Q1 2024 Broadcom Inc Earnings Call
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Operator: Hello and welcome to Broadcom Inc.'s First Quarter Fiscal Year 2024 Financial Results Conference Call. At this time, for opening remarks and introductions, I will turn the call over to Ji Yoo, Head of Investor Relations of Broadcom Inc. You may begin. Thank you, operator, and good afternoon everyone.
Speaker Change: Hello, and welcome to Broadcom, Inc. First quarter fiscal year 2024 financial results Conference call.
Speaker Change: At this time for opening remarks, and introductions I will turn the call over to Jay <unk> head of Investor Relations of Broadcom, Inc. You may begin.
Jay: Thank you operator, and good afternoon, everyone.
Ji Yoo: Joining me on today's call are Hock Tan, President and CEO, Kirsten Spears, Chief Financial Officer, and Charlie Kawas, President, Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the first quarter of fiscal year 2024. If you did not receive a copy, you may obtain the information from the Investor section of Broadcom's website at Broadcom.com.
Jay: Joining me on today's call are Hock Tan President and CEO.
Jay: Houston's spirits, Chief Financial Officer, and Charlie Clause, President semiconductor solutions group.
Speaker Change: Broadcom distributed a press release and financial tables after the market close describing our financial performance for the first quarter of fiscal year 'twenty 'twenty four.
Speaker Change: If you did not receive a copy you may obtain the information from the investors section of Broadcom website at Broadcom dotcom.
Ji Yoo: This conference call is being webcast live, and an audio replay of the call can be accessed for one year through the investor section of Broadcom's website. During the prepared comments, Hock and Kirsten will be providing details of our first quarter fiscal year 2024 results, guidance for our fiscal year 2024 as well as commentary regarding the business environment. We'll take questions after the end of our prepared comments. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. In addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. I'll now turn the call over to Hock.
Speaker Change: This conference call is being webcast live and then audio replay of the call can be accessed for one year to the investors section of Broadcom website.
Speaker Change: During the prepared comments Hawkins Kirsten will be providing details of our first quarter fiscal year 2024 results.
Speaker Change: For our fiscal year 2024, as well as commentary regarding the business environment, We will take questions. After the end of our prepared comments.
Speaker Change: 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.
Speaker Change: In addition to U S GAAP reporting Broadcom reports certain financial measures on a non-GAAP basis a.
Speaker Change: A reconciliation between GAAP and non-GAAP measures is included in the tables attached to todays press release.
Speaker Change: Comments made during today's call will primarily refer to are non-GAAP financial results I'll now turn the call over to Hawk.
Hock E. Tan: Thank you, Ji. And thank you everyone for joining us today. In our fiscal Q1 2024, consolidated net revenue was $12 billion, up 34% year-on-year as revenue included ten and a half weeks of contribution from VMware, including VMWare. consolidated revenue was up 11% year-on-year. Semiconductor Solutions revenue increased 4% year-on-year to $7.4 billion, and Infrastructure Software revenue grew 153% year-on-year to $4.6 billion. With respect to infrastructure software, revenue contribution from consolidating VMware drove a sequential jump in revenue by 132%. We expect continued strong bookings at VMware will accelerate revenue growth through the rest of fiscal 2024. AI revenue quadrupled year-on-year to $2.3 billion during the quarter, more than offsetting the current cyclical slowdown in enterprise and telcos. Now, let me give you more color on the two reporting segments, starting with software. Q1.
Hawk: Thank you Qi <unk>.
Hawk: And thank you everyone for joining us today.
Hawk: Fiscal Q1 2012 before consolidated net revenue was $12 billion up 34% year on year.
Hawk: This revenue included.
Hawk: And then they have weeks of contribution from Vmware.
Excluding Vmware.
Hawk: Consolidated revenues.
Hawk: 11% year on year.
Hawk: Semiconductor solutions revenue increased 4% year on year to 774 billion.
Hawk: In infrastructure software revenue grew 153% year on year to $4 6 billion.
Hawk: With respect to infrastructure software revenue contribution from consolidating <unk> drove a sequential jump in revenue by 132%.
Hawk: We expect continued strong bookings at Vmware will accelerate revenue growth through the rest of fiscal 'twenty to 'twenty four.
Hawk: In semiconductors.
Hawk: Revenue quadrupled year on year to $2 $3 billion during the quarter.
Hawk: More than offsetting the current sick sick cyclical slowdown in enterprise and telcos.
Now, let me give you more color on our two reporting segments.
Hawk: <unk> software.
Hock E. Tan: Software segment revenue of $4.6 billion was up 156% year-on-year and included $2.1 billion in revenue contribution from VMware. Consolidated bookings in software grew sequentially from less than 600 million to $1.8 billion in Q1 and is expected to grow to over $3 billion in Q2. Revenue from VMware will grow double-digit percentages sequentially quarter over quarter through the rest of the fiscal year. This is simply a result of our strategy with VMware. We are focused on upselling customers, particularly those who are already running their compute workloads with vSphere virtualization tools, to upgrade to VMware Cloud Foundation, otherwise branded as VCS. VCF is the complete software stack integrating compute, storage, and networking that virtualizes and modernizes our customers' data centers. This on-prem self-service cloud platform provides our customers a complement and an alternative to public cloud. And, in fact, on a VM Explore last August.
Hawk: Q1.
Hawk: Software segment revenue of $4 6 billion was up 156% year on year and included $2 1 billion in revenue contribution from Vmware.
Hawk: Consolidated bookings in software grew sequentially from less than $600 million.
Hawk: Two 1 billion.
Hawk: Bill in Q1.
Hawk: And is expected to grow to over 3 billion in Q2.
Hawk: Revenue from Vmware will grow double digit percentage.
Sequentially quarter over quarter through the rest of the fiscal year.
This is simply a result of our strategy with Vmware.
Hawk: Our focus on Upselling customers, particularly those who are already running their compute workloads with V sphere virtualization tools dropped Curry two Vmware Cloud Foundation.
Hawk: Otherwise branded as Vcs.
Hawk: Tcf is a complete software stack integrating compute storage and networking that virtualized us and modernize our customers data centers.
Hawk: This on Prem self service cloud platform provides our customers a compliment.
Hawk: And then alternative to public cloud.
And in fact.
Hawk: VM explore lots of August.
Hock E. Tan: VMware and NVIDIA entered into a partnership called VMware Private AI Foundation, which enabled VCF to run GPUs. This allows customers to deploy their AI models on premises and wherever they do business without having to compromise on privacy and control of their data, and we are seeing this capability drive strong demand for VCS from enterprises seeking to run their growing AI workloads on PREP. Reflecting all these factors, for the full year, we reiterate our fiscal 2024 guidance for software revenue of $20 billion. Turning to semiconductors, before I give you an overall assessment of this segment, let me provide more color by end markets. Q1 networking revenue of $3.3 billion grew 46% year-on-year, representing 45% of our semiconductor revenue. This was largely driven by strong demand for our custom AI accelerators at our two hyperscale customers. This strength extends beyond AI accelerators. I want the latest generation of Tomahawk 5 800G switches.
Hawk: Yes.
Hawk: Nvidia entered into a partnership called Vmware Private foundation, which enables vcs to run Gpus.
Hawk: This allows customers to deploy AI models on Prem.
Hawk: And wherever they do business without having to compromise on privacy and data and control of their data.
Hawk: And we're seeing this capability drive strong demand for vcs tremendous prizes seeking to run their growing AI workloads on Prem.
Reflecting all these factors for the full year.
Hawk: We reiterate our fiscal 'twenty to 'twenty four guidance for software revenue of $20 billion.
Turning to semiconductors before I give you an overall assessment of this segment.
Hawk: Let me provide more color by end markets.
Hawk: Q1 networking revenue of $3 3 billion grew 46% year on year.
Hawk: Representing 45% of our semiconductor revenue.
Hawk: This was largely driven by strong demand for our custom AI accelerators.
Hawk: Our two hyperscale customers.
Hawk: This strength extends beyond accelerators.
Hawk: Our latest generation Tomahawk 581 hundred G switches.
Hock E. Tan: Thor 2, Ethernet NICs, Re-Timers, DSPs, and Optical Components are experiencing strong demand at hyperscale customers, as well as large-scale enterprises deploying AI data centers. For Fiscal 2024, given the continuous strength of AI networking demand, we now expect networking revenue to grow over 35% year-on-year, compared to our prior guidance for 30% annual growth. Moving on to wireless, Q1 wireless revenue of $2 billion decreased 1% sequentially and declined 4% year-on-year, representing 27% of semiconductor revenue.
Hawk: Thought to Ethernet, Nic retirements, DSP and optical components.
Hawk: Experiencing strong demand at Hyperscale customers.
Hawk: As well as large scale enterprises deploying AI data centers.
Hawk: For fiscal 2020 fall given continued strength of AI networking demand.
Hawk: Now expect networking revenue to grow over 35% year on year compared to our prior guidance for 30%.
Hawk: Annual growth.
Hawk: Moving onto wireless Q1 wireless revenue of $2 billion decreased 1% sequentially and declined 4% year on year.
