Q3 2022 Broadcom Inc Earnings Call
Yeah.
Welcome to Broadcom, Inc. Third quarter fiscal year 2020 financial results conference call at this time for opening remarks, and introductions I would now like to turn the call over to.
Head of Investor Relations of Broadcom, Inc.
Thank you Sherry and good afternoon, everyone joining.
Joining me on today's call are Hock, Tan, President and CEO , Kirsten Spears, Chief Financial Officer, and Charlie Collier, President Semiconductor solutions group.
Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the third quarter of fiscal year of 2022. If you did not receive a copy you may obtain the information from the investors section of Broadcom website at Broadcom Dot 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 website.
During the prepared comments hock in person will be providing details of our third quarter fiscal year 2022 result.
Guidance for our fourth quarter.
As well as commentary regarding the business environment, we will 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 are non-GAAP financial results I'll now turn the call over to Hawk.
Thank you Qi <unk>.
And thank you everyone for joining today.
Is.
I feel we feel somewhat surreal here, we've won I'm about to report and go through in my script.
Let me, let me start by saying, while consumer hardware spending has been reported to be weak.
Every week from our vantage point infrastructure spend is still very much holding.
In our fiscal Q3 'twenty two.
Consolidated net revenue was a record eight 5 billion.
Up 25% year on year.
Semiconductor solutions revenue increased 32% year on year to $6 6 billion.
In infrastructure software revenue grew 5% year on year to be $1 8 billion.
In Q3.
Our semiconductor business was robust with solid contributions from all end markets.
And service provider growth.
<unk> strong and in Q4 is actually expected to accelerate year on year, driven by data center build outs.
And infrastructure upgrades.
Year on year enterprise continue to grow.
For the six consecutive quarter on campus deployment and data Center refreshes.
Looking at Q4 <unk>.
We expect enterprise to continue to grow double digit percent year over year.
Meanwhile.
In wireless which is very much tied to a large north American <unk> phone OEM.
It was solid in Q3 and is expected to grow in Q4, as we ramp the new platform.
Now, let me provide more color by end market.
Starting with networking networking revenue was a record $2 $3 billion.
Up 30% year on year, representing 35% of our semiconductor revenue.
As both cloud and enterprise data centers refresh they continue to increase adoption of our Tomahawk Trident and Jericho.
Switching silicon platforms.
Importantly.
We expect these trends to continue.
In mid August Broadcom announced the tomo five switch series, providing 51 two terabits.
Per second of Ethernet switching capacity in the single <unk>.
Monolithic device double the bandwidth of any other switch silicon available in the market today.
We also announced the industry's first silicon Photonics co package with the Tomahawk.
Which will enable a new benchmark for low power.
And extend our leadership and innovation in Hyperscale data centers.
Networking remains strong given this drivers and in Q4, we expect this segment to be up 30% year over year.
<unk> server storage connectivity revenue was a record $1 1 billion or 17% of semiconductor sales.
As growth of 70% year on year.
Seeded our expectations primary our primary driver remained the growth of our next generation server storage connectivity.
We benefited from higher content and continue deployment of servers and storage in both cloud and enterprises.
We anticipate and we anticipate this strong trend to actually continue and in Q4, we expect.
Server storage connectivity revenue to grow about 45% year on year.
Moving on to broadband.
Revenue of $1 $1 billion grew 20% year on year in line with our expectations and represented 17% of semiconductor sales.
This steady growth was driven by major service provider continuing to deploy next generation broadband fiber to the home globally with high attach rates of Wi Fi six and six.
We are the industry leader in investing in the next generation Wi Fi seven.
And unlocking amazing wireless experiences across home gateways enterprise access points and smartphones and we expect first deployments to occur in the second half 2023.
In Q4, we.
We expect our broadband business to grow above 20% year on year.
Finally, our next moving to wireless.
Q3 revenue of $1 6 billion represented 25% of our revenue in semiconductors sustained demand from a north American customer drove wireless revenue up 14% year on year in line with our guidance.
In Q4, we expect wireless revenues to be seasonally.
20% sequentially and grow 10% year on year.
Finally, Q3, industrial resales of $244 million.
Declined 4% year over year, reflecting weakness in China, partially offset by continued strength in the U S and Europe . Nonetheless, Q4, Q4, we forecast industrial resales.
To rebound to high single digit.
Growth year on year.
In summary, Q3 semiconductor solution revenues was up 32% year on year in Q4, we expect semiconductor revenue to remain strong at 25% year on year.
Now putting this in perspective.
And if we look at it on a sequential basis Q3 grew 6%.
Q2.
And Q4 will grow another 6%.
Largely driven by the seasonality of wireless.
Turning to software in Q3.
Infrastructure software revenue of $1 $8 billion grew 5% year on year and represented 22% of total revenue.
In dollar terms.
Consolidated renewal rates averaged 128% over expiring contracts.
<unk> for strategic accounts, we average 140%.
Within this strategic accounts annual bookings of $461 million include $136 million of cross selling of our portfolio of products to these core customers.
Now, 95% of our renewal value rep.
Represented recurring subscription and maintenance.
And just to put all this in context over the past 12 months consolidator renewal rates averaged 122% over expiring contracts and within strategic accounts, we have retail we actually averaged 137%.
Because of these trends.
Our.
Our.
Indicator of forward software revenue at the end of Q3 was $5 $5 billion, which is up 5% from a year ago.
And in Q4, we expect our infrastructure software revenue.
To sustain around mid single digit percentage growth year over year.
In summary, therefore, we are guiding consolidated Q4 revenue.
Of $8 9 billion.
Up 20% year on year.
All 5% sequentially.
Sure.
Yes.
Now before Kirsten.
Tells you more about our about our financial performance for the quarter.
Let me provide a brief update on our pending acquisition of Vmware.
We're making good progress with our various regulatory filings around the world.
We have an excellent team focused on these efforts and we are moving forward.
S very much as expected in this regard we continue to expect the transaction to be completed in Broadcom <unk> fiscal year 2023.
We remain excited about our acquisition of Vmware and continue to be impressed by.
They're world Class Engineering talent.
As well as strong.
Customer and channel partnerships with tremendous respect for what Vmware has built.
And together, we will enable enterprises to accelerate innovation and expand choice.
By addressing the most complex technology challenges.
In this multi cloud era.
And with that let me turn the call over to Ken.
Thank you Hock, let me now provide additional detail on our financial performance.
Revenue was $8 5 billion for the quarter up 25% from a year ago.
Gross margins were 76% of revenue in the quarter and up 80 basis points year on year.
Operating expenses were $1 2 billion.
Up 8% year on year, driven by investment in R&D.
Operating income for the quarter was $5 2 billion and was 32% from a year ago was up 32% from a year ago operating margin was 61% of revenue up approximately 320 basis points year on year.
Adjusted EBITDA was $5 $4 billion or 63, 5% of revenue.
Note that this figure excludes $129 million of depreciation.
Now a review of the P&L for our key segments.
Revenue for our semiconductor solutions segment was $6 6 billion and represented 78% of total revenue in the quarter.
This was up 32% year on year.
Gross margins for our semiconductor solutions segment or approximately 72% up.
Up 220 basis points year on year, driven by favorable product mix and content growth in next generation products across our extensive product portfolio.
Operating expenses were.
Our $853 million in Q3 up 9% year on year.
