Broadcom Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 12, 2024

There are 11 speakers on the call.

Operator

Welcome to Broadcom Inc. 2nd 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 Khawaz, President, Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the Q2 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 Kirsten will be providing details of our Q2 fiscal year 2024 results, guidance for our 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'll now turn the call over to Hock.

Speaker 2

Thank you, Ji, and thank you, everyone, for joining today. In our fiscal Q2 2024 results, consolidated net revenue was 12,500,000,000 dollars up 43% year on year as revenue included a full quarter of contribution from VMware. But if we exclude VMware, consolidated revenue was up 12% year on year. And this 12% organic growth in revenue largely driven by AI revenue, which stepped up 2 80% year on year to $3,100,000,000 more than offsetting continued cyclical weakness in semiconductor revenue from enterprises and telcos. Let me now give you more color on our 2 reporting segments.

Speaker 2

Beginning with software, In Q2, Infrastructure Software segment revenue of 5,300,000,000 dollars was up 175 percent year on year and included $2,700,000,000 in revenue contribution from VMware, up from $2,100,000,000 in the prior quarter. The integration of VMware is going very well. Since we acquired VMware, we have modernized the product SKUs from over 8,000 disparate SKUs to 4 core product offerings and simplified the go to market flow, eliminating a huge amount of channel conflicts. We are making good progress in transitioning all VMware products to a subscription licensing model. And since closing the deal, we have actually signed up close to 3,000 of our largest 10,000 customers to enable them to build a self-service virtual private cloud on prem.

Speaker 2

Each of these customers typically sign up to a multi year contract, which we normalize into an annual measure known as annualized booking value or ABV. This metric ABV for VMware products accelerated from $1,200,000,000 in Q1 to $1,900,000,000 in Q2. For our reference, for the consolidated Broadcom Software portfolio, ABV grew from $1,900,000,000 in Q1 to $2,800,000,000 dollars over the same period in Q2. Meanwhile, we have integrated SG and A across the entire platform and eliminated redundant functions. Year to date, we have incurred about $2,000,000,000 of restructuring and integration costs and drove our spending run rate at VMware to $1,600,000,000 this quarter from what used to be $2,300,000,000 per quarter pre acquisition.

Speaker 2

We expect spending will continue to decline towards a $1,300,000,000 run rate exiting Q4, better than our previous $1,400,000,000 plan and will likely stabilize at $1,200,000,000 post integration. VMware revenue in Q1 was $2,100,000,000 and grew to $2,700,000,000 in Q2 and will accelerate towards a $4,000,000,000 per quarter run rate. We therefore expect operating margins for VMware to begin to converge towards that of classic Broadcom software by fiscal 2025. Turning to semiconductors, let me give you more color by end markets. Networking.

Speaker 2

Q2 revenue of $3,800,000,000 grew 44% year on year, representing 53% of semiconductor revenue. This was again driven by strong demand from hyperscalers for both AI networking and customer accelerators. It's interesting to note that as AI data center clusters continue to deploy, our revenue mix has been shifting towards an increasing proportion of networking. We doubled the number of switches we sold year on year, particularly the Tomahawk 5 and Jericho 3, which we deployed successfully in close collaboration with partners like Arista Networks, Dell, Juniper and Super Micro. Additionally, we also doubled our shipments of PCI Express switches and NICS in the AI back end fabric.

Speaker 2

We're leading the rapid transition of optical interconnects in AI data centers to 800 gigabit bandwidth, which is driving accelerated growth for our DSPs, optical lasers and pin diodes. And we are not standing still. Together with these same partners, we are developing the next generation switches, DSP and optics that will drive the ecosystem towards 1.6 Terabit Connectivity to scale out larger AI accelerated clusters. Talking of AI accelerators, you may know our hyperscale customers are accelerating their investments to scale up the performance of these clusters. And to that end, we have just been awarded the next generation custom AI accelerators for these hyperscale customers of ours.

