Q2 2024 Broadcom Inc Earnings Call

Operator: Welcome to Broadcom Inc.'s Second Quarter Fiscal Year 2024 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ji Yoo, Head of Investor Relations at Broadcom. Thank you, operator, and good afternoon, everyone.

Yeah.

Ji Yoo: Joining me on today's call are Hock Tan, President and CEO, Kirsten Spears, Chief Financial Officer, and Charlie Kawwas, President, Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the second 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.

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 second 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.

Speaker Change: Welcome to Broadcom, Inc. Second quarter fiscal year 2024 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.

Ji Yoo: In addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-gap 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: Thank you operator, and good afternoon, everyone. Joining me on today's call are Hock Tan President and CEO.

Speaker Change: Houston sphere, Chief Financial Officer, and Charlie Clause, President semiconductor solutions.

Speaker Change: Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the second quarter of fiscal year 2024.

Speaker Change: If you did not receive a copy you may obtain the information from the investors section of Broadcom website at Broadcom dotcom.

Speaker Change: This conference call is being webcast live and then audio replay of the call can be accessed for one year through the investors section of Broadcom website.

Speaker Change: During the prepared comments Hawkins Kirsten will be providing details of our second quarter fiscal year 2024 result.

Speaker Change: For our fiscal year, 'twenty 'twenty, four as well as commentary regarding the business environment.

Speaker Change: 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.

Speaker Change: Broadcom reports certain financial measures on a non-GAAP basis.

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.

Speaker Change: 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 Q2 2024 result, consolidated net revenue was $12.5 billion, up 43% year-on-year as revenue included a full quarter of contribution from the MOF. But if we exclude VMware, consolidated revenue was up 12% year-on-year. And this 12% organic growth in revenue was largely driven by AI revenue, which stepped up 280% year-on-year to $3.1 billion, more than offsetting continued cyclical weakness in semiconductor revenue from enterprises and telcos. Let me now give you more color on our two reporting segments. Beginning with software,

Hawk: Thank you Jay and thank you everyone for joining today.

Hawk: In our fiscal Q2 2024, so a result, sorry consolidated net revenue was $12 5 billion.

Hawk: 43% year on year.

Hawk: Revenue included a full quarter of contribution from Vmware.

Hawk: Yeah.

Hawk: But if we exclude Vmware consolidated revenue was up 12, 12% year on year.

Hawk: And this 12% organic growth in revenue was largely driven by AI revenue.

Hawk: Which step up to 180% year on year to three point and $1 billion.

Hawk: More than offsetting continued cyclical weakness.

Hawk: In semiconductor revenue from enterprises and telcos.

Hawk: Let me now give you more color on our two reporting segments.

Hawk: Beginning with software.

Hock E. Tan: In Q2, infrastructure software segment revenue of $5.3 billion was up 175% year-on-year and included $2.7 billion in revenue contribution from VMware, up from $2.1 billion in the prior quarter. The integration of VMware is going very well. Since we acquired VMware, we have modernized the product SKUs from over 8,000 disparate SKUs to four core product offerings and simplified the go-to-market flow, eliminating a huge amount of channel conflicts. [inaudible] are making good progress in transitioning all VMware products to a subscription licensing model.

Hawk: Q2 infrastructure software segment revenue of 5.3 billion was up 175% year on year.

Hawk: <unk> two 7 billion in revenue contribution from Vmware.

Hawk: From two 1 billion in the prior quarter.

Hawk: The integration of Vmware is going very well.

Hawk: Since we acquired Vmware.

Hawk: We have modernized the product skus from over 8000 disparate skus to four core product offerings.

Hawk: And simplifying the go to market floor.

Hawk: Anything a huge amount of channel conflicts.

Hawk: We are.

Hawk: Making good progress in transitioning all Vmware products to a subscription licensing model.

Hock E. Tan: And since closing the deal, we have actually signed up close to 3,000 of our largest 10,000 customers to enable them to build a self-service virtual private cloud on-premises. Each of these customers typically signs up to a multi-year contract which we normalize into an annual measure known as annualized booking value or ABV.

Hawk: And since closing the deal we have actually signed up close to 3000 of our largest 10000 customers.

Hawk: To enable them to build a self service virtual private cloud on Prem.

Hawk: Each of these customers typically sign up to a multiyear contract, which we normalize into an annual measure known this annualized booking value or ABV.

Hock E. Tan: This metric ABV for VMware products accelerated from $1.2 billion in Q1 to $1.9 billion in Q2, for reference for the consolidated Broadcom software portfolio. Meanwhile... We have integrated SG&A across the entire platform and eliminated redundant functions. Here today, we have incurred about $2 billion in restructuring and integration costs and driven our spending run rate at VMware to $1.6 billion this quarter from what used to be $2.3 billion per quarter pre-acquisition. We expect spending will continue to decline towards a 1.3 billion run rate exiting Q4, better than our previous $1.4 billion plan, and will likely stabilize at 1.2 billion post-integration.

Hawk: This metric ABV for Vmware products accelerated from $1 2 billion in Q1.

Hawk: $219 billion in Q2.

Hawk: By reference for reference for a consolidator Broadcom software.

Hawk: Ah portfolio ABV grew from $1 9 billion.

Hawk: In Q1 to $2 8 billion over the same period in Q2.

Hawk: Meanwhile.

Hawk: We have integrated SG&A across the entire platform and eliminated redundant functions yet.

Hawk: Year to date, we have incurred about $2 billion of restructuring and integration costs.

Hawk: And drove our spending run rate at <unk> to $1 6 billion this quarter.

Hawk: From what used to be $2 3 billion per quarter pre acquisition.

Hawk: We expect spending will continue to decline towards the $1 3 billion run rate exiting Q4.

Better than our previous $1 $4 billion plan.

Hawk: And will likely stabilize at $1 2 billion post integration.

Hock E. Tan: VMware revenue in Q1 was $2.1 billion, grew to $2.7 billion in Q2 and will accelerate towards a $4 billion per quarter run rate. We therefore expect operating margins for VMware to begin to converge towards that of classic Broadcom software by Fiscal 2025. Turning to semiconductors, let me give you more color by Ann Marker.

Hawk: Vmware revenue in Q1 was $2 1 billion.

Hawk: Grew to $2 7 billion in Q2 and will accelerate towards a $4 billion per quarter run rate. We therefore expect operating margins for Vmware to begin to converge towards that of classic Broadcom software.

By fiscal 2025.

Hawk: Turning to semiconductors.

Hawk: To give you more color by end markets.

Hock E. Tan: Networking. Q2 revenue of $3.8 billion grew 44% year-on-year, representing 53% of semiconductor revenue. This was again driven by strong demand from hyperscalers for both AI networking and custom accelerators. It's interesting to note that as AI data center clusters continue to deploy, our revenue may have been shifting towards an increasing proportion of networking. We doubled the number of switches we sold year on year, particularly the Tomahawk-5 and Jericho-3, which we deployed successfully in close collaboration with partners like Arista Networks, Dell, Juniper, and Supermicro.

Hawk: Networking Q2 revenue of $3 $8 billion grew 44% year on year, representing 53% of semiconductor revenue.

Hawk: This was again driven by strong demand from Hyperscale is for both.

Hawk: Working.

Hawk: Custom accelerators.

Hawk: It's interesting to note that as AI data center clusters continue to deploy.

Hawk: Our revenue mix has been shifting.

Hawk: Towards an increasing proportion of networking.

Hawk: We doubled the number of switches we saw year on year, particularly come out five and Jericho III, which we deployed successfully in close collaboration with partners like Arista networks down Juniper and supermicro.

Hock E. Tan: Additionally, we also doubled our shipment of PCI Express switches and NICs in the AI backend fabric, which is leading the rapid transition of optical interconnects in AI data centers to 800 gigabit bandwidth, which is driving accelerated growth for our DSPs, optical lasers, and pin diodes. And we are not standing still. Together with these same partners, we're developing the next generation of switches. DSP, and optics that will drive the ecosystem towards 1.6 terabit connectivity to scale out larger AI-accelerated clusters.

Hawk: Additionally, we also doubled our shipments of PCI express switches and mix in the AI backed in fabric.

Hawk: We're leading the rapid transition of optical interconnects in AI data centers, two 800 gigabit bandwidth.

Hawk: Which is driving accelerated growth for our DSP is optical lasers and Pete in diodes.

Hawk: And we are not standing still.

Hawk: Together with the same partners, we're developing the next generation switches.

Hawk: DSP and optics that will drive the ecosystem towards one six terabits connectivity to scale out larger AI accelerated customer classes.

Hock E. Tan: Talking of AI Accelerators, you may know our hyperscale customers are accelerating their investments to scale up the performance of these clusters, and to that end, We have just been awarded the Next Generation Custom AI Accelerators for these hyperscale customers of ours. Networking, DCI Accelerators. It's very challenging, but the technology does exist today.

Hawk: Okay.

Hawk: Talking of AI accelerators.

Hawk: You may know our hyperscale customers.

Hawk: Accelerating investments to scale up the performance of these clusters and to that end.

We have just been awarded the next generation custom AI accelerators for these hyperscale customers of ours.