Hawk: Presenting 27% of semiconductor revenue.
Hock E. Tan: As you all may know, the engagement with our North American customers continues to be very deep, strategic, and, of course, multi-year, and in fiscal 2024, helped by content increases. We reiterate our previous guidance for wireless revenue to be flat year on year next. Our Q1 Service Storage Connectivity and Revenue was $887 million, or 12% of semiconductor revenue, down 29% year-on-year. We are seeing fierce demands in the first half, but expect recovery in the second half. Accordingly, we are revising our outlook for fiscal 24 service storage revenue to decline in the mid-20 percentage range year-on-year compared to prior guidance for high teens percentage decline year-on-year. On broadband, Q1 revenue declined 23% year-on-year to $940 million, and represented 13% of semiconductor revenue.
Hawk: As you all may know their engagement with our North American customer continues continues to be very deep strategic and of course multi year.
And in fiscal 'twenty to 'twenty four.
Hawk: Helped by content increases.
Hawk: We reiterate our previous guidance for wireless revenue to be flat year on year.
Hawk: Next our Q1 server storage connectivity revenue was 887 million or 12% of semiconductor revenue down 20, 29% year on year.
Hawk: We are seeing weaker demand in the first half, but expect recovery in the second half.
Currently we are revising our outlook for fiscal 'twenty four server storage revenue.
Hawk: A decline in the mid 20 percentage range year on year compared to prior guidance for high teens percentage decline year on year.
Hawk: On broadband Q1 revenue declined 23% year on year to $940 million Andrew.
Hawk: <unk> represented 13% of semiconductor revenue.
Hock E. Tan: We are seeing a cyclical trough this year for broadband as telco spending continues to weaken, and we do not expect improvement until later in the year. And accordingly, we're revising our outlook for fiscal 24 broadband revenue to be down 30% year-on-year from our prior guidance of down mid-teens year-on-year. And finally, Q1 industrial resales of $215 million declined 6% year-on-year.
Hawk: We are seeing a cyclical trough. This year for broadband is telco spending continues to weaken and do not expect improvement until late.
Hawk: In the year.
Hawk: And accordingly, we are revising our outlook for fiscal 'twenty for broadband revenue to be down 30% year on year from our prior guidance of down mid teens.
Hawk: Yeah.
Hawk: And finally Q1 industrial resales of $215 million declined 6% year on year.
Hock E. Tan: In fiscal 24, we continue to expect industrial resale to be down high single digits year upon year. And, in summary, with stronger than expected growth from AI. More than offsetting the cyclical weakness in broadband and server storage, Q1 semiconductor revenue grew 4% year-over-year to $7.4 billion. Turning to Fiscal 24,
Hawk: In fiscal 'twenty, four we continued to expand industrial resales to be down high single digits year upon year.
Hawk: And in summary, with stronger than expected growth from AI.
Hawk: More than offsetting the cyclical weakness in broadband and server storage Q1 semiconductor revenue grew 4% year over year to $7 4 billion.
Hawk: Turning to fiscal 'twenty four.
Hock E. Tan: We reiterate our guidance for semiconductor solution revenue to be up mid to high single digit percentage year on year. I know we told you in December our revenue from AI would be 25% of our full year semiconductor revenue. We now expect revenue from AI to be much stronger, representing some 35% of semiconductor revenue at over $10 billion, and this more than offsets weaker than expected demands in broadband and service storage. So for fiscal 2024, in summary, we reiterate our guidance for consolidated revenue to be $50 billion, which represents 40% year-on-year growth, and we reiterate our full year adjusted EBITDA guidance of... 60%. Before I turn this call over to Kirsten, who will provide more details of our financial performance this quarter, let me just highlight that Broadcom recently published its fourth annual ESG report, available on a corporate citizenship site, which discusses the company's sustainability initiatives.
Hawk: We reiterate our guidance for semiconductor solutions revenue to be up mid to high single digit percentage year on year.
Hawk: I know we told you in December our revenue from AI would be 25% of our full year semiconductor revenue.
Hawk: We now expect revenue from AI to be much stronger representing some 35% of semiconductor revenue at over $10 billion and this more than offset weaker than expected demand in broadband and server storage.
Hawk: <unk>.
Hawk: So for fiscal 2024 in summary, we reiterate our guidance for consolidated revenue to be $50 billion, which represents 40% year.
Hawk: On year growth and we reiterate our full year adjusted EBITDA guidance of <unk>.
Hawk: 60%.
Hawk: Before I turn this call over to kiss them, who will provide more details of our financial performance this quarter.
Kirsten M. Spears: Let me just highlight that Broadcom recently published its fourth annual ESG report available on our corporate citizenship site, which discusses the company's sustainability initiatives as a global technology leader, we recognize broadcom responsibility to connect our customers employees and <unk>.
Hock E. Tan: As a global technology leader, we recognize Broadcom's responsibility to connect our customers, employees, and communities. Through our product and technology innovation and operational excellence, we remain committed to this mission. Thank you, Hock.
Kirsten Hawkins: Ladies.
Kiss Them: Through our product and technology innovation and operational excellence, we remain committed to this mission.
Kiss Them: Yeah.
Kirsten M. Spears: Let me now provide additional detail on our Q1 financial performance, which was a 14-week quarter and included 10.5 weeks of contribution from VMware. Consolidated revenue was $12 billion for the quarter, up 34% from a year ago. Excluding the contribution from VMware, Q1 revenue increased 11% year-on-year, and gross margins were 75.4% of revenue in the quarter. Operating expenses were $2.2 billion, and R&D was $1.4 billion, both up year-on-year primarily due to the contribution from VMware. Q1 operating income, including VMware, was $6.8 billion and was up 26% from a year ago, with operating margin at 57% of revenue. Excluding transition costs of $226 million in Q1, operating profit of $7.1 billion was up 30% from a year ago, with operating margin of 59% of revenue, and adjusted EBITDA of $7.2 billion or 60% of revenue. This figure excludes $139 million in depreciation.
Speaker Change: Thank you Hock, let me now provide additional detail on our Q1 financial performance, which was a 14 week quarter and included $10 five weeks of contribution from Vmware.
Speaker Change: Consolidated revenue was 12 billion for the quarter up 34% from a year ago.
Speaker Change: Excluding the contribution from Vmware Q1 revenue increased 11% year on year.
Speaker Change: Gross margins were 75, 4% of revenue in the quarter.
Speaker Change: Operating expenses were $2 2 billion and R&D was $1 4 billion, both up year on year, primarily due to the contribution from Vmware.
Speaker Change: Q1, operating income, including Vmware was $6 8 billion and was up 26% from a year ago with operating margin at 57% of revenue.
Speaker Change: Excluding transition costs of $226 million in Q1 operating profit of $7 1 billion was up 30% from a year ago with operating margin of 59% of revenue.
Speaker Change: Adjusted EBITDA was $7 2 billion or 60% of revenue.
This figure excludes 139 million of depreciation.
Kirsten M. Spears: Now a review of the P&L for our two segments, starting with Semiconductor. Revenue for our Semiconductor Solutions segment was $7.4 billion and represented 62% of total revenue in the quarter. This was up 4% year on year. Gross margins for our semiconductor solution segment were approximately 67%, down 190 basis points year-on-year, driven primarily by product mix within our semiconductor end market. Operating expenses increased 8% year-on-year to $865 million, reflecting a 14-week quarter, resulting in semiconductor operating margins of 56%.
Speaker Change: Now a review of the P&L for our two segments starting with semiconductor.
Revenue for our semiconductor solutions segment was $7 4 billion and represented 62% of total revenue in the quarter. This was up 4% year on year.
Speaker Change: Gross margins for our semiconductor solutions segment were approximately 67% down 190 basis points year on year, driven primarily by product mix within our semiconductor end markets.
Speaker Change: Operating expenses increased 8% year on year to $865 million, reflecting a 14 week quarter, resulting in semiconductor operating margins of 56%.
Kirsten M. Spears: Now moving on to our infrastructure software segment. Revenue for infrastructure software was $4.6 billion, up 153% year-on-year, primarily due to the contribution of VMware, and represented 38% of revenue. Gross margins for infrastructure software were 88% in the quarter, and operating expenses were $1.3 billion in the quarter, resulting in an infrastructure software operating margin of 59%. Excluding transition costs, operating margin was 64%. Moving on to cash flow, free cash flow in the quarter was $4.7 billion and represented 39% of revenues on a higher revenue base. Excluding restructuring and integration spend of $658 million, free cash flows were 45% of revenue.
Speaker Change: Now moving onto our infrastructure software segment.
Revenue for infrastructure software was $4 6 billion up 153% year on year, primarily due to the contribution of Vmware and represented 38% of revenue.
Speaker Change: Gross margins for infrastructure software or 88% in the quarter and operating expenses were $1 3 billion in the quarter, resulting in infrastructure software operating margin of 59%.
Speaker Change: Excluding transition costs operating margin was 64%.
Speaker Change: Moving onto cash flow.
