Broadcom Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Welcome to Broadcom Inc.'s First Quarter Fiscal Year 2023 Financial Results Conference Call.

At this time, for opening remarks and introductions, I would like to turn the call over to Ji Yoo, Head of Investor Relations of Broadcom Inc.

[Ji Yoo, Investor Relations at Broadcom]

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 Kawwas, President, Semiconductor Solutions Group.

Broadcom distributed a press release and financial tables after the market closed, describing our financial performance for the first quarter fiscal year 2023. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom's website at broadcom.com. This conference call is being webcast live, and then audio replay of the call can be accessed for one year through the Investors section of Broadcom's website.

During the prepared comments, Hock and Kirsten will be providing details of our first quarter fiscal year 2023 results, guidance for our second quarter 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. 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.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Thank you, Ji, and thank you, everyone, for joining us today. In our fiscal '20 -- in our fiscal Q1 '23, consolidated net revenue, that was -- revenue was $8.9 billion, up 16% year-on-year. Semiconductor Solutions revenue increased 21% year-on-year to $7.1 billion, while as we expected, Infrastructure Software declined 1% year-on-year to $1.8 billion even as our core software sustained growth of 5% year-on-year.

Stepping back, let me sum up what happened in Q1. From our view, infrastructure spending continues to be up, particularly in service providers even as hyperscale and enterprise sustain. Spending in technology for infrastructure has been strong, showing double-digit growth for nine consecutive quarters. We continue to be booked for fiscal '23 and our lead times and visibility on semiconductors remain largely at 50 weeks. While there have been a small number of request to push out certain orders, we know that these are the exceptions and they have not had a material impact on our business.

Because we ship linearly throughout the quarter to our customers, inventory on our books has been consistent around 80 days, and the overall inventory of Broadcom products across the ecosystem remains very well-managed. We continue, needless to say, to be very disciplined in shipping of backlog only as and when needed by our end customers.

With that, let me now provide more color on each of our end markets, starting with networking. Networking revenue was $2.3 billion and was up 20% year-on-year, in line with guidance, representing 32% of our semiconductor revenue. We see continued deployment of our advanced Tomahawk switches by hyperscalers in their leaf and spine architectures. Even as we deliver on increased bandwidth for the hyperscalers, having said that, power remains a major challenge. So just this week, we announced the industry's first integrated silicon photonics networking solution, codenamed Bailly, which integrates the active optical interconnect with our next generation Tomahawk 5 switch at 51.2 terabit per second. Bailly doubles switching performance, but it will reduce total system power.

Keep in mind that as hyperscalers, a growing portion of our switches are being deployed within their AI networks which aren't separate from the traditional x86 CPU scale-out running existing workloads. Now, this is today. Tomorrow, with generative AI using large-scale language such as AI models with billions of parameters, we have to run thousands of AI engines in parallel, enabling large and synchronized burst of data at speeds of 400 and 800 gig. Demand works to support this massive processor density is critical, and as important as the AI engines. Such networks have to be lossless, low latency, and be able to scale. So as you know, so such AI networks are already been deployed at certain hyperscalers through our Jericho 2 switches and Ramon fabri.

In fact, in 2022, we estimated our Ethernet switch shipments deployed in AI was over $200 million. With the expected exponential demand from our hyperscale customers, we forecast that this could grow to well over $800 million in 2023. We anticipate this trend will continue to accelerate and mindful that we need even more higher-performance networks in the future, we have been investing in a new generation of this lossless, low-latency Ethernet fabri designed specifically to handle such data and compute-intensive AI workloads.

Of course, additionally, the exciting growth prospects for generative AI are driving our compute offload accelerated business and hyperscalers. As we have indicated to you last quarter, this business achieve over $2 billion in revenue in 2022. We are on track to exceed $3 billion in revenue in our fiscal '23. In Q2, looking forward short-term, we expect these tailwinds to drive our networking revenues to grow about another 20% year-over-year.

