Q2 2023 Broadcom Inc Earnings Call
[music].
Wow.
Welcome to Broadcom, Inc. Second quarter fiscal year 2023 financial results conference call at this time for opening remarks, and introductions I would like to turn the call over to <unk> head of Investor Relations of Broadcom, Inc.
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 Collier, President Semiconductor solutions group.
Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the second quarter fiscal year 2023.
You did not receive a copy you may obtain the information from the investors section of <unk> Com's website at Broadcom Dot com.
This conference call is being webcast slides and an audio replay of the call can be accessed for one year to the investors section of Broadcom to website.
During the prepared comments hawken, Kirsten will be providing details of our second quarter of fiscal year 2023 results guide.
Guidance for our third 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 todays 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 gene.
And thank you everyone for joining us today.
So in our fiscal Q2 2023.
Consolidated net revenue was $8.7 billion up 8% year on year.
Semiconductor solutions revenue increased 9% year on year to $6 8 billion.
And infrastructure software grew 3% year on year to $1 9 billion as the stable growth in core software.
More than offset softness in the brocade business.
No.
As I started this call I know you all want to hear about how we are benefiting.
From this strong deployment of generative AI by our customers.
Put this in perspective.
Our revenue today from this opportunity and opportunity rich.
<unk> about 15% of our semiconductor business.
Having said this.
It was only 10% in fiscal 'twenty two.
And we believe it could be over 25% of our semiconductor revenue.
In fiscal 'twenty four.
In fact.
Over the course of fiscal 'twenty three.
And we are in.
We are seeing a trajectory.
Well, our quarterly revenue entering the year.
Doubles by the time, we exit 'twenty three.
And.
In fiscal 'twenty.
Third quarter 'twenty, three we expect that.
This revenue to exceed $1 billion in the quarter.
But as you well know well.
Well also a broadly diversified semiconductor and infrastructure software company.
And in our fiscal Q2.
Demand for infrastructure.
It's driven by Hyperscale wireless service providers and enterprise continue to hold up.
Following the 30% year on year increases we have experienced over the past five quarters overall infrastructure demand in Q2 moderate to mid teens percentage growth year on year.
As we have always told you we continued to ship only to end user demand.
We remain very disciplined on how we manage inventory.
Across our ecosystem.
<unk>.
The quarter with less than 86 days on hand.
Level of inventory consistent with what we have maintained over the past eight quarters.
Now, let me give you more color on our end markets.
Let me begin with wireless.
As you saw in our recent 8-K filing.
We entered into a multiyear collaboration with North American wireless OEM on cutting edge wireless connectivity and five key components.
Our engagement.
In technology and supply remains deep strategic and long term.
<unk> revenue declined seasonally.
24% quarter on quarter and down 9% year on year.
Sure.
In Q3.
As we just begin the seasonal ramp of next of the next generation phone platform, we expect wireless revenue to be up low single digits sequentially.
We expect however, it will remain around flattish year on year.
Moving on to networking.
Ned will networking revenue was $2 6 billion.
And what's up 20% year on year in line with guidance, representing 39% of our semiconductor revenue.
There are two growth drivers here.
One continued strength in deployment of our merchant Tomahawk switching for traditional enterprise workloads as well as Jericho routing platforms for telcos.
And.
Two.
Strong growth in <unk> infrastructure, and Hyperscale is from compute offload and networking.
And speaking of AI networks.
What comes next generation Ethernet switching portfolio, consisting of <unk>, five and Jericho three AI.
Offers the industry's highest performance fabric for large scale AI clusters by optimizing the demanding and costly AI resources.
These switches based on an open distributed disaggregated architecture.
We'll support 32000, GPU clusters running at 800 gigabit per second bandwidth.
Ethernet fabric as we know it already supports multi tenancy capability and end to end congestion management.
This loss plus connectivity.
Hi, Qos performance has been well proven over the last 10 years of network deployment in the public cloud and telcos.
