Broadcom Inc. (NASDAQ:AVGO) Q1 2024 Earnings Call Transcript

Broadcom Inc. (NASDAQ:AVGO) Q1 2024 Earnings Call Transcript March 7, 2024

Operator: Hello, and welcome to Broadcom’s Inc. First Quarter Fiscal Year 2024 Financial Results Conference Call. At this time, for opening remarks and introductions, I will turn the call over to Ji Yoo, Head of Investor Relations of Broadcom Inc. You may begin.

Ji Yoo: 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 of fiscal year 2024. 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 an 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 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. 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 Tan: Thank you, Ji, and thank you, everyone, for joining us today. In our fiscal Q1 2024, consolidated net revenue was $12 billion, up 34% year-on-year as revenue included 10.5 weeks of contribution from VMware. Excluding VMware, consolidated revenue was up 11% year-on-year. Semiconductor solutions revenue increased 4% year-on-year to $7.4 billion, and infrastructure software revenue grew 153% year-on-year to $4.6 billion. With respect to infrastructure software, revenue contribution from consolidating VMware drove a sequential jump in revenue by 132%. We expect continued strong bookings at VMware will accelerate revenue growth through the rest of fiscal 2024. In semiconductors, AI revenue quadrupled year-on-year to $2.3 billion during the quarter, more than offsetting the current cyclical slowdown in enterprise and telcos.

Now let me give you more color on our two reporting segments. Starting with software. Q1, software segment revenue of $4.6 billion was up 156% year-on-year and included $2.1 billion in revenue contribution from VMware. Consolidated bookings in software grew sequentially from less than $600 million to $1.8 billion in Q1 and is expected to grow to over $3 billion in Q2. Revenue from VMware will grow double-digit percentage sequentially, quarter-over-quarter, through the rest of the fiscal year. This is simply a result of our strategy with VMware. We are focused on upselling customers, particularly those who are already running their compute workloads with vSphere virtualization tools to upgrade to VMware Cloud Foundation, otherwise branded as VCF.

VCF is the complete software stack, integrating compute, storage and networking that virtualizes and modernizes our customers’ data centers. This on-prem self-service cloud platform provides our customers a complement and an alternative to public cloud. And in fact, on a VM Explore last August, VMware and NVIDIA entered into a partnership called VMware Private AI Foundation, which enables VCF to run GPUs. This allows customers to deploy their AI models on-prem. And wherever they do business without having to compromise on privacy and data — in control of their data. And we are seeing this capability drive strong demand for VCF, from enterprises seeking to run their growing AI workloads on-prem. And reflecting all these factors for the full year, we reiterate our fiscal 2024 guidance for software revenue of $20 billion.

Turning to semiconductors. Before I give you an overall assessment of this segment, let me provide more color by end markets. Q1 networking revenue of $3.3 billion grew 46% year-on-year, representing 45% of our semiconductor revenue. This was largely driven by strong demand for our custom AI accelerators at our 2 hyperscale customers. This strength extends beyond AI accelerators. Our latest generation Tomahawk 5 800G switches saw through Ethernet mix refinements, DSPs and optical components are experiencing strong demand at hyperscale customers as well as large-scale enterprises deploying AI data centers. For fiscal 2024, given continued strength of AI NAND working demand, we now expect networking revenue to grow over 35% year-on-year compared to our prior guidance for 30% annual growth.

Moving on to wireless. Q1 wireless revenue of $2 billion decreased 1% sequentially and declined 4% year-on-year representing 27% of semiconductor revenue. As you all may know, the engagement with a North American customer continues to be very deep strategic and, of course, multiyear. And in fiscal 2024, helped by content increases, we reiterate our previous guidance for wireless revenue to be flat year-on-year. Next, our Q1 server storage connectivity revenue was $887 million or 12% of semiconductor revenue, down 29% year-on-year. We are seeing weaker demand in the first half, but expect recovery in the second half. Accordingly, we are revising our outlook for fiscal ’24 server storage revenue to decline in the mid-20 percentage range year-on-year compared to prior guidance for high teens percent decline year-on-year.

On broadband, Q1 revenue declined 23% year-on-year to $940 million and represented 13% of semiconductor revenue. We are seeing a cyclical trough this year for broadband as telco spending continues to weaken and do not expect improvement until late in the year. And accordingly, we are revising our outlook for fiscal ’24 broadband revenue to be down 30% year-on-year from our prior guidance of down mid-teens year-on-year. And finally, Q1 industrial resales of $215 million declined 6% year-on-year. In fiscal ’24, we continue to expand industrial resales to be down high single digits’ year upon year. And in summary, with stronger-than-expected growth from AI more than offsetting the cyclical weakness in broadband and server storage, Q1 semiconductor revenue grew 4% year-over-year to $7.4 billion.