Moving on next to our server storage connectivity revenue. That was a record $1.3 billion or 18% of semiconductor revenue, and up 57% year-on-year. Once again, as we discussed in preceding quarters, the rapid transition to next generation MegaRAID solutions drove the substantial year-on-year content increase. After four consecutive quarters of such increases, this transition, however, is significantly complete and we expect that in Q2 on a year-on-year basis, server storage connectivity revenue will moderate towards 20% year-on-year growth.

Moving on to broadband. Revenue grew 34% year-on-year to a record $1.2 billion and represented 17% of semiconductor revenue. During this quarter, our broadband business particularly benefited from robust deployments of -- by telcos of 10G PON and cable operators of DOCSIS 3.1. These gateways have high attach rates of Wi-Fi 6 and 6E. And in Q2, we expect the secular drivers behind broadband to sustain momentum on a sequential basis and year-on-year, broadband will grow a solid 10%.

Moving onto wireless. Q1 revenue of $2.1 billion represented 29% of semiconductor revenue. Demand from our North American customer drove wireless revenue up 4% year-on-year, reflecting content increases, which we had previously indicated last quarter. Sequentially, wireless was flattish compared to Q4 and seasonally, we expect wireless to be down sequentially in Q2 and down high-single digit percentage year-on-year.

Finally, Q1 industrial resale of $229 million decreased 4% year-over-year as softness in China offset strength in renewable energy and medical. And in Q2, we forecast industrial resales to be down low-single digit percentage year-on-year on continuing softness in China. So in summary, Q1 Semiconductor Solutions revenue was up 21% year-on-year and in Q2, we expect semiconductor revenue growth of high-single digit percentage year-on-year.

Turning to software. In Q1, Infrastructure Software revenue was $1.8 billion declined 1% year-on-year and represented 20% of total revenue. While core software revenue grew 5% year-on-year, the Brocade business declined because of lumpiness in enterprise consumption in this very narrow vertical of same storage.

For core software, consolidated renewal rates average 119% over expiring contracts and within our strategic accounts, we average 129% and within this strategic accounts, annualized bookings of $536 million included $197 million, which represent 37% of cross-selling of our portfolio products to the same core strategic customers. Over 90% of the renewal value represented recurring subscription and maintenance.

Now, by way of comparison, over the last 12 months, consolidated renewal rates average 119% over expiring contracts and in our strategic accounts, we average 134%. Because of these, our ARR, the indicator of forward revenue at the end of Q1 was $5.3 billion, which is up 3% from a year ago. In Q2, we expect our Infrastructure Software segment revenue to be up low-to-mid single digit percentage year-on-year as the stable core software growth continues to be partially offset now by weakness in Brocades.

So in summary, we are guiding consolidated Q2 revenue for the company to be $8.7 billion, up 8% year-on-year. Before Kirsten tells you more about our financial performance for the quarter, let me provide a brief update on our pending acquisitions of VMware. We continue to make progress with our various regulatory filings around the world, having now received legal merger clearance in Brazil, South Africa and Canada and foreign investment control clearance in Germany, France, Austria, Denmark, Italy and New Zealand. As we stated on our last earnings call, we continue to anticipate that the timeline for the review process will be extended in other key regions, especially given the size of this transaction. Having said that, we continue to expect the transaction to close within our fiscal 2023. We believe the combination of Broadcom and VMware is about enabling enterprises to accelerate innovation and expand choice by addressing the most complex technology challenges in this multi-cloud era. And we are confident regulators will see this when they conclude their review.

Finally, Broadcom recently publish its third annual ESG report available on our corporate citizenship website, which discusses the company's ESG initiatives. As a global technology leader, we recognize Broadcom's responsibility to have a positive impact on our customers, employees and communities. Through our product and technology innovation and operational excellence, we remain committed to this mission.

With that, let me turn the call over to Kirsten.