Speaker Change: Free cash flow in the quarter was $4 7 billion and represented 39% of revenues off a higher revenue base, excluding restructuring and integration spend of 658 million free cash flows were 45% of revenue we.
Kirsten M. Spears: We spent $122 million on capital expenses. Day sales outstanding were 41 days in the first quarter compared to 31 days in the fourth quarter due to higher accounts receivable due to the VMware acquisition. The accounts receivable we brought on from VMware has payment terms of 60 days, unlike Broadcom's standard 30 days. We ended the first quarter with inventory of $1.9 billion, up 1% sequentially. We continue to remain disciplined in how we manage inventory across the ecosystem. We ended the first quarter with $11.9 billion of cash and $75.9 billion of gross debt.
We spent 122 million on capital expenditures.
Speaker Change: Days sales outstanding were 41 days in the first quarter compared to 31 days in the fourth quarter on higher accounts receivable due to the Vmware acquisition.
Speaker Change: The accounts receivable, we brought on from Vmware has payment terms of 60 days. Unlike Broadcom standard 30 days.
We ended the first quarter with inventory of $1 9 billion up 1% sequentially. We continue to remain disciplined on how we manage inventory across the ecosystem.
We ended the first quarter with $11 9 billion of cash and $75 9 billion of gross debt the weighted average coupon rate in years to maturity of our 48 billion in fixed rate debt is three 5% and eight four years respectively.
Kirsten M. Spears: The weighted average coupon rate and years to maturity of our $48 billion in fixed rate debt are 3.5% and 8.4 years, respectively. The weighted average coupon rate and years to maturity of our $30 billion in floating rate debt are 6.6% and 3 years, respectively. During the quarter, we repaid $934 million of fixed rate debt that came due.
Speaker Change: The weighted average coupon rate in years to maturity of our 30 billion in floating rate debt is six 6% and three years respectively.
Speaker Change: During the quarter, we repaid $934 million of fixed rate debt that came due.
Kirsten M. Spears: This week, we repaid $2 billion of our floating rate debt, and we intend to maintain this quarterly repayment of debt throughout fiscal 2024. Turning to capital allocation, in the quarter, we paid stockholders $2.4 billion in cash dividends, based on a quarterly common stock cash dividend of $5.25 per share.
Speaker Change: This week, we repaid 2 billion of our floating rate debt and we intend to maintain this quarterly repayment of debt throughout fiscal 2024.
Speaker Change: Turning to capital allocation.
Speaker Change: In the quarter, we paid stockholders $2 4 billion of cash dividends.
Speaker Change: Based on our quarterly common stock cash dividend of $5 25 per share we executed on our plan to complete our remaining share buyback authorization, we repurchased $7 2 billion of our common stock and eliminated $1 1 billion of common stock for taxes due on vesting of employee equity.
Kirsten M. Spears: We executed on our plan to complete our remaining share buyback authorization. We repurchased $7.2 billion of our common stock and eliminated $1.1 billion of common stock for taxes due on the vesting of employee equity, resulting in the repurchase and elimination of approximately 7.7 million AVGO shares. To help you with modeling the share count, the weighted effect of the 54 million shares issued for the VMware acquisition resulted in a sequential increase in Q1 to 478 million, with the Q2 non-gap diluted share count expected to increase to approximately 492 million as the shares issued are fully weighted in the second quarter. Now on to Guy...
Speaker Change: QWERTY, resulting in the repurchase and elimination of approximately $7 7 million AVG O chairs.
Speaker Change: To help you with modeling share count the weighted effect of the 54 million shares issued for the Vmware acquisition resulted in a sequential increase in Q1 to 478 million with the Q2 non-GAAP diluted share count expected to increase to approximately 492 million as the shares issued or.
Fully weighted in the second quarter.
Speaker Change: Now onto guidance.
Kirsten M. Spears: Regardless of the updated dynamics of our semiconductor and software segments Hock discussed, we choose to reiterate our guidance for fiscal year 2024, consolidated revenue of $50 billion, and adjusted EBITDA of 60%. With regard to VMware, in February, we signed a definitive agreement to divest the end-user computing... With the transaction expected to close in 2024, subject to customary closing conditions, including regulatory approvals, the EUC division has been classified as discontinued operations in our Q1 finances. We have decided to retain the Carbon Black business and merge Carbon Black with Symantec to form Enterprise Security. The impact on revenue and profitability is not significant.
Speaker Change: Regardless of the updated dynamics of our semiconductor and software segments Hock Hock discussed we choose to reiterate our guidance for fiscal year 2024, consolidated revenue of 50 billion and adjusted EBITDA of 60%.
Speaker Change: With regard to Vmware in February we signed a definitive agreement to divest the end user computing.
Speaker Change: With the transaction expected to close in 2024 subject to customary closing conditions, including regulatory approvals. The AUC Division has been classified as discontinued operations in our Q1 financials.
Speaker Change: We have decided to retain the carbon black business and merged carbon black with Symantec to form the enterprise security group the impact on revenue and profitability is not significant.
Operator: That concludes my prepared remarks. Operator, please open up the call for questions. Thank you. Ladies and gentlemen, to ask a question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again.
Speaker Change: That concludes my prepared remarks, operator, please open up the call for questions.
Speaker Change: Thank you Les.
Speaker Change: Ladies and gentlemen to ask a question. Please press star one on your telephone and then wait to hear your name announced two.
Speaker Change: Withdraw your question. Please press star one again.
Harsh V. Kumar: We ask that you limit yourself to one question only. Please stand by while we compile the Q&A roster. Our first question comes from the line of Harsh Kumar with Piper Sandler.
Speaker Change: I ask that you limit yourself to one question only.
Speaker Change: Are you, saying, Bob I'll be compiled Q&A roster.
Speaker Change: Our first question comes from the line of harsh Kumar with Piper Sandler Your line is open.
Hock E. Tan: Your line is open. Yeah, hey, thank you, Hock. Once again, tremendous results and tremendous activity that you guys are benefiting from in AI. But my question was about software. I think if I heard you correctly, Hock, you mentioned that your software bookings will rise quite dramatically to $3 billion in 2Q. I was hoping that you could explain to us why it would rise almost 100%, if my math is correct, in 2Q over 1Q. Is it something simple, or is it something that you guys are doing from a strategic angle that's making this happen?
Harsh V. Kumar: Yes, Thank you hock.
Harsh V. Kumar: Once again tremendous resolve and tremendous activity that you guys are benefiting from an AI, but my question was on software I think if I heard you correctly Hock you mentioned that your software bookings will rise quite dramatically the $3 billion in <unk>.
I was hoping that you could explain to us why it would rise almost 100% up if my math is correct in Tokyo over <unk> is it something simple or is it something that you guys are doing from a strategy angle, that's making this happen.
Hock E. Tan: And as I indicated, with the acquisition of VMware, we're very focused on selling, upselling, and helping customers not just buy but deploy this private cloud, what we call the virtual private cloud, solution, or platform on their on-prem data center. It has been very successful so far, and I agree, it's still in the early innings at this point. We just closed on the deal, what? We closed on the deal late November, and we are now in early March. So we had the benefit of at least three months, but we have been very prepared to launch and focus on this PUSH initiative on the private cloud, VCF, and the results have been very much what we expected them to be, which have been very, very successful. Thank you all.
Speaker Change: Uh huh.
As I indicated.
With the acquisition of Vmware, we're very focus.
Speaker Change: On.
Selling upselling and helping customers not just by but deploy.
Speaker Change: This private cloud.
Speaker Change: We called virtual private cloud.
Speaker Change: Solution our platform on their on Prem data centers.
It has been very successful so far.
Speaker Change: Greece early innings still at this point, we just have close on the deal what we close on the deal late November and we are now March early March. So we had the benefit of at least three months, but we have been very prepared to launch and focus on this us.
Speaker Change: Push initiative on private club Vcs.
Speaker Change: The results has been very much what we expect it to be which is very very successful.
Speaker Change: Thank you hock.
Harlan Sur: Thank you. Please stand by for our next question. Our next question comes from the line of Harlan Sur with J.P. Morgan. Your line is open. Yeah, good afternoon.
Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Harlan sur with J P. Morgan Your line is open.
Hock E. Tan: Thanks for taking my question. Hock, on the AI outlook being revised, you know, from greater than seven and a half billion, I think last quarter to 10 billion plus this quarter, you know, as you mentioned, AI compute pulls your ASICs, but it also pulls your networking, optical, and PCIe connectivity solutions as well. So you can just help us understand what the two and a half billion increase in outlook is about, is it stronger AI ASIC demand, stronger networking, stronger optical, etc. And, more importantly, are you also seeing a similar acceleration in your forward ASIC design wind pipeline as well? There are a lot of questions, a lot of information you want me to disgorge. Let's take them one at a time, shall we?
Harlan Sur: Yeah. Good afternoon. Thanks for taking my question Hock on the on the outlook being revised.
Harlan Sur: From a greater than 75 billion and I think last quarter.
Harlan Sur: 10 billion plus this quarter you know as you mentioned, yes.