Turning to fiscal ’24. We reiterate our guidance for Semiconductor Solutions revenue to be up mid- to high single-digit percentage year-on-year. I know we told you in December, our revenue from AI would be 25% of our full year semiconductor revenue. We now expect revenue from AI to be much stronger, representing some 35% of semiconductor revenue at over $10 billion. And this more than offset weaker-than-expected demand in broadband and service storage. So for fiscal 2024 in summary, we reiterate our guidance for consolidated revenue to be $50 billion, which represents 40% year-on-year growth. And we reiterate our full year adjusted EBITDA guidance of 60%. Before I turn this call over to Kirsten, who will provide more details of our financial performance this quarter, let me just highlight that Broadcom recently published its fourth annual ESG report available on a corporate citizenship side, which discusses the company’s sustainability initiatives.

As a global technology leader, we recognize Broadcom’s responsibility to connect our customers, employees and communities. Through our product and technology innovation and operational excellence, we remain committed to this mission. Kirsten?

Kirsten Spears: Thank you, Hock. Let me now provide additional detail on our Q1 financial performance, which was a 14-week quarter and included 10.5 weeks of contribution from VMware. Consolidated revenue was $12 billion for the quarter, up 34% from a year ago. Excluding the contribution from VMware, Q1 revenue increased 11% year-on-year. Gross margins were 75.4% of revenue in the quarter. Operating expenses were $2.2 billion and R&D was $1.4 billion, both up year-on-year primarily due to the contribution from VMware. Q1 operating income, including VMware, was $6.8 billion and was up 26% from a year ago, with operating margin at 57% of revenue. Excluding transition costs of $226 million in Q1, operating profit of $7.1 billion was up 30% from a year ago, with operating margin of 59% of revenue.

Adjusted EBITDA was $7.2 billion or 60% of revenue. This figure excludes $139 million of depreciation. Now a review of the P&L for our two segments, starting with Semiconductor. Revenue for our Semiconductor Solutions segment was $7.4 billion and represented 62% of total revenue in the quarter. This was up 4% year-on-year. Gross margins for our semiconductor solutions segment were approximately 67%, down 190 basis points year-on-year driven primarily by product mix within our semiconductor end markets. Operating expenses increased 8% year-on-year to $865 million, reflecting a 14-week quarter resulting in semiconductor operating margins of 56%. Now moving on to our infrastructure software segment. Revenue for infrastructure software was $4.6 billion, up 153% year-on-year, primarily due to the contribution of VMware and represented 38% of revenue.

Gross margins for infrastructure software were 88% in the quarter, and operating expenses were $1.3 billion in the quarter, resulting in infrastructure software operating margin of 59%. Excluding transition costs, operating margin was 64%. Moving on to cash flow. Free cash flow in the quarter was $4.7 billion and represented 39% of revenues off a higher revenue base. Excluding restructuring and integration spend of $658 million free cash flows were 45% of revenue. We spent $122 million on capital expenditures. Days sales outstanding were 41 days in the first quarter compared to 31 days in the fourth quarter on higher accounts receivable due to the VMware acquisition. The accounts receivable we brought on from VMware has payment terms of 60 days unlike Broadcom standard 30 days.

We ended the first quarter with inventory of $1.9 billion, up 1% sequentially. We continue to remain disciplined on how we manage inventory across the ecosystem. We ended the first quarter with $11.9 billion of cash and $75.9 billion of gross debt. The weighted average coupon rate and years to maturity of our $48 billion in fixed rate debt is 3.5% and 8.4 years, respectively. The weighted average coupon rate and used to maturity of our $30 billion in floating rate debt is 6.6% and three years, respectively. During the quarter, we repaid $934 million of fixed rate debt that came due. This week, we repaid $2 billion 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 $2.4 billion of cash dividends based on a quarterly common stock cash dividend of $5.25 per share. We executed on our plan to complete our remaining share buyback authorization. We repurchased $7.2 billion of our common stock and eliminated $1.1 billion of common stock for taxes due on vesting of employee equity, resulting in the repurchase and elimination of approximately 7.7 million AVGO shares. To help you with modeling share count, the weighted effect of the 54 million shares issued for the VMware acquisition resulted in a sequential increase in Q1 to $478 million. With the Q2 non-GAAP diluted share count expected to increase to approximately $492 million as the shares issued are fully weighted in the second quarter.

Now on to guidance. Regardless of the updated dynamics of our semiconductor and software segments as Hock discussed, we choose to reiterate our guidance for fiscal year 2024 consolidated revenue of $50 billion and adjusted EBITDA of 60%. With regard to VMware, in February, we signed a definitive agreement to divest the end-user computing division with the transaction expected to close in 2024, subject to customary closing conditions, including regulatory approvals. The EUC division has been classified as discontinued operations in our Q1 financials. We have decided to retain the Carbon Black business and merge Carbon Black with Symantec to form the enterprise security group. The impact on revenue and profitability is not significant. That concludes my prepared remarks.