[Kirsten Spears, Chief Financial Officer and Chief Accounting Officer at Broadcom]

Thank you, Hock. Let me now provide additional detail on our financial performance. Broadcom had another great quarter with robust financials. Consolidated revenue was $0.9 billion for the quarter, up 16% from a year ago. Gross margins were 74% of revenue in the quarter, about 10 basis points higher than we expected. Operating expenses were $1.1 billion, down 1% year-on-year. R&D of $929 million was also down 1% year-on-year, primarily from streamline project and other variable spending offset in-part by higher people cost resulting from increased headcount as we are hiring. Operating income for the quarter was $5.4 billion and was up 17% from a year ago. Operating margin was 61% of revenue, up approximately 50 basis points year-on-year. Adjusted EBITDA was $5.7 billion or 64% of revenue. This figure excludes $127 million of depreciation.

Now, a review of the P&L for our two reportable segments. Revenue for our Semiconductor Solutions segment was $7.1 billion and represented 80% of total revenue in the quarter. This was up 21% year-on-year. As Hock discussed, this came from strength across all of our semiconductor end markets. Gross margins for our Semiconductor Solutions segment were approximately 69%, down approximately 160 basis points year-on-year driven primarily by product mix within our semiconductor end markets. Operating expenses were $802 million in Q1, down 2% year-on-year. R&D was $716 million in the quarter, down 1% year-on-year. Q1 semiconductor operating margins were 58%, so while semiconductor revenue was up 21%, operating profit grew 23% year-on-year.

Moving to the P&L for our Infrastructure Software reportable segment. Revenue for Infrastructure Software was $1.8 billion, down 1% year-on-year, and represented 20% of revenue. Gross margins for Infrastructure Software were 91% in the quarter and operating expenses were $346 million in the quarter, down 1% year-over-year. Infrastructure Software operating margin was 72% in Q1 and operating profit was stable year-over-year.

Moving to cash flow. Free cash flow in the quarter was $3.9 billion, representing a 16% increase year-over-year. Free cash flow represented 44% of revenues in Q1 '23, consistent with what we achieved the same quarter last year. We spent $103 million on capital expenditures. Days sales outstanding were 33 days in the first quarter compared to 30 days in the fourth quarter. We ended the first quarter with inventory of $1.9 billion, down 1% from the end of the prior quarter, or 78 days on hand. Overall, inventory of Broadcom's products across the ecosystem, as Hock indicated, remains well managed.

We ended the first quarter with $12.6 billion of cash and $39.3 billion of gross debt, of which $1.1 billion is short term. During the quarter, we repaid $260 million in senior notes that were due on maturity. The weighted average coupon rate and years to maturity of our fixed-rate debt is 3.61% and 10.2 years respectively.

Turning to capital allocation. In the quarter, we paid stockholders $1.9 billion of cash dividends. Consistent with our commitment to return excess cash to shareholders, we repurchased $1.2 billion of our common stock and eliminated $333 million of common stock for taxes due on vesting of employee equity, resulting in the repurchase and elimination of approximately $2.7 million AVGO shares. The non-GAAP diluted share count in Q1 was $434 million. As of the end of Q1, $11.8 billion was remaining under the share repurchase authorizations. Excluding the potential impact of any share repurchases, in Q2, we expect the non-GAAP diluted share count to be $438 million.

Based on current business trends and conditions, our guidance for the second quarter of fiscal 2023 is for consolidated revenues of $8.7 billion and adjusted EBITDA of approximately 64.5% of projected revenue. In forecasting such profitability, we expect gross margins to be up approximately 150 basis points sequentially on product mix, and R&D spending to be up sequentially on continuing hiring of engineers and seasonal payroll tax step-ups.

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

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question will come from the line of Harsh Kumar with Piper Sandler. Your line is open.

[Harsh Kumar, Analyst at Piper Sandler Companies]

Yeah. Hey, guys. Congratulations on yet another solid quarter and guide, and thanks for all the color you guys provided. Hock, you mentioned generative models in your commentary. I wanted to understand the difference between what you're doing in AI so far versus maybe what our understanding of generative is.