In other words.
The technology is not new.
And we are as Broadcom very well position to simply extend our best in class networking technology.
To generative AI infrastructure.
While supporting standard connected connectivity, which enables vendor interoperability.
In Q3.
We expect networking revenue to maintain its growth year on year of around 20%.
Next our server storage connectivity connectivity revenue was $1 1 billion or 17% of semiconductor revenue.
And up 20% year on year.
And as we noted last quarter.
With the transition to next generation Mega rate, largely completed and enterprise demand moderating.
But we expect server storage connectivity revenue in Q3 to be.
Low single digits year on year.
Moving onto broadband revenue grew 10% year on year to $1 2 billion and represented 18% of semiconductor revenue.
Growth in broadband was driven by continued deployments by telcos of next generation 10, G PON and cable operators of DOCSIS three one.
High attach rates of Wi Fi six and.
60.
And in Q3, we expect our broadband growth to moderate to low single digits percent year on year.
And finally Q2 industrial resales of $260 million increased 2% year on year.
The softness in China was offset by strength globally in our renewal renewable energy and robotics and in Q3, we forecast industrial every sales to be flattish year on year.
Continuing softness in Asia offset by strength in Euro.
So summary, Q2 semiconductor solutions revenue was up 9% year on year and in Q3, we expect semiconductor revenue growth of mid single digit year on year growth.
As expected continued softness in brocade.
Offset by the continuing stable growth in core software.
Relating to cost software consolidator renewal rates average, 114% over expiring contracts and in and in our strategic accounts, we average 120%.
Within that.
Strategic accounts and normalized bookings of $564 million.
Included 133 million or 23% of cross selling of other portfolio of products to these same core customers over 90% of the renewal value represented recurring subscription and maintenance.
And over the last 12 months.
Consolidator renewal rates averaged 117% over expiring contracts.
Among our strategic accounts, we average 128%.
Because of this our a R are the indicator of forward revenue at the end of Q2 was $5 3 billion up.
Up 2% from a year ago and in Q3, we expect.
Infrastructure software segment revenue to be up low single digits percentage year on year as the.
Call software growth continues to be offset by weakness in brocade.
On a consolidated basis, we are guiding Q3 revenue of 885 billion.
Up 5% year on year.
Before Kirsten.
To answer your more above 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 having received legal merger clearance in Australia, Brazil, Canada, South Africa, and Taiwan, and foreign investment control clearance in all necessary jurisdictions.
We still expect the transaction will close in broad scope broadcom fiscal 'twenty two 'twenty three.
The combination of Broadcom and Vmware is about enabling enterprises to accelerate to accelerate innovation and expand choice by addressing their most complex technology challenges in this multi cloud era.
And we are confident that regulators was Cds when they conclude their review.
With that.
Let me turn the call over to Kessler.
Thank you Hock, let me now provide additional detail on our financial performance.
Consolidated revenue.
7 billion for the quarter up 8% from a year ago.
Gross margins were 75, 6% of revenue in the quarter about 30 basis points higher than we expected on product mix.
Operating expenses were $1 2 billion down 4% year on year.
R&D of $958 million was also down 4% year on year on lower variable spending.
Operating income for the quarter was $5 4 billion and was up 10% from a year ago Apo.
Operating margin was 62% of revenue up approximately 100 basis points year on year.
Adjusted EBITDA was $5 7 billion or 65% of revenue.
This figure excludes 129 million of depreciation.
Now a review of the P&L for our two segments.
Revenue for our semiconductor solutions segment was $6 8 billion and represented 78% of total revenue in the quarter.
This was up 9% year on year.
Gross margins for our semiconductor solutions segment were approximately 71% down approximately 120 basis points year on year, driven primarily by product mix within our semiconductor end markets.
Operating expenses were $833 million in Q2 down 5% year on year.
R&D was $739 million in the quarter down 4% year on year.