Hawk: Networking this AI accelerators.

Hawk: It's very challenging.

Hawk: Technology does exist today.

Hock E. Tan: In Broadcom, we have the deepest and broadest understanding of what it takes for complex, large workloads to be scaled out in an AI fabric. Here's a proof in point. Seven of the largest eight AI clusters in deployment today use Broadcom's Ethernet solution. Next year, we expect all mega-scale GPU deployments to be on Ethernet. We expect the strength in AI to continue, and because of that, we now expect networking revenue to grow 40% year-on-year compared to our prior guidance of over 35% growth.

Speaker Change: In Broadcom, where the diapers.

Speaker Change: Around us understanding of what it takes for complex large workloads to be scale out in an AI fabric proof in 0.7 of the largest eight AI clusters in deployment today use Broadcom Ethernet solutions.

Speaker Change: Next year we.

Speaker Change: We expect all Mega scale GPU deployments to be on Ethernet.

Speaker Change: Yeah.

Speaker Change: We expect this strength to continue and because of that we now expect networking revenue to grow 40% year on year compared to our prior guidance of over 35% growth.

Hock E. Tan: Moving to wireless. Q2 wireless revenue of $1.6 billion grew 2% year-on-year, was seasonally down 19% quarter-on-quarter, and represents 22% of semiconductor revenue. In fiscal 24, helped by content increases. We reiterate our previous guidance for wireless revenue to be essentially flat year-on-year.

Speaker Change: Moving to wireless.

Speaker Change: Q2 wireless revenue of $1 6 billion grew 2% year on year.

Speaker Change: Seasonally down 19% quarter on quarter and represents 22% of semiconductor revenue.

Speaker Change: And in fiscal 'twenty four.

Speaker Change: By content increases.

Speaker Change: We reiterate our previous guidance for wireless revenue to be.

Speaker Change: <unk> essentially flat year on year.

Hock E. Tan: This trend is wholly consistent with our continued engagement with our North American customers, which is deep, strategic, and multi-year, and represents all of our wireless businesses. Next, our Q2 server storage connectivity revenue was $824 million, or 11% of semiconductor revenue, down 27% year-on-year. We believe, though, Q2 was the bottom for server storage, and based on updated demand forecasts and bookings, we expect a modest recovery in the second half of the year.

Speaker Change: This trend is wholly consistent with that.

Speaker Change: Our continued engagement with our North American customer.

Speaker Change: Which is deep strategic and multi year.

Speaker Change: Represents all of our wireless business.

Speaker Change: Our Q2 server storage connectivity revenue was $824 million or 11% of semiconductor revenue down.

Speaker Change: Down 27% year on year.

Speaker Change: We believe though Q2.

Speaker Change: Once the bottom in server storage and based on updated demand forecast and bookings.

Speaker Change: We expect a modest recovery.

Speaker Change: In the second half of the year.

Speaker Change: And accordingly, we forecast fiscal 'twenty for server storage revenue to decline around the 20% range year on year.

Hock E. Tan: And accordingly, we forecast fiscal 24 service storage revenue decline around the 20% range year-on-year. Moving on to broadband, Q2 revenue declined 39% year-on-year to $730 million and represented 10% of semiconductor revenue. Broadband remains weak on a continued pause in telco and service provider spending.

Speaker Change: Moving on to broadband.

Speaker Change: Q2 revenue declined 39% year on year to $730 million and represented 10% of semiconductor revenue.

Speaker Change: Broadband remains weak on a continued pause in telco and service provider spending.

Hock E. Tan: We expect Broadcom to bottom in the second half of the year. Way for Recovery in 2025. Accordingly, we are revising our outlook for fiscal 24 broadband revenue to be down in the high 30s year-on-year from our prior guidance for a decline of just over 30% year-on-year. Finally, Q2 Industrial Revenue Resale of $234 million declined 10% year-on-year.

Speaker Change: We expect broadcom to bottom in the second half of the year.

Wafer recovery in 2025.

Speaker Change: Accordingly, we are revising our outlook for fiscal 2004.

Speaker Change: <unk> revenue to be down high thirty's year on year from our prior guidance for a decline of just over 30% year on year.

Speaker Change: Finally, Q2 industrial Rev resale of Turing $34 million declined 10% year on year.

Hock E. Tan: And for fiscal 24, we now expect industrial resale to be down double digits percentage year on year compared to our prior guidance for high single digit decline. So to sum it all up, here's what we have seen. For Fiscal 24, we expect revenue from AI to be much stronger at over $11 billion. Non-AI Semiconductor revenue bottomed in Q2, and is likely to recover modestly for the second half of Fiscal 24.

Speaker Change: And for fiscal 'twenty, four we now expect industrial resales to be down double digits percentage year on year compared to our prior guidance for high single digit.

Speaker Change: Decline.

Speaker Change: So to sum it all up here's what we have seen.

Speaker Change: For fiscal 'twenty four we.

Speaker Change: We expect revenue from AI to be much stronger at over $11 billion.

Speaker Change: Non semiconductor revenue has bottomed in Q2.

Speaker Change: And it's likely to recover modestly for the second half of fiscal 'twenty four.

Hock E. Tan: On infrastructure software, we're making very strong progress in integrating VMware and accelerating its growth, pooling all these three key factors together. We're raising our fiscal 24 revenue guidance to $51 billion. And with that, I'll turn the call over to Kirsten.

Speaker Change: On infrastructure software.

Speaker Change: We're making very strong progress in integrating Vmware.

Speaker Change: And accelerating its growth.

Speaker Change: Pulling all of these three key factors together.

Speaker Change: We are raising our fiscal 'twenty revenue guidance too.

Speaker Change: The $1 billion and with that let me turn the call over to Kiss.

Kirsten M. Spears: Thank you, Hock. Let me now provide additional detail on our Q2 financial performance, which included a full quarter of contribution from VMware. Consolidated revenue was $12.5 billion for the quarter, up 43% from a year ago.

Thank you Hock, let me now provide additional detail on our Q2 financial performance, which included a full quarter of contribution from Vmware.

Kiss: Consolidated revenue with $12 5 billion for the quarter up 43% from a year ago.

Kirsten M. Spears: Excluding the contribution from VMware, Q2 revenue increased 12% year on year, and gross margins were 76.2% of revenue in the quarter. Operating expenses were $2.4 billion, and R&D was $1.5 billion, both up year-on-year, primarily due to the consolidation of VMware. Q2 operating income was $7.1 billion and was up 32% from a year ago, with operating margin at 57% of revenue. Excluding transition costs, operating profit of $7.4 billion was up 36% from a year ago, with operating margin of 59% of revenue. Adjusted EBITDA was $7.4 billion, or 60% of revenue. This figure excludes $149 million in depreciation.

Kiss: Excluding the contribution from Vmware Q2 revenue increased 12% year on year.

Kiss: Gross margins were 76, 2% of revenue in the quarter.

Kiss: Operating expenses were $2 4 billion and R&D was $1 5 billion, both up year on year, primarily due to the consolidation of Vmware.

Q2, operating income was $7 1 billion and was up 32% from a year ago with operating margin at 57% of revenue.

Kiss: Excluding transition cost operating profit of $7 4 billion was up 36% from a year ago with operating margin of 59% of revenue.

Kiss: Adjusted EBITDA was $7 4 billion or 60% of revenue. This figure excludes 149 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 $7.2 billion and represented 58% of total revenue in the quarter. This was up 6% year-on-year. Gross margins for our semiconductor solution segment were approximately 67%, down 370 basis points year-on-year, driven primarily by a higher mix of custom AI accelerators. Operating expenses increased 4% year-on-year to $868 million due to increased investment in R&D, resulting in semiconductor operating margins of 55%.

Kiss: Now a review of the P&L for our two segments.

Kiss: <unk> with semiconductors revenue for our semiconductor solutions segment was $7 2 billion and represented 58% of total revenue in the quarter. This was up 6% year on year.

Kiss: Gross margins for semiconductor solutions segment were approximately 67%.

Kiss: 370 basis points year on year, driven primarily by a higher mix of custom AI accelerators.

Kiss: Operating expenses increased 4% year on year to $868 million on increased investment in R&D, resulting in semiconductor operating margins of 55%.

Kirsten M. Spears: Now moving on to infrastructure software. Revenue for infrastructure software was $5.3 billion, up 170% year on year, primarily due to the contribution of VMware, and represented 42% of revenue. Gross margin for infrastructure software was 88% in the quarter, and operating expenses were $1.5 billion in the quarter, resulting in an infrastructure software operating margin of 60%. Excluding transition costs, the operating margin was 64%. Now, moving on to cash flow. Free cash flow in the quarter was $4.4 billion, and it represented 36% of revenue.

Kiss: Now moving on to infrastructure software.

Revenue for infrastructure software was $5 3 billion up 170% year on year, primarily due to the contribution of Vmware and represented 42% of revenue.

Kiss: Gross margin for infrastructure software.

Kiss: We're 88% in the quarter and operating expenses were $1 5 billion in the quarter, resulting in infrastructure software operating margin of 60% excluding transition physician costs.

Kiss: Trading margin was 64%.