You talked about $200 million in Ethernet related to AI. Is that largely generative because we've heard other companies say that for a large part, the generative models are using InfiniBand? And then you talked about $2 billion and compute offload going to sort of $3 billion. My understanding was that was mostly for video processing. Maybe help us think about how we think of AVGO's place or Broadcom's place in the generative process?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Well, yeah. Thank you for the question and opportunity to clarify why we highlighted -- why I highlighted it very purposefully. In 2022, generative is just barely starting to kicked-off, but there exist AI networks within the hyperscalers, particularly in fairly significant volume, and what we're trying to say is very similar to CPUs, traditional CPUs and traditional workloads in those same data centers. We've constrained on performance of those silicon CPUs, and the Moore's law, we're starting to see scale-out by positioning rows and rows of servers, CPUs, and networking them together to work closely in parallel. As we step up to large language models in AI, generative AI in particular come into play.

GPUs are starting to be strung together in hundreds soon to be thousands of racks and working in parallel, and you know how that goes. And basically, those GPUs work in parallel in fairly synchronous manner to basically run and do what we call bulk parametric exchange, basically run GPUs together, all AI engines together, whether they're GPUs, AI, our TPUs, or other AI engines, you run them together. It becomes network. The network becomes now potentially a critical part of this whole AI phenomenon in hardware. To make it work, you've got to put together many, many racks of AI engines in parallel, very similar to one we have been doing hyperscalers and have been doing on CPUs to make them run faster, high-performance as Moore's law come to an end and doesn't make any difference here in the form of AI engine. They come from silicon, they have -- they face similar constraints. So network becomes the problem -- becomes the constraint. Network becomes a very key part of fulfilling generative AI dream here.

And what we saying here -- what I'm saying in my comments is last year, 2022, this -- on this, a more, what you call the AI workloads that are running in hyperscale and the advent of generative AI is still relatively fresh and new, we are doing $200 million as far as we could estimate of silicon Ethernet switches and fabri that goes into those AI networks as far as we could identify in hyperscalers. With generative AI and the urgency and excitement of it coming in, that we are seeing today, we are seeing that increase very, very dramatically. And we're seeing urgency in our hyperscale customers coming to us to secure products, to secure ability, to put in place those very, very low -- lossless, I would call, very low-latency networks that can scale. And Ethernet is what makes those networks scale.

[Harsh Kumar, Analyst at Piper Sandler Companies]

Understood. Thanks, Hock.

[Operator]

Thank you. One moment for our next question, and that will come from the line of Harlan Sur with J.P. Morgan. Your line is open.

[Harlan Sur, Analyst at J.P. Morgan]

Good afternoon. Thanks for taking my question. Hock, as your cloud customers are now aggressively focused on generative AI development and deployment across their data center footprints, like this is driving strong AI-focused Ethernet switch port demand and demand for a compute offload ASICs like TPU for this year, as you mentioned, but from a new product ramp and design win funnel perspective, is this also causing your cloud customers to want to pull forward some of your future programs like Tomahawk 5 or Jericho 3 next-gen switching and routing products and/or pulling the design and tape next generation compute offload AI, ASIC programs?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Yes. We are seeing all of the foregoing by the way, and that happened over the last 90 days. We have seen a lot of that urgency, a lot of that people might call it excitement, but you hit it right on. Yes, which is accounting for the color in my commentary about both net generative AI-based networks and pushing us to develop a new generation altogether of Ethernet switching that can support this kind of very compute and data-intensive workloads, so that's one side of it. And the other side of it, you're right, we typically not want to talk much about compute offload, which is another way of saying, yeah, these are very related to some of the engines that certain -- that are fairly customized, dedicated to certain hyperscalers.

[Harlan Sur, Analyst at J.P. Morgan]

Thank you, Hock.

[Operator]

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

[Vivek Arya, Analyst at Bank of America]

Thank you for taking my question. Hock, I'm just curious to understand, just the views about the second half. If I look at the last few years, Broadcom has managed to grow semiconductor sales, right, anywhere between 5% to kind of double-digit, second half half-over-half. Just the broader business environment, so it's kind of more of a broader business environment, a question, not guidance per se. What could change that trend for Broadcom in positive or negative way this year?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Sort of broadly conceptual, not a guidance, as you said, but trend this way. We're kind of getting rather hopeful that it would be a soft landing. There will be moderation as we are indicating this future -- this Q2 quarter moderating growth, but we see, nonetheless, as probably leading to a soft landing of still a year-on-year improvement in the second half.