R&D was $765 million in the quarter up 10% year on year.
Q3 semiconductor operating margins increased to 59% so while semiconductor revenue was up 32% operating profit grew 44%.
Moving to the P&L for our infrastructure software segment.
Revenue for infrastructure software was $1 8 billion and represented 22% of revenue.
This was up 5% year on year.
Gross margins for infrastructure software or 90% in the quarter and were stable year over year.
Operating expenses were $375 million in the quarter up 4% year over year.
Infrastructure software operating margin was 70% in Q3 and operating profit grew 5%.
Moving to cash flow.
Free cash flow in the quarter was $4 3 billion, representing 51% of revenue.
We spent $116 million on capital expenditures.
Days sales outstanding were 29 days in the third quarter compared to 30 days a year ago.
We ended the third quarter with inventory of $1 8 billion up 10% from the end of the prior quarter in large part due to higher material costs and the expected sequential revenue ramp.
We ended the third quarter with $10 billion of cash and $39 5 billion of gross debt of which $304 million as short term.
Turning to capital allocation in the quarter, we paid stockholders, one 7 billion of cash dividends consistent with our commitment to return excess cash to shareholders, we repurchased $1 5 billion in common stock and eliminated $292 million of common stock for taxes due on vesting of employee.
<unk> equity, resulting in the elimination of approximately $3 2 million <unk> shares.
The non-GAAP diluted share count in Q3 was $436 million.
And Q4.
We expect the non-GAAP diluted share count to be 435 million, which excludes the potential impact of any share repurchases completed in the fourth quarter.
We have not repurchased any of our shares since we announced the pending acquisition of Vmware as repurchases are subject to regulatory rules, we maintain our commitment to return excess cash to shareholders, including buybacks as soon as we can under SEC rules.
Yes.
Based on current business trends and conditions, our guidance for the fourth quarter of fiscal 2022 is for consolidated revenues of $8 9 billion and adjusted EBITDA of approximately 63% of projected revenue.
That concludes my prepared remarks, operator, please open up the call for questions.
Thank you as a reminder to ask a question you will need to press star one one on your telephone we ask that you. Please limit yourself to one question. Please standby, while we compile the Q&A roster.
Our first question will come from Ross Seymore with Deutsche Bank. Please go ahead.
Hi, guys. Thanks, certainly ask a question Hock you started off your.
Preamble talking about the disconnect between some of the macro data points on the consumer side versus the infrastructure side. Obviously, you have a limited exposure on the consumer side of things, but in the networking broadband server the enterprise and cloud businesses. In general are you seeing any changes because it's really hard for I think investors and even myself to reconcile.
The fact that everything is fine for you. Despite the macro data points seemingly are worsening for many of your peers.
Well.
No Dan So short answer is no.
And by then this is what I mean, and this is something I've been talking about we've been talking about in the earnings call.
In sell side analyst calls about true demand.
What we are measuring what we are reporting it.
Revenues.
Is in our minds and we've been looking at it that way the past eight quarters, particularly as we told you we scrubbed through backlog thoughtfully carefully.
Before we deliver products to customers and users is that Thats true end demand.
And while we reported to you today and you'll see the numbers that representing.
And the strength of the numbers if I could say so myself is true end demand, what we're seeing with respect to the various end markets.
The infrastructure products, we sell into those end market, that's as far as we can.
Scrub through true end demand.
Now we also have a ton of backlog and our lead times continues unchanged at 50 weeks.
Now whether bookings.
That place today.
Running at somewhat different thoughts different rates is more a function of.
Perception psychology of customers trying to thing one year out.
But as far as what we reported in Q3 and expect to see in Q4, we believe to be true and we believe in.
Pretty clear about it to pretty true end demand and consumption by our customers.
Thank you one moment for our next question and that will come from the line of Stacy <unk> with Bernstein Research. Please.
Please go ahead.
Hi, guys. Thanks for taking my question.
Wanted to follow up on that I guess hock. So I understand you guys are thinking you're shipping the children. It feels like if this was the actual true demand situation that everybody was facing that everybody else wood wood.
I would feel stronger than they seem to be so I guess I don't know what else you can say about trying to help us square that square that circle.
What gives you confidence that.
What you actually you're seeing is indeed true demand I get the whole figure out trying to under ship and partially orders and everything else but.
You don't think it's possible that your customers could be gaming you, even even within all the actions that you're taking I guess, just what kind of confidence if anything can investors get.
Around that statement that you think you actually are shipping to demand.
Uh huh.
I mean, we.
We put in a lot of checks and balances hugely.
And before we.
Put products out on <unk>.
Aircraft.
Our trucks to our customers.
And we.
And we have been doing this now for two years. So we're pretty good at doing it and the question earlier answered by US by also have you seen any particular change in OLED.
In terms of consumption for all of our products.
Can only obviously to talk about our products and I can talk beyond our products.
No we don't see that.
Thank you one moment for our next question.
That will come from the line of Vivek Arya with Bank of America. Please go ahead.
Thank you.
Just wanted to clarify and then ask a question.
Just wanted to clarify if any of your products are directly or indirectly exposed to any.
China restrictions that have been in the press over the past handful of days and then Hock I wanted to ask the growth question in a different way, which is in the past you described.
Stable kind of mid single digit growth rate for Broadcom.
Is that still a good.
Framework to use as we are looking out at the next year or so or if you could give us maybe by end market hyper scalar versus enterprise versus telco or consumer.
Which markets.
Conceptually you would expect to kind of grow better or slower than that kind of broad growth rate for the company.
The second question is a very interesting question, but let me take care of the first no. We have not been notified none of our products are affected.
Affected by any action.
Occurred over the last week or a few days regarding.
Restriction on shipments of China, we have not been affected period.
And we do not expect to be.
Okay now in terms of what Youre, saying now that calls for similar degree of <unk>.
Speculation, but it's more than that I've always said.
The long term sustainable demand in the semiconductor space is a mid single digit compounded growth rate, 5% thereabouts, maybe six 5%, 6% and I still believe that.
No matter what all the.
The.
I mean hubris that marketing hubris that has occurred over the past 12 months. It always has been and I think we will revert to that Nam. Eventually now obviously is there interesting what we're seeing because it depends on where you start that then compounded growth because 5% is what I'd say to be.
Long term.
Our long term growth rate in the short term in this industry and we have all experienced this cycles you could have higher than 5% at the up cycle and clearly much lower than the downside goes to averaged at 5%.
But.
Your point is at some point, we will have to get back to the norm and I believe we will.
Not in this year 'twenty two.
The rate 'twenty twos growing now we might assuming.
Our forecasts.
Q4 comes to play we're talking about semiconductor growth rate for us.
Around 25% year on year.
<unk>.
That's way above the 5% known so at some point things will turn around and revert back to that norm now it may take a couple years before it gets there.
Alright.
One moment for our next question and that will come from the line of Harlan sur with Jpmorgan. Please go ahead.
Hi, Good afternoon. Thanks for taking my question you know back in April you guys did this really nice kitchen of your custom silicon ASIC business and the business has been growing at a 20% CAGR over the past few years, we've got a pipeline of over 70 programs at seven five and three nanometers.
And then specifically Hopkins compute offload right you've got some really nice programs like GPU Smart next video transport is the team still on track to drive $2 billion in compute offload basic revenues. This year and then just given the strategic nature of these programs to your customers' future initiatives like will this segment.
