Broadcom Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 5, 2024

There are 15 speakers on the call.

Operator

Welcome to Broadcom's, Inc. 3rd Quarter Fiscal Year 20 24 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. Joining me on today's call are Hock Tan, President and CEO Kirsten Spears, Chief Financial Officer and Charlie Kowaz, President, Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed, describing our financial performance for the Q3 of 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 call can be accessed for 1 year through the Investors section of Broadcom's website.

Speaker 1

During the prepared comments, Hock and Kiersten will be providing details of our Q3 fiscal year 2024 results, guidance for our Q4 fiscal year 2024 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.

Speaker 1

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.

Speaker 2

Thank you, G and thank you everyone for joining us today. In our fiscal Q3 2024, consolidated net revenue of $13,100,000,000 was up 47% year on year and operating profit was up 44% year on year. These strong results reflected 3 key factors. 1, AI revenue continues to grow and grow strongly. 2, VMware bookings continue to accelerate.

Speaker 2

And 3, non AI semiconductor revenue has stabilized. Before I give you more color on our 2 reporting segments, let me give you a quick update on guidance. Now we started the year providing annual guidance with quarterly updates as we run the process of integrating VMware. Things are now much more stable and we are in the 1st sorry, and we are in the final quarter of 2024. So instead of giving you annual guidance, we now revert to providing a quarterly guidance for Q4.

Speaker 2

Starting with software. In Q3, Infrastructure Software segment revenue of $5,800,000,000 was up 200% year on year, driven by $3,800,000,000 in revenue contribution from VMware. The transformation of the business model of VMware continues to progress very well. In fact, last week, we held a well attended VMware Explore Conference in Las Vegas, our first as a combined company. This event was all about promoting VMware Cloud Foundation or VCF, which is the full software stack that virtualizes an entire data center and create a private cloud environment on prem for enterprises.

Speaker 2

The success of this strategy is reflected in our performance in fiscal Q3. We booked more than 15,000,000 CPU costs of VCF, representing over 80% of the total VMware products we booked during the quarter. And this translates into an annualized booking value or ABB, as I had described before, of $2,500,000,000 during Q3, up 32% from the preceding quarter. Meanwhile, we continue to drive down costs in VMware. We brought VMware spending down to $1,300,000 in Q3 from $1,600,000 in Q2.

Speaker 2

And when we acquired VMware, our target was to deliver adjusted EBITDA of $8,500,000,000 within 3 years of the acquisition. We are well on the path to achieving or even exceeding this EBITDA goal in the next fiscal 2025. Now turning to semiconductors. In networking, Q3 revenue of $4,000,000,000 grew 43% year on year, representing 55% of semiconductor revenue. This was again driven by strong demand from hyperscalers for both AI networking and our custom AI accelerators.

Speaker 2

As you know, our hyperscale customers continue to scale up and scale out their AI clusters. Custom AI accelerators grew 3.5x year on year. In the fabric, Ethernet switching driven by Tomahawk 5 and Jericho 3AI grew over 4x year on year, while our optical lasers and pin diodes used in optical interconnect grew 3 fold. Meanwhile, PCI Express switches more than doubled and we are shipping in volume our industry leading 5 nanometers, 400 gigabit per second NICS and 800 gigabit per second DSPs. So now let me give you more color on our networking products, which are not used in AI.

Speaker 2

As we had indicated last quarter, we believe we hit bottom in Q2 and in Q3 non AI networking was up actually 17% sequentially, even as it was down 41% year on year. We expect this level of revenue to sustain in Q4 and the year on year decline to moderate to 30%. So in adding the strength we continue to see in AI, we expect total networking revenue to grow over 40% year on year in Q4. Across enterprise infrastructure, we see the same trend of recovery in server storage. Our Q3 server storage connectivity revenue was $861,000,000 up 5% sequentially and down 25% year on year.

Speaker 2

In Q4, we expect server storage revenue to grow mid to high single digit percent sequentially even as revenue is expected to be down high single digit percent year on year. Moving on to wireless. Q3 revenue, wireless revenue of $1,700,000,000 grew 1% year on year, representing 23% of semiconductor revenue. And in Q4, reflecting the launch of next generation devices and our North American customer, we expect wireless revenue to actually grow over 20% sequentially, even as it will be relatively flat year on year. On to broadband, Q3 revenue declined 49% year on year to $557,000,000 RAN represented 8% of semiconductor revenue.