[Vivek Arya, Analyst at Bank of America]

Thank you, Hock.

[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 Research]

Hi, guys. Thanks for taking my question. I just wanted to verify in close up, did you say that you started hearing urgency from your hyperscale customers around the AI in the last 90 days and that should -- given that, how do I think about that in the context of lead times that are still 50 weeks? You've got like -- sounds like $1.6 billion in incremental networking growth in year-over-year in '23 from the AI across both Ethernet and the ASICs. I guess, given the lead times, is that more of a second half kind of thing when that contributes to the model or does it contribute more linearly to the year or I guess, just how do I think about the timing of all this in the wake of the strong demand right now, just given the broader lead times?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Stacy, thank you for your question, very perceptive, and as I say, we don't -- we're not -- we are trying not to -- we are not guiding you guys what happens beyond the second quarter, not second half of this year.

[Stacy Rasgon, Analyst at Bernstein Research]

But you did give us some guidance for the year on this, right? So...

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

No guidance, sorry. I gave you a conceptual trend. How is that?

[Stacy Rasgon, Analyst at Bernstein Research]

Okay.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

But having said that, no, we are still working through timing of when our customers need those urgent -- those products in a fairly urgent manner and our ability to obviously want to be very, very helpful to all customers. Launch aggressively to generative AI. So we're in the midst of that.

[Stacy Rasgon, Analyst at Bernstein Research]

Okay. Because like the networking implied guide for Q2 has got to be up like call it mid-teens sequentially, is that -- some of that contributing or do I get even more, I guess as we go beyond, because we're already -- once you get through this quarter, we are already into the first half, right? So I guess, it has to be in the second half, right?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Stacy, I wish you guys would not do too much analysis, but I know that won't happen. I'm only guiding Q2. I'll let you figure out what happens in the second half. I think you're probably better off at it than I am.

[Stacy Rasgon, Analyst at Bernstein Research]

Got it. Okay. Thank you so much, Hock.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Thank you.

[Operator]

Thank you. One moment for our next question and that will come from the line of CJ Muse with Evercore ISI. Your line is open.

[C.J. Muse, Analyst at Evercore ISI]

Yeah. Good afternoon, and thank you for taking the question. And I know that it might be difficult to share too much on the ongoing review from the European Commission, but was hoping maybe you could speak a little bit about where they're concerned i.e. next Fibre Channel Host Bus Adapters and other storage adapters? Do you view these as core businesses within Broadcom? Are they easy to extract out of your portfolio? And is there IP that is critical for these businesses that are clearly used by your other larger core businesses? Anything to kind of help us understand would be grateful. Thank you.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

C. J., I appreciate the fact that you have been definitely reading a lot of those Reuters and Bloomberg and lexicon report, the share data and you equally know that I cannot and will not comment on any of this as we are working very, very positively and progressively with regulators on all the issues related to our clearance. So sorry, I can't comment, but just to let you know we're making good progress.

[C.J. Muse, Analyst at Evercore ISI]

Thank you.

[Operator]

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

[Vijay Rakesh, Analyst at Mizuho Securities]

Yeah. Hi, Hock. Just a quick question on, you talked about generative AI. Just wondering, as you look at the workload, what percent of workloads would be on generative AI exiting calendar '23 or '24? And also want to hit on the silicon photonics side. I think you briefly mentioned the silicon photonics cable with integrated switch, the 51.2 terabyte switch, when do you see this ramping and what's the power advantage on that? Thanks.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Okay. Well, it's -- I'm sure, I don't need to elaborate on what we all hear about on generative AI and it's -- I think it's still early innings on generative AI, but we obviously are also indicating, we are seeing a very strong -- and a strong sense of urgency among our customers, especially in the hyperscale environment to be -- to not miss out -- not to be late in this trend. And what -- with generative AI, as I said, we have many more -- much more than billions of parameters that come into the models that they are doing. You're talking about scale out of data centers driving AI engines network together in a manner that we probably have not seen before. It's not a problem that's not solvable. It is very, very clearly solvable as evidenced by the fact that we have -- and deploy technology to support AI networks even today to certain hyperscalers, where we're talking about at least hundreds, if not thousands of AI engines, AI servers network together and working in a synchronous manner.