Hold up better in a weaker macro environment, let's say next year.
Well to answer your first question, yes, we're on track.
For this year to hit that $2 billion.
All of that and we're getting that.
As far as does it does this particular compute offload defied gravity.
I don't know.
I don't I can really answer that like to believe it's emerging and it's a very emerging business.
And so like.
Emerging business that have hit some level of critical mass.
As it appears to have in our case in May.
Pull up somewhat better than perhaps.
Enterprise as we are seeing and Paul and so you're not wrong in that regard, but that that is actually calling for some level of speculation on our part because I mean in more than 23 I'm looking at.
'twenty three 'twenty four 'twenty five next three years will it hold up better that I don't know the answer for 'twenty three sure it will hold up better.
And one moment our next question.
Will come from the line of Timothy Arcuri with UBS. Please go ahead.
Oh hi.
I was wondering if you could update us on the <unk> backlog number I think it was $25 billion last call, which was a little bit more than a year.
Can you update us on that backlog number and then also within that have you seen any movement in the backlog and the and I know, probably it's up but have you seen any customers cancel or push out I mean, obviously that was more than offset by.
Coming bookings it sounds like but sort of what's the fluidity within that backlog.
Well.
Yes to clarify the first couple of months.
Our bank loan.
Our terms are very clear.
We do not allow cancellation on our backlog.
We have not seen it.
And to answer your second question.
And on the first part keep in mind, our revenue continue to grow each quarter sequentially as our backlog continues to build up and compared to the preceding quarter.
Our backlog at the end of Q3 increased to $31 billion. So we're still shipping below our booking rate.
And one moment for our next question that will come from the line.
William Stein with <unk> Securities. Please go ahead.
Great. Thank you for taking my question.
HOKA sometimes.
We forget that.
Historically, we've been in an ASP eroding.
Sort of industry.
At least on a <unk>.
Like parked for part B.
Basis, I know the mix changes over time.
But I think thats changed significantly in the last.
Year, and a half or so I'm wondering whether youre seeing that dynamic.
Continue or reverse.
If you can comment as to how that's influencing margins youre getting such tremendous contribution margins in the semi business I would have to think pricing.
Is playing some part in that thank you.
Actually.
It is.
And I said that before in previous earnings couple of earnings calls it worthwhile for me to repeat.
We have been able to raise prices obviously over the last.
12 months, but only because.
Our material cost has gone up.
So we're talking a bit talking percentages not.
Absolute dollars.
Eva cost Mitchell costs cost of goods sold increased 10% in order to keep our margin in percentage terms from been diluted.
With the raise the price.
No less than 10%.
And just doing that it says staying put.
Is it just keeping the gross margin in percentage term staying neutral.
So.
I would say price increases.
Very little impact on our margin improvement.
What is what has enabled our margins to accelerate or improve as I said in the last earnings call.
In this environment of.
Panel in some degree in the last couple of years last 12 months in particular.
All.
Basically a pent up level of spending, particularly in enterprise somewhat in cloud as well and broadband as well is the adoption of new Gen. <unk> next generation products and technology.
And then always Enhancers as I've said before our gross margin.
And it's just it's the basic fundamental of this semiconductor cycle new generation of products improve.
Improves.
<unk>, our gross margin and the.
<unk> adoption.
It's one expenses gross margin and that's pretty much what has been the case here, but not price increase per se.
And one moment for our next question.
And that will come from the line of Aaron Rakers with Wells Fargo. Please go ahead.
Okay.
Mr. Rakers. Your line is open if you would like to ask a question.
Yes, yes. Thanks.
I appreciate you taking the question.
I wanted to ask about the wireless segment solid results. This last quarter it sounds like Youre guiding 20% sequential growth.
Into this current quarter, but if I look back over the past couple of years, it's actually been solidly above the 20% sequential growth rates, So I guess how.
How are you thinking about the demand profile, there and I guess with that Youre content expansion opportunity as we look at the next generation product cycle going forward. Thank you.
Okay.
On the wireless business, if I could.
Tried to clarify.
Yeah.
When we think any particular three months period, like Q3, and going to be Q4, now and take a snapshot of it and compared to the same period of time, a year ago in never quite replicate itself in <unk> in other words, it's not.
There is no normalization.
So it could be 20% equal with 25% it could even be 30%.
Changes and I consider that all kind of in the same ballpark simply because all it takes is a slippage of a couple of weeks in shipments in the product's been taken to make that the particular different so I would not put too much.
Thinking behind that is 20% various in mind have been closer to 30% two years ago or a year ago in the same period, if you don't mind simply because.
Nothing nothing comes up.
To be sold.
<unk> year over year changes.
But in terms of overall volume, we do not see them mongst units dramatically different from a year ago. Israeli the content increase that might give us the lift year upon year and even on the leap year on year quarter. When you compare to any three months period.
It with a grain of salt that some volume some volume might have shifted.
Forward.
Not be with industry months.
But it's kind of in the ballpark.
One moment for our next question.
And that will come from the line of harsh Kumar with Piper Sandler. Please go ahead.
Yeah, Hey, guys first of all congratulations for reporting very good guidance very good results in such a turbulent market.
Hi.
Wanted to ask a quick one and then the main question Theres been a lot of concerning sort of news coming out of China reported by companies. So I was curious first of all how much exposure do you have to China and then for my main question. It's a question of sustainability somebody asked about revenues, but I wanted to ask about gross margins.
90% of our margins in software that I think is the norm, but then you've got 72% gross margins in semi as Richard honestly abnormal compared to other companies. So when you think of sustainability of that semi business up in the seventies. What do you think are some of the drivers that keep it up there for you guys longer term.
Yeah.
Okay. Let me answer the second question first since since it's a little more complex, but it is.
Our semiconductor gross margin by the way, we talk about sustainability I will say it keeps expanding.
Stay still as you probably know if you look back two five years ago.
We were more like 60%.
In the mid sixties, although <unk> gross margin today is over.
Over 70, and it's simply the case that and Thats the beauty of the thing not a semiconductor technology business.
Always have new generation of products, whether it's wireless running.
We're creating a generation every 12 to 24.
Months, where it is.
Switching that's every two to three years all storage every four or five years and every time, we put in the new generation.
Yes.
You expand your margin because you're delivering more value.
Youre diluting and much more value usually.
And youre able to extract.
From the higher value.
Higher.
Price and profitability.
And that's the beauty of this industry, so as we keep coming out with new generations.
<unk>.
The portfolio keep expanding so were now as the seventies.
Then you asked where will we be five years from now in this known in their this phenomena of constantly updating two next generation products I will see this.
Gross margin expansion continuing.
Empirically don't ask me for any mathematical formula behind physics behind it, but empirically given our portfolio of about.
16 semiconductor franchises.
We have average.
Close to 50 to 100 basis points expansion year after year.
And that's pretty good and we see that trend continuing and as I responded to an earlier question.
Over the last two years.
With the rebound.
I almost feel by.
Perhaps the changes.
In.
<unk> spending.
Based on I guess Lockdowns based on behavioral changes with COVID-19, we.
We've seen accelerated adoption of next generation products in many of our franchises. So we have seen some level of accelerated expansion.
Of our semiconductor gross margin, but things will reverse bank my belief to a more normalized 50 to 100 basis point expansion. Once all this excitement starts cooling off a bit, but we'll still see the sustainable expansion of our semiconductor gross margin software.