Operator, please open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Harsh Kumar with Piper Sandler.

Harsh Kumar: Yes, thank you, Hock. Once again, tremendous results and tremendous activity that you guys are benefiting from in AI. But my question was on software. I think if I heard you correctly, Hock, you mentioned that your software bookings will rise quite dramatically to $3 billion in 2Q. I was hoping that you could explain to us why it would rise almost 100% up, if my math is correct, in 2Q over 1Q. Is it something simple? Or is it something that you guys are doing from a strategy angle that’s making this happen?

Hock Tan: As I indicated, with the acquisition of VMware we’re very focused on selling, upselling and helping customers, not just buy but deploy this private cloud what we call virtual private cloud solution or platform on their on-prem data centers. It has been very successful so far. And I agree it’s early innings still at this point. We just have closed on the deal — well, we closed on the deal late November, and we are now March, early March. So we had the benefit of at least three months, but we have been very prepared to launch and focus on this push initiative on private cloud, VCF. And the results has been very much what we expect it to be, which is very, very successful.

Harsh Kumar: Thank you, Hock.

Operator: Our next question comes from the line of Harlan Sur with JPMorgan. Your line is open.

Harlan Sur: Good afternoon. Thanks for taking my question. Hock, on the AI outlook being revised from greater than $7.5 billion, I think, last quarter to $10 billion plus this quarter. As you mentioned, AI compute pulls your ASICs, but it also pulls your networking, optical, PCIe, connectivity solutions as well. So can you just help us understand like of that $2.5 billion increase in outlook? Is it stronger AI ASIC demand, stronger networking, stronger optical, et cetera. But more importantly, are you also seeing a similar acceleration in your forward ASIC design win pipeline as well?

Hock Tan: There’s a lot of questions, a lot of information you want me to disgorge. Let’s take them one at a time, shall we. Yes, the increase, as we have said before as we shown before, it’s roughly two-thirds, one-third or 70-30, which is AI celebrators which are custom ASIC AI accelerators this. We’ve a couple of hyperscalers compared to the other components, which are collectively considered as networking components. And it’s about 70%, 30% mix. And that increase of almost $3 billion that you mentioned, it’s a similar combination.

Harlan Sur: And then are you seeing a similar acceleration on the forward design win pipeline and customer engagements?

Hock Tan: I have indicated that I only have to really only have to say, I don’t count anybody. I do not go into production as a rail customer at this point.

Harlan Sur: Okay. Thanks, Hock.

Operator: Our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.

Vivek Arya: Thank you for taking my question. Hock, on, again, on the over $10 billion for AI, is this still a supply constrained number? Or do you think that this is kind of a very project-driven number, so it’s not really supply that gets it. So if you were to get, let’s say, increase supply, could there be upside? And then kind of part B of that is, on the switching side, have you already started to see benefits from the 51 terabit per second switches? Is that something that comes along later? Like what is the contribution of 51T to the switching upside that you mentioned for this year?

Hock Tan: Yes. No, our Tomahawk 5 is going great guns. Now it’s not driven unlike in the past, Tomawak 3, Tomawak 4 by traditional scale-out in hyperscalers on their cloud environment. This is all largely coming from a scaling out of AI data centers. The building of larger and larger clusters to enable generative AI computing functionality. And you’re going for bigger and bigger pipes. Hence, the Tomahawk 5 51 terabit is a perfect solution, and we’re seeing a lot of demand. And in many cases, we are basically, they are surpassing the rate of adoption that we had previously thought. So it is a very good solution in connecting GPUs. And with respect to AI accelerators where I think you are focusing on, is that a constraint on supply chain? We do get enough lead time out of our hyperscale customers that we do not have a supply chain constraint.

Vivek Arya: Thank you.

Operator: Our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is open.

Stacy Rasgon: Hi, guys. Thanks for taking my question. I had a question on the core software business. So you said VMware for the two months that was in there was $2.1 billion, which would put the rest of the software, CA Symantec and Brocade at like 2.5 almost could be up like 25% sequentially and almost 40% year-over-year. I guess do I have my math right? And if so, like how can that be? What’s going on in the core business? And how should we be thinking about the growth of the core business in VMware as we go through the year? Is the VMware still $12 billion or just — how do we think about that?

Hock Tan: Yes, don’t get too excited over that. I think it’s certain products, contracts we obtained and — but it’s very strong contract renewals in the older — from old Broadcom contracts, especially in mainframes were very strong, as was some of our other distributor software platform. So that has also accelerated, but that’s not the star of this show, Stacy. Star this show is the accelerating bookings and backlog we are accumulating on VMware.

Stacy Rasgon: Okay. So VMware is still running at like an $11 billion to $12 billion run rate benefit. So that sounds like that should accelerate. So the overall for VMware should be more than the $12 billion that you talked about. So the core business, the strength this quarter that was kind of a onetime we could model that kind of like falling off because you’ve shown at the overall software at 20?