Speaker 2

Networking these AI accelerators is very challenging, but the technology does exist today. In Broadcom, we're the deepest and broadest understanding of what it takes for complex, large workloads to be scaled out in an AI fabric. Proof in point, 7 of the largest 8 AI clusters in deployment today use Broadcom Ethernet solutions. Next year, we expect all mega scale GPU deployments to be on Ethernet. We expect the strength in AI to continue and because of that, we now expect networking revenue to grow 40% year on year compared to our prior guidance of over 35% growth.

Speaker 2

Moving to wireless. Q2 wireless revenue of 1,600,000,000 dollars grew 2% year on year, was seasonally down 19% quarter on quarter and represents 22% of semiconductor revenue. And in fiscal 2024, helped by content increases, we reiterate our previous guidance for wireless revenue to be essentially flat year on year. This trend is wholly consistent with our continued engagement with our North American customer, which is deep, strategic and multi year and represents all of our wireless business. Next, our Q2 server storage connectivity revenue was 824,000,000 dollars or 11% of semiconductor revenue, down 27% year on year.

Speaker 2

We believe though Q2 was the bottom in server storage and based on updated demand forecasts and bookings, we expect a modest recovery in the second half of the year. And accordingly, we forecast fiscal 2024 server storage revenue to decline around the 20% range year on year. Moving on to broadband. Q2 revenue declined 39% year on year to 730,000,000 dollars and represented 10% of semiconductor revenue. Broadband remains weak on a continued pause in telco and service provider spending.

Speaker 2

We expect Broadcom to bottom in the second half of the year with a recovery in 2025. Accordingly, we are revising our outlook for fiscal 2024 broadband revenue to be down high 30s year on year from our prior guidance for a decline of just over 30% year on year. Finally, Q2 industrial Rev resale of $234,000,000 declined 10% year on year. And for fiscal 2024, we now expect industrial resales to be down double digits percentage year on year compared to our prior guidance for high single digit decline. So to sum it all up, here's what we have seen.

Speaker 2

For fiscal 2024, we expect revenue from AI to be much stronger at over $11,000,000,000 Non AI Semiconductor revenue has bottomed in Q2 and is likely to recover modestly for the second half of fiscal twenty twenty four. On infrastructure software, we're making very strong progress in integrating VMware and accelerating its growth. Pulling all these three key factors together, we're raising our fiscal 2024 revenue guidance to $51,000,000,000 And with that, let me turn the call over to Kiersten.

Speaker 3

Thank you, Hock. Let me now provide additional detail on our Q2 financial performance, which included a full quarter of contribution from VMware. Consolidated revenue was $12,500,000,000 for the quarter, up 43% from a year ago. Excluding the contribution from VMware, Q2 revenue increased 12% year on year. Gross margins were 76.2 percent of revenue in the quarter.

Speaker 3

Operating expenses were $2,400,000,000 and R and D was 1,500,000,000

Speaker 4

the consolidation of VMware.

Speaker 3

Q2 operating income was $7,100,000,000 and was up 32% from a year ago with operating margin at 57 percent of revenue. Excluding transition costs, operating profit of $7,400,000,000 was up 36 percent from a year ago with operating margin of 59% of revenue. Adjusted EBITDA was $7,400,000,000 or 60 percent of revenue. This figure excludes $149,000,000 of depreciation. Now a review of the P and L for our 2 segments, starting with semiconductors.

Speaker 3

Revenue for our semiconductor solutions segment was 7 point $2,000,000,000 and represented 58% of total revenue in the quarter. This was up 6% year on year. Gross margins for our Semiconductor Solutions segment were approximately 67 accelerators. Operating expenses increased 4% year on year to $868,000,000 on increased investment in R and D resulting in semiconductor operating margins of 55%. Now moving on to infrastructure software.

Speaker 3

Revenue for infrastructure software was $5,300,000,000 up 170% year on year primarily due to the contribution of VMware and represented 42% of revenue. Gross margin for infrastructure software were 88% in the quarter and operating expenses were $1,500,000,000 in the quarter resulting in infrastructure software operating margin of 60%. Excluding transition costs, operating margin was 64%. Now moving on to cash flow. Free cash flow in the quarter was $4,400,000,000 and represented 36 percent of revenues.