You are right, we kind of stick there at 90% and we're not going anywhere with it.
But this explain about semiconductor will continue to expand.
And lastly on your first question China.
That's about 13% of.
Semiconductor revenue, that's our exposure to China.
One moment for our next question.
That will come from the line of the Jive Rakesh with Mizuho. Please go ahead.
Yes, Hi, just two questions here again, sorry.
On the enterprise storage side I saw you guys had a pretty good quarter and guide just wondering what your exposure was between consumer and enterprise.
What are you seeing in terms of that strength going forward and also just my second question on the Vmware side I know you.
Said, you're still expecting that to close in fiscal 'twenty three.
You give us some color regarding most of the approvals that we're waiting on some.
Thanks.
Okay.
Well in terms of a breakdown basically asking asking us on our semiconductor revenues, what's a breakdown.
Of our revenues.
We would classify three ways three groups.
Non end markets, but groups it cuts across all our end markets.
Probably wireless wireless is all consumer.
And so no surprise.
Our consumer business within semiconductor represents.
About <unk>.
<unk> thousand three or just less than 25% of our revenues just over <unk>.
Between 20 to 25 is the best description and on the balance which could be anywhere from $7 75 to almost 80% is almost split evenly between enterprise traditional enterprise as we call. It <unk>.
And the final grouping, we call as service providers, which is really too.
The Hyperscale guys.
And telcos, which we consider to be service provider and Thats and so in between traditional enterprise and telcos Hyperscale, that's evenly split consumer 20% to 25%.
As far as the regulator process into Vmware.
Right now I'll say when the thick of it and we're thinking it across.
Several a few a couple of jurisdictions.
We're moving along and is making good progress.
And just to reiterate and we fully expect to close on this within fiscal 'twenty three.
And one moment for our next question.
That will come from the line of Joseph Moore with Morgan Stanley . Please go ahead.
Great. Thank you with regards to the 50 week lead times that you talked about what is your goal there over the next say 12 months do you want to get that down and to the extent. If you do want to kind of what has to happen from the standpoint of foundries of trades things like that to get that number lower.
I don't know, we havent thought that hard about it seriously Joe no I kind of like the 50 week lead time.
To be Frank because kind of what has to happen from the standpoint of foundries or trade things like that.
Get that number lower.
I don't know, we havent thought that hard about it seriously Joe no I kind of like the 50 week lead time.
To be Frank because it gives us.
Great visibility.
It also pushes.
Slightly generally about the demand.
They are the main one.
One year. So it gives us great visibility minimal between now through the end of 50 weeks.
We all know where we stand with each other and we know where we stand now which is pretty good visibility.
And one moment for our next question.
That will come from the line of Toshi Hari with Goldman Sachs. Please go ahead.
Hi, Thanks for taking the question I wanted to follow up on Joe's question on the supply side.
Hock just based on the sequential revenue growth that you've been marking over the past couple of quarters. Your guidance for the October quarter, It's pretty clear that supply continues to be kind of a key determinant of your revenue growth.
Based on indications from your foundry supplier and key substrate suppliers.
From a modeling perspective should we expect mid single digit growth to be kind of a normal cadence over the next few or several quarters or could there be a point in time, where your rate of growth starts to accelerate given given easing in some of the other end markets. Thank you.
And that's a hell of a good question. So let me try to answer.
Answer that.
And which is this.
We've always said and we continue to say it.
It's not really supplying that constrained our revenue.
We look at as we said, we scrubbed through and trying to.
Really get as closely as we can to one our customers.
Truly need to consume and we ship according to that.
And Thats as basic as all day. So if you look at it that way supplying.
It's not a true constrained.
<unk> demand.
A real demand.
And getting to the rail demand just.
October quarter Q4.
She is bum up to $8 nine from eight four.
<unk> eight fine believe me. This is all largely driven by the seasonal ramp of our North American handset manufacturer.
That's really what drives that loss to increase so we're.
We're very very kind to end consumption and consumption of products.
And it's not really all about much about supply and I would say that for the last four five quarters and we're still in that same behavior mode.
Okay.
Yeah.
Alright.
And one moment for our next question.
Yes.
That will come from the line of Pierre <unk> with New Street Research. Please go ahead.
Hi, Thanks for taking my question.
You mentioned in your prepared remarks, like you're first co package upticks.
Product and networking and so I was wondering if you can give us.
Slightly deeper overview of where things stand on these phones.
First on your product portfolio. So are you going to have like.
In parallel products with co packaged optics and traditional products.
<unk> to be used as Craig a little uptick in Paris.
In the next.
A few years and then in terms of market adoption.
Can you give us a sense of how material co package optics is going to become.
Maybe in the next 345 years and if it's going to be like a progressive adoption on specific use case is always going to be more like a hook is together option from a certain bandwidth from which like co package is going to make more sense than credibility.
Oh, okay.
Trying to get.
<unk>.
Talk through this basically your question is about how is.
I mean, we constantly come out across all our product franchises in especially in semis.
New generation of products and.
And they are pretty cool, even though I say it myself.
<unk> adoption.
It's never as quickly as we all like it to be it tends to be.
Must slowdown with things so for instance.
Switching tomahawks data top of the ranked data center switching I am still selling Tomahawk 123.
<unk> III, which was the.
The generation before the current generation and now we are selling Tomahawk four.
And just to give you a sense thermal fall.
As a percent of my total Tomahawk volume.
I would estimate to be less than 30% in total so you can see they coexist and it tends to happen. So by the time, we launched among five.
Two years ago two years from now.
We're probably maybe be getting our tomahawk, one to the point, where it becomes de Minimis. So there is this constant coexistence of multiple generations and appliance by the way to every product we had server storage.
Where we have to treat with three generations running simultaneously it because it's the way the wall at dumps.
New technology.
And we will keep having a mix, which is probably why when you boil down to it at the end of the day.
It's wheel we have.
There's no hockey stick in any product adoption.
There is no such thing as winner take all.
Whether it's part of a new product offer them into a new player. There is always a coexistence of <unk>.
<unk>.
Volume and mix.
Mix of technologies and <unk>.
And we see that very clearly across now consumer perhaps is less is more of a hockey stick and even then we see month to month, two or three generations of a north American OEM running simultaneously, but of course, it's more of a hockey stick I believe than our infrastructure products.
Infrastructure.
It takes a while.
We would have but not surprise not very uncommon to have three generation running simultaneously.
And that means any expansion of gross margin coming back where drain down too because it's a reflection of product mix.
In terms of product generation as why our gross margin grows much more steadily but more.
Not as rapidly as we would like to but it's okay. Because it gets more sustainable and as each year passes and the newer generation products get adopted more in step.
Measured manner, our gross margin grows that 50 to 100 basis points.
Each particular year that passes.
Hope that answers your question.
Alright, and then I would now like to turn the call back over to MS. Zhu for any closing remarks.
Thank you Sherry Broadcom currently plans to reported earnings for the fourth quarter of fiscal 2002 after close of market on Thursday December eight 2022.
Public webcast at Broadcom earnings Conference call will follow at two P M Pacific.
That will conclude our earnings call. Thanks, all for joining Terry.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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Welcome to Broadcom, Inc. Third quarter fiscal year 2022 financial results conference call at this time for opening remarks, and introductions I would now like to turn the call over to Jay <unk> head of Investor Relations of Broadcom, Inc.