Harlan Sur: <unk> pulls your asics, but it also pulls your networking optical pcie connectivity solutions as well. So you can just help us understand like of that $2 5 billion increase in outlook is it stronger.
Harlan Sur: If demand stronger network, even stronger optical et cetera, and but more importantly are you also seen a similar acceleration in your board design.
Harlan Sur: Design win pipeline as well.
Speaker Change: There's a lot of questions a lot of information you wanted me to disgorge, So let's take them one at a time shall we yeah, Chris as we've said before ever shown before.
Hock E. Tan: Yeah, they increase, as we have said before, as we have shown before, it's roughly two-thirds, one-third, or 70-30, which is AI accelerators, which are Custom A6 AI accelerators with a couple of hyperscalers compared to the other components, which I collectively consider as networking components, and it's about 70-30% mixed, and that increase of almost $3 billion that you mentioned is a similar combination. And then are you seeing a similar acceleration on the forward design wind pipeline and customer engagements? I only have two. I really only have two.
Speaker Change: Roughly two thirds, one third or 70, 30, which is AI accelerators, which are.
Speaker Change: Custom ASIC AI accelerators.
Speaker Change: A couple of Hyperscale as compared to net compared to the other components, which are collectively consider as networking components.
Speaker Change: And it's about 70, 30% mix and that increase of.
Speaker Change: Almost $3 billion.
Speaker Change: You mentioned.
Speaker Change: It is a similar combination.
Speaker Change: And then are you seeing a similar acceleration on the floor design win pipeline and customer engagements I only.
Speaker Change: Kate I only have two really only have to seriously I don't count anybody I do not go into production.
Hock E. Tan: Seriously, I don't count anybody; I don't go into production as a real customer at this point. Okay. Thanks, Hock.
Speaker Change: Our rail customer at this point.
Kate: Okay. Thanks Hock thanks.
Vivek Arya: Thanks. Please stand by for our next question. Our next question comes from the line of Vivek Arya with Bank of American Security. Your line is open.
Speaker Change: Please standby for our next question.
Our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.
Hock E. Tan: Thank you for taking my question. Hock, again, on the over $10 billion for AI, is this still a supply-constrained number? Or do you think that this is kind of a very project-driven number, so it's not really supply that gates it? So if you were to get, let's say, increased supply, could there be upside? And then kind of part B of that is, on the switching side, have you already started to see benefits from the 51 terabits per second switches? Or is that something that comes along later? Like, what is the contribution of 51T to the switching upside that you mentioned for this? Uh, yeah, no, our, our, our Tomahawk five.
Vivek Arya: Thank you for taking my question Hock on again on the over $10 billion for AI is this.
Vivek Arya: Supply constrained number or.
Vivek Arya: Or do you think that.
Vivek Arya: This is kind of a very project driven number so it's not really supply that gateway. So do you know if you were to get let's say increased supply could there be upside and then kind of part b of that is on the switching side have you already started to see benefits from the <unk> 51 that a bit.
Vivek Arya: Second switches that that's something that comes along later like what is the contribution of 51.
Vivek Arya: Two the switching upside that you mentioned for this year.
Speaker Change: Oh, Yeah no our.
Our tomahawk five.
Hock E. Tan: He's going great guns now, but unlike in the past, Tomahawk-3, and Tomahawk-4 are driven by traditional scale-out in hyperscalers on their cloud environment. This is all largely coming from scaling out of AI data centers, the building of larger and larger clusters to enable generative AI computing functionality, and you're going forth bigger and bigger pipes. Hence, the Tomahawk 551 terabit is a perfect solution
Speaker Change: He is going great guns, no, it's not driven unlike in the past.
Speaker Change: Top three top four by traditional scale out in Hyperscale as Onvia.
Speaker Change: Cloud environment. This is all largely coming from a scaling out of AI data centers, the building of larger and larger clusters too.
Speaker Change: Enable generative AI computing functionality, and youre going for bigger and bigger pipes and <unk>.
Speaker Change: 551, terabyte is a perfect solution and we're seeing a lot.
Hock E. Tan: And we're seeing a lot of demand. And in many cases, basically, they are surpassing the rate of adoption that we previously thought. So it is a very good solution for connecting GPUs. And with respect to AI accelerators, where I think you are focusing on, is that a constraint on the supply chain? We do get enough lead time out of our hyper-scale customers that we do not have a supply chain constraint. Thank you.
Speaker Change: A lot of demand.
And in many cases, we are basically they are surpassing the rate of adoption that we had previously thought so it is it is a it's a very good solution in connecting Gpus.
Speaker Change: And with respect to.
Speaker Change: True.
Speaker Change: Accelerate this.
Speaker Change: I think you are focusing on is that a constraint on supply chain.
Speaker Change: We do get enough lead time out of our Hyperscale customers that we don't we do not have a supply chain constraints.
Speaker Change: Thank you.
Stacy Aaron Rasgon: Please stand by for our next question. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is open.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Stacy <unk> with Bernstein Research. Your line is open.
Hock E. Tan: Hi guys, thanks for taking my question. I had a question about the core software business. You said VMware for the two months it was in there was $2.1 billion, which would put the rest of the software, CA Semantic and Brocade, at like two and a half and be up like 25% sequentially and almost 40% year over year. I guess the question is, do I have my math right? And if so, like, how can that be?
Stacy: Hi, guys. Thanks for taking my question I have a question on the core software business. So you said Vmware for the two months that was in there was $2 1 billion would you put the rest of the software CA Symantec and brocade that like two and a half almost it would be up about 25% sequentially and almost 40% year over year. I guess question is do I have my math right.
Hock E. Tan: What's going on in the core business? And how should we be thinking about the growth of the core business in VMware as we go through the year? Or is VMware still just $12 billion? Yeah, don't get too excited over that.
Stacy: And if so like how cannot be with what's going on in the core business and how should we be thinking about.
Stacy: The growth of the core business and Vmware as we go through the years at Vmware, So 12 billion or.
Stacy: Don't get too how do we think.
Speaker Change: Don't get too excited over that I think it's a it's certain products contracts we obtained.
Hock E. Tan: Don't get too excited over that. I think it's certain products, contracts we obtain, but they're very strong. Contract renewals in the older, from old Broadcom contracts, especially mainframes, were very strong, as were some of our other distributed software platforms. So that has also accelerated. But that's not the style of this show, Stacy.
Speaker Change: But it's very strong contract renewals in the older from old Broadcom.
Speaker Change: Contracts, especially mainframes well very strong as was our some of our other disparate distributors software platform. So that has also accelerated.
Speaker Change: But that's not our style. This show Stacy stopped this show is decelerating bookings and backlog we are accumulating on Vmware.
Hock E. Tan: The style of this show is the accelerating bookings and backlog we are accumulating on VMware. Okay, so VMware is still running at like an $11 or $12 billion run rate, then if it's so, that sounds like that should accelerate. So the overall value of VMware should be more than the $12 billion that you talked about. So the core business, the strength of core, that was kind of a one time we should model that kind of falling off because we still got the overall software at 20. [inaudible] Got it.
Okay. So we're still running at like an 11 or $12 billion run rate benefits. So that sounds like that should accelerate so the overall for Vmware should be more than the 12 billion you talked about so the core business. The strength. This quarter that was kind of a onetime we should model that kind of like falling off because I'm sure that the overall software it 20 <unk>.
Stacy Aaron Rasgon: Okay. Thank you. Thank you.
Correct.
Speaker Change: Got it okay. Thank you.
Aaron Christopher Rakers: Please stand by for our next question. Thank you. Our next question comes from the line of Aaron Rakers with Wells Fargo. The line is open.
Speaker Change: Thanks.
Speaker Change: Standby for our next question.
Speaker Change: [laughter].
Speaker Change: Our next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.
Hock E. Tan: Yeah, thanks for taking the question. I wanted to kind of continue on the VMware discussion a little bit, you know, Hock, now that you've had the asset for a little while, I'm curious how you, how the go-to-market strategy looks with VMware relative to the prior software acquisitions that you've done. What I'm really getting at is kind of like, you know, how have you kind of thought about the segmentation of the customer base for VMware? Are you, I know there's been some discussion around your channel engagements, you know, the legacy VMware channel in the past. So I'm just kind of curious how you've been managing to go to market. Oh, I think... Now, we haven't had it for that long, to be honest, like three months, about three months.
Yes, thanks for taking the question.
Aaron Christopher Rakers: I wanted to ask kind of continuing on the Vmware discussion a little bit.
Aaron Christopher Rakers: Now that you've had the asset for a little while I'm curious of how you how the go to market strategy looks with Vmware relative to the prior software acquisitions that you've done at what I'm really getting at is kind of like.
Aaron Christopher Rakers: How have you kind of thought about the segmentation of the customer base of Vmware are you I know there's been some discussion around your channel engagement legacy Vmware channel in the past. So I'm just kind of curious how you've been managing that go to market.
Aaron Christopher Rakers: I think.
Speaker Change: No we haven't had it for that long to be honest three months, but about three months, but yeah. It's.
Speaker Change: And it seems to be no known that kinks to be worked out but things seem to be progressing very well as much as we had hoped it would because.