So this is about ability to scale out in a fairly a substantial manner and that was the color I was providing and is really about trying to make sure that happens and not be the bottleneck to our own -- to our ability to get the best system performance and I emphasize the word system performance of the -- of an AI data center. And where it's coming from right now is frankly, how to network them and how to do those massive parametric exchange, so to speak, when you run large numbers of engines or machines in parallel as you grind through this huge database and that we need to do. So that's -- we are in early innings and which is why we think we have time to come -- to start to work on even a new generation of switches in Ethernet that dedicate then -- specifically designed dedicated to these kind of workloads, which are very different from the normal workloads that we see today, traditionally in data centers. And we have to address that they have to be, as I said, literally lossless, virtually lossless, very low latency, and be able to scale into thousands of engines. And that's the main three criteria we are aware of and we're driving solutions -- silicon solutions that enable that. We have it but we think we need to improve the performance of what we have to -- and in anticipation of a trend that we foresee over the next several years. And so, we're putting a lot of investment in that direction.

[Vijay Rakesh, Analyst at Mizuho Securities]

On the silicon photonics cable, just wondering, when the time of ramp and the product wanted to fare. Thanks.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Well, we intend to launch Tomahawk 5 early '24 as we indicated previously, and that's the conventional silicon base with pluggable optics switch, top of the rack switch, Tomahawk 5, 51.2 terabit per second. Bailly, which is the fully-integrated silicon photonic version, we don't fully integrate the active component -- active element active elements of those pluggable optics into the switch. We anticipate launching that shortly thereafter. Power-wise, you can see silicon photonics, that's a lot. Tomahawk 5 compared to what we have today it's 2x the performance of Tomahawk 4, and -- but we believe we can do Tomahawk 5 at the same power, close to the same power, if not lower than of Tomahawk 4.

[Vijay Rakesh, Analyst at Mizuho Securities]

Great. Thank you.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Sure.

[Operator]

Thank you. One moment for your next question, and that will come from the line of Ross Seymore with Deutsche Bank. Your line is open.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks for letting me ask the question. I want to go into the compute offload number that you talked about, Hock, the $2 billion last fiscal year, going to $3 billion this year. I know it's a touchy subject, and so no customer specifics, of course, but generally speaking, can you just talk about the breadths and types of compute offload and how that's changing in the mix from the $2 billion last year to $3 billion this year?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Well, I rather not answer that question, Ross. Highly sensitive to some of my very limited customer base. But as I said, it includes some of them, engines, the compute engines, and somewhat related components that support these engines.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

Is the concentration changing, so are you broadening customers and that growth?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

No, no. Very concentrated.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Thank you.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Thank you.

[Operator]

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

[Edward Snyder, Analyst at Charter Equity Research]

Thank you very much. Good quarter, Hock. So apparently over the last quarter, you were getting out of wireless, you're getting into wireless or how is it? You guys are going to be -- start doing wireless? So I wanted to get a couple of updates, so maybe you could set the record straight. First of all even if you see a change in let's say silicon, mixed silicon baseband providers in the next year or two, does that fundamentally change your opinion of your wireless group, and either way, actually, does it get better or does it get worse because obviously, architecture's changed, and there's a big impact on supply chain? And I know historically, you've worked very closely with key players in helping develop all the other pieces of the puzzle like transceivers that are required if you're going to do your own. So maybe you could just kind of reset the bar on what you expect for not guidance, but in general, the wireless division in the next year or two? Does it atrophy or get greater? Thanks.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Thanks. Good question. As you know, our wireless group, as we call it, not division, is really not one single product line or one single division. It's not one homogeneous group either. It is -- so a few key products that comprises this wireless division, all selling, you're right, you're correct, to the -- to a same application and very high-end flagship status handsets and largely focused on one key customer, a North American, our much beloved North American OEM customer. So in this sense, it's one single focus area.