Thank you Sherry and good afternoon, everyone joining.
Joining me on today's call are Hock Tan President and CEO .
And spirit, Chief Financial Officer, and Charlie Collier, President Semiconductor solutions group.
Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the third quarter of fiscal year of 2022. If you did not receive a copy you may obtain the information from the investors section of <unk> website at Broadcom Dot com.
This conference call is being webcast live and an audio replay of the call can be accessed for one year due to the investors section of <unk> website.
During the prepared comments Hawkins, Justin will be providing details of our third quarter fiscal year 2022 result.
Guidance for our fourth quarter.
As well as commentary regarding the business environment, we will 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 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 are non-GAAP financial results I'll now turn the call over to Hawk.
Thank you Qi <unk>.
And thank you everyone for joining today.
Is <unk>.
I feel we feel somewhat surreal here with what I'm about to report and go through in my script.
Let me, let me start by saying, while consumer IP hardware spending has been reported to be weak.
Very weak from our vantage point infrastructure spend is still very much holding.
In our fiscal Q3 'twenty two.
Solid data net revenue was a record $8 5 billion.
Up 25% year on year.
Semiconductor solutions revenue increased 32% year on year to $6 6 billion.
In infrastructure software revenue grew 5% year on year to be $1 8 billion.
In Q3, our semiconductor business was robust with solid contributions from all our end markets.
Cloud and service provider growth remained strong and in Q4 is actually expected to accelerate year on year, driven by data center build outs.
Infrastructure upgrades.
Year on year enterprise continue to grow.
For the sixth consecutive quarter on campus deployment and data center refreshes looking at Q4.
We expect enterprise to continue to grow double digit percent year over year.
Meanwhile in.
In wireless which is very much tied to a large north American <unk> phone OEM.
Was solid in Q3 and is expected to grow in Q4, as we ramp the new platform.
Now, let me provide more color by end market.
Starting with networking networking revenue was a record $2 $3 billion.
And was up 30% year on year, representing 35% of our semiconductor revenue.
As both cloud and enterprise data centers refresh.
They continue to increase adoption of our Tomahawk, Trident and Jericho switching silicon platforms.
Importantly.
We expect these trends to continue.
In mid August Broadcom announced the tomo five switch series, providing 51 two terabits.
Per second of Ethernet switching capacity in the single <unk>.
Monolithic device double the bandwidth of any other switch silicon available in the market today.
We also announced the industry's first silly.
Silicon Photonics co package with the Tomahawk, which will enable a new benchmark for low power.
And extend our leadership and innovation in Hyperscale data centers.
Networking remains strong given these drivers and in Q4, we expect this segment to be up 30% year over year.
Next server storage connectivity revenue was a record $1 1 billion or 17% of semiconductor sales as.
<unk> growth of 70% year on year exceeded our expectations, primarily a primary driver remained the growth of our next generation server storage connectivity.
We benefited from higher content.
We continue deployments of servers and storage in both cloud and enterprises.
We anticipate we anticipate this strong trend to actually continue and in Q4, we expect.
Server storage connectivity revenue to grow about 45% year on year.
Moving onto broadband.
Revenue of $1 $1 billion grew 20% year on year in line with our expectations and represented 17% of semiconductor sales.
This steady growth was driven by major service provider continuing to deploy next generation broadband fiber to the home globally with high attach rates of Wifi six and <unk>.
We are the industry leader in investing in the next generation Wi Fi seven.
Unlocking amazing wireless experiences across home gateways enterprise access points and smartphones and we expect first deployments to occur in the second half 2023.
In Q4.
We expect our broadband business to grow above 20% year on year.
Finally next moving to wireless.
Q3 revenue of $1 6 billion represented 25% of our revenue in semiconductors sustained demand from a north American customer drove wireless revenue up 14% year on year in line with our guidance in Q4, we.
<unk> wireless revenue to be seasonally.
20% sequentially and grow 10% year on year.
Finally, Q3, industrial resales of $244 million.
Declined 4% year over year, reflecting weakness in China, partially offset by continued strength in the U S and Europe . Nonetheless, Q4, Q4, we forecast industrial resales.
To rebound to high single digit.
Growth year on year.
In summary, Q3 semiconductor solution revenues was up 32% year on year in Q4, we expect semiconductor revenue to remain strong at 25% year on year.
Now putting this in perspective.
And if we look at it on a sequential basis Q3 grew 6%.
Q2.
And Q4 will grow another 6%.
Largely driven by the seasonality of wireless.
Turning to software in Q3.
Infrastructure software revenue of $1 $8 billion grew 5% year on year and represented 22% of total revenue.
In dollar terms consolidated renewal rates averaged 128% over expiring contracts and for strategic accounts, we averaged 140%.
Within this strategic accounts annual bookings of $461 million include $136 million of cross selling of our portfolio of products to these core customers.
Now, 95% of our renewal value rep.
It represented recurring subscription and maintenance.
And just to put all this in context over the past 12 months consolidator renewal rates averaged 122% over expiring contracts and within strategic accounts, we have retail we actually averaged 137%.
Because of these trends.
Our.
Our.
Indicator of forward software revenue at the end of Q3 was $5 $5 billion, which is up 5% from a year ago.
And in Q4, we expect our infrastructure software revenue.
To sustain around mid single digit percentage growth year over year.
In summary, therefore, we are guiding consolidated Q4 revenue.
Of $8 9 billion up.
Up 20% year on year or 5% sequentially.
Now before Kirsten.
Tells you more about our about our financial performance for the quarter.
Let me provide a brief update on our pending acquisition of Vmware.
We're making good progress with our various regulatory filings around the world. We have an excellent team focused on these efforts and we are moving forward as very much as expected in this regard.
We continue to expect the transaction to be completed in Broadcom.
Fiscal year 2023.
We remain excited about our acquisition of <unk> and continue to be impressed by their world class Engineering talent.
As well as strong customer and channel partnerships.
We have tremendous respect for what Vmware has built and together.
We will enable enterprises to accelerate innovation and expand choice.
By addressing the most complex technology challenges.
In this multi cloud era.
And with that let me turn the call over to Ken.
Thank you hock.
Let me now provide additional detail on our financial performance Rep.
Revenue was $8 5 billion for the quarter up 25% from a year ago.
Gross margins were 76% of revenue in the quarter and up 80 basis points year on year.
Operating.
<unk> expenses were $1 2 billion.
Up 8% year on year, driven by investment in R&D.
Operating income for the quarter was $5 2 billion and was 32% from a year ago was up 32% from a year ago operating margin was 61% of revenue up approximately 320 basis points year on year.
Adjusted EBITDA was $5 $4 billion or 63, 5% of revenue.
Note that this figure excludes $129 million of depreciation.
Now a review of the P&L for our key segments.
Revenue for our semiconductor solutions segment was $6 6 billion and represented 78% of total revenue in the quarter.
This was up 32% year on year.
Gross margin for our semiconductor solutions segment, or approximately 72% up 220 basis points year on year, driven by favorable product mix and content growth in next generation products across our extensive product portfolio.
Operating expenses.
Our $853 million in Q3 up 9% year on year.
R&D was $765 million in the quarter up 10% year on year.