Kiss: Now moving on to cash flow.

Kiss: Free cash flow in the quarter was $4 4 billion and represented 36% of revenue excluding.

Kirsten M. Spears: Excluding cash used for restructuring and integration of $830 million, free cash flows of $5.3 billion were up 18% year-on-year and represented 42% of revenue. Free cash flow as a percentage of revenue declined from 2023 due to higher cash interest expense from debt related to the VMware acquisition and higher cash taxes due to a higher mix of U.S. income and the delay in the reenactment of Section 174. We spent $132 million on capital expenses. Day sales outstanding were 40 days in the second quarter, consistent with 41 days in the first quarter.

Kiss: Excluding cash used for restructuring and integration of $830 million free cash flows of $5 3 billion were up 18% year on year and represented 42% of revenue.

Kiss: Free cash flow as a percentage of revenue has declined from 2023 due to higher cash interest expense from debt related to the <unk> acquisition and higher cash taxes due to a higher mix of U S income and the delay and the reenactment of section 174.

Kiss: We spent 132 million on capital expenditures.

Kiss: Day sales outstanding were 40 days in the second quarter consistent with 41 days in the first quarter. We ended the second quarter with inventory of $1 8 billion down 4% sequentially.

Kirsten M. Spears: We ended the second quarter with inventory of $1.8 billion, down 4% sequentially. We continue to remain disciplined on how we manage inventory across our ecosystem. We ended the second quarter with $9.8 billion of cash and $74 billion of gross debt. The weighted average coupon rate and years to maturity of our $48 billion in fixed rate debt are 3.5% and 8.2 years, respectively. The weighted average coupon rate and years to maturity of our $28 billion in floating rate debt are 6.6% and 2.8 years, respectively.

Kiss: We continue to remain disciplined on how we manage inventory across our ecosystem.

Kiss: We ended the second quarter with $9 8 billion of cash and 74 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 two years respectively.

Kiss: The weighted average coupon rate in years to maturity of our 28 billion in floating rate debt is six 6% and two eight years respectively.

Kirsten M. Spears: During the quarter, 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. In Q2, the non-GAAP diluted share count was 492 million as the 54 million shares issued for the VMware acquisition were fully weighted in the second quarter. We paid $1.5 billion in withholding taxes due on the vesting of employee equity, resulting in the elimination of 1.2 million ABGO shares.

Kiss: During the quarter, we repaid 2 billion of our floating rate debt and we intend to maintain this quarterly payment of debt throughout fiscal 2024.

Kiss: Turning to capital allocation.

Kiss: In the quarter, we paid stockholders $2 4 billion of cash dividends based on our quarterly common stock cash dividend of $5 25 per share.

Kiss: In Q2, non-GAAP diluted share count was $492 million at the 54 million shares issued for the Vmware acquisition were fully weighted in the second quarter.

Kiss: We paid $1 5 billion withholding taxes due on vesting of employee equity, resulting in the elimination of $1 2 million <unk> shares.

Kirsten M. Spears: Today, we are announcing a 10-for-1 forward stock split of Broadcom's common stock to make ownership of Broadcom stock more accessible to investors and to employees. Our stockholders of record after the close of market on July 11, 2024, will receive an additional nine shares of common stock after the close of market on July 12, with trading on a split adjusted basis expected to commence at market open on July 15, 2024. In Q3, reflecting a post-split basis, we expect the share count to be approximately 4.92 billion shares.

Kiss: Today.

Kiss: We are announcing a 10 for one forward stock split of Broadcom is common stock to make ownership of broadcom stock more accessible to investors and to employees.

Kiss: Our stockholders of record after the close of market on July 11th 2024 will receive an additional nine shares of common stock. After the close of market on July 12, with trading on a split adjusted basis expected to come in at market Open on July 15th 2024.

Kiss: In Q3, reflecting a post split basis, we expect share count to be approximately 492 billion shares.

Kirsten M. Spears: Now on to God. We are raising our guidance for fiscal year 2024 consolidated revenue to $51 billion and adjusted EBITDA to 61%. For modeling purposes, please keep in mind that gap net income and cash flows in fiscal year 2024 are impacted by restructuring and integration-related cash costs due to the VMware acquisition. That concludes my prepared remarks. Operator, please open up the call for questions. Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To withdraw your question, press star 11 again.

Kiss: Now onto guidance.

Kiss: We are raising our guidance for fiscal year 2024, consolidated revenue to 51 billion and adjusted EBITDA to 61%.

For modeling purposes. Please keep in mind that GAAP net income and cash flows in fiscal year 2024 are impacted by restructuring and integration related cash costs due to the Vmware acquisition.

Speaker Change: That concludes my prepared remarks, operator, please open up the call for questions.

Speaker Change: Thank you as a reminder to ask a question you will need to press star one one on your telephone to withdraw.

Operator: Due to time restraints, we ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. And our first question will come from the line of Vivek Arya with Bank of America. Your line is open.

Speaker Change: A question 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.

Speaker Change: And our first question will come from the line of Vivek Arya with Bank of America. Your line is open.

Vivek Arya: Thanks for taking my question. Hock, I would appreciate your perspective on the emerging competition between Broadcom and NVIDIA across both accelerators and Ethernet switching. So on the accelerator side, you know, they are going to launch their BlackBell product at many of the same customers that you have a very large position in custom compute. So I'm curious how you think customers are going to make that allocation decision, just broadly what the visibility is.

Vivek Arya: Alright, Thanks for taking my question Hock I would.

Vivek Arya: I appreciate your perspective on the emerging competition between Broadcom and Nvidia across both accelerators and Ethernet switching so on the accelerator side.

Speaker Change: They're going to launch their Blackberry product that many of the same customers that you have a very large position in the custom compute so I'm curious how you think customers are going to do that the allocation decision just broadly what the visibility is and then I think part b of that is as they launched their spectrum ex the Ethernet switch do you think that pauses.

Vivek Arya: And then I think part B of that is, as they launch their Spectramex Ethernet switch, do you think that poses increasing competition for Broadcom and the Ethernet switching side in AI for next year? Thank you. A very interesting question, Vivek.

Speaker Change: Creating competition for Broadcom in the Ethernet switching side in AI for next year. Thank you.

Hock E. Tan: On AI accelerators, I think we're operating on a different scale, much as a different model. The GPUs, which are the AI accelerator of choice in a merchant environment, are... something that is extremely powerful as a model and it's something that NVIDIA operates in a very, very effective manner. We don't even think about competing against them in that space. None in the list.

Speaker Change: Very interesting question Vivek on AI accelerators, I think we're operating on a different.

Speaker Change: To start with scale much as different model.

Speaker Change: It is.

Speaker Change: And on that the Gpus, which are the AI accelerator of choice on much.

Speaker Change: <unk> environment.

Speaker Change: Is something that is extremely powerful as a model is something that.

Speaker Change: Nvidia operates.

Speaker Change: Great and in a very very effective manner, we don't even thinking about competing against them in that space.

Hock E. Tan: That's where they're very good at, and we know where we stand with respect to that. Now, what we do for very selected or selective hyper scalers is if they have the skill and the skills to try to create silicon solutions which are AI accelerators to do particular AI, very complex AI workloads. We're happy to use our IP portfolio to create those. For example, the Custom ASIC AI Accelerator. So I do not see them as truly competing against each other, and far from it for me to say I'm trying to position myself to be a competitor for basically GPUs in this market. We're not. We are not competitors with them, and we don't try to be either.

Speaker Change: Not in the least that's where they're very good at it.

Speaker Change: No, where we stand with respect to debt no what we do for very selected our selective.

Speaker Change: Hyperscale us.

Speaker Change: If they have the scale.

Speaker Change: And on the skills to try to create silicon solutions, which are AI accelerators to do particular, AI very complex AI workloads, we're happy to use our IP.

Speaker Change: IP portfolio to create those custom ASIC AI accelerators, so I do not see them as truly compete.

Competing against each other.

Speaker Change: And final for me for me to say I am trying to position myself to be a competitor on the.

Speaker Change: On a basically gpus in this market. We're not we are not competitor today, we don't try to be either.

Hock E. Tan: Now, on networking, maybe that's different. But again, again, people may be approaching it from different angles. We are, as I indicated all along, very deep in the ethernet. We've been doing the internet for over 25 years, internet networking, and we've gone through a lot of market transitions, and we have captured a lot of market transitions from cloud scale networking to Routing and now AI.

Speaker Change: Now on net looking maybe that's different but again, the mid 10 people, maybe approaching and Dave maybe approaching it from different angles.

Speaker Change: Well as I indicated all along very deep in Ethernet.

We've been doing Ethernet for over 25 years, Ethernet networking and we've gone through a lot of market transitions.

Speaker Change: And we have captured a lot of market transitions from cloud scale.

Hock E. Tan: So it's a natural extension for us to go into AI. We also recognize that being the... AI Compute Engine of Choice in the ecosystem, which is GPUs, that they are trying to create a platform that is probably end-to-end very integrated. We take an approach that we don't do those GPUs, but we enable the GPUs to work very well.

Speaker Change: Networking to routing and now AI. So it's a natural extension for us to go into AI, We also recognize that beating the.