And to answer your question. Well, we're among these multiple products and they tend to keep progress as each new generation happens. May not be every year, but it happens pretty -- with fairly regular frequency on a cadence that is pretty predictable off the wall, each on its own cadence. It's a very, very good business for us. And to answer your question directly. No. Nothing meaningful has changed. Our relationship, our strategic engagement continues very much the same as it has for the last multiple years. And we see that still continue in a fairly predictable, stable manner.

[Edward Snyder, Analyst at Charter Equity Research]

And then, just remind if you could, three-year roadmap. I mean you see stuff pretty far out, right.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Yes.

[Edward Snyder, Analyst at Charter Equity Research]

Great. Thank you.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Thank you.

[Operator]

Thank you. One moment for our next question. That will come from the line of Pierre Ferragu with New Street Research. Your line is open.

[Pierre Ferragu, Analyst at New Street Research]

Hey. Thank you for taking my question. Can you hear me well?

[Charlie Kawwas, President, Semiconductor Solutions Group at Broadcom]

Yes.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Yes.

[Pierre Ferragu, Analyst at New Street Research]

Great. So I'm trying to pull together a perspective of what's happening at hyperscale clients this year. So if I look at your networking division, if you grow like at least $600 million this year in AI and if your compute offload division grows by $1 billion, that might well represent all your growth in that -- in networking. So that would mean you're missing that is regrowing that is bringing a lot this year in that space is AI. And when I look at outside of Broadcom, what we've seen is memory and the x86 CPU server are having a very difficult time at the moment, and expect a recovery in the second half, while like with the GPU segment as a market is actually in very, very good shape and growing very well and accelerating again.

So my question at the end of the day is, is it fair to say that in these large data centers this year only AI is growing, and is that a sign of what the future will be, or do you think it's a general-purpose stock that constitutes or like centered around x86 or similar general purpose CPUs still is a very good growth market?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

You've put -- you've posed very, very interesting and good questions, Pierre. The problem is I do not get -- my customers, hyperscale customers do not necessary honor me my sharing all those insights that you -- on those questions you're asking. I do not know. I do not know. All I know and what I do know because I don't sell them CPUs, I don't even sell them GPUs, by the way, but I know what you know out there, which is in certain areas of the business, we're seeing some of these hyperscalers bringing on a sense of urgency and focus, and of course, spending to be up to speed, if not, to not be left behind as we see the excitement hyped perhaps in pushing applications and workloads in generative AI. That's what we see driving a lot of this excitement and we're -- all we're seeing is we're seeing some of that effect on our networking business with those hyperscalers, that's what it is. Beyond that, we -- unfortunately, other than the backlog, we get a normal networking switches, routers and key components, we see that. And as I indicated in our this -- last quarter's result, we continue to see sustained strength now. Last quarter and continuing as we indicate this particular quarter, Q2. Beyond that, we don't get to see -- we do not want to guide what we are going to see beyond that. But right now, last quarter, this quarter, we are seeing traditional data centers scale out in networking, in deployment and networking continues to be strong and sustain in hyperscalers as well I might indicate in enterprise.

[Pierre Ferragu, Analyst at New Street Research]

Okay. Right. And just to clarify specifically on what you are doing, is it fair to assume that the majority, a very large majority of your growth this year in networking is going to come from AI, which we have, $600 million is coming from AI, Ethernet and a $1 billion coming from offload chip. So is that not the right way to think about it, just for your business, not looking at anything else?

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

I would not think about it. At this point, it might be a bit too premature. Don't forget, generative AI...

[Pierre Ferragu, Analyst at New Street Research]

Okay.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Is still early stage.

[Pierre Ferragu, Analyst at New Street Research]

Yeah. Okay. That's very clear. Thanks lot.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Thank you.