Q3 semiconductor operating margins increased to 59% so while semiconductor revenue was up 32% operating profit grew 44%.
Moving to the P&L for our infrastructure software segment.
Revenue for infrastructure software was $1 8 billion and represented 22% of revenue this was up 5% year on year.
Gross margins for infrastructure software, where 90% in the quarter and were stable year over year.
Operating expenses were $375 million in the quarter up 4% year over year.
Infrastructure software operating margin was 70% in Q3 and operating profit grew 5%.
Moving to cash flow.
Free cash flow in the quarter was $4 3 billion, representing 51% of revenue.
We spent $116 million on capital expenditures.
Days sales outstanding were 29 days in the third quarter compared to 30 days a year ago.
We ended the third quarter with inventory of $1 8 billion up 10% from the end of the prior quarter in large part due to higher material costs and the expected sequential revenue ramp.
We ended the third quarter with $10 billion of cash and $39 5 billion of gross debt of which $304 million as short term.
Turning to capital allocation in the quarter, we paid stockholders $1 7 billion of cash dividends consistent with our commitment to return excess cash to shareholders, we repurchased $1 5 billion in common stock and eliminated $292 million of common stock for taxes due on vesting of employee.
<unk> equity, resulting in the elimination of approximately $3 2 million <unk> shares.
The non-GAAP diluted share count in Q3 with $436 million.
In Q4, we expect the non-GAAP diluted share count to be $435 million, which excludes the potential impact of any share repurchases completed in the fourth quarter.
We have not repurchased any of our shares since we announced the pending acquisition of Vmware as repurchases are subject to regulatory rules, we maintain our commitment to return excess cash to shareholders, including buybacks as soon as we can under SEC rules.
Yes.
Based on current business trends and conditions, our guidance for the fourth quarter of fiscal 2022 is for consolidated revenues of $8 9 billion and adjusted EBITDA of approximately 63% of projected revenue.
That concludes my prepared remarks, operator, please open up the call for questions.
Thank you as a reminder to ask a question you will need to press star one one on your telephone we ask that you. Please limit yourself to one question. Please standby, while we compile the Q&A roster.
Our first question will come from Ross Seymore with Deutsche Bank. Please go ahead.
Hi, guys. Thanks, certainly ask a question Hock you started off your.
Preamble talking about the disconnect between some of the macro data points on the consumer side versus the infrastructure side. Obviously, you have a limited exposure on the consumer side of things, but in the networking broadband server the enterprise and cloud businesses. In general are you seeing any changes because it's really hard for I think investors and even myself to reconcile.
The fact that everything is fine for you. Despite the macro data points seemingly are worsening for many of your peers.
Well.
No Dan sorry short answer is no.
And by then this is what I mean, and this is something I've been talking about we've been talking about in the earnings call.
In sell side analyst calls about true demand.
What we are measuring what we are reporting.
Revenues.
In our minds and we've been looking at it that way the past eight quarters, particularly as we told you we scrubbed through backlog thoughtfully carefully before we deliver products to customers and users is that thats true end demand.
While we reported to you today and you'll see the numbers that representing.
And the strength of the numbers, if I could say so myself.
True end demand, what we're seeing with respect to the various end markets.
And the infrastructure products, we sell through into those end market, that's as far as we can.
Scrub through true end demand now.
Now we also have a ton of bank loan.
Our lead time continues unchanged.
<unk> 50 weeks.
Now whether bookings.
Data plays today.
Running at somewhat different thoughts different rates is more function of.
Perception psychology of customers trying to thing one year out.
But as far as what we reported in Q3 and expect to see in Q4, we believe to be true and we believe.
We're pretty clear about it to pretty true end demand and consumption by our customers.
Thank you one moment for our next question and that will come from the line of Stacy <unk> with Bernstein Research. Please.
Please go ahead.
Hi, guys. Thanks for taking my question.
Wanted to follow up on that I guess hock. So I understand you guys are thinking you're shipping the true demand. It feels like if this was the actual true demand situation that everybody was facing that everybody else wood wood.
I would feel stronger than they seem to be so I guess I don't know what else you can say about trying to help us square that square that circle.
What gives you confidence that.
What you actually you're seeing is indeed true demand I get the whole figure out trying to under ship and partially orders and everything else but.
You don't think it's possible that your customers could be gaming you even even within every all the actions that you're taking I guess, just what kind of confidence if anything can investors get.
Around that statement that you think you actually are shipping to demand.
Uh huh.
I mean, we.
We put in a lot of checks and balances hugely.
And before we.
Put products out on us.
Aircraft.
Our trucks to our customers.
And we.
And we have been doing this now for two years. So we're pretty good at doing it and the question earlier answered by US by Ross was have you seen any particular change in OLED.
In terms of consumption for all of our products.
Can only obviously to talk about our products and I can talk beyond our products.
No we don't see that.
Thank you one moment for our next question.
That will come from the line of Vivek Arya with Bank of America. Please go ahead.
Thank you.
Wanted to clarify and then ask a question.
Just wanted to clarify if any of your products are directly or indirectly exposed to any.
China restrictions that have been in the press over the past handful of days and then Hock I wanted to ask the growth question in a different way, which is in the past you described.
Stable kind of mid single digit growth rate for Broadcom.
Is that still a good.
Framework to use as we are looking out at the next year or so or if you could give us maybe by end market hyper scalar versus enterprise versus telco or consumer.
Which market.
Conceptually you would expect to kind of grow better or slower than that kind of broad growth rate for the company.
Then second question is a very interesting question, but let me take care of the first no. We have not been notified none of our products are affected by any action.
Occurred over the last week or a few days regarding.
Restriction on shipments of China, we have not been affected period.
And we do not expect to be.
Okay now in terms of what Youre, saying now that calls for similar degree of.
Speculation, but it's more than that I've always said.
The long term sustainable demand in the semiconductor space is a mid single digit compounded growth rate, 5% thereabouts, maybe six 5%, 6% and I still believe that.
No matter what all the.
Then I mean hubris that marketing hubris that has occurred over the past 12 months. It always has been and I think we will revert to that Nam. Eventually now obviously is there interesting what we're seeing because it depends on where you start that then.
Impounded growth because 5% is what I'd say to be a long term.
Long term growth rate in the short term in this industry and we have all experienced this cycles you could have higher than 5% at the up cycle and clearly much lower than the downside goes to averaged at 5%.
But.
Your point is at some point, we'll have to get back to the norm and I believe we will.
Not in this year 'twenty two.
The rig 20 twos growing now we might assuming.
Our forecasts.
Q4 comes to play we are talking about semiconductor growth rate for us.
Around 25% year on year.
<unk>.
That's way above the 5% known so at some point, yes, things will turn around and revert back to that norm now it may take a couple years before it gets there.
Alright.
One moment for our next question and that will come from the line of Harlan sur with Jpmorgan. Please go ahead.
Hi, Good afternoon. Thanks for taking my question you know back in April you guys did this really nice teaching of your custom silicon ASIC business and the business has been growing at a 20% CAGR over the past few years, we've got a pipeline of over 70 programs at seven five and three nanometers.
And then specifically Hopkins compute offload right you've got some really nice programs like GPU Smart next video transport is the team still on track to drive $2 billion in cash.
Offload Asics revenues this year and then just given the strategic nature of these programs to your customers' future initiatives.
Segment hold up better in a weaker macro environment, let's say next year.