Speaker Change: AI compute engine of choice.

Speaker Change: In merchant sell in India in the ecosystem, which is gpus.

Speaker Change: They are trying to create a platform that is probably end to end very integrated we take the approach that we don't do those gpus, so, but we enable the gpus to work very well so if anything else we supplement.

Speaker Change: And hopefully complement those gpus in.

Speaker Change: We have customers, who are building bigger and bigger GPU clusters.

Hock E. Tan: So if anything else, we supplement and hopefully complement those GPUs with customers who are building bigger and bigger GPU clusters. Thank you. One moment for our next question, and that will come from the line of Ross Seymour with Deutsche Bank. Your line is open. Hi guys. Thanks for asking a question. I want to stick on the AI theme, Hock.

Speaker Change: Thank you.

Speaker Change: Thank you one moment for our next question.

And that will come from the line of Ross Seymore with Deutsche Bank. Your line is open.

Ross Clark Seymore: The strong growth that you had in the quarter, the 280% year-over-year, could you delineate a little bit between if that's the compute offload side versus the connectivity side? And then as you think about the growth for the full year, how are those split in that realm as well? Are they kind of going hand in hand, or is one side growing significantly faster than the other, especially with the, I guess you said the next generation accelerators are now going to be Broadcom as well?

Ross Clark Seymore: Hi, guys. Thanks for May ask a question I wanted to stick on the AIC Hawk. The strong growth that you had in the quarter, the 280% year over year could you delineate a little bit between if thats the compute offload side versus the connectivity side and then as you think about the growth for the full year.

Speaker Change: How are those split in that realm as well are they kind of going hand in hand or is one side growing significantly faster than the other especially with the I guess you said the next generation accelerators are now going to be broad cotton as well.

Ross Clark Seymore: Well, to answer your question on the mix, you're right. It's something we don't really predict very well, nor understand completely, except in hindsight, because it's tied to some extent to the cadence of deployment of when they put in the AI accelerators versus when they put in the infrastructure that puts it all together, the networking. And we don't really quite understand it 100%.

Speaker Change: While they don't say your question on the mix you are right.

Speaker Change: We don't really.

Speaker Change: Predict very well know understand completely except in hindsight, because it's tied to some extent to the cadence of deployment.

Speaker Change: <unk>.

Sure.

Speaker Change: When they put in.

Speaker Change: The AI accelerators versus when they put in the infrastructure that puts it together the networking.

Speaker Change: We don't really quite understand at 100% all we know what it used to be 80% accelerators, 20%.

Hock E. Tan: All we know is that it used to be 80% accelerators, 20% networking. It's now running closer to two-thirds accelerators, one-third networking, and we'll probably head towards 60-40 by the close of the year.

Speaker Change: Networking is now running closer to one.

Two thirds accelerators, one third networking and we're probably head towards 60 40 by the close of the year.

Hock E. Tan: Thank you. Thank you. One moment for our next question, and that will come from the line of Stacy Rasgon with Bernstein. Your line is open. Hi guys.

Speaker Change: Thank you.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And that will come from the line of Stacy <unk> with Bernstein. Your line is open.

Stacy Aaron Rasgon: Thanks for taking my question. I wanted to ask about the $11 billion AI guide. You'd be at 11.6, even if you didn't grow AI from the current level in the second half. And it feels to me like you're not suggesting that it feels to me like you think you would be growing.

Speaker Change: Hey, guys. Thanks for taking my question I wanted to ask about the $11 billion AI Guide.

Speaker Change: You'd be at 11.6, even if you didn't grow AI from the current level in the second half and it feels to me like Youre not suggesting that it feels to me like do you think it will be gone. So why wouldn't that AI number would be a lot more than 11.6, it feels like it ought to be.

Stacy Aaron Rasgon: So why wouldn't that AI number be a lot more than 11.6? It feels like it ought to be. Am I missing something?

Hock E. Tan: Because I guided just over 11 billion, they say it could be, what you think it is. You know, quarterly shipments get sometimes very lumpy, and it depends on the rate of deployment, it depends on a lot of things. So you may be right; you may estimate it better than I do. The general trajectory is, is getting better. Okay, so I guess again. How are you just suggesting that more than 11 billion is sort of like the worst it could be? Because that would just be flat at the current levels. But you're also suggesting that things are getting better in the second half.

Speaker Change: Or am I missing.

Speaker Change: <unk> guided just over eight eight over $11 billion copay, what do you think it is.

Speaker Change: Yes.

Speaker Change: It's.

Speaker Change: Quarterly shipments get sometimes very lumpy and it depends on rate of deployment has been a lot of things. So you may be right. You may be you may you may ask.

Speaker Change: Estimated better than I do but.

Speaker Change: The general trend trajectory is.

Speaker Change: Getting better.

Speaker Change: Okay. So I guess again, how do I are you just suggesting that that more than $11 billion is sort of like the worst it could be because that would just be flat at the current levels, but you're also suggesting that things are getting better and you back out so.

Stacy Aaron Rasgon: So all right. Okay, so I guess we just take that that's a very, if I'm reading it wrong, that's just a very conservative number. That's the best forecast I have at this point, Stacy.

Speaker Change: Correct.

Speaker Change: [laughter], Okay. So I guess, we just take that that's a very good.

Speaker Change: Reading it wrong, but that's just a very conservative number.

Speaker Change: It's the best forecast I have at this point.

Hock E. Tan: All right. Okay, Hock. Thank you. I appreciate it. Thank you. Thank you. One moment for our next question, and that will come from the line of Harlan Sur with J.P. Morgan. Your line is open. Yeah, good afternoon.

Speaker Change: Alright.

Speaker Change: I appreciate it.

Speaker Change: Okay.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And that will come from the line of Harlan sur with Jpmorgan. Your line is open.

Harlan L. Sur: Thanks for taking my question. Hock on cloud and AI networking silicon. You know, good to see that the networking mix is steadily increasing, like clockwork. The Broadcom team has been driving a consistent two-year cadence, right, of new product introductions, Trident, Tomahawk, and Jericho family of switching and routing products for the past seven generations.

Speaker Change: Yes. Good afternoon, thanks for taking my question.

Speaker Change: On cloud and AI networking silicon.

Speaker Change: Good to see that the networking mixing steadily increasing like clockwork. The broadcom team has been driving a consistent two year cadence right of new product introductions tried in Tomahawk and Jericho family of switching and routing products for the past seven generations.

Hock E. Tan: On top of that, your GPU, and TPU customers are accelerating their cadence of new product introductions and deployments of their products. So is this also driving a faster adoption curve for your latest Tomahawk and Jericho products? And then maybe just as importantly, like clockwork, it's been two years since you introduced the Tomahawk 5 product introduction, right, which if I look back historically means you have silicon and are getting ready to introduce your next generation, three nanometer Tomahawk 6 products, which would, I think, put you two to three years ahead of your competitors. Can you just give us an update there?

On top of that your GPU TPU customers are accelerating their cadence of new product introductions and deployments of their products. So is this also driving faster adoption curve, where latest tomahawk and Jericho products and then maybe just as importantly, like clockwork. It's been two years since you've introduced.

Speaker Change: Tomahawk five product introduction rate, which if I look back historically beans, you have silicon and are getting ready to introduce your next generation doing nanometers Tomahawk six products, which I think puts you two to three years ahead of your competitors can you just give us an update there.

Hock E. Tan: Harlan, you're pretty, pretty insightful there. Yes, we launched among the five, 23. So you're right, by late 25 is the time we should be coming out with Tomahawk 6, which is the 100 terabit switch. Yes. And is this acceleration of cadence by your GPU and TPU partners also what's kind of driving the strong growth in the networking product? Well, you know what? Sometimes you have to let things take their time.

Speaker Change: Yes.

Speaker Change: What day Insightful day, yes, we launched <unk> five.

Speaker Change: 23.

Speaker Change: So you're right by late 'twenty five the time, we should be coming out with Tomahawk six.

Speaker Change: Okay.

Speaker Change: Which is the 100 therapy switch yes.

Speaker Change: And as and as D is this acceleration of cadence by your GPU and CPU partners is that also what's kind of driving the strong growth in the networking products.

Speaker Change: Well you know what sometimes you have to let things take its time, but its two year cadence so were right on.

Hock E. Tan: But it's a two-year cadence, so we're right on. Late, late, you know, 23 was when we showed it to Atomic Five, and it adoption has been tremendous because it ties in with the need for very large bandwidth in the networking, in the fabric for AI clusters, AI data centers. But, Regardless, we've always targeted Tomahawk 6 to be out, two years after that, which we should put it into late 25.

Speaker Change: Later on.

Speaker Change: 23 was when we showed it out.

Speaker Change: Five.

Adopters adoption Youre correct with AI has been tremendous because of that.

Speaker Change: I think with the need for very large bandwidth.

Speaker Change: The networking in the fabric for AI clusters, AI data data centers, but.

Speaker Change: Regardless, we are always target the tomo six to be out two years after that which we should put it into late 'twenty five.