Q2 semiconductor operating margins were 59% so while semiconductor revenue was up 9% operating profit grew 10% year on year.
Moving to the P&L for our infrastructure software segment.
Revenue for infrastructure software was $1 9 billion up 3% year on year and represented 22% of revenue.
Gross margins for infrastructure software, where 92% in the quarter and operating expenses were $361 million in the quarter down 3% year over year.
Infrastructure software operating margin was 73% in Q2 and operating profit grew eight grew 8% year on year.
Moving to cash flow.
Free cash flow in the quarter was $4 4 billion and represented 50% of revenues in Q2, we spent 122 million on capital expenditures.
Day sales outstanding were 32 days in the second quarter compared to 33 days in the first quarter. We ended the second quarter with inventory of $1 9 billion down 1% from the end of the prior quarter.
We ended the second quarter with $11 6 billion of cash and $39 3 billion of gross debt of which $1 1 billion of short term.
The weighted average coupon rate in years to maturity of our fixed rate debt is 361% and nine nine years, respectively.
Turning to capital allocation in the quarter, we paid stockholders, one 9 billion of cash dividends.
Consistent with our commitment to return excess cash to shareholders, we repurchased $2 8 billion of our common stock and eliminated $614 million of common stock for taxes due on the vesting of employee equity.
<unk> and the repurchase and elimination of approximately $5 6 million AVG O shares.
non-GAAP diluted share count in Q2 with $435 million.
As of the end of Q2 9 billion was remaining under the share repurchase authorization.
Excluding the potential impact impact of any share repurchases in Q3, we expect non-GAAP diluted share count to be $438 million.
Based on current business trends and conditions, our guidance for the third quarter of fiscal 2023 is for consolidated revenues at 885 billion and adjusted EBITDA of approximately 65% of <unk>.
Projected revenue in.
In Q3, we expect gross margins to be down approximately 60 basis points sequentially on product mix.
That concludes my prepared remarks, operator, please open up the call for questions.
Thank you to ask a question you will need to press star one one on your telephone to withdraw your question. Please press star one again due to time restraints. We ask that you. Please limit yourself to one question. Please standby, while we compile the Q&A roster.
Yes.
Okay.
Yes.
And today's first question will come from the line of Ross Seymore with Deutsche Bank Your.
Thanks for letting me ask a question Hock I might as well start off with the topic that you started AI. These days is everywhere. Thanks for the color that you gave in the percentage of sales that it was potentially going to represent into the future I wanted to just get a little bit more color on two aspects of that how you've seen the demand evolve during the course of your quarter.
Has it accelerated in what areas et cetera, and then is there any competitive implications for it we've heard from some of the compute folks that they want to do more on the networking side and then obviously you wanted to do more into the compute side. So I just wondered how the competitive intensity is changing given the AI workload increases these days.
Okay well.
Your first part of your question.
Yeah, I mean last earnings call we have indicated.
Yes.
Was.
A strong sense of demand.
And we have seen that continue unabated in terms of that strong demand search that's coming in normal course.
We all realize lead times.
Manufacturing lead times on most of this cutting edge products.
It is fairly extended.
Don't make this manufactured these products and all a process.
Anything less than six months or thereabouts.
And while there is strong demand and strong urgency of demand.
The ability to ramp up will be more measured.
Addressing.
Demands that are most urgent.
On the second part no we always seen competition and really even in non traditional.
Workloads in the enterprise data centers and Hyperscale data centers.
Our business, our our markets in networking switching routing continues to face.
Competition, so really nothing new here the competition continues to exist and we all each of US do the best we can in the areas.
<unk> is doing.
Thank you.
Yes.
Thank you one moment our next question.
That will come from the line of Vivek Arya with Bank of America Securities. Your line is open.
Thanks for taking my questions are how can I just wanted to first clarify.
I think it might have mentioned it but I think last quarter, you gave very specific numerical targets of 3 billion in assets and $800 million in switches for fiscal 'twenty three I just wanted to make sure. If there is any specific update to those.
