We have by far one of the best technology, combination technology out there to do XPUs and to connect those XPUs. The silicon technology that enables it, we have it here in Broadcom by the boatloads, which is why we are very well positioned with these 3 customers of ours. So based on that, we are and based on the depth of our engagement today, this didn't just start. This has been going on now for a while in terms of deep engagement with engineering teams from the other side each of the other side. We are very well positioned, well on the way to creating a multiyear roadmap for to enable these few customers of ours to get to where the ambition leads them to be.

Hock Tan
Hock Tan
President and CEO at Broadcom

And it's because of the great technology we have, where we are actually enabling in the areas we are very good at. We're talking about silicon design, packaging design and optical technology.

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

Thank you.

Operator

One moment for our next question. And that will come from the line of William Stein with Truist Securities. Your line is open.

William Stein
William Stein
Managing Director / Senior Analyst at Truist Securities

Great. Thanks for taking my question. I want to add my congrats to all the great results this year and for the quarter and outlook. But Hock, this is sort of a stunning turn of events in the last year with what we've been accustomed to thinking of as a sort of mature, slow growth business at its core with all the M and A tacked onto it. And I wonder with the sudden acceleration of the organic business given your exposure to these capabilities in ASICs to bring AI technologies to customers, does that change your interest level in M and A and does it change your focus area of potential M and A going forward?

William Stein
William Stein
Managing Director / Senior Analyst at Truist Securities

Thank you.

Hock Tan
Hock Tan
President and CEO at Broadcom

No, it doesn't. We are open, still open, always open because that's been a core part of our strategy and business model of this company for the last 10 years, which is we're always interested in adding to our portfolio very good franchise assets, be they in semiconductors or be they in infrastructure software. As long as they always say they meet the criteria, the fairly demanding criteria we look for, we will always be open to acquiring this asset and adding into our portfolio. So no, it hasn't changed our thinking at all.

William Stein
William Stein
Managing Director / Senior Analyst at Truist Securities

Thank you.

Operator

One moment for our next question. And that will come from the line of Vijay Rakesh with Mizuho. Your line is open.

Vijay Rakesh
Vijay Rakesh
Managing Director at Mizuho Financial Group

Hi, Hock. Great results here. Just a question back on the AI custom filter side. I guess, it looks like of the $17,500,000,000 TAM here, you have about 70% share. So assuming that 70% looking out to $27,000,000 your custom silicon AI revenue should be like $50,000,000,000 in fiscal 20 27.

Vijay Rakesh
Vijay Rakesh
Managing Director at Mizuho Financial Group

So do we have a good line of sight into fiscal 20 26 and showing a pretty nice ramp to hit those numbers, maybe with our trial turn

Vijay Rakesh
Vijay Rakesh
Managing Director at Mizuho Financial Group

and all that to do the 1,000,000 XPUs? How do you see that? Thanks.

Hock Tan
Hock Tan
President and CEO at Broadcom

I don't have we don't have really a good enough line of sight to want to share it with you nor for that matter do we have a policy or giving you guidance beyond what we're doing 1 quarter a year. But we do want to give you a sense of where this journey is headed.

Hock Tan
Hock Tan
President and CEO at Broadcom

We want to give you a sense of where this could lead us, this company in terms of its AI, semiconductor AI revenue trajectory, given that we now made it very open, official almost that we are going forward only guiding AI revenue versus non AI revenue. We figured at least give you a sense of what the AI trajectory is. On the non AI, we have known it. You have known it with us for a long time. It's mature, stable, evolving, growing mid single digit GDP plus AI, we've never given you that.

Hock Tan
Hock Tan
President and CEO at Broadcom

So that's why we take the step now, unprecedented in some ways, of laying that road map in terms of potential market for AI. Now only market we have is the customers we have and the end markets we serve. So we create this same and the clarity we see is to some extent in 2027. How that journey progresses with each of our customers is somewhat variable. It's the rate of the adoption and of their own XPUs.

Hock Tan
Hock Tan
President and CEO at Broadcom

And we'll be very much a part of that journey. But because of that, we expect to see a situation where there could be quarter to quarter variability given there are only 3 customers and the fact that deployment comes in big chunks typically. So my best answer to you is I can't give you any clarity beyond what I've given so far.

Vijay Rakesh
Vijay Rakesh
Managing Director at Mizuho Financial Group

Got it. And the other 2 CSPs, when do you see them ramping?

Hock Tan
Hock Tan
President and CEO at Broadcom

Well, first of all, I got to get into production. They got to get into production. So why don't we cross that bridge where we get to it. We are working very hard with them to get it production stage. We're pretty deeply engaged with tape out chips and but they got to get their software ready, they got to get it tested and they got to get going on it.

Hock Tan
Hock Tan
President and CEO at Broadcom

So now I'm not sure, but definitely over the next 3 years.

Operator

And thank you. That is all the time we have for our question and answer session. I would now like to turn the call back over to Ji Yu, Head of Investor Relations for closing remarks.

Ji Yoo
Ji Yoo
Head, IR at Broadcom

Thank you, Sherry. Broadcom currently plans to report its earnings for the Q1 of fiscal year 2025 after close of market on Thursday, March 6, 2024. A public webcast of Broadcom's earnings conference call will follow at 2 p. M. Pacific Time.

Ji Yoo
Ji Yoo
Head, IR at Broadcom

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

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