Hock E. Tan: Okay. Thank you, Hock. Thank you. One moment for our next question, and that will come from the line of Ben Reitzes with Mellius. Your line is open. Hey, thanks a lot, and congratulations on the quartering guide.

Okay. Thank you.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And that will come from the line of Ben Reitzes with Melius. Your line is open.

Ben Reitzes: Hey, Thanks, a lot and congrats on the quarter and guide.

Benjamin Alexander Reitzes: Hock, I wanted to talk a little bit more about VMware. Just wanted to clarify if it is indeed going better than expectations, and how would you characterize the customer willingness to move to subscription? And also, just a little more color on Cloud Foundation.

Speaker Change: Hock I wanted to talk a little bit more about Vmware.

Just wanted to clarify if it if it is indeed going better than expectations and how would you characterize the.

Speaker Change: The customer willingness to move to subscription.

Speaker Change: And also just a little more color on.

Hock E. Tan: You've cut the price there, and are you seeing that it beats expectations? Thanks a lot. Thanks and thanks for your kind regards for the quarter. It's got, as far as VMware is concerned... We're making good progress. The journey is not over by any means, but it's pretty much, very much to expectation. Moving to subscription. Hell, at VMware, we're very slow compared to, I mean, a lot of other guys, Microsoft, Salesforce, Oracle, who have already been pretty much in subscription.

Speaker Change: <unk> Foundation.

Speaker Change: You have cut the price there and are you seeing that beat expectations. Thanks a lot.

Speaker Change: Thanks, and thanks for your kind regards on the on the quarter, but.

Speaker Change: It's got as far as <unk> is concerned.

Speaker Change: We're making good progress the journey is not all of them by any means but it's pretty much very much to expectation.

Speaker Change: Moving to subscription.

Speaker Change: Vmware in Vmware were very slow compared to I mean, a lot of other guys. Microsoft Salesforce Oracle, we have really been pretty much in subscription. So vmware is late in that process.

Hock E. Tan: So VMware is late in that process, but we're trying to make up for it by offering it and offering it in a very, very compelling way, because subscription is the right thing to do, right? It's a situation where you put out your product offering, and you update it, patch it, but update it feature-wise; everything has capabilities on a continual basis. It's almost like getting your news on an ongoing basis, subscription online versus getting it in a printed manner once a week. That's how I compare perpetual to subscription.

When we're trying to make up for it by offering in an offering it very very compelling compelling manner, because subscription as the right things to do right is a situation where you put out your product your.

Offering.

Speaker Change: Can you update it.

Speaker Change: Padgett, but updated feature wise everything is capabilities on a continual basis almost like getting your news on ongoing basis subscription online versus getting in in printer manner. Once a week.

Hock E. Tan: So it's very interesting for a lot of people to want to get on. And so, to no surprise, we are getting on very well.

Speaker Change: How do I compare perpetual to subscription so it's it's very interesting for people to wonder.

Speaker Change: Dead on and so so no surprise.

Hock E. Tan: The big selling point we have, as I indicated, is the fact that we're not just trying to keep customers, kind of start on just server or compute virtualization. That's a great product, great technology, but it's been out for 20 years. Based on what we are offering now at a very compelling price point, compelling and very attractive price point, the whole stack, the software stack, to use vSphere and its basic fundamental technology to virtualize networking, Story, operation, and management, the entire data center and create this self-service private cloud. And thanks for saying that.

Speaker Change: And they are getting on very well the big selling point, we have as I indicated is the fact that we're not just.

Speaker Change: Trying to keep customers.

Speaker Change: Kind of.

Speaker Change: Stop on just server compute virtualization, that's great products, great technology, but that's been out for 20 years.

Speaker Change: What we're offering now at a very compelling.

Speaker Change: Compelling price point compelling been very attractive price point.

Speaker Change: Full stack software stack to use this fear and needs basic fundamental technology to virtualized.

Speaker Change: Networking storage.

Speaker Change: Operation and management, the entire data center and greatly cell service private cloud and thanks for saying it Youre right.

Hock E. Tan: You're right. And we have priced it down to the point where it's comparable. We've just completed virtualization. So yes, that's getting a lot of interest, a lot of attention from the customers who have signed up, who would like to deploy the ability to deploy a private cloud, their own private cloud on-premises. A nice complement, maybe even alternative or hybrid to public cloud. That's the selling point.

Speaker Change: Had price it down too.

Speaker Change: To the point, where it's comparable.

Speaker Change: Just compute virtualization. So yes, that's getting a lot of interest a lot of attention from the customers who have signed up.

Speaker Change: <unk>.

Speaker Change: Thanks to deploy the ability to deploy.

But.

Speaker Change: Cloud.

Speaker Change: Our own private cloud on Prem.

Speaker Change: Yes.

Speaker Change: Nice complement maybe even alternative or hybrid to public clouds.

Hock E. Tan: And we're getting a lot of interest from our customers in doing so, Great, and it's on track for four billion by the fourth quarter still, which is reiterated. Well, I didn't give a specific time frame design, but it's on track as we see this process growing towards a $4 billion quarter. Okay, thanks a lot Hock.

Speaker Change: The selling point and we're getting a lot of interest from our customers in doing that.

Speaker Change: Great and then it's on track for four Bill by the fourth quarter still which is reiterated.

Speaker Change: Well I didn't give a specific timeframe design, but it's on track.

Speaker Change: We see this process growing towards a $4 billion quarter.

Benjamin Alexander Reitzes: Thanks. Thank you. One moment for our next question, and that will come from the line of Toshiya Hari with Goldman Sachs. Your line is open.

Speaker Change: Okay. Thanks, a lot hock.

Speaker Change: Thanks.

Speaker Change: Thank you one moment our next question.

Speaker Change: And that will come from the line of Toshi Hari with Goldman Sachs. Your line is open.

Toshiya Hari: Hi, thank you so much for taking the question. I guess, kind of, a follow-up to the previous question on your software business. Hockey seemed to have pretty good visibility into hitting that $4 billion run rate over the medium term.

Toshiya Hari: Hi, Thank you so much for taking the question I guess kind of a follow up to the previous question on your software business hockey.

Speaker Change: Hock you seem to have pretty good visibility into hitting that $4 billion run rate.

Hock E. Tan: You also talked about your operating margins in that business converging to classic Broadcom levels. I know, you know, the integration is not done, and you're still kind of in debt pay-down mode, but how should we think about your growth strategy beyond VMware? Do you think you have enough drivers, both on the semiconductor side and the software side, to continue to drive growth, or is M&A still an option beyond VMware? Thank you. Interesting question.

Speaker Change: Over the medium term, perhaps you also talked about your operating margins in that business converging to classic broadcom levels.

Speaker Change: No.

Speaker Change: <unk> not done and Youre still kind of in debt pay down mode, but how should we think about your growth strategy beyond Vmware or do you think you have enough drivers both on the semiconductor side and the software side to continue to drive growth or is M&A still an option beyond Vmware. Thank you.

Hock E. Tan: And you're right, I'm very, you know, what, as I indicated in my remarks, even without the contribution from VMware, this, uh, this past quarter, where, you know, we have AI helping us, but we have non-AI semiconductors. We're able to show 12% organic growth year-on-year. So, I almost have to say, do we need to rush to buy another company? The answer is no.

Speaker Change: Interesting question.

Speaker Change: And.

Speaker Change: Right.

Speaker Change: As I indicated in my remarks, even without the contribution from Vmware.

Speaker Change: This this past quarter.

Speaker Change: You know, we have AI, helping us.

Speaker Change: But we have no non AI semiconductors sort of bottoming out.

Speaker Change: We're able to show a 12% organic growth year on year. So almost types of say so do we need to rush to buy another company and says no but.

Hock E. Tan: All options are always open because we're trying to create the best value for our shareholders who have entrusted us with the capital to do that. So I would not discount that alternative because our strategy, our long-term model has always been to grow through a combination of acquisitions but also on the assets required to really improve, invest in, and operate them better to show organic growth as well. But again, organic growth, often enough, is determined very much by how fast your market grows.

Speaker Change: All options are always open because we're trying to create the best value for our shareholders, who have entrusted us with the capital to do that so I would not I would not discount that.

Speaker Change: Alternative because of our strategy our long term model has always been to grow through a combination of.

Speaker Change: Acquisition, but also on the on the assets, we acquire to really improve invest and operate them better to show off.

Speaker Change: Again, a growth as well, but again organic growth often enough.

Hock E. Tan: So we do look towards acquisitions now and then. Great, thank you. Thank you. One moment for our next question, and that will come from the line of Blaine Curtis with Jefferies.

Speaker Change: Is is determined very much by how fast your market would grow so we do look towards acquisitions now in that.

Speaker Change: Great. Thank you.

Speaker Change: Thank you one moment our next question.

And that will come from the line of Blayne Curtis with Jefferies. Your line is now open.

Blayne Peter Curtis: Your line is open. Hey, thanks for taking my question. I wanted to ask you, Huck, about the networking business, kind of XAI. Obviously, you know, I think there's an inventory correction the whole industry is seeing, but just kind of curious. I don't think you mentioned that it was at a bottom, so just...