Speaker 3

Excluding cash used for restructuring and integration of 830,000,000 dollars free cash flows of $5,300,000,000 were up 18% year on year and represented 42% of revenue. Free cash flow as a percentage of revenue has declined from 2023 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 delay in the reenactment of Section 174. We spent $132,000,000 on capital expenditures.

Speaker 3

Day sales outstanding were 40 days in the 2nd quarter consistent with 41 days in the 1st quarter. We ended the 2nd quarter with inventory of $1,800,000,000 down 4% sequentially. We continue to remain disciplined on how we manage inventory across our ecosystem. We ended the 2nd quarter with $9,800,000,000 of cash $74,000,000,000 of gross debt. The weighted average coupon rate and years to maturity of our $48,000,000,000 in fixed rate debt is 3.5% and 8.2 years respectively.

Speaker 3

The weighted average coupon rate and years to maturity of our $28,000,000,000 in floating rate debt is 6.6% and 2.8 years respectively. During the quarter, we repaid $2,000,000,000 of our floating rate debt and we intend to maintain this quarterly repayment of debt throughout fiscal 2024. Turning to capital allocation. In the quarter, we paid stockholders $2,400,000,000 of cash dividends based on a quarterly common stock cash dividend of $5.25 per share. In Q2, non GAAP diluted share count was 492,000,000 as the 54,000,000 shares issued for the VMware acquisition were fully weighted in the Q2.

Speaker 3

We paid $1,500,000,000 in withholding taxes due on vesting of employee equity, resulting in the elimination of 1,200,000 AVGO shares. Today, we are announcing 10 for 1 forward stock split of Broadcom's common stock to make ownership of Broadcom stock more accessible to investors and to employees. Our stockholders of record after the close of market on July 11, 2024 will receive an additional 9 shares of common stock after the close of market on July 12 with trading on a split adjusted basis expected to commence at market open on July 15, 2024. In Q3, reflecting a post split basis, we expect share count to be approximately 4,920,000,000 shares. Now on to guidance.

Speaker 3

We are raising our guidance for fiscal year 2024 consolidated revenue to $51,000,000,000 and adjusted EBITDA to 61%. For modeling purposes, please keep in mind that GAAP net income and cash flows in fiscal year 2024 are impacted by restructuring and integration related cash costs due to the VMware acquisition. That concludes my prepared remarks. Operator, please open up the call for questions.

Operator

Thank you.

Speaker 5

And our first question will come from

Operator

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

Speaker 6

Thanks for taking my question. Hock, I would appreciate your perspective on the emerging competition between Broadcom and NVIDIA across both accelerators and Ethernet switching. So on the accelerator side, they are going to launch their Black Belt product at many of the same customers that you have a very large position in the custom compute. So I'm curious how you think customers are going to do that allocation decision, just broadly what the visibility is? And then I think part B of that is as they launch their X Ethernet switch, do you think that poses increasing competition for Broadcom and the Ethernet switching side in AI for next year?

Speaker 6

Thank you.

Speaker 2

Very interesting question, Vivek. On AI accelerators, I think we're operating on a different, to start with, scale, much as different model. The GPUs, which are the AI accelerator of choice on merchant in a merchant environment, is something that is extremely powerful as a model and is something that NVIDIA operate in a very, very effective manner. We don't even think about competing against them in that space, not in the list. That's where they're very good at and we know where we stand with respect to that.

Speaker 2

No, what we do for very selected or selective hyperscalers is if they have the scale and the skills to try to create silicon solutions, which are AI accelerators to do particular AI very complex AI workloads. We're happy to use our IP portfolio to create those custom ASIC AI accelerator. So I do not see them as truly competing against each other. And far for me to say, I'm trying to position myself to be a competitor on basically GPUs in this market. We're not.

Speaker 2

We are not competitor to them. We don't try to be either. Now on networking, maybe that's different. But again, they may think people may be approaching and they may be approaching it from different angle. We are, as I indicated all along, very deep in Ethernet as we've been doing Ethernet for over 25 years, Ethernet networking, And we've gone through a lot of market transitions and we have captured a lot of market transitions from cloud scale networking to routing and now AI.

