Broadcom Inc. (NASDAQ:AVGO) Q4 2023 Earnings Call Transcript

Broadcom Inc. (NASDAQ:AVGO) Q4 2023 Earnings Call Transcript December 7, 2023

Broadcom Inc. misses on earnings expectations. Reported EPS is $8.25 EPS, expectations were $10.95.

Operator: Welcome to Broadcom Inc.’s Fourth Quarter and 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. The floor is yours.

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 fourth 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 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 fourth quarter and fiscal year 2023 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 Q4 2023, consolidated net revenue was $9.3 billion, up 4% year-on-year and very much as we had guided at the last conference call. Semiconductor solutions revenue increased 3% year-on-year to $7.3 billion, and infrastructure software revenue grew 7% year-on-year to $2 billion. Overall, while infrastructure software remains very stable, semiconductor is continuing the cyclical slowdown at enterprises and telcos that we have been seeing over the past six months. However, hyperscalers remain strong. Generative AI revenue, driven by Ethernet solutions and custom AI accelerators, represented close to $1.5 billion in Q4 or 20% of semiconductor revenue, while the rest of the semiconductor revenue continued to be rather stable at around $6 billion.

Moving on to results for the year. For fiscal 2023, consolidated revenue hit a record $35.8 billion, growing 8% year-on-year. And since 2020, even though we have not made an acquisition, we have shown a robust trajectory of growth, driven by semiconductor growing at an 18% CAGR over the past three years. In fiscal 2023, operating profit grew by 9% year-on-year, and our free cash flow grew 8% year-on-year to $17.6 billion or 49% of revenue. We returned $13.5 billion in cash to our shareholders through dividends and stock buybacks. As you well know, we just closed the acquisition of VMware on November 22, just about four weeks into Broadcom’s fiscal 2024. We are now refocusing VMware on its core business of creating private and hybrid cloud environments among large enterprises globally and divesting noncore assets.

Reflecting the consolidation of a restructured VMware into our 2024 outlook, we forecast our fiscal year ‘24 consolidated revenue to be $50 billion. We expect the integration to take about a year and will require close to $1 billion in transition spending, which will largely be done as we exit fiscal ‘24. Regardless, we expect our fiscal year 2024 adjusted EBITDA to be approximately 60% of revenue. Kirsten will give you more details in her section. Now, let me give you more color on our two reporting segments, and I’ll start with software. In Q4, as you know, there’s no VMware revenue and the infrastructure software business of CA, Symantec and Brocade grew 7% year-on-year to $2 billion. Consolidated renewal rates averaged 119% over expiring contracts.

And in our strategic accounts, we actually averaged 130%. Over 90% of the renewal value represented recurring subscription and maintenance. For the year, renewal rates averaged 116% over expiring contracts and in strategic accounts, we averaged 124%. Revenue in fiscal 2023 was $7.6 billion, up 3% year-on-year and our expectation for fiscal ‘24 is for this revenue to be $8 billion, which is 4% year-on-year. For the s2024 outlook, we are excited to now include VMware. As we all know, VMware has the leading technology to virtualize entire data centers, not just compute, and by doing so, create private cloud on-prem. Our strategy going forward is simply to enable global enterprises to run their applications across the other data centers as well as on public clouds by consuming VMware’s higher-value software stack.

And to attract and keep these workloads across the environment, we are investing in a rich catalog of microservices tools. This will be our focus. And the noncore businesses of end-user computing and Carbon Black will be divested. So for 2024, based on 11 months of contribution from VMware, we expect VMware to contribute $12 billion in revenue. And on a consolidated basis, we expect our infrastructure software revenue in 2024 to be $20 billion. Turning now to the semiconductor segment. Let me give you more color by end markets. Q4 networking revenue of $3.1 billion grew 23% year-on-year, representing 42% of our semiconductor revenue. This was primarily driven by strong demand from hyperscalers for our custom AI accelerators and as well for our networking switches, routers and NICs, Network Interface Cards, dedicated towards scaling our AI data centers.