Speaker Change: We are focusing our go to market.
Hock E. Tan: It seems to be, there are things to be worked out, but things seem to be progressing very well, as much as we had hoped they would. Because where we are focusing our go-to market, and more than just go-to market, where we are focusing our resources on, not just going to market but on engineering a very improved VCF tank which we have and selling it out there and being able to then support it in the process. Get Help Customers Deploy and start to really make it stand up in your data centers. All that focus is on the largest.
Speaker Change: More than go to market, where we are focusing.
Speaker Change: Our resources on don't just go to market, but on engineered engineering, a very improved vcs stake, which we have.
And selling it out there and being able to then support and event and in the process.
Speaker Change: Help customers deploy.
Speaker Change: And start to really make it stand up in their data centers. All the focus is on the largest.
Speaker Change: I would say.
Speaker Change: Uh huh.
Speaker Change: 2000 strategic customers. These are guys, who want to still have significant.
Hock E. Tan: I would say 2,000 strategic customers. These are guys who want to still have a significant distributed data center on brand. You know, many of our customers are looking at a hybrid situation. I'm not trying to use the word too loosely.
Speaker Change: Sure.
Speaker Change: Distributed data center on Prem.
Speaker Change: Many of our customers.
Speaker Change: Looking at a hybrid situation not trying to use the word.
Hock E. Tan: Basically, a lot of these customers have some... Very old but critical mainframes. That's an old platform, not growing, except that it's still vital. Then what they have in modernizing workloads today and in the future is they really have a choice, which they are taking both angles on, of running a lot of applications in data centers on-premises, distributed data centers on-premises, which can handle these modernized workloads. While at the same time, being able to also put some of these applications into the public cloud. Today's environment...
Speaker Change: Stu loosely basically a lot of these customers has some.
Speaker Change: Very legacy, but critical mainframe.
Speaker Change: That's the old platform not growing.
Except it's still vital.
What they have two more in modernizing workloads today and in the future is they really have a choice which they take.
Speaker Change: Taking both both angles of running a lot of applications in data centers.
Speaker Change: On Prem distributed data centers on Prem, which can handle this modernized workloads.
Speaker Change: While at the same time too because of elastic demand to be able to also put some of these applications into public cloud.
Speaker Change: Today's environment.
Hock E. Tan: Most of these customers do not have an on-premises data center that resembles what's in the cloud, which is very high availability, very low latency, highly resilient, which is one we are offering with VMware Cloud Foundation of VCF. It exactly replicates what they get in a public cloud, and they love it. Now, it has been three months, but we are seeing it in the level of bookings we have generated over the last three months. Thank you. Please stand by for our next question. Our next question comes from the line of Chris Dangley with Citi. Your line is open.
Speaker Change: Most of these customers do not have.
Speaker Change: The on Prem data center.
Speaker Change: Resembles what is in the cloud, which is very high availability.
Speaker Change: Very low latency.
Hi, Lee resilient.
Speaker Change: Which is what we are offering with Vmware Cloud Foundation of VCA is exactly replicate what they get in a public cloud.
Speaker Change: And they love it.
All three months.
Speaker Change: And but we are seeing it in the level of bookings we are generating over the last three months.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Chris Danley with Citi. Your line is open.
Christopher Adam Jackson Rolland: Hey, thanks gang for letting me... Hey Hock, just a question on the AI upside in terms of a customer perspective, how much of the upside is coming from new versus existing customers, and then how do you see the customer base going forward. I think it's going to broaden, and we know how you like to... Hopefully, I... Oh, Chris, thanks for this question. I love it.
Christopher Adam Jackson Rolland: Hey, Thanks for letting me ask a question Hey, Hock just a question on the AI upside in terms of a customer perspective, how much of the upside is coming from new versus existing customers and then how do you see the customer base going forward I think it's going to broaden and we know how you like to.
Christopher Adam Jackson Rolland: Price. So if you do get a bunch of new customers for these products could there be some better better pricing and better margins as well hopefully aren't listening to the call.
Christopher Adam Jackson Rolland: Oh.
Hock: Chris Thanks for this question love it.
Hock E. Tan: And because perhaps let me try to... Perhaps give you a sense of what we think of the AI market, the new generative AI market, so to speak, using it very loosely and generically as well. It's really, we see it as two broad segments. One sentiment is hyperscaling, especially very large hyperscalers with huge, huge consumer subscriber bases. You probably can guess who these few people are.
Speaker Change: Because perhaps let me try to.
Speaker Change: Perhaps give you a sense how we think.
Christopher Adam Jackson Rolland: Of the AI market, the new generative AI market, so to speak using it very loosely and generically as well its really we see it as two and Mark two broad segments.
Christopher Adam Jackson Rolland: One segment.
Christopher Adam Jackson Rolland: Is type of scale is especially very large hyperscale is.
Christopher Adam Jackson Rolland: Huge huge consumer subscriber base you probably can guess will this few people are very large subscriber base and very almost infinite amount of data.
Hock E. Tan: Very large subscriber base and a large and almost infinite amount of data. And our model is... to keep getting subscribers, to keep using this platform they have and, through that, be able to generate a better experience for not only the subscribers but a better advertising opportunity for their advertising clients. It's a great ROI.
And our model is.
Christopher Adam Jackson Rolland: Getting subscribers to keep using.
Christopher Adam Jackson Rolland: This.
Christopher Adam Jackson Rolland: Platform they have.
Christopher Adam Jackson Rolland: And through that be able.
Christopher Adam Jackson Rolland: <unk> to generate a better experience.
Christopher Adam Jackson Rolland: For not only the subscribers, but a better advertising opportunity for Dr advertising clients.
Christopher Adam Jackson Rolland: It's a great ROI.
Hock E. Tan: As we are seeing, it's a ROI that comes very quickly, and the investment continues vigorously with that segment, comprising very few players but with a huge subscriber base but with a scale to invest a lot. ASICs, custom silicon, custom AI accelerators make plenty of sense, and that's where we focus that attention. They also buy, as they scale up those AI accelerators through clusters, increasing large clusters, because of the way the models are running, the foundation models run, and large language models need to generate those parameters.
Christopher Adam Jackson Rolland: As we are seeing.
Christopher Adam Jackson Rolland: Rewind that comes very quickly and the investment continues vigorously with dose.
Christopher Adam Jackson Rolland: With that segment.
Christopher Adam Jackson Rolland: Pricing very few players.
Christopher Adam Jackson Rolland: But we've got a huge subscriber base, but with the scale to invest a lot in here.
Christopher Adam Jackson Rolland: Eight six custom silicon custom AI accelerators makes plenty of sense, and that's where we focus their attention on day also buying as they scale up those AI accelerators true clusters, increasing large clusters because of the way the model is that running the founder.
Christopher Adam Jackson Rolland: Models run and lush language models need to generate those parameters they buy a lot of networking together with it.
Hock E. Tan: They buy a lot of networking equipment together with it, but obviously, to the value of the AI accelerators we sell. Now, the networking side, while growing, is a small percentage compared to the size and value of the accelerators. That's one big segment we have.
Christopher Adam Jackson Rolland: In comparison.
Speaker Change: Yes, Lee to the value of AI accelerators, we sell.
Speaker Change: The network working side, while growing is small percentage compared to the size the value of the accelerators. That's one big segment. We have the other segment, we have which are smaller.
Hock E. Tan: The other segment we have, which is smaller, is the enterprise, what I broadly call the enterprise segment in AI. Here you're talking about companies, large, not so large, but large, who want to do, who have AI initiatives going on. You know, all this big news and hype about AI being the savior of productivity and all that gets all these companies on multiple, on their own initiatives. And here... You know, short of going to the public cloud, they try to run it on-premises.
Speaker Change: And the price what I broadly call Enterprise segment, an AI here Youre talking about companies launch not so large, but large who wants to do.
Speaker Change: AI initiatives going on you know all this big news and hype about AI being the Savior two productivity and all of that gets all these companies on multiple on their own initiatives and chin.
Sort of going to public cloud they tend to run it on Prem.
Hock E. Tan: If they try to run it on-prem, they take standard silicon from AI accelerators as much as possible. And here, in terms of the AI accelerator, we don't have a market; that's the merchant silicon market. On the networking side, as they tie it together with their data centers, they do buy all of those, our networking components, beginning with switches, routers, even, through people like the Arista 7800, but switches, for sure, and the various other components I mentioned. And that's a different sense of the market that we have. So it's an interesting mix, and we see both.
Speaker Change: Try and run it on Prem they take standard silicon for AI accelerators, it as much as possible and here in terms of the AI accelerator, we don't have a market that's a merchant silicon market, but.
Speaker Change: In the networking site as they tie it together with their data centers. They do buy all of those our networking components beginning the switches routers, even true people at Arista 7800 about switchers for Sean.
Speaker Change: And the various other components I mentioned and that's a different sense.
Speaker Change: That we have so it's an interesting mix and we see both.
Karl Ackerman: Well, thanks a lot, Hock. Thank you. Please stand by for our next question. Our next question comes from the line of Karl Ackerman with BNP Paribas. Your line is open.