Speaker 2

Broadband remains weak on a continued pause in telco and service provider spending. And in Q4, we expect broadband to continue to be down over 40% year on year, but we do expect that recovery to begin in 2025. Finally, Q3 industrial resales of $164,000,000 declined 31% year on year. We believe we are approaching bottom in Q3 as Q4 resales are expected to recover sequentially. Year on year, Q4 industrial resales will still be down approximately 20%.

Speaker 2

In summary, here are the trends we are seeing in semiconductors. In aggregate, we have reached bottom in our non AI markets and we're expecting recovery in Q4. AI demand remains strong and we expect in Q4 AI revenue to grow sequentially 10 percent to over $3,500,000,000 This will translate to AI revenue of $12,000,000,000 for fiscal 2024, up from our prior guidance of over $11,000,000,000 Putting it all together with software, here's our forecast for Q4. We expect Q4 semiconductor revenue of approximately $8,000,000,000 up 9% year on year. For infrastructure software, we expect revenue to be about $6,000,000,000 So we are guiding Q4 consolidated revenue to be approximately $14,000,000,000 which is up 51% year on year.

Speaker 2

We also expect this will drive Q4 consolidated adjusted EBITDA to achieve approximately 64% of revenue. This Q4 guidance would imply we are raising the outlook for our fiscal 2024 revenue to $51,500,000,000 and adjusted EBITDA for the year to 61.5%. And with that, let me turn the call over to Curtis.

Speaker 3

Thank you, Hock. Let me now provide additional detail on our Q3 financial performance. Consolidated revenue was $13,100,000,000 for the quarter, up 47% from a year ago. Excluding the contribution from VMware, Q3 revenue increased 4% year on year. Gross margins were 77.4 percent of revenue in the quarter.

Speaker 3

R and D was $1,500,000,000 and consolidated operating expenses were $2,200,000,000 up year on year primarily due to the consolidation of VMware. Q3 operating income was $7,900,000,000 and was up 44% from a year ago with operating margin at 61% of revenue. Excluding transition costs, operating profit of $8,000,000,000 was up 45% from a year ago with operating margin of 62% of revenue. Adjusted EBITDA was $8,200,000,000 or 63 percent of revenue. This figure excludes $149,000,000 of depreciation.

Speaker 3

Now a review of the P and L for our 2 segments, starting with semis. Revenue for our Semiconductor Solutions segment was $7,300,000,000 and represented 56% of total revenue in the quarter. This was up 5% year on year. Gross margins for our Semiconductor Solutions segment were approximately 68%, down 2 70 basis points year on year, driven primarily by a higher mix of custom AI accelerators. Operating expenses increased 11% year on year to $881,000,000 on increased investment in R and D, resulting in semiconductor operating margins of 56%.

Speaker 3

Now moving on to Infrastructure Software. Revenue for Infrastructure Software was $5,800,000,000 up 200% year on year, primarily due to the contribution of VMware and represented 44% of revenue. Gross margins for infrastructure software were 90% in the quarter and operating expenses were $1,300,000,000 in the quarter, resulting in infrastructure software operating margin of 67%. Excluding transition costs, operating margin was 69%. Moving on to cash flow.

Speaker 3

Free cash flow in the quarter was $4,800,000,000 and represented 37 percent of revenues. Excluding cash used for restructuring and integration of $529,000,000 free cash flows of $5,300,000,000 were up 14% year on year and represented 41% 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 and higher cash taxes due to a higher mix of U. S. Income and the continued delay in the reenactment of Section 174.

Speaker 3

We spent $172,000,000 on capital expenditures. Day sales outstanding were 32 days in the quarter, in line with a year ago. We ended the 3rd quarter with inventory of $1,900,000,000 up 3% sequentially. Note that we continue to remain disciplined on how we manage inventory across the ecosystem. We ended the Q3 with $10,000,000,000 of cash and $72,300,000,000 of gross principal debt.