Well to answer your first question, yes, we're on track.
For this year to hit that $2 billion, we told you that and we're getting that.
As far as does it does this particular compute offload defied gravity.
I don't know.
Yes.
I don't I can really answer that like to believe it's emerging and it's a very emerging business and so like emerging business that have hit some level of critical mass.
As it appears to have in our case in May.
Pull up somewhat better than perhaps.
Enterprise as we are seeing and Paul and so youre not wrong in that regard but that that.
That is actually calling for some level of speculation on our part because I mean in more than 23 I'm looking at.
'twenty three 'twenty four 'twenty five next three years will it hold up better.
I don't know the answer for 'twenty three surely it will hold up better.
And one moment. Our next question that will come from the line of Timothy Arcuri with UBS. Please go ahead.
Oh, Hi, Hock I was wondering if you could update us on the <unk> backlog number I think it was $25 billion last call, which was a little bit more than a year.
Can you update us on that backlog number and then also within that have you seen any movement in the backlog I mean, I know, probably it's up but have you seen any customers cancel or push out I mean, obviously that was more than offset by.
In coming bookings it sounds like but sort of what's the fluidity within that backlog.
Well.
Yes to clarify the first couple of months.
Our bank loan.
Our terms are very clear, we do not allow cancellation on our backlog.
Yeah.
We have not seen it.
And to answer your second question.
On the first part keep in mind, our revenue continued to grow each quarter sequentially as our backlog continues to build up.
And compared to the preceding quarter.
Our backlog at the end of Q3 increased to $31 billion.
So we are still shipping below our booking rate.
And one moment for our next question that will come from the line.
William Stein with <unk> Securities. Please go ahead.
Great. Thank you for taking my question.
Hakan.
<unk>.
We forget that.
Historically, we've been in an ASP eroding.
Sort of industry.
At least on a.
Parked for park.
Basis, I know that mix changes over time.
But I think thats changed significantly in the last year and a half or so I'm wondering whether youre seeing that dynamic.
Continue or revert.
And if you can comment as to how that's influencing margins youre getting such tremendous contribution margins in the semi business I would have to think pricing.
Is playing some part in that thank you.
Actually.
It isn't.
I've said that before in previous earnings couple of earnings calls it worthwhile for me to repeat.
We have been able to raise prices obviously over the last.
Last 12 months, but only because.
Our material cost has gone up.
So we're talking a bit talking percentages not absolute dollars.
Eva cost metal cost cost of goods sold increased 10% in order to keep our margin in percentage terms from been diluted with.
With the raise the price.
No less than 10%.
And just doing that it says staying put.
It's just keeping the gross margin in percentage term staying neutral.
So.
I would say price increases.
Very little impact on our margin improvement.
What is what has enabled our margins to accelerate or improve as I said in the last earnings call.
Is in this environment of.
Panel in some degree in the last couple of years last 12 months in particular.
Ill.
<unk>.
Basically a pent up level of spending, particularly in enterprise somewhat in cloud as well and broadband as well is the adoption of new Gen. <unk> next generation products and technology.
And then always enhances as I've said before our gross margin.
And it's just it's the basic fundamental of this semiconductor cycle new generation of products improve.
Improves.
<unk>, our gross margin and the accelerated adoption.
<unk> expenses gross margin and that's pretty much what has been the case here, but not price increase per se.
And one moment for our next question.
And that will come from the line of Aaron Rakers with Wells Fargo. Please go ahead.
Yes.
Okay.
Mr. Rakers. Your line is open if you would like to ask a question.
Yes, yes. Thanks.
I appreciate you taking the question.
I wanted to ask about the wireless segment solid results. This last quarter it sounds like Youre guiding 20% sequential growth.
Into this current quarter, but if I look back over the past couple of years, it's actually been solidly above the 20% sequential growth rates. So I guess, how are you thinking about the demand profile, there and I guess with that Youre content expansion opportunity as we look at the next generation product cycle going forward. Thank you.
Okay.
On the wireless business, if I could.
We've tried to clarify.
Yeah.
When we think any particular three month period like Q3.
And going to be Q4, now and take a snapshot of when compared to the same period of time a year ago in never quite replicate itself in <unk>. In other words is there is no normalization so it could be 20% equaled 25%.
It could even be 30% changes.
I consider that all kind of in the same ballpark simply because all it takes is a slippage of a couple of weeks in shipments in the product's been taken to make that particular different so I would not put too much.
Thinking behind that is 20%, whereas in mind have been closer to 30% two years ago or a year ago in the same period, even though my simply because.
Nothing nothing comes up so it's.
To be sold.
Planned year over year changes.
But.
In terms of overall volume, we do not see them much units dramatically different from a year ago is really the content increase that might give us the lift year upon year and even on the leap year on year quarter. When you compare to any three month period, they get with a grain of salt that.
Some volume some volume might have shifted.
Forward.
Not be with industry months, but it's kind of in the ballpark.
One moment for our next question.
And that will come from the line of harsh Kumar with Piper Sandler. Please go ahead.
Yeah, Hey, guys first of all congratulations for reporting very good guidance very good results in such a turbulent market.
Hi.
Wanted to ask a quick one and then the main question Theres been a lot of concerning sort of news coming out of China reported by companies. So I was curious.
First of all how much exposure do you have to China and then for my main question. It's a question of sustainability somebody asked about revenues, but I wanted to ask about gross margins.
90% of our margins in software I think is the norm, but then you've got 72% gross margins in semi which are sort of honestly abnormal compared to other companies. So when you think of sustainability of that semi business up in the seventies. What do you think are some of the drivers that keep it up there for you guys longer term.
Okay.
Okay. Let me answer the second question first since since it is a little more complex, but it is an offer.
Our semiconductor gross margin by the way we talk about sustainability.
It keeps expanding.
Doesn't stay still as you probably know if you look back two five years ago.
We were more like 60%.
In the mid <unk> or low <unk> gross margin today is now over 70, and it's simply the case that and Thats. The beauty of the thing not a semiconductor technology business.
You will always have new generation of products, whether it's wireless running.
Creating generation every 12 to 24 months, where it is.
Switching that's every two to three years all storage every four or five years and every time, we put in the new generation.
You expand your margin because they are delivering more value.
We're diluting and much more value, usually and youre able to extract.
From the higher value or higher price.
Price and profitability.
And Thats the beauty of this industry, so as we keep coming out with new generations.
<unk>.
The portfolio keep expanding so were now as the seventies.
Then you asked where will we be five years from now in this known in their this phenomena of constantly updating to next generation product I don't see this month.
Gross margin expansion, continuing and empirically don't ask me for any mathematical formula behind physics behind it but empirically given our portfolio of about.
16 semiconductor franchises.
We have average.
Close to 50 to 100 basis points expansion year after year.
And that's pretty good and we see that trend continuing and as I responded to an earlier question.
Over the last two years.
With the rebound.
Almost ache field by.
Perhaps the changes.
<unk>.
<unk> spending.
He is on the I guess lockdowns based on behavioral changes with COVID-19, we.
We have seen accelerated adoption of next generation products in many of our franchises. So we have seen some level of accelerated expansion.
Of our semiconductor gross margin.
Things will reverse bank my belief to a more normalized 50 to 100 basis point expansion. Once all this excitement starts cooling off a bit but we'll still see the sustainable expansion of our semiconductor gross margin software youre right, we kind of stick there at 90% and we're now going.