Well, thanks, a lot hock.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Karl Ackerman with BNP Paribas. Your line is open.
Hock E. Tan: Yes, thank you. Hock, weakness in broadband server and storage customers is understandable given what your peers have said this earnings season, but perhaps you could speak to the backlog visibility you have with your customers in those markets that would indicate those markets could begin to order again and see sequential growth in the second half of your calendar year. Thank you.
Karl Ackerman: Yes, Thank you hock.
Karl Ackerman: Weakness in broadband server and storage customers is understandable given what your peers have said this earning season, but perhaps you could speak to the backlog visibility you have with your customers in those markets that would indicate those markets could begin to order again and see sequential growth in the second half calendar year. Thank you.
Karl Ackerman: Yeah.
Edward Francis Snyder: We are, as I say, we are almost near the trough, this year 24, first half for sure will be the trough, second half 24, don't know yet, but we have a 52-week lead time, as you know, we are very disciplined speaking to it, and based on that, we are seeing bookings, lately, are significantly up from bookings a year ago. Thank you. Please stand by for our next question, which comes from the line of Christopher Rolland with Susquehanna. Your line is open. Thanks for the question. So Hock, this one's for you on optical.
Speaker Change: Youre correct.
Speaker Change: As I say, we are on we are almost like near the trough.
Speaker Change: This year 24 first half for sure will be.
Speaker Change: The trough second half journey for Danone, yet, but what we have 52 week lead time as you know, we're very disciplined sticking to it and based on that we are seeing bookings.
Speaker Change: Lately.
Speaker Change: Significantly up from bookings.
Speaker Change: A year ago.
Yeah.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Our next question comes from the line of Christopher Roland with Susquehanna. Your line is open.
Christopher Adam Jackson Rolland: Thanks for the question.
So hock this one's for you.
Christopher Adam Jackson Rolland: On the optical so our checks suggest.
Christopher Adam Jackson Rolland: So our checks suggest that you're vertically integrating there. You're now putting in your own drivers, TIAs. You're starting to get traction in PAM4DSP, and I think you kind of had an early lead in 100 gigabit data center lasers as well. And this is, a lot of this should be on the back of AI networking that appears to be exploding here. So I was wondering if you could help us size the market and then also talk about how fast this is growing for you. I think there may have been some clues in that one-third number of the AI you gave us, but perhaps if you could kind of double click or square that for us, it'd be great.
Christopher Adam Jackson Rolland: That you are vertically integrating there you.
We're now putting in your own drivers TIAA is.
Hock: You're starting to get traction and Pam four DSP.
Hock: Hum.
Hock: And I think you kind of have an early lead and 100 gig data center lasers as well.
Hock: And this is all a lot of this should be on the back of AI networking appears to be exploding here.
Speaker Change: So I was wondering if you could help us size the market and then also talk about how fast this is growing for you.
Speaker Change: There may have been some clues in that one third number that you gave us, but perhaps if you can kind of double click or square that for us it would be great. Thanks, Okay before before you get carried away. Please.
Hock E. Tan: Thanks. Okay, before you get carried away, please. And those in the other categories outside AI accelerators, all those things like PEM4, DSPs, optical components, and diamonds. They are small compared to Tomahawk switches and Jericho routers used in AI networks. And also, we are in an environment where, as you all know, traditional enterprise networking is kind of in a bit of a slowdown phase. So all we're seeing is demand driven very much by AI. And that tends to push us in a line of thinking that could be very biased because what it is showing is that the mix and the content of networking relative to compute is very obscure, and very different in an AI data center compared to a traditional CPU-based data center. So, I don't want to get you guys all in the wrong way, but you're right, in an AI data center, there's a lot of, there's quite a bit of content. On DSPs, PAMFOs, optical components, re-timers, and PCI Express switches.
Speaker Change: And those in the other categories outside AI accelerators, all those things the Pam four DSP is optical components in <unk>.
Speaker Change: <unk>.
Speaker Change: Yes, it's small compared to tomahawk switches and <unk>.
Speaker Change: <unk> routers, using AI networks, and also being in an environment where.
Speaker Change: As you all know that traditional enterprise networking is kind of also in a bit of a slowdown law so always sing.
Demand driven very much by AI and that tends to push us in a line of thinking that could be very biased because.
Speaker Change: What it is showing is that the mix.
Speaker Change: Andy and the content on networking relative to compute is very bumpy SKU are very different from <unk>.
Speaker Change: And on the AI data center compared to.
Speaker Change: Traditional CPU based data center, so I don't want to get your guys all in the wrong way, but you're right in the AI data center. There's a lot of there is a quite a bit of content.
Speaker Change: On DSP spend falls or optical components, and re timers and PCI express switches, but they are still not that big in the overall scheme of things compared to what we sell in switches and routers and compared to AI accelerators.
Hock E. Tan: But they're still not that big in the overall scheme of things compared to what we sell in switches and routers. And compared to AI accelerators... They are even small.
Hock E. Tan: I think in that ratio, as I said, AI revenue of $10 billion plus this year, 70% will be AI accelerators, 30% everything else. And within that everything else, 30% or so, I would say... More than half of that 30%, more like 20%, are switchers and routers. And the rest are the various DSP components that are being retired. Because, unlike what you said, we're not vertically integrated in the sense we do not make the entire transceiver, the optical transceiver. We don't do that. Those are typically manufactured by OEMs, contract manufacturers like Inolite, and E-Optolink guys in China. Those guys are much more competitive.
Small.
Speaker Change: Thinking in that ratio as I say, all right ER revenue of 10 million plus this year, 70% will be AI accelerators, 30% everything else and within that everything else, 30% or so.
Speaker Change: Say.
Speaker Change: More than half of that 30% more like 20% or the switches and routers.
Speaker Change: And the rest are the command other various three time, a DSP components, because we were not.
Speaker Change: And like what you said, we're not vertically integrated integrated in the sense, we do not do the entire transceiver. The optical transceiver. We don't we don't do that those are manufactured typically by Oems contract manufacturers like in online.
Speaker Change: Tolling guys in China, where they're and those guys are much more competitive.
Hock E. Tan: But we provide those key components we talk about. So when you look at it that way, you can understand the kind of weighting of the various values. Super helpful. Thank you, Hock. Thank you. Our next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open.
Speaker Change: Those key components, we talked about so when you look at it that way you can understand the kind of the weighting of the various values.
Speaker Change: Super helpful. Thank you hock.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Yes.
Speaker Change: Our next question comes from the line of <unk> Hari with Goldman Sachs. Your line is open.
Toshiya Hari: Hi, thank you for taking the question. Hock, I think we all appreciate the capabilities you have in terms of custom computing. I asked this question last quarter on the group callback, but there is one competitor based in Asia who continues to be pretty vocal and adamant that one of the future designs at your largest customer, they may have some share. And we're picking up conflicting evidence, and we're getting a bunch of investor questions.
Hari: Hi, Thank you for taking the question Hock.
Hari: I think we all appreciate that.
Capabilities you have in terms of custom compute.
Hari: I asked the question last quarter on the group call back, but there is one.
Hari: Competitor based in Asia, who continues to be pretty vocal in adamant.
Hari: One of the future designs at your largest customer that they may have some share.
Hari: We're picking up conflicting evidence and we're getting a bunch of investor questions. I was hoping you could address that in and your confidence level in sort of maintaining if not extending your youre positioned there. Thank you.
Hock E. Tan: I was hoping you could address that and your confidence level and sort of maintaining, if not extending, your position there. Thank you. You know, I can't stop somebody from trash-talking, okay?
Speaker Change: I can't stop somebody from trash talking Okay is the best way to describe it.
Hock E. Tan: It's the best way to describe it. Let the numbers speak for themselves, please, and leave it that way. And I add to that. Like most things we do in terms of large, critical technology products, we tend to always have, as we do here, a very deep... Strategic and Multi-Year Relationship with our customers. I understand. Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Vijay Rakesh with Mazuhu. Your line is open.
Speaker Change: Let the numbers speak for themselves. Please.
I'll leave it that way and I add to it.
Speaker Change: Like most things we do in terms of large critical technology products.
Speaker Change: We tend.
Speaker Change: Tend to always have as we do here.
Speaker Change: Very deep strategic and multiyear relationship with our customer.
Speaker Change: Understood.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Jay with Quiche with Mizuho. Your line is open.
Vijay Raghavan Rakesh: Hi Hock, just on the custom silicon side, obviously, you guys dominate that space, but you mentioned two customers, only two major customers, but I was just wondering what's really holding back other hyperscalers from, you know, ramping up their custom silicon side? And on the flip side, you're hearing some peers talk about custom silicon roadmaps as well, so if you could hit both, thank you. Well, number one, we don't dominate this market. We only have two. I can't be dominating it, too.
Jay: Yeah, Hi, Hock, just under custom Silicon side, obviously, you guys dominate that space.
Jay: But you mentioned two customers two customers.
Jay: Youre only two major customers, but just wondering what's really holding back other hyperscale as some.