Speaker 3

During the quarter, we replaced $5,000,000,000 of floating rate notes with new fixed senior notes. We used the proceeds from the completed sale of the NWARE's end user computing business to KKR and cash on hand to reduce floating rate debt by an additional $4,200,000,000 dollars Following these actions, the weighted average coupon rate and years to maturity of our $53,000,000,000 in fixed rate debt is 3.6% and 7.7 years respectively. The weighted average coupon rate and years to maturity of our $19,000,000,000 in floating rate debt is 6.7% and 3.1 years respectively. We expect to repay approximately $1,900,000,000 of fixed rate senior notes due in Q4. Turning to capital allocation.

Speaker 3

In Q3, we paid stockholders $2,500,000,000 of cash dividends, which based on a split adjusted quarterly common stock count represented a cash dividend of $0.525 per share. For Q4, we are rounding up the quarterly cash dividend to $0.53 per share. In Q3, the split adjusted non GAAP diluted share count was $4,920,000,000 in line with expectations. We paid $1,400,000,000 in withholding taxes due on vesting of employee equity, resulting in the elimination of 8,400,000 AVGO shares. In Q4, we expect a non GAAP diluted share count to be approximately 4,910,000,000 shares.

Speaker 3

Now on to guidance. Our guidance for Q4 is for consolidated revenue of $14,000,000,000 and adjusted EBITDA of approximately 64%. For modeling purposes, we expect consolidated gross margins to be down approximately 100 basis points sequentially on the higher revenue mix of semiconductors and product mix within semiconductors. GAAP net income and cash flows in Q4 are impacted by higher taxes, restructuring and integration related cash costs due to the VMware acquisition. As Hock just discussed, we are resuming quarterly revenue and adjusted EBITDA guidance for fiscal 2025 as fiscal year 2024 has been a transition and integration year following the VMware deal close.

Speaker 3

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

Operator

Thank

Speaker 4

And our first question will come from the

Operator

line of Vivek Arya with Bank of America. Your line is

Speaker 2

open. Thanks for taking my question. Just a clarification, Hawken, then the question. So I think AI revenue roughly $3,100,000,000 in Q3, flattish sequentially. What was the mix in terms of compute versus networking?

Speaker 2

And then the $3,500,000,000 for Q4, what do you see as that mix? And then as we get into fiscal 2025, I realize you're not guiding overall AI, but just how's your general kind of confidence and visibility? Do you think that Broadcom can kind of grow in line or better than the overall AI silicon industry in fiscal 2025? Yes. Well, as we indicated in the last earnings call, for this past quarter, I think we're talking about 2 thirds in compute and 1 third in networking.

Speaker 2

And we kind of expect Q4 to run the similar trend. And as far as to answer your second part, no, we don't guide for yet for fiscal 2025, but we do expect fiscal 2025 to continue to be strong to show strong growth on our AI revenue. Thank you.

Operator

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

Speaker 5

Great. Thanks for taking my question. Hock, one of the things that we've picked up from both suppliers and the broader ecosystem in AI, I think we heard this from NVIDIA as well, that there was a shift in their revenue in the quarter, somewhat away from cloud service providers towards enterprise. And I wondered if that might potentially have a slowing effect on your revenue outlook in this end market because your participation is really pretty focused on the cloud customers. I wonder if you're seeing that, if you view it as a challenge or maybe you have a contrary view.

Speaker 5

Thank you.

Speaker 2

Okay. Well, that's an interesting question in terms of the shift. But see, we do not focus very much on enterprise AI market, as you know, Will. Our products in AI are largely very much largely focused, especially on the AI accelerator or XPU side, but even so more so and just as much on networking side. On hyperscalers, on cloud, those 3 large platform and some digital natives, what you call big guys.

Speaker 2

We don't deal very much on AI with enterprise. So we obviously don't see that trend.

Operator

Thank you. One moment for our next question.

Speaker 4

And that will come from

Operator

the line of Ross Seymore with Deutsche Bank. Your line is open.

Speaker 6

Hi. Thanks for letting me ask a question. I wanted to pivot over to the software side of things. Hock, it seems like obviously the VMware business had a great fiscal Q3. It seems like the classic Broadcom software fell off.

Speaker 6

So I guess the 2 part question is, what happened in the Classic Broadcom side of things to create that volatility? And are we now kind of reaching that $4,000,000,000 base in the Q4 that you talked about with VMware? And kind of if so, what are the puts and takes in the growth rate as we look into the future on that business?