Blayne Curtis: Hey, Thanks for taking my question I wanted to ask you hock on the networking business kind of ex AI. Obviously I think there is an inventory correction the whole industry is seeing but just kind of curious I don't think you mentioned that it was at a bottom so just.

Hock E. Tan: Unknown Attendee, We see it behaving, I didn't particularly call it out, obviously, because more than anything else, I kind of link it very much to server storage, non-AI, that is, and we call server storage as at the bottom, Q2, and we call it to..., recover modestly in the second half of the year. We see the same thing in networking, which is a combination of enterprise networking as well as hyperscalers who run their traditional workloads on it. Though it's hard to figure it out sometimes, but it is.

Speaker Change: The perspective, I think it's down about 50% year over year that business finding a bottom I know you said overall whole semi business should not AI.

Speaker Change: The recovery or are you expecting there and any perspective on just customer inventory levels in that segment.

We see it behaving.

Speaker Change: Particularly call it out obviously, because because more than anything else.

Kind of link it very much to server storage.

Non AI that is.

Speaker Change: We call server storage as at a bottom Q2.

Rick: And we call it to Rick.

Rick: Recover modestly second half of the year we.

Rick: We see the same thing in networking, which is combination of enterprise networking as well as the Hyperscale us who run their traditional.

Rick: Workloads on dose always hard to figure out sometimes but it is so we see the same trajectory as we head.

Hock E. Tan: So we see the same trajectory as we are calling out on server storage. Okay, thank you. Thank you. One moment for our next question, and that will come from the line of Timothy Arcuri with UBS. Your line is open. Mr. Arcuri, your line is open. Hi. Hi. Sorry.

Rick: Calling out on server storage.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And that will come from the line of Timothy Arcuri with UBS. Your line is open.

Speaker Change: Mr. <unk> your line is open.

Timothy Michael Arcuri: Thanks. Hock, is there a way to sort of map GPU demand back to your AI networking opportunity? I think I've heard you say in the past that if you spend $10 billion on GPU compute, you need to spend another $10 billion on other infrastructure, most of which is networking. So I'm just kind of wondering if when you see these big GPU numbers, is there sort of a rule of thumb that you use to map it back to what the opportunity will be for you? There is, but it's so complex.

Speaker Change: Hi, Hi, sorry.

Speaker Change: <unk> is there is there a way to sort of that.

Speaker Change: <unk> demand back to your AI networking opportunity I think I think I've heard you say in the past that if that $10 billion on GPU compute you need to spend another $10 billion on other than just a share most of which is not working so so I'm just kind of wondering if when you see these big GPU.

Speaker Change: <unk> numbers is there sort of a rule of thumb that you use for that but back to what the opportunity will be for you. Thanks.

Speaker Change: There is but it is so complex.

Hock E. Tan: I stopped creating such a model team. I'm serious, but there is, because one would say that for every, you know, you want to say for every billion dollars you spend on GPUs, you probably would spend..., probably on networking and, if you include, The Optical Interconnect. As part of it, though, we are not totally in that market, except for the components like DSPs, lasers, pin dives that go into those high bandwidth optical links.

<unk>, creating such a model.

Speaker Change: But there is because one would say that.

Speaker Change: For every <unk>.

Speaker Change: I want to say for every billion dollars of spend on GPU.

Speaker Change: Probably would span.

Probably on the.

Speaker Change: Our networking and if you include.

Speaker Change: The optical interconnects as part of it though we are not totally net market, except for the components <unk> dsp's.

Speaker Change: Lasers <unk> that go into those.

Speaker Change: High bandwidth.

Hock E. Tan: But if you just take optical connects in totality, switching, all the networking components that go into, attaches itself to, clustering, a bunch of GPUs, you probably would say that about... 25% of the value of the GPU goes to networking, the rest goes to the rest of the components. Now, not entirely all of it is my available market. I don't do the optical connect, but I do the few components I talk about in it.

Speaker Change: Optical connect but if you just take optical connections in totality switching all day and all the networking component that goes into attaches itself too clustering.

Speaker Change: A bunch of Gpus, you, probably would say that about 25%.

Speaker Change: The value of the GPU goes to networking.

Speaker Change: The retro networking now not entirely all of it is mine avail.

Speaker Change: Available market I don't do the optical connect but I do the few components that are bound in it but roughly the simple way to look at it is probably about 25% maybe 30% of all of this infrastructure.

Hock E. Tan: But roughly, the simple way to look at it is probably about 25%, maybe 30% of all this infrastructure, components, and so on is kind of attached to the GPU value point itself. But, having said that, it's never that precise that deployment is the same way.

Speaker Change: Bonus.

Speaker Change: Is kind of attached to.

Speaker Change: The GPU.

Valuable Valuepoint itself.

Speaker Change: But having said that it's never one whenever that precise that deployment is the same way. So you may see the deployment of GPU or purchase of GPU much earlier.

Hock E. Tan: So you may see the deployment of GPUs or the purchase of GPUs much earlier, and the networking comes later, or sometimes less, the other way around. Which is why you're seeing the mix going on within my AI revenue mix. But typically, you run towards that range.

Speaker Change: And the networking comes later.

Speaker Change: Some times less the other way around which is why youre seeing the mix going on within my AI revenue mix, but typically you run towards that range.

Hock E. Tan: Overtime, Perfect talk. Thank you so much. Thank you. One moment for our next question, and that will come from the line of Thomas O'Malley with Barclays. Your line is open.

Speaker Change: Overtime.

Speaker Change: Perfect. Thank you so much.

Thank you one moment our next question.

Speaker Change: And that will come from the line of Thomas O'malley with Barclays. Your line is open.

Thomas O'malley: Hey, guys, thanks for taking my question and for the nice results. But my question concerns the Custom Async AI talk. You had a long run here of a very successful business, particularly with one customer. But if you look in the market today, you have a new entrant who's playing with different customers. And I know that you said historically that that's not really a direct customer to you. But could you talk about what differentiates you from the new entrant in the market as of late?

Hey, guys. Thanks for taking my question and nice results, but my question regards to the customer.

Thomas O'malley: <unk> had a long run here of very successful business, particularly with one customer. If you look in the market today, you have a new entrants who is playing with different customers and I know that you've said historically, that's not really a direct customer to you, but could you talk about what differentiates you from a new entrant in the market as of late and then.

Thomas O'malley: And then there's been profitability questions around the sustainability of gross margins longer term. Can you talk about whether you see any increased competition and if there's really any areas that you would deem more or less defensible in your profile today? And if you would see that additional entrant maybe attack any of those in the future?

Theres been profitability questions around the sustainability of gross margins longer term can you talk about if you see any increased competition and if theres really areas that you would deem more or less the festival in Europe and your profile today and if you would see you kind of.

Thomas O'malley: That additional entrants maybe attack any of those in the future.

Hock E. Tan: Let me take the second part first, which is our AI Accelerate, a custom version of this. It is a very profitable business, and let me put it on a scale and examine it from a model point of view. You know, each of these AI accelerators is no different from a GPU. The way these large language models get run, computing gets run on these accelerators. No one single accelerator, as you know, can run these big, large language models. You need multiple of them, no matter how powerful those accelerators are, but also in the way the models are run.

Thomas O'malley: Hmm.

Speaker Change: Let me take the second part first.

It is our AI salaried customers accelerate the business.

Speaker Change: It is a very profitable business and let me put the scaling.

Speaker Change: Examined from a model point of view.

Speaker Change: Yes.

Each of this AI accelerators no different from a GPU.

Speaker Change: This.

Speaker Change: This loss.

Speaker Change: <unk> language models get run computing that run on these accelerators no. One single accelerator as you know can run this big long lateral language models, you need multiple of it no matter.

How powerful those accelerators.

Speaker Change: But also in the way the models are run.

Hock E. Tan: There's a lot of memory, access to memory requirements. So each of these accelerators comes with a large amount of cache memory, as you call it. What you guys probably now know as HBM, High Bandwidth Memory, specialized for AI accelerators or GPUs. So we're supplying both in our custom business. The logic side of it, where the compute function is on doing the chips, the margin there is no different than the margin in most of our semiconductor silicon chip business. But when you attach to it a huge amount of memory, the memory comes from a third party. There are a few memory makers who make this specialized thing and do margin stacking on that band.

Speaker Change: That's a lot also memory access to memory requirements. So each of this accelerates that comes with large amount of cash memory as we call. It what you guys probably know no S. HBM high bandwidth memory specialized for AI.

Speaker Change: Accelerators, our Gpus.

Speaker Change: So we supply both.

Speaker Change: In our custom business.

The logic side of it.

Speaker Change: Where you where the compute function is on doing the chips.

Speaker Change: Margin, they're no different than the margin in any in most of any of our.

Speaker Change: Semiconductor.

Speaker Change: Silicon chip business, but when you attach to it a huge amount of memory memory comes from third party few memory makers to make this specialized thing we don't we don't.

Hock E. Tan: So by... Almost Buying Basic Math Will Dilute The Margin For AI Accelerators When You Sell Them With Memory, Which We Do. It does push up revenue somewhat higher, but it is... dilutes the margin. Regardless, the SPAN, the R&D, and the OPEX that goes to support this. As a percent of the revenue, which is higher revenue, so much less, so on an operating margin level, this is easily as profitable, if not more profitable, given the scale that each of those... a customer as AI accelerates and can go up to. It's even better than our normal operating margin scale. So that's the return on investment that attracts and keeps us going at this game. And This is more than a game.