Speaker 2

So it's a natural extension for us to go into AI. We also recognize that being the AI compute engine of choice in merchants in the ecosystem, which is GPUs, that they are trying to create platform that is probably end to end very integrated. We take an approach that we don't do those GPUs, so but we enable the GPUs to work very well. So if anything else, we supplement and hopefully complement those GPUs in with customers who are building bigger and bigger GPU clusters.

Speaker 4

Thank you.

Operator

Thank you. One moment for our next question.

Speaker 5

And that will come from

Operator

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

Speaker 7

Hi guys. Thanks for letting me

Speaker 2

ask a question. I want

Speaker 7

to stick on the AI theme, Hock. The strong growth that you had in the quarter, the 2 80% year over year, could you delineate a little bit between if that's the compute offload side versus the connectivity side? And then as you think about the growth for the full year, how are those split in that realm as well? Are they kind of going hand in hand or is one side growing significantly faster than the other, especially with the I guess you said the next generation accelerators are now going to be Broadcom as well?

Speaker 2

Well, to answer your question on the mix, you're right. It's something we don't really predict very well nor understand completely except in hindsight because it's tied to some extent to the cadence of deployment of when they put in the AI accelerators versus when they put in the infrastructure that puts it together, the networking. And we don't really quite understand it 100%. All we know, it used to be 80% accelerators, 20% networking. It's now running closer to twothree accelerators, onethree networking and we'll probably head towards sixty-forty by the close of the year.

Speaker 7

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.

Speaker 4

Hi, guys. Thanks for taking my question. I wanted to ask about the $11,000,000,000 AI guide. You'd be at 11.6 even if you didn't grow AI from the current level in the second half. And it feels to me like you're not suggesting that.

Speaker 4

It feels to me like you think you need to be growing. So why wouldn't that AI number be a lot more than 11 point 6? It feels like it ought to be. Or am I missing something?

Speaker 2

Because I guided just over $11,000,000,000 They say it could be what you think it is. It's quarterly shipments get sometimes very lumpy. And it depends on rate of deployment, depends a lot of things. So you may be right. You may estimate it better than I do, but the general trajectory is getting better.

Speaker 4

Okay. So I guess again, how do I are you just suggesting that more than $11,000,000,000 is sort of like the worst it could be because that would just be flat at the current levels, but you're also suggesting that things are getting better into the back half. Correct. Okay. So I guess we just take that that's a very that if I'm reading it wrong, that that's just a very conservative number?

Speaker 2

That's the best forecast I have at this point, Stacy.

Speaker 4

All right. Okay, Hock. Thank you. I appreciate it.

Speaker 2

Thank you.

Operator

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

Speaker 7

Yes, good afternoon. Thanks for taking my question. On cloud and AI networking silicon, good to see that the networking mix is steadily increasing. Like Cloudwork, the Broadcom team has been driving a consistent 2 year cadence, right, of new product introductions, Trident, Tomahawk, Jericho family of switching and routing products for the past 7 generations. You layer on top of that, your GPU, TPU customers are accelerating their cadence of new product introductions and deployments of their products.

Speaker 7

So is this also driving faster adoption curve for your latest Tomahawk and Jericho products? And then maybe just as importantly, like clockwork, it's been 2 years since you've introduced Tomahawk 5 product introduction, right, which if I look back historically means you have silicon and are getting ready to introduce your next generation, 3 nanometer Tomahawk 6 products, which would I think puts you 2 to 3 years ahead of your competitors. Can you just give us an update there?

Speaker 2

Alan, you're pretty insightful there. Yes, we launched AMOLT five 23. So you're right, by late 2025 is the time we should be coming out with Tomahawk 6, which is the 100 terabit switch. Yes.

Speaker 7

And is the is this acceleration of cadence by your GPU and TPU partners? Is that also what's kind of driving the strong growth in the networking products?

Speaker 2

Well, you know what, sometimes you have to let things take its time. But it's 2 year cadence, so we're right on. Late 'twenty three was when we shut it out to a top of 5 and adoption, you're correct, with AI has been tremendous because it ties in with the need for very large bandwidth in the networking in the fabric for AI clusters, AI data centers. But regardless, we have always targeted Tomahawk 6 to be out 2 years after that, which we should put it into late 2025.