Speaker 2

Well, as far as as we indicated, the VMware business continues to book very well as we convert our customers very much in 2 ways, 1 from perpetual to subscription license, but also those subscription license are for the full stack of DCF. And that has been very successful, as I indicated, given the high ratio of DCF subscribers, new subscribers that we have achieved. And we see this trend continuing in Q4 and very much so and possibly very likely through into 2025. So in terms of directional trend, other than the indication I'm giving you than the guidance I'm giving you in 2024 in Q4, 2024, directionally, we continue to see accelerated bookings and by extension accelerated growth.

Operator

Thank you. One moment for our next question.

Speaker 4

And that will come from

Operator

the line of Stacy Rasgon with Bernstein Research. Your line is open.

Speaker 7

Hi, guys. Thanks for taking my questions. I have 2 short ones, 1 on each segment. So on semis, the non AI networking is like more than 50% below where it was running before it rolled off. And clearly, the other businesses are also way below their peaks.

Speaker 7

Is there any reason why those shouldn't event? Is this just cyclical or something else going on? Is there any reason why those shouldn't get back to prior levels once recovery happens? And then on the software side, so the non VMware pieces looks like it's back to that $2,000,000,000 ish a quarter level or so that it was at before. Is that just brocade falling off?

Speaker 7

And is this sort of $2,000,000,000 ish a quarter? Is that bottomed as well? Is that the right level we ought to be thinking about for growth for the non VMware software business as we go forward from here?

Speaker 2

Yes. On the semi side, the answer is very simple. We have as you all know, we've gone through your typical down cycle of semiconductors. And I'm referring particularly to non AI and we have talked about that before many times. We've gone through a down cycle and as the ecosystem as many of our customers, but the broader ecosystems work on an adjustment in the inventory levels at all stages in the supply chain.

Speaker 2

And we're not totally we are not immune from it, obviously, as we try to insulate ourselves from it as much as possible. We've gone through it and our the signs and the indications we have seen very clearly is we have in fact passed through the bottom. The best indicator is the bookings we are receiving. In non AI, our bookings in Q3 of non AI semiconductor demand is up 20%. And so that tells us this we are well on the way to a recovery.

Speaker 2

Now by end markets, as I indicated, the level of the amount of recovery, the timing of recovery somewhat varies. But we're seeing largely on enterprise, enterprise data center, enterprise IT spending, we've passed the bottom. And Q3 was in fact sequentially a recovery from the bottom of we believe Q2 or Q1 this fiscal year. And we will see Q4 continuing that recovery and obviously in our view into 2025 in terms of the cycle. Broadband, we are not seeing it yet in terms of the bottom, but we see that as close to bottom in the sense that here again bookings are up from where it used to be.

Speaker 2

And so we are very, very clear in our thinking that broadly we have as a whole non AI semiconductors, we've gone through the down cycle, it's on an uptick. And like all previous cycles, my sense to you, Stacy, is we will get up back to the level we used to be. There's no reason at all why it doesn't and given the rate of bookings, it won't go. I dare say even point a thought in your mind that as AI permits enterprises all across and digital natives. You need to upgrade service.

Speaker 2

You need to upgrade storage. You need to upgrade networking, connectivity across the entire ecosystem. And if anything else, we are headed we could be headed for upcycle timing precisely when, we're not sure, but an upcycle that could even meet or even surpass what our previous upcycles would be simply because the amount of bandwidth you need, the amount of to manage a store, manage all those workloads that come out of AI, we'll just put the need to refresh and upgrade hardware. So that's my $0.02 worth on where we're hidden from this down cycle. So I believe in 2024 was the lowest point for the uptick.

Speaker 2

That's part of the reasons we are stating it very clearly here. On the software side, your question, no, I think we have reached a level of stability that puts and takes, Brocade, one of those then goes up and down very volatile, and that's largely it. But on the non VMware revenue, on the software revenue, I think we've reached a level of very clear stability. And what we are looking towards more is how VMware picks up over the next several year, year and a half.

Speaker 7

Got it. That's helpful. Thank you, Hope.

Operator

Thank you. One moment for our next question.

Speaker 5

Hello.