[Operator]

Thank you. And we do have time for one final question and that will come from the line of Karl Ackerman with BNP Paribas. Your line is open.

[Karl Ackerman, Analyst at BNP Paribas]

Yes. Thank you for taking my question. There were many great questions quite frankly on the networking business, which I think is quite significant for you. Maybe if I could, a clarification on that and then a broader question that I want to address on broadband. On the networking piece, I was curious if you could discuss the growth opportunity in your Tomahawk portfolio now that a peer has elected to stop investing in their switch division? And then as it relates to broadband, several companies across the broadband ecosystem have guided a softer outlook due to a buildup of inventory, but quite frankly, that's been on the customer premise side. You obviously have more waiting towards fibre and sell into the infrastructure portion. And so I was hoping you could discuss, how you're thinking about the growth of your fibre business within broadband, both from an infrastructure side and a consumer equipment standpoint as governments begin to deploy funds for broadband infrastructure? Thank you.

[Hock E. Tan, President and Chief Executive Officer at Broadcom]

Thank you for the question. Yes, broadband is to us a very, very good business and very sustaining, used to be boring. Boring is good at this point and last quarter, Q1 as I reported, we actually grew 34% year-on-year, I know. In my view, that's rather exceptional, even though in broadband, we have been seeing year-on-year growth now at least for the past four, five quarters, but still 34% was rather exceptional and sure enough, Q2, it normalizes to a more sedate level, but still growing. And the growth in that is simply because we are very well positioned with respect to next generation PON. 10 gig PON, which has been deployed in big volumes now by telcos supported by their governments, countries all over Europe and even in Nort America, not to mention, other nations beyond that. Basically, it is about reaching this key utility broadband service to every household and we see a lot of deployment and then more vertical market, we also see simultaneously PON or fiber as you call it. Launch a strong continued deployment of cable, DOCSIS, certainly coaxial to the home, because the cable operators, a few of them who are on the scale of the telcos and who need to maintain competitiveness as the telcos launch 10 gigabit PON, that cable has to update DOCSIS to be able to compete and not lose subscribers in the same market they compete against each other. So we see strength both in cable, DOCSIS 3.1 as I call it and potentially, next generation not yet happening, but hopefully, within the next couple of years, DOCSIS 4 -- 4.0. Meanwhile, PON is happening, which accounts for the strength we saw last quarter and continuing strength over the last several quarters. And content increases come to not just unit deployment of those gateways and infrastructure, but also the fact that a lot of this deployment come with very high attach rate of Wi-Fi 6 and 6E. And that provides additional boost, content increases more to what I'll call it to our revenue growth in broadband. So that's quietly still chugging along very nicely for us. All right.

[Operator]

Thank you. As I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Ji Yoo for any closing remarks.

[Ji Yoo, Investor Relations at Broadcom]

Thank you, Sherry. In closing, we would like to highlight that Broadcom will be attending the Morgan Stanley Technology, Media and Telecom Conference on Tuesday, March 7th. Broadcom currently plan to report its earnings for the second quarter of fiscal '23 after close of market on Thursday, June 1, 2023. A public webcast of Broadcom's earnings conference call will follow at 2 p.m. Pacific Time. That will conclude our earnings call today. Thank you all for joining. Sherry, you may end the call.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Ji Yoo, Investor Relations
• Hock E. Tan, President and Chief Executive Officer
• Kirsten Spears, Chief Financial Officer and Chief Accounting Officer
• Charlie Kawwas, President, Semiconductor Solutions Group

Analysts

• Harsh Kumar, Piper Sandler Companies
• Harlan Sur, J.P. Morgan
• Vivek Arya, Bank of America Co.
• Stacy Rasgon, Bernstein Research
• C.J. Muse, Evercore ISI
• Vijay Rakesh, Mizuho Securities
• Ross Seymore, Deutsche Bank Aktiengesellschaft
• Edward Snyder, Charter Equity Research
• Pierre Ferragu, New Street Research
• Karl Ackerman, BNP Paribas