Speaker 7

Okay. Thank you, Hock.

Operator

Thank you. One moment for our next question. And that will come from the line of Ben Ritzes with Melius. Your line is open.

Speaker 8

Hey, thanks a lot and congrats on the quarter and guide. Hock, I wanted to talk a little bit more about VMware. Just wanted to clarify if it is indeed going better than expectations. And how would you characterize the customer willingness to move to subscription? And also just a little more color on Cloud Foundation, You've cut the price there and are you seeing that beat expectations?

Speaker 8

Thanks a lot.

Speaker 2

Thanks and thanks for your kind regards on the quarter. But as far as VMUI is concerned, we're making good progress. The journey is not over by any means, but it's pretty much very much to expectation. Moving to subscription, VMware in VMware were very slow compared to I mean a lot of other guys Microsoft, Salesforce, Oracle, who have already been pretty much in subscription. So VMware is late in that process.

Speaker 2

But when trying to make up for it by offering it and offering it very, very compelling in a compelling manner because subscription is the right things to do, right? It's a situation where you put out your product offering and you update it, patch it, but update it feature wise, everything else, capabilities on a continual basis, almost like getting your news on an ongoing basis, subscription online versus getting it in a printed manner once a week. That's how I compare perpetual to subscription. So it's very interesting for a lot of people to want to get on. And so that to no surprise, we're getting and they are getting on very well.

Speaker 2

The big selling point we have, as I indicated, is the fact that we're not just trying to keep customers kind of stuck on just server or compute virtualization. That's a great product, great technology, but that's been out for 20 years based on what we are offering now at a very compelling price point, compelling being very attractive price point, the whole stack, software stack to use vSphere and its basic fundamental technology to virtualize networking, storage, operation and management, the entire data center and create this self-service private cloud. And thanks for saying it, you're right. And we have priced it down to the point where it's comparable with just compute virtualization. So yes, that's getting a lot of interest, a lot of attention from the customers we have signed up who would like to deploy the ability to deploy private cloud, their own private cloud on prem as a nice complement maybe even alternative or hybrid to public clouds.

Speaker 2

That's the selling point and we're getting a lot of interest from our customers in doing that.

Speaker 8

Great. And it's on track for 4 bill by the Q4 still, which is reiterated?

Speaker 2

Well, I didn't give a specific timeframe, did I? But it's on track as we see this process growing towards a $4,000,000,000 quarter.

Speaker 8

Okay. Thanks a lot, Hak. Thanks.

Operator

Thank you. One moment for our next question.

Speaker 5

And that will come from

Operator

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

Speaker 9

Hi, thank you so much for taking the question. I guess kind of a follow-up to the previous question on your software business. Hockey seemed to have pretty good visibility into hitting that $4,000,000,000 run rate over the medium term perhaps. You also talked about your operating margins in that business converging to classic Broadcom levels. I know the integration is not done and you're still kind of in debt pay down mode, but how should we think about your growth strategy beyond VMware?

Speaker 9

Do you think you have enough drivers both on the semiconductor side and the software side to continue to drive growth? Or is M and A still an option beyond VMware? Thank you.

Speaker 2

Interesting question. And you're right. As I indicated in my remarks, even without the contribution from VMware this past quarter where we have AI helping us, but we have non AI semiconductors sort of bottoming out, we're able to show 12% organic growth year on year. So, almost have to say, so do we need to rush to buy another company? Answer is no.

Speaker 2

But all options are always open because we're trying to create the best value for our shareholders who have entrusted us with the capital to do that. So I would not discount that alternative because our strategy, our long term model has always been to grow through a combination of acquisition, but also on the assets we acquired to really improve, invest and operate them better to show organic growth as well. But again, organic growth often enough is determined very much by how fast your market would grow. So we do look towards acquisitions now and then.

Speaker 9

Great. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Blayne Curtis with Jefferies. Your line is open.

Speaker 4

Hey, thanks for taking my question. I wanted to ask you, Hock, on the networking business kind of ex AI. Obviously, I think there's an inventory correction the whole industry is seeing. But just kind of curious, I don't think you mentioned that it was at a bottom. So just perspective, I think it's down about 60% year over year.