The numbers does it more than $4 billion in total now etcetera and then my question is.
Longer term.
What do you think the share is going to be between kind of general purpose GPU type solutions versus Asics do you think that share shifts towards AC rigs do you think it shifts towards general purpose solutions, because if I look outside of the compute offload opportunity you have generally favored right more of the general purpose market. So I'm curious how do you.
See this shared between general purpose versus Asics play out in this AI processing opportunity longer term.
On the first part of your question you guys Love Your question in two parts. So let's do the first part first.
We've guided all we indicated therefore fiscal 'twenty three.
Debt.
The revenue we're looking at.
In this space is $3 8 billion. There is no reason nor are we trying to do it now in the middle of the year to change that forecast.
At this point.
So we still keep to that guidance.
<unk> forecast, we are giving you into fiscal.
Fiscal 'twenty three we obviously, giving you a sense of trajectory in my remarks on what we see 24 to look like.
And that again is a guide it's a broad trajectory of the guidance nothing more than that just to give you a sense for the accelerate that move from 'twenty to 'twenty, three and headed into 2000 for nothing more than that but in terms of specific numbers that you indicated we gave.
Uh huh.
You know, we stay by our forecast of fiscal 'twenty 338.
Frankly, because my view is a bit early to give you any revised.
Okay.
Then beyond that on your most broad specific questions AC versus merchant you know I always favor merchant.
Whether it's in compute whether it's in networking.
<unk>.
To me in my mind long term.
<unk> will eventually my view have a better shot at prevailing.
But what we're not talking at what we're talking about today is obviously.
A shorter term issue versus a very long term issue than a shorter term issue is compute offload exist, but again then.
The number of players in compute offload Asics is very very limited and Thats, what we continue to see.
Thank you.
Thank you one moment for our next question.
And that will come from the line of Harlan sur with Jpmorgan. Your line is open.
Hi, good afternoon. Thanks for taking my question, great to see the strong and growing ramp up here.
Compute offload and networking products on your next generation Hawk on your next generation AI and compute offload.
Programs that are in the design phase now you've got your Nextgen switching and routing platforms that are being qualified like are your customers continuing to push the team to accelerate the design funnel.
And program timing and then I think he might have addressed this but I just want to clarify all of these solutions use the same type of very advanced packaging like stack die HBM memory co Los packaging and not surprisingly. This is the same architecture used by your AI GPU peers, which are.
Driving the same strong trends right. So is the broadcom team casein or expected to face like advanced packaging advanced substrate supply constraints and all this.
The operations team going to sort of manage through all of this.
Well.
Youre right in that day.
This AI product.
Product.
And this generated for AI products next generation current generation.
All using very leading edge technologies in wafers, silicon wafers, and substrates and packaging, including memory stacking.
Yeah.
But you know it's.
From crude from.
And Sumption.
It's still there's still products out there still capacity there all day as I say and this is.
This is not something you wanted to be able to ship or deploy right away. It takes time.
And we see the SMA should ramp over and that has started in fiscal 'twenty three and we will continue its pace through 'twenty four.
And on the design win funnel are you seeing customers trying to pull in all of their design.
Well it's.
We are working our basic.
Opportunity still lies in the networking of AI in networks.
And we have the products out there.
And we are working with many many customers obviously to put in place this aggregated distributor disaggregated architecture.
Which of Ethernet fabric on AI.
Yes.
That's a lot of obvious interest and lots of design that exists out there.
Yes.
Thank you hock.
Thank you one moment for our next question.
And that will come from the line of Timothy Arcuri with UBS. Your line is open.
Thanks, a lot Hock I was wondering if you can sort of help shed some light on the general perception that.
All this AI spending is sort of boxing out traditional compute.
Can you talk about that or is that just capex budgets are going to have to grow to support all this extra capex I mean, the truth is probably somewhere in the <unk>.