Operator

And that will come from the line of Ben Ritzes with Melius Research. Your line is open.

Speaker 8

Hey, thanks a lot for the question. Hock, I wanted to ask you about semiconductors, your AI revenue. If you could just clarify some of your comments. Was the Q3 3.1 ish in line with your expectations? And was anything weaker than expected?

Speaker 8

And then with the sequential growth, the 3.5%, where are you expecting that to come from? And then if you don't mind, you said next year AI revenue should grow quite a bit. I was just wondering if that was due to any additional customers within your hyperscaler and consumer Internet portfolio? Thanks.

Speaker 2

Well, our number in Q3 is very much pretty much in line what we expect AI revenue to be. And our revenue in Q4 was what forecast for Q4 is what is giving us the basis to a large extent to step it up and to step up our guidance for AI revenue for the full year to over $12,000,000,000 So if nothing else, that continues to indicate, I hope to us, that next year will continue the trend will continue to be strong. And again, it's all largely hyperscalers, cloud and digital natives. And it's again a mix of AI accelerators and networking and it's also largely based on backlog we have in place for that. Beyond that and it shows the growth.

Speaker 2

Beyond that, no, we're not guiding you beyond the backlog we have. So I kind of answer your question indirectly on do I have any more customers. We shall see. Okay. Thank you, Hock.

Operator

Thank you. One moment for our next question.

Speaker 4

And that will come from

Operator

the line of Karl Ackerman with BNP Paribas. Your line is open.

Speaker 9

Yes. Thank you. Kirsten, I was hoping you could speak to the relocation of IP back to the U. S. That is causing a $4,500,000,000 tax liability.

Speaker 9

Historically, Broadcom has redomiciled ahead of a pending transaction, and I'm getting questions from investors if this action may relate to any asset sales as the company seeks to pay down debt. So if you could clarify that, that would be helpful. Thank you.

Speaker 3

Yes. No, it was just the timing of when we chose to do at this time. And no, it doesn't have anything to do with that. It's just we relocated the IP and that caused the $4,000,000,000 charge. The offset to that is a deferred tax liability.

Speaker 3

So think of that as non cash, very little cash impact to that.

Speaker 5

Thank you.

Operator

One moment for our next question.

Speaker 4

And that will come from the

Operator

line of Timothy Arcuri with UBS. Your line is open.

Speaker 5

Thanks a lot. Hock, I wanted to ask about the growth rate in your AI revenue versus what we're seeing on the GPU side. Your AI revenue grew in the same zip code this year as what the GPU computes growing. And you did say that it would be up next year, but your main customers ramping a new version of their custom ASIC next year and there's some thought that they might shift some of their purchasing back to GPUs next year. So do you think that the growth of your AI revenue should still approximately track how much GPU compute is going to grow next year?

Speaker 5

If you can give us any qualitative or quantitative thoughts there, that would be great. Thank you.

Speaker 2

Hey, Tim. I think we had some communication gaps here. Could you repeat the question?

Speaker 5

Yes. So the question, Hawk, really is around the growth rate of your AI revenue versus what we're seeing on the GPU side because this year you grew about the same as what GPU computes growing. And the question is, is there anything happening next year that would change that equation so that your growth rate of your AI revenue would be materially different than what GPU computes growing next year?

Speaker 2

That's a very difficult question for me to answer because it comes in 2 parts, right? In terms of GPU growth, you should ask the guy who does merchant GPU, GPU which is obviously NVIDIA and AMD. And I don't see in I don't play in the enterprise market at all. See that's part of their market I don't see. Having said that, they do both play somewhat in the hyperscalers where I'm totally focused on doing.

Speaker 2

So that's really very and that's really no connection one with the other. There is indirect, but enough suffice for me to say long term, I'm saying that clearly and thoughtfully, long term, the large hyperscalers, few and large hyperscalers with very large platforms, huge consumer platform subscriber base, have their entire model predicated on running a lot of large language models, a lot of AI requirements, workloads out there. And it will drive what a matter of time towards creating as much as possible their own compute silicon, their own custom accelerators as a matter of time. And we are in the midst of seeing that transition. It should may take several a few years for that to happen.