Speaker 4

Is that business finding a bottom? I know you said overall, the whole semi business should non AI should see recovery. Are you expecting any there and any perspective on just customer inventory levels in that segment?

Speaker 2

We see it behaving. I didn't particularly call it out, obviously, because more than anything else, I kind of like link it very much to server storage, non AI that is. And we call server storage as at a bottom Q2 and we call it to recover modestly second half of the year. We see the same thing in networking, which is combination of enterprise networking as well as the hyperscalers who run their traditional workloads on those. It's always hard to figure out sometimes, but it is.

Speaker 2

So we see the same trajectory as we are calling out on server storage.

Speaker 4

Okay. Thank you.

Operator

Thank you. One moment for our next question.

Speaker 5

And that will come from

Operator

the line of Timothy Arcuri with UBS. Your line is open. Mr. Arcuri, your line is open.

Speaker 4

Hi, sorry, thanks. Hock, is there a way to sort of map GPU demand back to your AI networking opportunity? I I've heard you say in the past that if you spend $10,000,000,000 on GPU compute, you need to spend another $10,000,000,000 on other infrastructure, most of which is networking. So I'm just kind of wondering if when you see these big GPU numbers, is there sort of a rule of thumb that you use to map it back to what the opportunity will be for you? Thanks.

Speaker 2

There is, but it's so complex. I stopped creating such a model, Tim. I'm serious. But there is, because one would say that for every you almost say for every $1,000,000,000 you spend on GPU, you probably would spend probably on networking and if you include the optical interconnects as part of it, though we are not totally in that market, except for the components like DSPs, lasers, pin dyes that go into those high bandwidth optical connect. But if you just take optical connect in totality, switching all the networking components, it goes into attaches itself to clustering a bunch of GPUs, you probably would say that about 25% of the value of the GPU goes to networking, the rest are networking.

Speaker 2

Now not entirely all of it is my available market. I don't do the optical connect, but I do the few components I talked about in it. But roughly, the simple way to look at it is probably about 25%, maybe 30% of all this infrastructure components is kind of attached to the GPU value point itself. But having said that, it's never one we're never that precise that deployment is the same way. So you may see the deployment of GPU or purchase of GPU much earlier and the networking comes later or sometimes less the other way around, which is why you're seeing the mix going on within my AI revenue mix.

Speaker 2

But typically, you run towards that range over time.

Speaker 4

Perfect, Taka. Thank you so much.

Operator

Thank you. One moment for our next question. And that will come from the line of Thomas O'Malley with Barclays. Your line is open.

Speaker 4

Hey, guys. Thanks for taking my question and nice results. But my question regards to the Customization AI business talk, you had a long run here of a very successful business, particularly with 1 customer. If you look in the market today, you have a new entrant who's playing with different customers. And I know that you said historically that's not really a direct customer to you.

Speaker 4

But could you talk about what differentiates you from the new entrant in the market as of late? And then there's been profitability questions around the sustainability of gross margins longer term. Can you talk about if you see any increased competition and if there's really areas that you would deem more or less defensible in your profile today? And if you would see kind of that additional interim maybe attack any of those in the future?

Speaker 2

Let me take the second part first, which is our AI accelerate customer accelerated business. It is a very profitable business and let me put the scale in look at examine it from a model point of view. I mean, each of these AI accelerators, no different from a GPU. The way these large language models get run computing get run on these accelerators. No one single accelerator, as you know, can run this big, large language models.

Speaker 2

You need multiple of them no matter how powerful those accelerators are. But also and the way the models are run, there's a lot of memory access to memory requirements. So each of this accelerator comes with a large amount of cache memory, as you call it, what you guys probably now know as HBM, high bandwidth memory, specialized for AI accelerators or GPUs. So we supply both in our custom business. And the logic side of it, the where you where the compute function is on doing the chips, the margin there are no different trend of margin in most of any of our semiconductor silicon chip business.

Speaker 2

But when you attach to it a huge amount of memory, memory comes from a 3rd party. There are a few memory makers who make this specialized thing. We don't do margin stacking on that part. So by almost buying basic math will dilute the margin of these AI accelerators when you sell them with memory, which we do. It does push up revenue somewhat higher, but it is dilute the margin.