Jay: Ramping up their custom silicon side.
Jay: And on the flip side, you're hearing some peers talk about custom silicon roadmaps as well. So if you could hit book Thanks.
Jay: Well.
Jay: Number one we don't dominate this market I only have two.
Jay: I can be dominating it too and number one number two the second point is.
Hock E. Tan: And number one, number two, the second point is that it's very, it takes years. It takes a lot of heavy lifting to create that custom silicon because you need to do more than just hardware or silicon to really have a solution for generative AI or even AI in trying to create those AI capabilities in your data centers. It's more than just silicon. You have to invest a lot in creating software. Model that works on your custom silicon that matches your business model in the first place, which leads to and creates... Foundation Models, which then need to work and optimize on the custom silicon you're developing.
Jay: It's very it's it takes it takes years it takes a lot of heavy lifting to create that custom silicon because you need to do more than just hardware our silicon.
Jay: To really have a solution for January.
Jay: Or even AI from China and trying to create this.
Jay: <unk> capabilities in Europe.
Jay: Data centers, it's more than just silicon you're doing you have to invest a lot in creating software.
Jay: Models.
Jay: That works on your custom Silicon that matches you got to match your business model in the first place.
Which leads to two and create.
Jay: Our foundation models, which then needs to work and optimize on the custom silicon developing so it's an iterative process and it's a constantly evolving process even for the same customer we deal with I mentioned that in our lives.
Hock E. Tan: So it's an iterative process, and it's a constant evolving process, even for the same customer we deal with. I mentioned that in the last call. So it takes... Yo!
Jay: US Gulf So it takes you.
Hock E. Tan: to really understand or to be able to basically reach a point where you can say that, hey, I'm finally delivering production-worthy material, and it's not because silicon is bad. It's because it doesn't work well with the foundation models that a customer put in place and the software layer that works with it, the firmware, and the software layer that translates into it. All that has to work. You're almost creating an entire ecosystem on a limited basis, which we recognize very well in x86 CPUs, but in GPUs, those kind of AI accelerators, something still at a very early stage.
Jay: Yes.
Jay: Really understand or b to be able to basically.
Jay: Basically it reach a point, where you can say that hey, I'm finally, delivering production, we'll see and it's not because silicon is bad because it doesn't work well with the foundation model that the customer put in place and a software layer that what's driven the firmware the software layer that translates.
Jay: Do it all of that has to work.
Jay: Almost like creating an entire ecosystem.
Jay: In a limited basis, which we recognize very well in <unk> six Cpus, but in Gpus those kind of all.
Jay: Accelerators, some things still very early stage. So it takes years and for our two customers. We are engaged for years.
Hock E. Tan: So it takes years. And for our two customers, we have been engaged for years. With one of them, we have been engaged for eight years to get to this point. You have to be very patient, persevere, and hope, then.
Jay: One of them, we are engaged for eight years to get to this point.
Jay: So it's something you have to be very patient.
Jay: Persevere and hope.
Hock E. Tan: I hope that everything lines up because ultimate success, if you are just a silicon developer, is not just dependent on you but depends as much, if not more, on your partner or customer doing it. So I just got to be patient, guys. I've got the two only so far, and on the peers coming into that. Who is getting to the market? Please, repeat.
Jay: And then.
Jay: Hope that everything lines up because ultimate success. If you had the just the silicon developer is not just dependent on you, but dependent as much if not more on your cost your partner or customer doing it.
Jay: So.
Jay: It just got to be patient and guys I got the two only so far.
Jay: And on the on the peers kind of getting into that market.
Speaker Change: Who is getting to the market please repeat.
Hock E. Tan: You talk about some of your peers, like I think NVIDIA has been talking about entering the custom silicon market. Oh, the custom silicon market! I have no comment to make on it.
Speaker Change: You talk about some of your peers like Nvidia has been talking about entering the custom silicon luck at all Scott.
Speaker Change: Yeah.
Speaker Change: No comment to be made on it all I do say is I have no interest in going into a market way.
Hock E. Tan: All I do say is I have no interest in going into a market where... You know, we have a philosophy for running our business, Broadcom, and maybe other people have a different philosophy. Let me tell you my simple philosophy, which I've articulated over time, every now and then, but which is very clear to my management team and to the whole of Broadcom. You do what you're good at. And you keep doubling down on things you know you are better than anybody else. And you just keep doubling down because nobody else will catch up to you if you keep running ahead of the pack.
Scott: You know we have a philosophy in running our business Broadcom and maybe other people have a different philosophy. Let me tell you my simple philosophy whichever articulated overtime every now and then but which is very clear to my management team and do the whole broadcom.
Scott: You do what you're good at and you do you keep doubling down on things you know you are better than anybody else and you just keep doubling down because nobody else will catch up to you. If you keep running of the bank, but do not do something that you think you can do.
Hock E. Tan: But do not do something that you think you can do, but somebody else is doing a much better job than you are. That's my philosophy. Thanks Hock. Thank you. Will you stand by for our next question? Our next question comes from the line of Matt Ramsay with TD Cohen.
Scott: But somebody else is doing much better job than you are.
Speaker Change: That's my philosophy.
Hock: Right. Thanks Hock.
Great: Great. Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Matt Ramsay with TD Cowen Your line is open.
Matthew D. Ramsay: Your line is open. Thank you very much for squeezing me in, guys. Just kind of a two-part thing on the custom silicon stuff. I guess, Hock, if some of the merchant leaders in AI were interested in some custom networking stuff from you either in switching routing, would you consider it? And the second question is for Kirsten.
Matthew D. Ramsay: Thank you very much for squeezing me in guys.
Matthew D. Ramsay: Kind of a two part thing on the custom silicon stuff I guess pocket.
Matthew D. Ramsay: If some of the merchant leaders in AI.
Matthew D. Ramsay: We're interested in some custom networking stuff from you either in switching routing would.
Matthew D. Ramsay: Would you consider it.
Speaker Change: And the second question is for gears then.
Hock E. Tan: The business model around custom silicon for most folks is to take NRE payments up front and sell the end product at a lower gross margin but a higher operating margin, and you guys have ramped up this massive custom business with no real impact on gross margin. So maybe you could just unpack the philosophy and the accounting about the way that you guys approach the custom silicon opportunities just from a margin perspective. Thanks, guys. I'll take this.
Speaker Change: The business model around custom silicon.
Speaker Change: This focuses.
Speaker Change: Hey, Ken are repayments upfront.
Ken: So the end product at a lower gross margin, but a higher operating margin and.
Ken: You guys had rapids massive custom business with no real impact to gross margins. So maybe you could just unpack the philosophy and the accounting about the way that you guys approach that the custom silicon opportunity just from a margin perspective, thanks guys.
Hock E. Tan: Because you're asking about the business model, you're not really asking about number crunching. So let me try to answer in this way. No, there's no particular reason, short of what constitutes and Eeya Essaleri.
Speaker Change: I'll take that.
Speaker Change: Because youre asking business model.
Speaker Change: Asking really number crunching. So let me try to answer in this way no. There's no particular reason.
Speaker Change: Short of what constitutes.
Hock E. Tan: An AI accelerator, the way it's configured now, whether it's the merchant or it's custom, has a lot. For an AI accelerator to run foundation models very well, it needs not just a whole bunch of floating point multipliers to do matrix multiplication, and matrix analysis on regression. That's the logic part. The compute part, it comes with access to a lot of memory, literally almost cache memory tied to it. The chip is not just a simple multiplier; it has memory attached to it. It's almost like a layered, three-dimensional chip, which it is.
Speaker Change: The AI accelerators.
And AI accelerate the way its configured now.
Speaker Change: There is a merchant always custom has a law.
Speaker Change: It's an AI accelerators to run foundation models very well no.
Speaker Change: It's not needs not just a whole bunch lots of floating point multipliers to do matrix multiplication matrix.
Speaker Change: It's not needs not just a whole bunch lots of floating point multipliers to do matrix multiplication matrix.
Speaker Change: Atrix analysis on regression, that's the logic part.
Speaker Change: Compute.
Speaker Change: It comes you have to come with.
Speaker Change: Access to a lot of memory literally almost cash memory tied to the chip is not just a simple multiplying it has it comes attached to it memory.
Speaker Change: It's almost a layer three dimensional chips is it Richard is.
Hock E. Tan: Memory is not something we are, any of us in the AI accelerator field, super good at designing or building. So we buy the memory from very specialized high bandwidth memory, you all know about that, from key memory suppliers. Every one of us does that. So you pile the two together, and combine the two together; that's what an AI accelerator is.
Memory is not something we are.
Speaker Change: Any of us in the AI accelerators are super good at designing or building.
Speaker Change: We buy the memory from very specialized high bandwidth memory and you all know but from key memory suppliers every one of US does that so you probably.
Speaker Change: Due to combine the two together thats, one and accelerate days, so even if I get very good net normal amount.
Hock E. Tan: So even if I get very good, normal, marginal, corporate silicon gross margin on my Compute Logic chip for multipliers, there's no way I can apply that kind of add-on margin to the high bandwidth memory, which is a big part of the cost of the total chip. And so, by simple math,
Speaker Change: Corporate silicon gross margin or might.