Speaker 2

So that is on a different trajectory, a different path and I'm in that path of doing that, enabling customer salaries. I'm in that path. I'm not in the path of, in the meantime, a different trajectory of enabling enterprises to do AI on their own workloads. That's more the merchant guys. But some of the merchant guys are obviously also in the AI in the hyperscalers today, but there's a process obviously of a transition going on.

Speaker 2

So one doesn't really connect to the other team in that regard. But I would likely say, obviously, as the transition occurs, we have a good tailwind in the business model we have are providing accelerators and networking to the AI data centers of those large hyperscales.

Speaker 5

Right, Hock. Okay. Thank you so much.

Operator

One moment for our next question.

Speaker 4

And that will come from the line

Operator

of Harsh Kumar with Piper Sandler. Your line is open.

Speaker 10

Yes, Hock. I was curious about the profitability of VMware. Historically, your software businesses have had operating margins greater than 70%. VMware, I know, is newer and you're doing things a little different. You're keeping more customers than you historically have kept.

Speaker 10

But I was curious if you see a similar profile as the rest of your software businesses for VMware after you're done with all the cuts and everything.

Speaker 2

Well, I'll let you draw your own conclusion, Harsh, but I was at pains to lay out, as you probably heard. In Q3, our revenue from VMware was $3,800,000,000 and our operating expenses is $1,300,000,000 And you can pretty quickly figure out where we're headed in terms of operating margin and as I indicated EBITDA margin. And Q4 will continue the trajectory of revenue continuing to grow and expenses starting and still dropping even as it starts to stabilize but continue to reduce.

Speaker 10

Thank you, Hart.

Operator

One moment for our next question.

Speaker 4

And that will come from the

Operator

line of C. J. Muse with Cantor Fitzgerald. Your line is open.

Speaker 7

Yes, good afternoon. Thank you for taking the question. I wanted to focus on software gross margin. So when you close the acquisition of VMware, we ticked lower from low 90s to kind of high 80s. And we're now pushing a bit higher into July.

Speaker 7

And curious as we kind of get to that $4,000,000,000 threshold and you've kind of indicated higher in fiscal 2025, how should we think about the gross margin trajectory overall for software?

Speaker 2

Well, it's for us, software gross margin is actually redirect, it's not that relevant. You know that, right? Software is unless I'm running SaaS big time. Now a lot of our products are subscription, but they're not SaaS. We have some of our products on SaaS cloud based, but most of them are not.

Speaker 2

And our gross margin will be around 90% at least.

Operator

And one moment for our next question.

Speaker 4

And that will come from

Operator

the line of Chris Caso with Wolfe Research. Your line is open.

Speaker 2

Yes, thank you. Good evening.

Speaker 3

I wonder if you could speak to the custom AI revenue and perhaps the contribution from some of the other customers aside from that largest customer. How meaningful are the other customers in that segment? And what do you expect into next year as some of those newer projects start to ramp?

Speaker 2

Well, I know we're dancing around the thing. As I indicated, we have 3 customers now going on and all 3 of them are meaningful. Otherwise, we won't call them customers as the criteria we have used until we get meaningful shipments out to them on AI accelerators, we do not really consider that as a customer simply because it's a new this is an emerging trend. It's not an easy product to deploy for any customer. And so we do not consider proof of concepts as production volume.

Speaker 2

These are all production accelerators deployed in data center AI data centers of those 3 customers.

Operator

One moment for our next question.

Speaker 4

And that will come from

Operator

the line of Christopher Rolland with Susquehanna. Your line is open.

Speaker 5

Hi, thanks for the question. My question is actually on storage and Hock, you bought Seagate's hard disk drive SoC assets earlier in the year. Can you talk about what you actually bought there? What it means in terms of economics for your company and whether this accelerates your storage business over the next few years? Thanks.

Speaker 2

This is more of a partnership than anything else. Basically, it's what we essentially created in that transaction was to begin with, we actually believe long term in the sustainability of hard disk drives media as a great long term sustainable storage alternative or storage medium for those hyperscales. It makes sense. No one would like to eventually everything goes to flash. Don't think so.