Anywhere with it.
But this explain about semiconductor will continue to expand.
And lastly on your first question China Thats.
That's about 13% of <unk>.
Semiconductor revenue, that's our exposure to China.
One moment for our next question.
That will come from the line of the Jive Rakesh with Mizuho. Please go ahead.
Yes, Hi, just two questions here again, sorry on.
And the enterprise storage side I saw you guys had a pretty good quarter guide just wondering what your exposure was between consumer and enterprise.
What are you seeing in terms of that strength going forward and also just my second question on the Vmware side I know you said, you're still expecting that to close in fiscal 'twenty. Three can you give us some color regarding most of the approval of the Saudi waiting on some where that stood.
Thanks.
Okay.
Well in terms of a breakdown basically asking asking us on our semiconductor revenues, what's a breakdown of our revenues.
We would classify three ways three groups non.
Non end markets, but groups it cuts across all our end markets.
<unk>, probably wireless wireless it's all consumer.
And so no surprise.
Our consumer business within semiconductor represents.
About <unk>.
'twenty, three or just less than 25% of our revenues just over <unk>.
Between 20 to 25 is the best description and on the balance which could be anywhere from 775 to almost 80% is almost split evenly between enterprise traditional enterprise as we call. It <unk>.
And the final grouping, we call as service providers, which is really too.
The Hyperscale guys.
In telcos, which we consider to be service provider and Thats and so you're in between traditional enterprise and telcos Hyperscale, that's evenly split at consumer 20% to 25%.
As far as the regulator process and through Vmware.
Right now I'll say when the thick of it and we're taking it across.
Several a few a couple of jurisdictions.
We're moving along and is making good progress.
And just to reiterate and we fully expect to close on this within fiscal 'twenty three.
And one moment for our next question.
That will come from the line of Joseph Moore with Morgan Stanley . Please go ahead.
Great. Thank you with regards to the 50 week lead times that you talked about what is your goal there over the next say 12 months do you want to get that down and to the extent. If you do want to kind of what has to happen from the standpoint of foundries of trades things like that to get that number lower.
I don't know, we havent thought that hard about it yes seriously Joe no I kind of like the 50 week lead time.
To be Frank because kind of what has to happen from the standpoint of foundries or trade things like that.
That number lower.
I don't know, we havent thought that hard about it seriously Joe no I kind of like the 50 week lead time.
To be Frank because it gives us.
Great visibility.
It also pushes politely gently about the on demand.
The demand outlook one year. So it gives us great visibility minimal between now through the end of 50 weeks.
We all know where we stand with each other.
And we know where we stand now which is pretty good visibility.
And one moment for our next question.
That will come from the line of Toshi Hari with Goldman Sachs. Please go ahead.
Hi, Thanks for taking the question I wanted to follow up on Joe's question on the supply side.
Just based on the sequential revenue growth that you've been marking over the past couple of quarters. Your guidance for the October quarter, It's pretty clear that supply continues to be kind of a key determinant.
Of your revenue growth.
Based on indications from your foundry supplier and key substrate suppliers.
From a modeling perspective should we expect mid single digit growth to be kind of a normal cadence over the next few or several quarters or could there be a point in time, where your rate of growth starts to accelerate given given easing in some of the other end markets. Thank you.
And that's a hell of a good question. So let me try to answer.
Incident.
And which is this.
We've always said and we continue to say.
It's not really supplying that constrained our revenue.
We look at as we said, we scrubbed through and trying to.
Really get as closely as we can to one our customers.
Truly need to consume and we ship according to that.
And Thats as basic as all day. So if you look at it that way supplying.
It's not a true constraint.
<unk> demand.
A real demand.
And getting to the rail demand just.
October quarter Q4.
She is bum up to $8 nine from eight points for.
<unk> eight 5 billion.
Believe me this is all largely driven by the seasonal ramp of our North American handset manufacturer.
That's really what drives that loss to increase so it's we're very very kind to end consumption and consumption of products.
And it's not really all about much about supply and I would say that for the last four five quarters and we're still in that same behavior mode.
Okay.
Yeah.
Alright.
And one moment for our next question.
Okay.
That will come from the line of Pierre <unk> with New Street Research. Please go ahead.
Hi, Thanks for taking my question.
You mentioned in your prepared remarks, like you're first co package upticks.
Product and networking and so I was wondering if you can give us.
Slightly deeper overview of where things stand on these storms.
And.
On your product portfolio. So are you going to have like.
In parallel products, we use co packaged optics and traditional products.
Meant to be used with Craig even upticks in parallel.
In the next.
Next few years and then in terms of market adoption.
Can you give us a sense of how material co package optics is going to become.
Maybe in the next 345 years and if it's going to be like a progressive adoption on specific use case is always going to be more like a hockey stick adoption from the certain bandwidth from which like co package is going to make more sense than clickability.
Okay, let me try to get.
<unk>.
Talk through this basically your question is about how is <unk>.
I mean, we constantly come out across all our product franchises in especially in semis.
New generation of products.
<unk>.
And they are pretty cool, even though I say it myself.
<unk> adoption.
It's never as quickly as we all like it to be it tends to be.
March slowed everything so for instance.
Switching tomahawks data top of the ranked data center switching I am still selling tomahawk, one two or three.
Three we chose the.
The generation before the current generation and now we are selling Tomahawk four.
And just to give you a sense thermal fall.
As a percent of my total Tomahawk volume.
I would estimate to be less than 30% in total so you can see they coexist and it tends to happen. So by the time, we launched among five.
Two years ago two years from now.
We're probably maybe be getting our tomahawk, one to the point, where it becomes de Minimis. So there is this constant coexistence of multiple generations and appliance by the way to every product we have server storage.
And where we have to treat with three generations running simultaneously because it's the way the wall at dumps.
New technology.
And we will keep having a mix, which is probably one win in bolt onto it at the end of the day.
Yes.
We'll we have.
There's no hockey stick in any product adoption.
There is no such thing as winner take all.
Whether it's part of a new product.
For that matter a new player there is always a key.
Our existence.
Sure.
Vault volume.
Sure.
Mix of technologies.
<unk>.
And we see that very clearly across now consumer perhaps is less is more of a hockey stick and even then we see month to month, two or three generations of a north American OEM running simultaneously, but of course, it's more of a hockey stick I believe than our infrastructure products.
Our structure.
It takes a while and we would have for not surprise not very uncommon to regeneration run running simultaneously.
And that means any expansion of gross margin coming back where drain zoned to because it's a reflection of product mix.
In terms of product generation as why our gross margin grows much more steadily but more not as rapidly as we would like to but it's okay. Because it gets more sustainable and as each year passes and the newer generation products get.
Adopted more in step in a measured manner. Our gross margin grows that 50 to 100 basis points each.
This particular year that passes.
Hope that answers your question.
Yes.
Alright, and then I would now like to turn the call back over to MS. Zhu for any closing remarks.
Thank you Sherry Broadcom currently plans to reported earnings for the fourth quarter of fiscal 'twenty two after close of market on Thursday December eight 2022.
Public webcast at Broadcom earnings Conference call will follow at two P M Pacific.
That will conclude our earnings call. Thank you all for joining Terry.
Tom.
This concludes today's conference call. Thank you for participating you may now disconnect.