Speaker Change: Compute logic chip on multipliers.
Speaker Change: The only way I can apply that kind of add on margin to the high bandwidth memory, which is a big part of the cost of the total chip and so naturally by simple math.
Hock E. Tan: It will hold an entire consolidated AI accelerator, and brings a gross margin below what a traditional silicon product we have out there. No going away from that because you are adding on memory, even though we have to create the access, the IOs that attach it, we do not and could not justify adding that kind of margin to memory. Nobody could do it for us.
Speaker Change: It will that hold a entire consolidated AI accelerator brings a gross margin below what a traditional.
Speaker Change: Silicon product, we have out there no going away from that because youre, adding on.
Speaker Change: Memory, even though we had to create the excess the I OS that attach it.
Speaker Change: We do not and could not justify and taking that kind of margin to memory nobody could for us. So it brings that natural margin, that's really the simple basis to it but on the logic part of it sure with the kind of content with a kind of IP and that we developed cutting.
Hock E. Tan: So it brings in the natural law of the margin. That's really the simple basis for it. But on the logic part of it, sure, with the kind of content, and the kind of IP that we develop, cutting-edge, to make those high-density floating-point multipliers on 800 square millimeters of advanced silicon, we can command a margin similar to our corporate gross margin. Thank you. Please stand by for our next question. Our next question comes from the line of Edward Snyder with Charter Equity Research. Your line is open. Thanks a lot. First, a housekeeping one if I could, Hock. You mentioned the second customer, but you also mentioned that it takes years of work iteratively. I mean, anybody who's looked at the TPU history, I guess, understands that.
Speaker Change: <unk> to make those high.
Speaker Change: High density high density floating point multi multipliers on 800 square millimeters of events Silicon, We can command the margins similar to our corporate gross margin.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Edward Snyder with Charter equity Research. Your line is open.
Thanks, a lot first of all housekeeping, one if I could hock.
Edward Francis Snyder: You mentioned the second customer usage customer, but you also mentioned that it takes years of work iteratively anybody who's looked at the TPU history, I guess understands.
Edward Francis Snyder: And you've said before that it takes time to wrap things up, but maybe you could give us a little bit of color. You said phenomenal growth in your custom silicon products. Is much or a material part of that coming from your second customer? And taking into account the low revenue number, is the growth rate, generally speaking, fairly comparable?
Edward Francis Snyder: And you've said before that it takes time to wrap it up so, but maybe you could give us a little bit of color is a nominal growth in custom silicon products is much or a material part of that coming from your second customer and.
Edward Francis Snyder: Taking into account the lower revenue number as the growth rate generally speaking fairly comparable.
Hock E. Tan: And then I had a question about VMware. You better go on to VMware customers because, first, I don't want to talk about my customers individually, sorry. Okay. Well, okay, never mind. That's a waste of time.
Speaker Change: And then I had a question about them.
Speaker Change: But the Vmware.
Speaker Change: You've gotta go onto Eventbrite customers and because on the first.
Speaker Change: I don't tell them about my customer individually sorry.
Okay.
Speaker Change: Well.
Speaker Change: Never mind.
Edward Francis Snyder: So closing VMware held kind of a significant shift in your software strategy from focusing on the largest thousand or so customers to, well, hundreds of thousands now. Why should we expect once you get through, I don't want to say, the low-hanging fruit of selling into the, like you mentioned, the first thousand customers with the VCS product, that your OpEx as a share of sales, especially in sales and marketing, will start to increase because that's the big leverage Broadcom has had over almost all your acquisitions in software? And that seems to be changing now.
Speaker Change: As the top so closing Vmware held kind of a significant shift in your software strategy from focusing on largest thousand or so customers to hundreds of thousands now.
Speaker Change: Why should we expect once you once you get through obviously, the low hanging fruit of selling into that like you mentioned the first thousand customers with the vcs product that your opex as a share of sales person sales and marketing will start to increase speeds up the big leverage.
Speaker Change: Broadcom has had over almost all your acquisitions and software and that seems to be changing now.
Hock E. Tan: Ah, we have a shift here, and it's interesting. You're right in all regards, we are spending more on go-to-market and support. Because we have a lot of customers; we have 300,000, but we segment. So we have the strategic guys, we sell upsell, VCF, private cloud, very well. But the long tail of what we call smaller commercial customers, we continue to support and sell improved versions of just vSphere compute virtualization to improve productivity on their servers. We don't attempt to say, go build up your whole VCF. They don't have the skills or the time to do it.
Speaker Change: Okay.
Speaker Change: We we have a shift here.
Speaker Change: And it's interesting you're right now we've got we are spending more.
Our go to market and support because we have a lot of customers there.
Speaker Change: There are 300000, but we stratify them. So we have the strategic guidance, we sell upsell vcs private cloud very good but the long tail of what we call smaller commercial customers. We continue to support and sell improved versions of just the V C.
Speaker Change: This field.
Speaker Change: The virtualization to improve productivity on the service, we don't attempt to say go bill.
Speaker Change: <unk> they don't have the skills on the scale to do it but all it its obviously youre right my cost.
Hock E. Tan: But all it adds up is, you're right, my cost of my span, my OPEC span, you know, go to market, world increase. But the difference between that and, say, CA, the acquisition we did, is that we're growing this business very fast, and you don't have to increase your spend to grow this business.
Speaker Change: Off my spend Opex spend.
Speaker Change: Yes.
Speaker Change: Our support services.
Speaker Change: You know go to market will increase.
Speaker Change: But the difference between that and say see a mine.
Speaker Change: The acquisition, we did is.
Speaker Change: We're growing this business very fast.
Speaker Change: And you don't have to increase your spend growing this business. So.
Hock E. Tan: So we will have operating leverage through revenue growth over the next three years. Great. If I could squeeze one more in, you mentioned several times in the last quarter that there were two divisions you were going to divest, including carbon black, and that's changed. What has changed? Has the market outlook kind of softened, and it's a wait and see, or did you change your strategy and how you're going to integrate? I'm just curious why last quarter you said you'd probably get rid of it in three months, and now you're keeping it. Well, we find out that we could generate more value for you, the shareholders, assume you are, I'm just kidding, but we would generate more value for our shareholders by taking carbon blank, which is not that big, and integrating it into Symantec, that by doing it, we would generate much, much better value for our shareholders, taking a one-shot divestiture on this asset, not particularly large to begin with.
Speaker Change: So we have operating leverage through revenue growth over the next three years.
Great if I could squeeze one more in.
Speaker Change: You had mentioned several times actually in the last quarter that there were two divisions, you're going to divest including carbon black and that's changed what has changed is the market outlook kind of sources and uses.
Speaker Change: Do you see or did you change your strategy and how you integrate I'm just curious why.
Speaker Change: Last quarter, which as you probably get a little bit three months now you're keeping it.
Speaker Change: Well, we find now that we could generate more value to you the shareholders Sumit.
Sumit: I'm, just kidding, but we would generate more value to our shareholders by taking carbon black which is not that big.
Sumit: And.
Sumit: Integrating it into cement day that through by doing it we would generate much.
<unk> better value to our shareholders then.
Taking a one shot divestiture on this asset not particularly large to begin with.
Hock E. Tan: Great, thank you. Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Ji Yoo for closing remarks. Thank you, Operator. In closing, we would like to highlight our Broadcom Enabling AI in Infrastructure Investor Meeting on Wednesday, March 20, 2024 at 9 a.m. Pacific, 12 p.m. Eastern Time. Charlie Kawas, President of Broadcom Semiconductor Solutions Group, and several General Managers will present on Broadcom's Merchant Silicon Portfolio. The live webcast and replay of the investor meeting will be available at investors.broadcom.com. Broadcom currently plans to report its earnings for the second quarter of fiscal 24 after the close of the market on Wednesday, June 12, 2024.
Speaker Change: Great. Thank you.
Speaker Change: Thank you Lady.
Speaker Change: Ladies and gentlemen in the interest of time I would now like to turn the call back over to <unk> for closing remarks.
Speaker Change: Thank you operator in closing, we would like to highlight our broadcom, enabling AI and infrastructure Investor meeting.
Speaker Change: On Wednesday March 20th 2024 at nine a M Pacific 12 P M Eastern time.
Speaker Change: Harley cause president of Broadcom semiconductor solutions group and several general managers will present on Broadcom merchant silicon portfolio.
Speaker Change: The live webcast and replay of the Investor meeting will be available at investors <unk> Com dotcom.
Broadcom currently plan to report its earnings for the second quarter of fiscal 'twenty four after close of market on Wednesday June 12 2024.
Ji Yoo: A public webcast of Broadcom's earnings conference call will follow at 2 p.m. Pacific time. That will conclude our earnings call today. Thank you all for joining. Operator, you may end the call. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change: Our public webcast at Broadcom The earnings conference call will follow at two P. M Pacific time.
Speaker Change: That will conclude our earnings call today. Thank you all for joining operator, you may end the call.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
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