As you know, even as Ethernet is the standard protocol in front-end networks, hyperscalers are also deploying Ethernet predominantly in their AI networks. In fiscal ‘23, networking revenue grew 21% year-on-year to $10.8 billion. If we exclude the AI accelerators, networking connectivity represented about $8 billion, and this is purely silicon, not systems, not cable nor subsystems. In fiscal 2024, we expect networking revenue to grow 30% year-on-year, driven by accelerating deployment of networking connectivity and expansion of AI accelerators in hyperscalers. Moving to wireless. Consistent with the seasonal launch by our North American customers, Q4 wireless revenue of $2 billion increased 23% sequentially and declined 3% year-on-year, representing 27% of semiconductor revenue.

In fiscal ‘23, wireless revenue was relatively flat at $7.3 billion, just down 2% year-on-year. The engagement with our North American customers continues to be deep, strategic and multiyear. And accordingly, in fiscal ‘24, we expect wireless revenue to again remain stable year-on-year. Next, our Q4 server storage connectivity revenue was $1 billion or 14% of semiconductor revenue and down 17% year-on-year. In fiscal ‘23, server storage connectivity was $4.5 billion, up 11% year-on-year. And going to fiscal ‘24, we expect server storage revenue to decline mid- to high-teens percentage year-on-year, driven by the cyclical weakness that began late ‘23. And moving on to broadband. Q4 revenue declined 9% year-on-year to $950 million, in line with expectations and represented 13% of semiconductor revenue.

And in fiscal ‘23, broadband revenue was $4.5 billion and up 8% year-on-year. Moving on to fiscal ‘24, we expect broadband revenue to be down low- to mid-teens percentage year-on-year and reflecting, again, the further slowdown as the cyclical weakness at service providers that began in late ‘23 continues into fiscal ‘24. And finally, Q4 industrial sales of $236 million was stable year-on-year. In fiscal ‘23, industrial resales were $962 million. In fiscal ‘24, we expect industrial resales to be down low single digits year-on-year. So in summary, fiscal ‘23 semiconductor solutions revenue was up 9% year-on-year to $28.2 billion. Revenue from generative AI in fiscal ‘23 reached 15% of semiconductor revenue, in line with our expectation.

And moving on to fiscal ‘24, we forecast semiconductor solutions revenue to be up mid- to high-single-digit percent year-on-year. We expect revenue from generative AI to represent more than 25% of the semiconductor revenue, consistent with prior guidance, which more than offset the lack of growth from non-AI semiconductor revenue. With the consolidation of VMware, bringing our Infrastructure Software segment revenue to $20 billion and the semiconductor segment holding at mid-high single digit growth year-on-year, we are, therefore, guiding our fiscal ‘24 revenue to be $50 billion, which represents 40% year-on-year growth from fiscal ‘23. With that, let me turn the call over to Kirsten.

Kirsten Spears: Thank you, Hock. Let me now provide additional detail on our Q4 financial performance. Consolidated revenue was $9.3 billion for the quarter, up 4% from a year ago. Gross margins were 74.3% of revenue in the quarter, in line with our expectations. Operating expenses were $1.2 billion, flat year-on-year. R&D of $940 million was also stable year-on-year. Operating income for the quarter was $5.7 billion and was up 4% from a year ago, with operating margin at 62% of revenue. Adjusted EBITDA was $6 billion or 65% of revenue, in line with expectations. This figure excludes $124 million of depreciation. Now, a review of the P&L for our two segments, starting with our semiconductor segment. Revenue for our semiconductor solutions segment was $7.3 billion and represented 79% of total revenue in the quarter.

This was up 3% year-on-year. Gross margins for our semiconductor solutions segment were approximately 70%, down 110 basis points year-on-year driven primarily by product mix within our semiconductor end markets. Operating expenses were stable year-on-year at $822 million, resulting in operating profit growth of 2% year-on-year and semiconductor operating margins of 58%. Now, moving on to our infrastructure software segment. Revenue for infrastructure software was $2 billion, up 7% year-on-year and represented 21% of revenue. Gross margins for infrastructure software were 92% in the quarter, and operating expenses were $339 million in the quarter. Q4 operating profit grew 12% year-on-year with infrastructure software operating margin at 75%.