Speaker 2

But regardless, the spend, the R and D, the OpEx that goes to support this as a percent of the revenue, which is higher revenue, so much less. So on an operating margin level, this is easily as profitable, if not more profitable, given the scale that each of those customer is AI accelerates and can go up to. It's even better than our normal operating margin scale. So that's the return on investment that attracts and keeps us going at this game. And this is more than a game, it's a very difficult business.

Speaker 2

And to answer your first question, there's only 1 Broadcom, period.

Speaker 4

Thanks, Hawk.

Operator

Thank you. One moment for our next question.

Speaker 5

And that will come from

Operator

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

Speaker 7

Yes, thank you. Good afternoon. Hock, your networking switch portfolio with Tomahawk and Jericho chipsets allow hyperscalers to build AI clusters using either a switch scheduled or endpoint scheduled network. And that, of course, is unique among competitors. But as hyperscalers seek to deploy their own unique AI clusters, are you seeing a growing mix of white box networking switch deployments?

Speaker 7

I ask because what if your custom silicon business continues to broaden, it will be helpful to better understand the growing mix of your $11,000,000,000 AI networking portfolio combined this year? Thank you.

Speaker 2

Let me have Charlie address this question. He is the expert.

Speaker 10

Yes. Thank you, Hart. So two quick things on this. One is the you're exactly right that the portfolio we have is quite unique in providing that flexibility. And by the way, this is exactly why Hawk in his statements earlier on mentioned that 7 out of the top 8 hyperscalers use our portfolio and they use it specifically because it provides that flexibility.

Speaker 10

So whether you have an architecture that's based on an endpoint and you want to actually build your platform that way or you want that switching to happen in the fabric itself, that's why we have the full N10 portfolio. So that actually has been a proven differentiator for us. And then on top of that, we've been working, as you know, to provide a complete network operating system that's open on top of that using Sonic and SAI, which has been deployed in many of the hyperscalers. And so the combination of the portfolio plus the stack really differentiates the solution that we can offer to these hyperscalers. And if they decide to build their own mix, their own accelerators, our custom or use standard products, whether it's from Broadcom or other, that platform, that portfolio of infrastructure switching gives you that full flexibility.

Speaker 4

Thank you.

Operator

Thank you. One moment for our next question.

Speaker 5

And that will come from

Operator

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

Speaker 4

Yes, good afternoon. Thank you for taking the question. I was hoping to ask 2 part software question. So excluding VMware, your Brocade, CA and Symantec business is now running $500,000,000 higher for the last two quarters. So curious, is that the new sustainable run rate or were there one time events in both January April that we should be considering?

Speaker 4

And then the second question is, as you think about VMware Cloud Foundation adoption, are you seeing any sort of crowding out of spending like other software guys are seeing as they repurpose their budgets to IT? Or is that business so less discretionary that it's just not an impact to you? Thanks so much.

Speaker 2

Well, on the second one, I don't know about any crowding out to be honest. It's not. What we're offering obviously is not something that they would like to use themselves to be able to do themselves, which is they're already spending on building their own on prem data centers. And typical approach people take, a lot of enterprises take historically, continue today than most people do, a lot of people do, is they have best of breed. What I mean was they create a data center that is compute as a separate category, best compute there is and they often enough use vSphere for compute virtualization due to improved productivity, but best of breed there.

Speaker 2

And they're best of breed on networking and best of breed on storage with a common management operations layer, which very often is also VMware be realized. And what we're trying to say is this mix back and what they see is this mix back best of breed data center, very heterogeneous, it's not a highly resilient data center. I mean you have a mixed bag, so it goes down. Where do you find quickly root cause? Everybody is pointing fingers at the other.

Speaker 2

We got a problem not very resilient and not necessarily secure between bare metal in one side and software on the other side. So it's a natural thinking on the part of many CIOs we talk to, to say, hey, I want to create one common platform as opposed to just best of breed of age. So that gets us into that. So if it's a greenfield, it's not bad. They started from scratch.