Do margins, taking on debt bonds so by.

Speaker Change: Almost buying basic math.

Speaker Change: Or dilute the margin.

Speaker Change: Of this AI accelerators, when you sell them with memory, which we do.

Speaker Change: It does put some revenue somewhat higher but it is diluted the margin by.

<unk>.

Speaker Change: Regardless the <unk>.

Speaker Change: The R&D the Opex that goes to support this.

Speaker Change: As a percent of the revenue, which has a higher revenue so much less so on an operating margin level. This is easily as profitable if not more profitable given the scale that each of those.

Speaker Change: Our customer is AI accelerators can go up to is even better than our normal operating margin and scale. So that's the return on investment that attracts and keeps us going at this game.

Speaker Change: And this is more than a game, it's a very difficult.

Hock E. Tan: It's a very difficult business. And to answer your first question, there is only one Broadcom, period. Thank you. One moment for our next question, and that will come from the line of Karl Ackerman with BNP. Your line is open. Yes, thank you. Good afternoon.

Speaker Change: And to answer your first question there is only one broadcom.

Speaker Change: Period.

Hock E. Tan: Thanks Hock.

Speaker Change: Thank you one moment our next question.

Speaker Change: And that will come from the line of Karl Ackerman with BNP. Your line is open.

Karl Ackerman: Hock, your networking switch portfolio with the Tomahawk and Jericho chipsets allows hyperscalers to build AI clusters using either a switch-scheduled or endpoint-scheduled network. And that, of course, is unique among competitors. But as hyperscalers seek to deploy their own unique AI clusters, are you seeing a growing mix of white-box networking switch deployments? I ask because while your custom silicon business continues to broaden, it would be helpful to better understand the growing mix of your $11 billion AI networking portfolio combined this year. Thank you. I'll have Charlie address this question. He's the expert.

Karl Ackerman: Yes. Thank you good afternoon.

Karl Ackerman: Hock your networking switch portfolio with Tomahawk, and Jericho chipsets allow high prescribers to build AI clusters, using either a switch scheduled or endpoint scheduled network and that of course is unique among competitors, but as hyperscale or seek to deploy their own unique AI clusters are you seeing a growing mix of white box networking switch deployments.

Speaker Change: I asked because once your custom silicon business continues to broaden it would be helpful to better understand the growing mix of your $11 billion.

Speaker Change: AI networking portfolio.

Speaker Change #100: Combine this year. Thank you.

Speaker Change: Yes.

Let me have Charlie addressed this question is the expert.

Charlie B. Kawwas: Thank you. So two quick things on this one is that you're exactly right that the portfolio we have is quite unique in providing that flexibility. And by the way, this is exactly why Hock, in his statements earlier, mentioned that seven out of the top eight hyperscalers use our portfolio, and they use it specifically because it provides that flexibility. So whether you have an architecture that's based on an endpoint, and you want to actually build your platform that way, or you want that switching to happen in the fabric itself, that's why we have the full end-to-end portfolio. So that actually has been a proven differentiator for us.

Thank you so.

Speaker Change #101: Two quick things on this one is the youre exactly right that the portfolio we have.

Speaker Change #102: Is quite unique in providing that flexibility and by the way. This is exactly why hawken. His statements earlier on mentioned that seven out of the top a typo scanners use our portfolio and they use it specifically because it provides that flexibility. So whether you have an architecture, that's based on an endpoint and.

Speaker Change #102: Do you want to actually build your platform that way or you want that switching to happen in the fabric itself. That's why we have the full end to end portfolio. So that actually has been a proven differentiator for us and then on top of that we've been working as you know to provide a complete network operating system. That's.

Charlie B. Kawwas: And then on top of that, we've been working, as you know, to provide a complete network operating system that's open on top of that using Sonic and Psy, which have been deployed in many hyperscalers. And so the combination of the portfolio plus the stack really differentiates the solution that we can offer to these hyperscalers. And if they decide to build their own NICs, their own accelerators that are custom, or use standard products, whether it's from Broadcom or another company, that platform, that portfolio of infrastructure switching gives you that full flexibility. Thank you. Thank you. Please take a moment for our next question. And that will come from the line of CJ Mews with Cantor Fitzgerald. Your line is open.

Speaker Change #102: Open on top of that using Sonic and Si, which has been deployed in many of the hyperscale and so the combination of the portfolio plus the stack really differentiate the solution that we can offer to these hyperscale as and if they decide to build their own next.

Speaker Change #102: On accelerators are custom or use standard products, whether it's from broadcom or other that platform that portfolio of infrastructure switching gives you that flexibility.

Speaker Change #103: Thank you.

Speaker Change #104: Thank you one moment for our next question.

Speaker Change #104: Okay.

Speaker Change #105: And that will come from the line of C. J Muse with Cantor Fitzgerald. Your line is open.

Christopher James Muse: Yeah, good afternoon. Thank you for taking the question. I was hoping to ask a two-part software question. So, excluding VMware, your Brocade, CA, and Symantec business is now running $500 million higher for the last two quarters. So, curious, is that the new sustainable run rate? Or were there one-time events in both January and April that we should be considering?

Speaker Change #106: Yes. Good afternoon. Thank you for taking the question I was hoping to ask two parts software question. So excluding Vmware Youre brocade, CA and Symantec business now running $500 million higher for the last two quarters. So curious is that the new sustainable run rate or were there one time events in both January and April that we should be considered.

Speaker Change #106: And then the second question is as you think about Vmware Cloud Foundation of adoption are you seeing any sort of crowding out of spending like other software guys are saying is they repurpose their budgets or is that.

Speaker Change #107: That business, so less discretionary that it's just not an impact to you. Thanks so much.

Hock E. Tan: And then the second question is, as you think about VMware Cloud Foundation adoption, are you seeing any sort of crowding out of spending like other software guys are seeing as they repurpose their budgets to IT? Or is that business so less discretionary that it's just not an impact to you? Thanks so much.

Speaker Change #108: Well on the second one.

Speaker Change #109: I don't know about any crowding out to be honest, it's not what we're offering obviously is not something that they need.

Hock E. Tan: Well, on the second one... I don't know about any crowding out; to be honest, it's not. What we're offering, obviously, is not something that they would like to use themselves, to be able to do themselves, which is what they're already spending on building their own on-prem data centers. And the typical approach people take, a lot of enterprises take, historically, and continue today, that most people do, a lot of people do, is they have the best of breed. What I mean is they create a data center that is compute-based, and as a separate category, Best Compute AIs, and they often enough use vSphere for compute virtualization due to improved productivity, but there's a breed there.

Speaker Change #109: I would like to use themselves to be able to do themselves, which is they are already spending on building. The on Prem data centers and typical approach people take a lot of enterprises take historically continuing today than most people do a lot of people do.

Speaker Change #109: They have best of breed, what I mean was the creator data center that is.

Speaker Change #109: Compute.

Speaker Change #109: As a separate category best compute <unk> and often in our views vis fear for compute virtualization to do to improve productivity, but best of breed and they're better.

Hock E. Tan: Then there's a breed on networking, and there's a breed on storage with a common management operations layer, which is very often also VMware V-Ray like. And what we're trying to say is this makes back what they say, is this mixed bag, that's a big data center, very heterogeneous, it's not grieving over that, it's not highly resilient. Data Center. I mean, you have a mixed bag.

Speaker Change #109: Best of breed on networking and best of breed on.

Speaker Change #109: Storage with a common management and operations layer, which summed up very often is also Vmware <unk>.

Speaker Change #109: <unk> life.

Speaker Change #109: And what we're trying to say is this makes bank and what they see is this mix back that's a big data center very heterogeneous.

Speaker Change #109: Griffin of highly resilient.

Speaker Change #109: Data Center I mean, you have a mixed bag.

Hock E. Tan: Goldstown, Where do you find the root cause? Everybody's pointing fingers at each other. So we've got a problem, not very resilient and not necessarily secure between... Bear Metal on one side and software on the other side. So it's a natural thing on the part of many CIOs we talk to to say, hey, I want to create one common platform as opposed to just a batch of bread for each. So that gets us into that. So if it's a green field, that's not bad.

Speaker Change #109: <unk> down.

Speaker Change #109: Where do you where do you find it quickly root cause everybody is pointing fingers at the other so you've got a problem not very resilient.

Speaker Change #109: Not necessary secure between.

Speaker Change #109: Bare metal in one site and software on the other side. So it's a natural and thinking on a bulk of many <unk>, we talked to to say, hey, I want to create one common.

Speaker Change #109: Platform as opposed to just best of breed of age so that gets us into that so it is a greenfield.

Hock E. Tan: They started from scratch. If it's a brown field, that means they have existing data centers trying to upgrade, it's uh, that's sometimes more challenging for us to get that adopted. So I'm not sure there's a crowding out here. There's some competition, obviously, on Greenfield, where they can spend their budget on an entire platform versus Bear Supreme. But on the existing data center where you're trying to upgrade, that's the trickier thing to do. And it cuts the other way as well for us.