Now moving on to cash flow. Free cash flow in the quarter was $4.7 billion and represented 51% of revenues in Q4. We spent $105 million on capital expenditures. Days sales outstanding were 31 days in the fourth quarter compared to 30 days in the third. We ended the fourth quarter with inventory of $1.9 billion, up 3% sequentially. We continue to remain disciplined on how we manage inventory across the ecosystem. We exited the quarter with 76 days of inventory on hand, down 80 days in Q3. We ended the fourth quarter with $14.2 billion of cash and $39.2 billion of gross debt, of which $1.6 billion is short term. Now let me recap our financial performance for fiscal 2023. Our revenue hit a record $35.8 billion, growing 8% year-on-year. Semiconductor revenue was $28.2 billion, up 9% year-over-year.

Infrastructure software revenue was $7.6 billion, up 3% year-on-year. Gross margin for the year was 74.7%, down 90 basis points from a year ago. Operating expenses were $4.6 billion, down 4% year-on-year. Fiscal 2023 operating income was $22.1 billion, up 9% year-over-year and represented 62% of net revenue. Adjusted EBITDA was $23.2 billion, up 10% year-over-year and represented 65% of net revenue. This figure excludes $502 million of depreciation. We spent $452 million on capital expenditures, and free cash flow grew 8% year-on-year to $17.6 billion or 49% of fiscal 2023 revenue. Now, turning to capital allocation. For fiscal 2023, we spent $15.3 billion, consisting of $7.6 billion in the form of cash dividends and $7.7 billion in share repurchases and eliminations.

We ended the year with $7.2 billion of authorized share repurchase programs remaining. With the VMware deal closed, we have resumed repurchasing shares under our existing program. In fiscal year 2024, including the incremental shares from the acquisition of VMware and excluding the potential impact of any share repurchases, we expect the non-GAAP diluted share count to be approximately 494 million. Aligned with our ability to generate increased cash flows in the preceding year and now off of a larger share count base from the acquisition of VMware, we are announcing an increase in our quarterly common stock cash dividend in Q1 fiscal 2024 to $5.25 per share, an increase of 14% from the prior quarter. We intend to maintain this target quarterly dividend throughout fiscal ‘24 subject to quarterly Board approval.

This implies our fiscal 2024 annual common stock dividend to be a record $21 per share. I would like to highlight that this represents the 13th consecutive increase in annual dividends since we initiated dividends in fiscal 2011. Now on to guidance. As Hock discussed, with the recent closing of our VMware acquisition and the integration process, which will take at least one year, for fiscal 2024, we will provide our outlook for the full year instead of quarterly guidance. Based on current business trends and conditions, our guidance for fiscal year 2024 is for consolidated revenues of $50 billion. Within this, our fiscal year 2024 semiconductor revenue is expected to grow mid- to high-single-digit percent year-on-year. Our fiscal year 2024 infrastructure software segment revenue from continuing operations is expected to be $20 billion, including $8 billion from CA, Symantec Enterprise and Brocade and $12 billion from VMware.

With regard to VMware, our forecast for fiscal ‘24 revenue of $12 billion reflects 11 months of contribution from VMware. This does not include revenue from EUC and Carbon Black of approximately $2 billion, which we plan to divest. We are also converting an installed base of licenses that is over 60% perpetual today to one that will be mostly subscription by the end of fiscal 2024. Offsetting these, our new strategy for VMware will accelerate revenue growth over the next three years. During fiscal ‘24, we expect to incur about $1 billion of spend related to transitioning VMware into the new Broadcom model. This transition spending will be largely completed by the end of the fiscal year as our VMware spending run rate exits fiscal ‘24 at approximately $1.4 billion per quarter, down 40% from a year ago.

So, in fiscal year 2024, including VMware, we expect consolidated adjusted EBITDA of approximately 60% of projected revenue. 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 will come from the line of Vivek Arya with Bank of America.