But I'm wondering if you can help shed some light on just the general perception that all of this is coming at the extension of the traditional compute and the traditional infrastructure. Thanks.
Jan Jan.
Estimate your guess is as good as mine actually I can tell either I mean, youre right days and days. This AI networks and this budget budget then allow a located more in Mumbai.
The hyperscale towards this AI networks.
Not necessary, particularly in enterprise at the expense of traditional workloads and traditional data centers I think there is going to vehicle and there's definitely coexistence and a lot of the launch of mono spending on the AI today that we see for US that is it's very much on.
The hyperscale.
So enterprise is still focusing a lot of their budget as they have on there.
The traditional data centers and traditional workloads supporting.
<unk> six.
And but it just may be too early to really for us to figure out whether that is that cannibalization.
Thank you hock.
Thank you one moment our next question.
And that will come from the line of <unk> Srivastava with BMO capital markets. Your line is open.
Alright, Thank you very much hawk.
Les <unk>.
Sexy topic to talk about but obviously very important in how you manage the business can you talk about lead times and especially in the light of demand moderating.
Factoring cycle times coming down not to mention the six month that you highlighted for the cutting edge can you still staying with the 52 week kind of quoting.
According to customers.
Or has that changed thank you.
And by the way is 50, yes, my standard lead time for our products.
Is 50 weeks and we are still staying with it because it's not about as much lead time to manufacture the products.
Yes.
Our interest and frankly.
Actual interest between our customers and ourselves to take a hard look at providing visibility.
For us in ensuring we can supply and supply in the right amount at the right time.
Requirements. So yes, we are still sticking to 50 weeks.
Thank you Chuck.
Thank you one moment for our next question.
And that will come from the line from harsh Kumar with Piper Sandler.
Yes, Hey, Howard coverage.
Hoping you could clarify something for us I think earlier in the beginning of the call. When you gave your commentary you said that Jenny I revenues are 15% at today. They will go to 25% by the end of 2024, that's practically all your growth for three 4 billion that youll growth.
Looking at your commentary I know your core business is doing really well, so I know that I am probably misinterpreting it but I was hoping that that maybe there's not so many hoping that there is no cannibalization going on in your business, but maybe you could clarify for us.
And so from an earlier question by a peer of yours.
We do not see.
Obviously, we don't know we do not see cannibalization.
But these are early innings relatively speaking.
Just don't change that rapidly if there's cannibalization obviously it comes from where the spending goes in terms of priority.
Obvious to us.
<unk>.
Clarity.
To be able to tell you there's cannibalization none in the list and by the way if you look at the.
<unk> that all the growth is coming from it.
Youre right.
As we.
Sit in 'twenty, three and we still show some level of growth.
I would say.
We still show growth in the in the rest of our business in the rest of our products.
Mentor.
That growth is augmented.
The growth in AI.
<unk> revenue and delivering an AI product, but it's not entirely all our growth I would say.
The growth is still on our traditional business. The other half maybe out of January deep AI.
Thank you so much.
Thank you one moment for our next question.
Okay.
And that will come from the line of Karl Ackerman with BNP Paribas. Your line is open.
Yes. Thank you for taking my question.
Hock you rightly pointed to the custom silicon opportunity.
That supports your cloud AI initiatives.
However, your AI revenue, that's not tied to custom silicon appears to be doubling in fiscal 'twenty three.
And the outlook for fiscal 'twenty four it implies that it will double again.
Obviously broadcom has multiple areas of exposure to AI really across pcie switches, Tomahawk, and Jericho and Vermont, Asics and electro optics, yes.
I guess, what sort of opportunity do you see your electric optics portfolio, playing a role in high performance networking environments.
For inferencing and training AI applications.
Yeah.
No.
What you said is very very insightful.
It's.
A big part of our growth now in AI comes from the networking.
Components that were supplying into creating this.
Ethernet fabric for AI clusters in fact, a big part of it you hit on.
The rate of growth that is probably faster than our offload computing can grow.