Speaker 2

If it's a brownfield, that means they have existing data centers trying to upgrade. It's that's sometimes that's more challenging for us to get that adopted. So

Speaker 4

I'm not

Speaker 2

sure there's a crowding out here. There's some competition obviously on greenfield where they can spend their budget on an entire platform versus best of breed. But on the existing data center where you're trying to upgrade, that's the trickier thing to do. And it cuts the other way as well for us. But so that's how I see it.

Speaker 2

So in that sense, best answer is I don't think we're seeing a level of crowding out that is any and that's very significant for me to mention. In terms of the revenue mix, no, Brocade is having a great, great field year so far and still chunking along. But will that sustain? Hell no. You know that.

Speaker 2

Brocade goes through cycles like most enterprise purchases. So we're enjoying it while it lasts.

Operator

Thank you. And we do have time for one final question. And that will come from the line of William Stein with Truist Securities. Your line is open.

Speaker 4

Great. Thanks for squeezing me in. Hock, congrats on the yet another great quarter and strong outlook in AI. I also want to ask about something you mentioned with VMware. In your prepared remarks, you highlighted that you've eliminated tremendous amount of channel conflict.

Speaker 4

I'm hoping you can linger on this a little bit and clarify maybe what you did and specifically also what you did in the heritage Broadcom Software Business where I think historically you'd shied away from the channel and there was an idea that perhaps you'd reintroduce those products to the channel through a more unified approach using VMware's channel partners or resources? So any sort of clarification here I think would be helpful. Thank you.

Speaker 2

Yes. Thank you. That's a great question, Dangisa. Yes, VMware taught me a few things. They have 300,000 customers, 300,000.

Speaker 2

That's pretty interesting. And we look at it. I know under CA, we took a position that let's pick an A list strategic guys and focus on it. I can't do that in VMware. I have to approach it differently.

Speaker 2

And we start and I start to learn the value of a very strong bunch of partners they have, which are a network of distributors and something like 15,000 vast value added resales supported with these distributors. So we have doubled down and invested in this reseller network in a big way for VMware. It's a great move I think by 6 months into the game, but we are seeing a lot more velocity out of it. Now these resellers having said that tend to be very focused on a very long tail of that 300,000 customers. The largest 10,000 customers of VMware are large enterprises and who tend to there are very large enterprises, the largest banks, the largest healthcare companies.

Speaker 2

And their view is I want very bespoke service support engineering solutions from us. So we've created a direct approach, supplemented with their bar of choice where they need to. But on the long tail of 300,000 customers, They get a lot of services too from the resellers, value added resellers and so in their way. So we now and strengthen that whole network of resellers so that they can go direct, manage, support it financially with distributors. And we don't try to challenge those guys unless the customers it all boils down to the end of the day, the customer chose where they like to be supported.

Speaker 2

And so we kind of simplify this together with the number of SKUs there are. In the past, unlike what we're trying to do here, everybody is a partner. I mean, you're talking a full range of partners and whoever makes the biggest deal gets the lowest, the partner that makes the biggest deal gets the biggest discount, lowest price and they are out there, basically kind of creating a lot of channel chaos and conflict in the marketplace. Here we don't. The customers are unaware.

Speaker 2

They can take it direct from VMware to the direct sales force or they can easily move to the reseller to get it that way. And as a third alternative which we offer, if they chose not they want to run their applications on VMware and they want to run it efficiently on a full stack, they have a choice now of going to a hosted environment managed by a network of managed service providers which we set up globally that will run the infrastructure, invest and operate the infrastructure. And this enterprise customer just run their workloads in and get it as a service, basically VMware as a service, as a third alternative. And we are clear to make it very distinct and differentiated for our end use customers. The available to all 3 is how they chose to consume our technology.

Speaker 4

Great. Thank you.

Operator

Thank you. I would now like to hand the call over to Ji Yu, Head of Investor Relations, for any closing remarks.

Speaker 1

Thank you, Sherry. Broadcom currently plans to report its earnings for the Q3 of fiscal 2024 after close of market on Thursday, September 5, 2024. A public webcast of Broadcom's earnings conference call will follow at 2 p. M. Pacific Time.

Speaker 1

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
Broadcom Q2 2024
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