Vivek Arya: Hock, so yesterday, one of your peers suggested that the market for AI accelerators could be as large as $400 billion. So kind of three related questions. What do you think about that number? And then number two, how does Broadcom participate in that, just beyond your large kind of ASIC project on the compute offload side? And then what does this larger AI accelerator market imply for your Ethernet networking business? I assume that they are correlated, but what is the right way to think about what is presumably a much larger market for accelerators and how it impacts Broadcom’s growth prospect?

Hock Tan: Thank you for those very interesting questions. Starting with the first part, I mean, it’s — what we’re seeing is a market that continues to grow, to accelerate. What is also very obvious is it’s very, very dynamic as architectures of large language models, software models continues to change, I mean, literally change on the fly. We are also seeing the requirements for compute silicon change. And it’s very interesting, very fascinating for us, but it also presents quite an interesting opportunity, which is to say that if a customer has a business model that is substantial and have resources which obviously supports that, is getting to a stage that it might make a lot of sense to design AI compute engines, which comprises memory as well as the compute engine itself, then that can be tailored or better word, customized for their particular requirements on applications, on their particular LLM model.

And we’re seeing this as we all are seeing LLM models continue to change and the face — the shape of generative AI dynamically change more and more, where training and inference are now starting to, in a way, converge and the chip designs are changing. And we are seeing that in the way we design specific custom chips for hyperscalers. That’s interesting. So that’s a very interesting opportunity for us. And as I indicated in my remarks, we see that revenue as part of networking revenue, $4 billion and networking — AI networks and going — doubling almost during 2024. Nothing new. We have said that before. And if anything else, we are reinforcing that particular guidance. Now, networking is particularly interesting as you heard in my opening remarks.

It is accelerating as fast as our AI accelerators, the compute engines are growing. And we see that growing hand in hand and particularly so as training — continuous training of very large language models with very different and very large parameters keep going on and things keep changing. So we’re seeing no slowdown, in fact, in the update on building out this AI networks. If anything else on average, we are seeing a doubling on size of those networks across the board. So, that’s — to your answer question. Yes, I fully concur with AMD, when they indicate that it looks like demand appears to be accelerating rather than staying stable or decelerating.

Operator: Thank you. One moment for our next question. And that will come from the line of Ross Seymore with Deutsche Bank.

Ross Seymore: Just a quick clarification on the question. The clarification is, is the fiscal year guidance going to be the new protocol, or is that just this quarter? And then the real question, Hock, is on the VMware side of things, Kirsten talked about it potentially accelerating off of that $12 billion base. Can you just talk about the linearity of it maybe throughout the year, or more importantly, how is it going to be accelerating as people start to look at what the VMware Street estimates were before. We know we have to take out the two divested operations. But what are the drivers of acceleration? And how should we consider the magnitude of that as we look forward?

Hock Tan: Yes. We are very — we are in a very interesting, very exciting situation here as we move into the next chapter of VMware. As I said, we focus the business on VMware Cloud Foundation, which is the full software stack that virtualizes data centers on-prem, not totally [ph] virtualize it, a cloud environment, and we are converting more and more customers step-by-step as they come up for renewal into this higher value stack, and we’re doing it on a subscription basis. So become very focused. So we will kick it off at a much lower rate — because subscription generally brings down revenues, as you know, in software based on revenue recognition. But we see a trajectory of accelerated growth even in 2024 — through 2024.

And it just doesn’t stop there because it’s the math and the trajectory. And to answer your question, you’re right, we are accelerating from $12 billion, and we’re probably seeing a double-digit growth for the next three years, just by sheer math of selling that higher value virtualization stack versus the very loose component sales in the past, particularly on compute only.

Ross Seymore: And on the fiscal year side, is this a one quarter thing, or is this the new way you guys are going to be doing it?

Hock Tan: Well, that’s a good question. Well, we will — just to give you an indication, in 2024 because it’s an accelerating trend, our view is that it’s more appropriate and more relevant to getting you guys a sense of where we’re headed to get to turn it to an annual guidance for ‘24. And we will report results every quarter and update our annual guidance ‘24 each time we report the quarterly actuals.

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