Speaker 2

Hard disk drive storage will still be meaningful. And the PoP technology, which is most interesting for us, has a lot of ways to go as hard disk drives goes on to from where it is today, which is 22, 23, 24 terabytes to going to 30, 40 and even 50 terabytes. A lot of technology along the way and a lot of that resides in silicon. So what we're doing in effect is a collaboration more than anything else though it's structured obviously, as a purchase of intellectual property, but we're also taking engineers, designers, combining it with the designers we have and basically enabling Seagate and eventually the entire industry to continue a roadmap that goes towards 50 terabytes. That's our ambition, that's our vision and to be able to do that within 5 years or less.

Speaker 2

So that's pretty much what it is. It's a statement of our belief that hard disk drive, nearline hard disk drive storage will sustain very well over the next five years, if not longer.

Speaker 5

Thank you, Hak.

Operator

One moment for our next question. And that will come from the line of Aaron Rakers with Wells Fargo. Your line is open.

Speaker 11

Yes. Thanks for taking the question. Kind of thinking strategically as we look forward ahead to NVIDIA's Blackwell product cycle, there's been some indications that possibly Broadcom has an opportunity to participate more deeply in the optical side of that product platform for NVIDIA. I'm curious, do you see that as an opportunity relative to prior generations of NVIDIA just to deepen a participation or just to participate in general in kind of the areas of DSPs and maybe other things related to the Blackwell cycle from NVIDIA? Thank you.

Speaker 2

That's an interesting question and got a simple answer. I'm not really participating in that NVIDIA's roadmap. And I'm really not directly in that kind of market, in that kind of product roadmap. That NVIDIA's product roadmap in terms of Blackwell, impressive product on the way to coming out. Now in terms of base technology, we developed, of course, it will be used, it will be applied, and we are very happy to share that with and as it may be useful to get and to enable Blackwell to be part of that, whether it's on the optical component side, which is what you're referring to, or even on the DSP side in terms of providing the interconnects to enable clusters of Blackwell to be built.

Speaker 2

That's as far as our engagement in that. We're happy to be part of that ecosystem, as I said. But directly, we're not in that market, as you know. Yes.

Operator

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

Speaker 12

Great. Thank you. I wonder, Hock, if you could talk about your thoughts on further M and A. Is that still on your radar down the road? And is it if you did, would it be still software focused or any possibility of semiconductors becoming interesting to you again?

Speaker 2

Joe, that's a beautiful question. I'll tell you this bluntly, so that you don't disappoint it. Right now, I'm having my hands really full and enjoying myself doing it on really turning, transforming the business model of VMware. It's a great experience and you're feeling great about it when you do it and when it's doing it's pretty much running way beyond expectation as we indicated in that slide. So no, I'm very focused on getting VMware continue as it continues to accelerate in getting private cloud deployed in the largest enterprises in the world.

Speaker 2

And you know what, Michael, another year, 2 years ago to make that transformation totally complete.

Speaker 5

Very clear. Thank you.

Operator

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

Speaker 13

Good afternoon. Thanks for taking my question. Last quarter you talked about an acceleration in R and D investments by your AI customers and you talked about your follow on wins for their next generation XPU ASIC programs. It also looks like they're trying to accelerate their deployments of their TPUs, XPUs and networking into their data centers here in the second half of the year. We know that on AI accelerators specifically, supply is quite tight given the co ops packaging and HBM memory constraints.

Speaker 13

So has the team seen upside orders and demand for XPUs and networking here in the second half? Have you been able to meet that upside demand or is the team somewhat supply constrained? I guess, in other words, is AI demand greater than your supply here in the second half of the year?

Speaker 2

Yes. No, we continue to see orders. We continue to see upsides. And you're right in the pattern of that behavior that's going because it's as our customers, these are hyperscalers trying to deploy more and more capacity of AI data centers in AI data centers and you start to hear them talk in terms of power. They don't even talk in terms of how many XPU or GPU classes.

Speaker 2

They talk in, is there a 500 megawatt, 1 gigawatt, not yet, but people are dreaming that. So we are as they get this enabled, we're getting pull ins, we're getting upsides. And I expect that to happen a lot more in 2025. We're not putting that in any guidance or indication we're giving you, but I fully what you say is exactly right on. We do expect to see upside as we've been seeing recently.

Speaker 2

We continue to see that probably going forward over the next 12 months, especially related to XPUs getting deployed and getting infrastructure available and rushing to deploy that. We see quite a bit of that.