And Thats, where we are focused on as I say our networking products.
Merchant standard products supporting.
The very rapid growth of <unk>.
January Steve AI clusters holiday in the compute side and for US this growth in the networking site is really the first part of the growth.
Thank you.
Thank you one moment for our next question.
Okay.
That will come from the line of Joseph Moore with Morgan Stanley . Your line is open.
Great. Thank you.
To ask about the renewal of the wireless contract.
Can you give us a sense for.
How much sort of concrete visibility you have into content.
Over the duration of that and just you mentioned, it's both RF and wireless connectivity just any other additional color you can give us would be great.
Okay, well I don't want to be what's my view on nitpicky.
This is an extension I would call it of our existing long term agreement and it's an extension.
In the form of a collaboration and strategic arrangement.
Is the best way to describe it it's not really a renewal.
But the characteristics are similar which is through a supply technology supplier products in certain in the bunch of very.
Specific products related to five G components, and wireless connectivity, which is our strength, which is the technology we keep.
Leading in the marketplace, and it's multi year and beyond that.
I've truly.
I refer you to our 8-K and not provide any more specifics simply because our sensitivities all around.
Great. Thank you.
Thank you one moment for our next question.
And that will come from the line of Christopher Rolland with Susquehanna. Your line is open.
Mr. Rowan your line is open.
Okay, we'll move on to the next question.
And that will come from the line of Toshi Hari with Goldman Sachs. Your line is open.
Hi, Thank you so much for taking the question.
Hock I'm curious, how you're thinking about.
Sure.
Semiconductor business long term.
<unk> discussed AI pretty extensively throughout this call.
Could this be something that that drives higher growth for your semiconductor business on a sustained basis I think historically you've given.
<unk> lead.
Subdued or muted growth rates for your business vis vis many of your competitors is this something that can drive sustained.
The growth acceleration for your business and if so how should we think about the rate of R&D for us going forward as well because I think your peers are growing R&D faster than.
What you guys are doing thank.
Thank you.
Very very good question. So sure well we are still a very broadly diversified semiconductor company as I pointed out with multiple was still multiple end markets.
Beyond just AI, most of which AI revenue happen to sit in my networking segment of the business as you all noted.
And Youll see so we still have plenty, others and and even as I mentioned for fiscal 'twenty fall. Our view is that it could hit over 25% of our.
Semiconductor revenue, we still have many large number of underpinnings.
For the rest of our semiconductor business I mean, our wireless business <unk> has a very strong lease of life for multi years, and that's a big chunk of business.
And just at the in the AI business appears to be trying to catch up to it in terms of the size, but our broadband service storage enterprise business continues to be very very sustainable.
And when you mix it all up I don't know, we haven't updated our focus long term.
So Tokyo I really have nothing more to add than what we already told you in the past we did have it make a difference in our long term growth rate.
Don't know, we havent thought about it.
I'll leave it to you to probably speculate before I put anything on paper.
I appreciate it thank you.
Thank you one moment for our next question.
And that will come from the line of William Stein with <unk> Securities. Your line is open.
Great. Thank you.
I'm wondering if you could talk about your foundry relationships I know you've got a very strong relationship with TSM and of course until it's been very vocal.
About winning new customers.
Potentially I wonder if you can talk about your flexibility and openness in considering new partners and then maybe also talk about pricing from foundry and whether thats influencing.
Any changes quarter to quarter, there have been certainly a lot of <unk>.
This increases that we've heard about recently I'd love to hear your comments. Thank you.
Thank you.
We tend to be very loyal.
To our suppliers. The same reason, we look at customers the same.
In that same manner.
Cuts both ways for us so thats deep abiding loyalty to all our key suppliers.
Having said that we also have to be very realistic of the geopolitical environment. We have today and so we are also very open to looking at.
In certain specific technologies to broaden our supply base and we have taken steps to constantly look at it.
Much as we still continue to want to be very loyal and fair to our existing base. So no.
