Broadcom(US:AVGO)2024-06-13 00:04Financial Data and Key Metrics - Consolidated net revenue for Q2 2024 was $12.5 billion, up 43% YoY, driven by a full quarter contribution from VMware Excluding VMware, revenue grew 12% YoY, with AI revenue surging 280% YoY to $3.1 billion [6] - Gross margins were 76.2% of revenue, with operating income at $7.1 billion, up 32% YoY, and operating margin at 57% of revenue Adjusted EBITDA was $7.4 billion, or 60% of revenue [16][17] - Free cash flow was $4.4 billion, representing 36% of revenue Excluding restructuring and integration costs, free cash flow was $5.3 billion, up 18% YoY [18] - The company raised its fiscal 2024 revenue guidance to $51 billion, with adjusted EBITDA expected at 61% [21] Business Segment Performance Infrastructure Software - Revenue for the infrastructure software segment was $5.3 billion, up 175% YoY, primarily due to VMware's contribution VMware revenue grew from $2.1 billion in Q1 to $2.7 billion in Q2, with a target of $4 billion per quarter run rate [7][8] - Annualized Booking Value (ABV) for VMware accelerated from $1.2 billion in Q1 to $1.9 billion in Q2, with the broader software portfolio ABV growing from $1.9 billion to $2.8 billion [8] - Operating margin for infrastructure software was 60%, excluding transition costs, and is expected to converge towards classic Broadcom software levels by fiscal 2025 [8][15] Semiconductor Solutions - Semiconductor revenue was $7.2 billion, up 6% YoY, representing 58% of total revenue Networking revenue grew 44% YoY to $3.8 billion, driven by strong demand from hyperscalers for AI networking and custom accelerators [9][17] - Wireless revenue grew 2% YoY to $1.6 billion, while server storage connectivity revenue declined 27% YoY to $824 million Broadband revenue declined 39% YoY to $730 million, and industrial resale revenue declined 10% YoY to $234 million [12][13][14] - Gross margins for semiconductors were 67%, down 370 basis points YoY, due to a higher mix of custom AI accelerators [17] Market Performance and Trends - AI revenue is expected to exceed $11 billion in fiscal 2024, with networking revenue growth revised to 40% YoY, up from prior guidance of over 35% [14][15] - The company is leading the transition to 800 gigabit bandwidth in AI data centers and developing next-generation switches, DSPs, and optics for 1.6 terabit connectivity [10] - Non-AI semiconductor revenue is expected to recover modestly in the second half of fiscal 2024, with server storage and broadband revenue bottoming in Q2 [14][15] Strategic Direction and Industry Competition - The integration of VMware is progressing well, with the company modernizing product SKUs and transitioning to a subscription licensing model VMware's spending run rate is expected to decline to $1.3 billion by Q4 2024 [7][8] - Broadcom is not competing directly with NVIDIA in the GPU market but focuses on custom AI accelerators for hyperscalers The company is leveraging its deep expertise in Ethernet networking to support AI clusters [24][25] - The company is developing next-generation networking products, including Tomahawk 6, expected in late 2025, to support larger AI clusters [39][41] Management Commentary on Business Environment and Outlook - Management highlighted strong demand for AI-related products, with AI revenue expected to grow significantly in fiscal 2024 The company is optimistic about the recovery of non-AI semiconductor revenue in the second half of the year [14][15] - The integration of VMware is on track, with significant progress in reducing costs and improving operational efficiency The company expects VMware's operating margins to converge with Broadcom's classic software margins by fiscal 2025 [8][15] Other Important Information - Broadcom announced a 10-for-1 forward stock split, with trading on a split-adjusted basis expected to commence on July 15, 2024 [20] - The company repaid $2 billion of floating-rate debt in Q2 and plans to continue quarterly debt repayments throughout fiscal 2024 [19] Q&A Session Summary Question: Competition with NVIDIA in AI accelerators and Ethernet switching [23] - Broadcom does not compete with NVIDIA in GPUs but focuses on custom AI accelerators for hyperscalers The company leverages its expertise in Ethernet networking to complement GPU clusters [24][25][26] Question: AI revenue growth and mix between compute and connectivity [28] - AI revenue mix is shifting from 80% accelerators and 20% networking to closer to 60% accelerators and 40% networking by year-end [29] Question: AI revenue guidance and growth trajectory [31] - The $11 billion AI revenue guidance is conservative, with potential for higher growth as deployment rates improve [32][33] Question: Networking product cadence and adoption [37] - Broadcom maintains a two-year cadence for new networking products, with Tomahawk 6 expected in late 2025 to support larger AI clusters [39][41] Question: VMware integration and subscription model adoption [43] - VMware's transition to a subscription model is progressing well, with strong customer interest in Cloud Foundation offerings [44][45] Question: Growth strategy beyond VMware [48] - Broadcom is focused on organic growth and improving acquired assets, but M&A remains an option to drive shareholder value [50] Question: Networking business ex-AI and inventory correction [52] - Non-AI networking revenue is expected to recover modestly in the second half of fiscal 2024, following a bottom in Q2 [53] Question: GPU demand and AI networking opportunity [55] - Approximately 25-30% of GPU infrastructure spending is allocated to networking, with Broadcom benefiting from its components and switching solutions [56][57] Question: Custom AI accelerator profitability and competition [59] - Broadcom's custom AI accelerator business is highly profitable, with strong margins driven by scale and integration with high-bandwidth memory [60][61] Question: Networking switch portfolio and white-box deployments [65] - Broadcom's networking portfolio offers flexibility for hyperscalers, with a strong focus on open network operating systems and end-to-end solutions [66][67] Question: Software business ex-VMware and Cloud Foundation adoption [69] - Brocade's strong performance is cyclical, while VMware Cloud Foundation adoption is driven by enterprise demand for integrated data center solutions [70][71][72] Question: VMware channel conflict resolution [75] - Broadcom has streamlined VMware's channel strategy, investing in a network of distributors and value-added resellers to improve sales velocity [76][77][78]