Speaker Change #109: But they started from scratch.

Speaker Change #109: Brownfield that means that you have existing data centers.

Speaker Change #109: And they're trying to upgrade.

Speaker Change #109: Sometimes thats more challenging for us to get that adopted so I am not sure. There is a crowding out here. There is some competition, obviously on greenfield, where they can spend their budget on an entire platform versus best of breed, but on the existing data centers.

Speaker Change #109: Trying to upgrade that's a tricky thing to do.

Hock E. Tan: But that's how I see it. So in that sense, the best answer is I don't think we're seeing a level of crowding out that is very significant for me to mention. In terms of the revenue mix, no, Brocade is having a great, great field year so far and still chugging along. But will that sustain? Hell no.

Speaker Change #109: And it cuts the other way as well for us but.

Speaker Change #109: That's how I see it so in that sense.

Speaker Change #109: That answer is I don't think we are seeing.

Speaker Change #109: Our level of crowding out that is.

Speaker Change #109: There is a need.

Speaker Change #109: That's very significant for me dimension.

Speaker Change #109: In terms of the revenue mix no brocade is having a great great field year, sofa, and still chunking, along but well they're sustained hell no youll know that brocade goes through cycles like most enterprise purchases. So we're enjoying it while it lasts.

Hock E. Tan: You know that Brocade goes through cycles like most enterprise purchases. So we're enjoying it while it lasts. Thank you, and we do have time for one final question. And that will come from the line of William Stein with Truist Securities. Your line is open.

Speaker Change #110: Thank you.

Speaker Change #110: Thanks.

Speaker Change #111: Thank you and we do have time for one final question.

Speaker Change #112: And that will come from the line of William Stein with <unk> Securities. Your line is open.

William Stein: Great. Thanks for squeezing me in. Hock, congrats on yet another great quarter and strong outlook in AI. I also want to ask about something you mentioned with VMware. In your prepared remarks, you highlighted that you've eliminated a tremendous amount of channel conflict. I'm hoping you can linger on this a little bit and clarify maybe what you did, and specifically also what you did in the Heritage Broadcom software business, where I think historically you'd shied away from the channel.

William Stein: Great. Thanks for squeezing me in.

Speaker Change #114: Congrats on yet another.

Speaker Change #115: Great quarter and strong outlook in AI I also wanted to ask about something you mentioned with Vmware and your prepared remarks, you highlighted that you've eliminated tremendous amount of channel conflict I am hoping you can linger on this a little bit and clarify maybe.

Speaker Change #115: Maybe what you did and specifically also what you did in the heritage.

Speaker Change #115: Okay.

William Stein: And there was an idea that perhaps you'd reintroduce those products to the channel through a more unified approach using VMware's channel partners or resources. So any sort of clarification here would be helpful. Thank you.

Speaker Change #116: Broadcom software business, where I think historically, you've shied away from the channel.

Speaker Change #117: There was an idea that perhaps you.

Reintroduce those products through the channel through a more unified.

Speaker Change #117: Approach using VM.

Speaker Change #117: <unk>.

Speaker Change #118: Channel partners your resources, so any any sort of clarification here I think it would be helpful. Thank you.

Hock E. Tan: That's a great question. Yeah, VMware taught me a few things. They have 300,000 customers. 300,000

Speaker Change #119: Yes. Thank you that's a great question and it gives US yes, Vmware taught me a few things there are 300000 customers 300000.

Hock E. Tan: Pretty interesting, amazing, and we look at it, I know under CA, we took a position that let's pick an A-list strategic guy and focus on it. I can't do that in VMware, I have to approach it differently, and I start to learn the value of... a very strong bunch of partners they have, which are a network of distributors, and something like 15,000 VAS, value-added resales, supported by So we have doubled down and invested in this reseller network in a big way for VMware. And it's a great move, I think, but six months into the game, we're seeing a lot more.

Speaker Change #120: Pretty interest amazing and we'll look at it.

Speaker Change #121: I know on the CA, we took a position that lets speak and a less strategic guys and focus on it.

Speaker Change #121: I can do that and Vmware.

Speaker Change #121: Approach it differently and we start start to learn the value of.

Speaker Change #121: A very strong bunch of partners, they had which are a network of distributors and something like 15000 Vars value added resellers supported with this distributors. So we have doubled down and invested in.

Speaker Change #121: In this reseller network in a big way for Vmware.

Speaker Change #121: It's a great move I think about six months into the game, but we are seeing a lot more.

Hock E. Tan: Velocity out of it. Now, these three sellers, having said that, tend to be very focused on the very long tail of that 300,000 customers. The largest 10,000 customers of VMware are large enterprises who tend to, you know, they are very large enterprises, the largest banks, the largest healthcare companies, and their view is, I want very bespoke Service, Support, and Engineering Solutions from us. So we've created a direct approach, supplemented with their bar of choice where they need to.

Speaker Change #121: <unk> city out of it now this resale is having said that tend to be very focused on a very long tail of that 300000 customers. The largest 10000 customers of Vmware or large enterprises.

Speaker Change #121: And who tend to they are very large enterprise is the largest banks the largest health care companies and their view is one very bespoke.

Speaker Change #121: Service support engineering.

Speaker Change #121: Solutions from us.

Speaker Change #121: So we created a direct approach supplemented with the evolve choice where they need to.

Hock E. Tan: But on the long tail of 300,000 customers, they get a lot of services from value-added resellers in their way. So we now strengthen that whole network of resellers so that they can go direct, and manage our support financially with distributors. And so we kind of simplify this together with the number of skills there are, unlike what we're trying to do here.

Speaker Change #121: But on the long tail of 300000 customers they get a lot of services to from the resale of value added resellers and so India way. So we know and strengthen that whole network of resellers. So that they can go direct manner.

Speaker Change #121: Which supported financially with distributors and with.

Speaker Change #121: Don't try to challenge this guys.

Speaker Change #121: Unless our customers all in all both on the end of the day the cancer.

Ross: Ross, where they'd like to be supported.

Ross: And so we kind of simplified this together with the number of Skus there.

Ross: In the past.

What we're trying to do here.

Hock E. Tan: [inaudible] I mean, you're talking about a full range of partners and everybody and whoever makes the biggest deal, gets the lowest price. The partner that makes the biggest deal, gets the biggest discount, the lowest price, and they're out there basically kind of creating a lot of channel chaos and conflict in the marketplace. Here we don't.

Ross: Everybody is upon us.

Ross: You are talking a full range of partners and everybody and whoever.

Ross: Makes the biggest deal gets the lowest partner partner they make the biggest deal gets the biggest discount lowest price.

Ross: Out there.

Ross: Basically kind of creating a lot of channel chaos in conflict in the marketplace here, we don't the customers I don't know.

Hock E. Tan: The customers are aware. They can take it direct from VMware to the direct sales force, or they can easily move to the reseller to get it. And as a third alternative which we offer, if they choose not to, they want to run their applications on VMware, and they want to run them efficiently on the full stack. They have a choice now of going to a hosted environment, managed by a network of managed service providers which we have set up. Globally, that will run. The infrastructure, invest in and operate the infrastructure, and this enterprise customer just runs their workloads in it and gets it as a service, basically VMware as a service, as an alternative.

Ross: Where they can take a direct from Vmware to the direct sales force all they can easily move to the resellers to get it that way.

Ross: And as a third alternative which we offer.

Ross: They chose not they wanted to run their applications on Vmware.

Ross: And they wanted to run it efficiently.

Ross: Full stack.

Ross: They have a choice now of going to a hosted environment managed by a network of managed service providers, which we set up.

Ross: Globally that will run.

Ross: Infrastructure invest and operating infrastructure and this enterprise customers just.

Ross: I'll run their workloads in and get it as a service <unk> service that alternative and we are clear to make in very distinct and differentiated for our end use customers. They are available to all three is how they choose to consume.

Hock E. Tan: And we are clear to make it very distinct and a Differentiator for our end-use customers. They're available to all three. It's how they choose to consume.

Hock E. Tan: I will take no. Great, thank you. Thank you. I would now like to hand the call over to Ji Yoo, Head of Investor Relations, for any closing remarks. Thank you, Cherie. Broadcom currently plans to report its earnings for the third quarter of fiscal 24 after the close of market on Thursday, September 5, 2024. A public webcast of its earnings conference call will follow at 2 p.m. Pacific time.

Ross: Our technology.

Ji Yoo: 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.

Speaker Change #123: Great. Thank you.

Speaker Change #124: Thank you I would now like to hand, the call over to <unk> head of Investor Relations for any closing remarks.

Suri: Thank you Suri.

Speaker Change #126: Broadcom currently plans to reported earnings for the third quarter of fiscal 'twenty four after close of market on Thursday September five 2024 public.

Speaker Change #127: Public webcast at Broadcom as earnings Conference call will follow at two P. M Pacific time.

That will conclude our earnings call today. Thank you all for joining operator, you may end the call.

Speaker Change #128: Thank you all for participating. This concludes today's program you may now disconnect.

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