So we continue that way and because of that partnership and loyalty.
For us price increase.
Is something that is a very long term thing.
As part of the overall relationship.
Then.
And put it simply we don't move.
Just because of prices.
We.
Stay put.
Because of support service.
<unk> abiding sense of.
Gary abiding sense of commitment mutually.
Thank you.
Thank you one moment for our next question.
And that will come from the line of Edward Snyder with charter equity Research. Your line is open.
Yes.
Thank you very much.
Basically housekeeping question it sounded like your comments in the press release on the wireless deal did not include mixed signal, which is part of your past agreement.
You seem to have said today doesn't suggest that may not be the mix you mentioned wireless and RF.
You are also doing a lot of mixed signals of two so for every quarter.
And now also why shouldn't we expect the increase interest and Jim AI to increase the prospects if not the orders immediately for the electro optic products that are coming down physically, but I would think that would be much greater demand given the clusters and the size of these arrays that people track because the government would provide.
I think in power with it.
Some color on that thanks.
Alright, you have two questions here you all don't you.
And what was the two part question I was going to do a three.
Thank you I Love you guys with your multi part questions.
Let's do the first one you're right our.
Long term collaboration agreement that we recently announced.
It includes as it indicated wireless wireless connectivity.
And <unk> components.
It does not include the high performance edge.
Analog components mixing all components.
We also sell to that North American OEM customer.
Alright that doesn't make it any less I would add.
Strategic non deeply engage with each other.
I would.
Definitely.
Ed.
And on the second part and if you could indulge me could you repeat that question.
Yeah, So you're talking about generally II and the increasing demand that youre seeing from.
Hyperscale guys and we are already seeing how big these questions you get and it's really putting a stress on your network the assets, but I would think given given the size of the laser facing will be busy.
Electro optic products that you're releasing next in Tomahawk fiber to leasing next year.
So with tonnage on the chip.
<unk> will lead to more attractive because significantly uses the power requirements and I know <unk> has not been deployed but I would think that interested in that should increase in a wrong.
Youre not wrong all of this as I indicated upfront in my remarks script remarks, yes, we see our next generation coming Tomahawk Fyfe.
Which we'll have silicon photonics, which is co packaging as a key part of the offering.
Non dimension that is growing up to 51 Terabits per second then cut cut true bandwidth is exactly what you wanted to put in place for very high demanding.
AI networks, especially those AI and then it will start running two.
30 over 32000, GPU clusters running at 800 gigabit per second then you really need a big amount of switching because those kind of networks as I mentioned have to be very low latency.
Yes.
Virtually lossless Ethernet <unk> calls for some.
Interesting science and technology in order to Meg Ethernet losses, because by definition Ethernet tense, who haven't traditionally but the technology is there to make it in losses. So all of this fits in with a new generation of products and not to mention our Jericho three AI, which is <unk>.
The router.
Yes.
A unique differentiator.
Differentiated technology.
That allows for very very low pale latency.
<unk>.
In terms of how it transmits and reorder packets. So that there is no loss and very little latency.
And Thats exists in network routing in telcos, which we now apply to AI networks in a very effective manner and thats a whole new generation of products. So yes, we're leaning into this opportunity with our networking technology and next generation.
Products very much. So so you hit it right on and which is what makes it very exciting for us in AI in the networking area networking space that we see most interesting opportunities.
Thank you one moment for our next question.
And that will come from the line of Anton <unk> with New Street Research. Your line is open.
Hi, Thank you very much for the question I'll stick to a single part question.
Can you maybe double click on your compute offload business.
What can you maybe tell us about.
How growth could split between revenues from existing customers.
Potential diversification.
That business going forward. Thank you.
Thank you good question.
An hour.
Reiterate the answers in some other ways that given to certain other.
Pete of audience, we have asked me this question.
We really have only one rail customer one customer.
In my forecast in my in my remarks, so far and offload computing.