Speaker 13

Have you been able to meet that upside or are you somewhat limited by supply constraints?

Speaker 2

We can meet those upsides.

Speaker 13

Perfect. Thank you, Hock.

Speaker 2

Thanks.

Operator

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 14

Thank you very much. Hock, that was a perfect segue into my question. You said in the past calls that you thought that AI compute would move away from ASICs and go to merchant market, but it looks like the trend is kind of heading the other way. Are you still the opinion that that's going to be the long term trend of this? And secondly, as you just pointed out, power is becoming the defining factor for deployment with all the big guys at this point.

Speaker 14

Given the performance per watt of the ASICs over GPUs, which is superior GPUs, why shouldn't we see more of these guys moving to custom ASICs? I know it takes a long time, it takes a lot of funding, etcetera. But especially as the enterprise starts getting more involved with this, there are going to be some applications that are kind of standard across some of the enterprises, wouldn't we even see some of the bigger like AWS move to a custom silicon for a specific workload? So basically the overall trend in ASICs in AI. Thanks.

Speaker 2

Okay. Ed, did I hear you right to say at the beginning maybe that you mean that there is a trend towards ASIC or XPU from general purpose GPU, right?

Speaker 10

Yes.

Speaker 2

You're right. And you're correct in pointing out to me that, hey, I used to think that general purpose merchant silicon will win at the end of the day. Well, based on history of semiconductors, mostly so far, general purpose merchant silicon tends to win. But like you, I flipped in my view. And I did that by the way, 6 last quarter, maybe even 6 months ago, but nonetheless catching up is good.

Speaker 2

And I actually think so because I actually think there are 2 markets here on AI accelerators. There's one market for enterprises of the world and none of these enterprises are incapable nor have the financial resources or interest to create the silicon, the custom silicon, nor the large language models or the software going maybe to be able to run those AI workloads on custom silicon too much and there's no return for them to do it because it's just too expensive to do it. But there are those few cloud guys, hyperscalers, with the scale of the platform and the financial web result for them to make it totally rational, economically rational to create their own customer accelerators because it's all right now, I'm not going to I'm not trying to overemphasize it. It's all about compute engines. It's all about especially training those large language models and enabling it on your platform.

Speaker 2

It's all about constraint to learn a large part about GPUs. Seriously, it's getting to a point where GPUs are more important than engineers. It is some of these hyperscalers in terms of how we think. Those GPUs are much more our XPUs are much more important. And if that's the case, what better thing to do than bring it under the control of your own destiny by creating your own custom silicon accelerators.

Speaker 2

And that's what I'm seeing all of them do. It's just doing it at different rates and do both and they're starting at different times. But they all have started and obviously, it takes time to get there, but there are a lot of them, there are a lot of learning in the process versus what the biggest guy of them who has done it longer have been doing for 7 years. Others are trying to catch up and it takes time. I'm not saying it will take 7 years.

Speaker 2

I think they will be accelerated, but it will still take some time step by step to get there. But those few hyperscalers, platform guys will create their own if they haven't already done it and start to train them on their large language models. And that's yes, you're right. They will all go in that direction totally into ASIC or as we call it XPUs, custom silicon. Meanwhile, there's still a market for in enterprise or merchant silicon.

Speaker 14

Right. But that basically suggests that you're on the early part of your curve where I'm not trying to call the GPUs or whatever, but you could be getting to something closer to the peak of the GPU market just because everything, right, besides the cost expense and

Speaker 5

as you're spend all this

Speaker 14

money and you're paying all this money for power, the ASICs become more and more attractive. So the curves are going to look different, right?

Speaker 2

It's an accelerating curve. It may take longer than we all like it to happen, but it's definitely accelerating because the size of those and the size of the demand from those hyperscalers will totally rival that in the enterprise.

Operator

Thank you. And that is all the time we have for our question and answer session. I would now like to turn the call over to Ji Yu for any closing remarks.

Speaker 1

Thank you, operator. This quarter Broadcom will be presenting at the Goldman Sachs Communicopia and Technology Conference on Wednesday, September 11, in San Francisco. Broadcom currently plans to report its earnings for the Q4 fiscal year 2024 after the close of market on Thursday, December 12, 2024. 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

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

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Earnings Conference Call
Broadcom Q3 2024
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