It's pretty much very very largely around one customer is not very diversified is very focus.
That's a compute offload business.
Thank you one moment for our next question.
And that will come from the line of C. J Muse with Evercore ISI.
Hey, Thank you this is Kurt swartz on for CGI.
Wanted to just touch on software gross margins, which continue to tick higher alongside softness and brocade curious what sort of visibility you may have entered brocade stabilization and how we should think about software gross margins as mix normalizes. Thank you.
Okay well.
Our corn our software segment comprises you hit it correctly two parts, that's our call software.
Products revenues.
And sold directly to enterprises and this.
The typical infrastructure software products.
They are multiyear contracts and we have done and we have a lot of backlog something like $17 billion of backlog averaging over almost 253 years.
In every quarter above that renewals and we give you the data on it so very stable.
And given our historical pattern of of <unk>.
Renewing on expanding consumption of a core group of customers, we tend to drive that in a very stable manner and the growth rate is very very predictable and we're happy with that.
When we overlay on that.
Business that is software, but also very appliance different in the sand the fiber channel San business of Brocade, and Thats very enterprise driven very rare muscle youll only used by enterprises obviously.
And large enterprises that debt and it is.
Fairly cyclical business.
And last year was a very strong up cycle and this year not surprisingly the cycle or not is strong, especially compared year on year to the very strong numbers last year.
So this will this is the <unk>.
Phenomenon. This the outcome of the combining the two is what we're seeing today.
Given another my view next year the cycle could turn around and broke brocade would go on and then instead of a 3% year on year growth in this whole segment, we could end up with.
High single digits year on year growth rate.
Because the call software revenue as I've always indicated you guys plan long term on mid single digit year on year grocery.
And thats, the very predictable part of our numbers.
Thank you.
And today's final question.
Will come from the line of Vijay Rakesh with Mizuho. Your line is open.
Hi, Hock just a quick I'll keep it a two part question for you to wrap up so.
Just wondering what the content uplift.
Broadcom is on an AI services general compute so and if you look at Jared to AI.
So as today are being outfitted for Tim as you look.
You have such a dominant share of that and where do you see that.
Take ratio, if we're going to do AI and yet if you look at fiscal 'twenty four 'twenty five.
And sorry to disappoint you on your two parts, but it's too early for me to be able to give you a good answer a very definitive answer on that.
And sorry to disappoint you on your two parts, but it's too early for me to be able to give you a good answer a very definitive answer on that.
Because.
Yeah.
The majority of service today.
Your traditional servers.
Driving.
X 86, Cpus and net working today.
Very very.
Still running Ethernet traditional.
Data center networking because most enterprises.
Virtually all enterprises today.
Every months deal running.
They are on traditional servers on exited <unk> generated for AI is something so new.
And in a way so there.
What the limits of it saw extended debt, what we largely see today.
At the Hyperscale guys.
In terms of deploying <unk>.
Scale.
And it does generate.
Infrastructure enterprises continue to shift.
Deploy and operate.
Standard <unk> six servers and.
Ethernet networking in the traditional data centers and so that's still so what we're seeing today, maybe early part of the whole cycle. There is a question which is why im.
I cannot be I cannot give you any definitive view or opinion of what how what the attach rate what the ratio will be or if there is any stability that could be achieve anywhere in the near term.
We both we see bolt running.
And coexisting very much together.
Alright.
Thank you thanks.
Thank you I would now like to turn the call over to you for any closing remarks.
Thank you operator in closing we would like to highlight that Broadcom will be attending the Bofa Global Technology Conference on Tuesday June six.
Broadcom currently plans to reported earnings for the third quarter of fiscal 2003 after close of market on Thursday August 30.
Good morning, Gary.
Public webcast comes earnings conference call will follow at two P M Pacific that.
That will conclude our earnings call today. Thank you all for joining operator, you may end the call.
Thank you all for participating. This concludes today's program you may now disconnect.
Okay.
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