Q2 2024 Broadcom Inc Earnings Call
[music].
Yeah.
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 G. You head of Investor Relations of Broadcom, Inc.
Thank you operator, and good afternoon, everyone. Joining me on today's call are Hock Tan President and CEO, Kirsten spear, Chief Financial Officer, and Charlie Clause President semiconductor solutions.
Broadcom distributed a press release and financial tables after the market closed.
Ascribing, 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 investors section of Broadcom website at Broadcom dotcom.
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.
During the prepared comments Hawkins Kirsten will be providing details of our second quarter fiscal year 2024 results.
Guidance for our fiscal year, 'twenty 'twenty, four as well as commentary regarding the business environment.
We will take questions. After the end of our prepared comments.
Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward looking statements made on this call.
In addition to U S GAAP reporting.
Broadcom reports certain financial measures on a non-GAAP basis.
Reconciliation between GAAP and non-GAAP measures is included in the tables attached to todays press release.
Comments made during today's call will primarily refer to are non-GAAP financial results.
I'll now turn the call over to Hawk.
Yes.
Thank you Jay and thank you everyone for joining today.
In our fiscal Q2 2020 for consult a result, sorry consolidated net revenue was $12 5 billion.
43% year on year.
Revenue included a full quarter of contribution from Vmware.
But if we exclude Vmware.
Consolidated revenue was up 12, 12% year on year.
And this 12% organic growth in revenue was largely driven by AI revenue.
Which step up to 180% 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 that.
Our two reporting segments.
Beginning with software.
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 8000 disparate skus to four core product offerings.
And simplifying the go to market flow, eliminating a huge amount of channel conflicts.
We are making good progress in transitioning all Vmware products to a subscription licensing model and since closing the deal we have actually signed up close to 3000 of our largest 10000 customers.
To enable them to build a self service virtual private cloud on Prem.
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.
This metric ABV for Vmware products accelerated from $1 2 billion in Q1.
219 billion in Q2.
By referenced for reference for a consolidator Broadcom software.
Portfolio.
<unk> grew from $1 9 billion.
In Q1 to $2 8 billion over the same period in Q2.
Meanwhile.
We have integrated SG&A across the entire platform and eliminated redundant functions year to date with incurred above $2 billion of restructuring and integration costs.
And drove our spending run rate at <unk> 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 the $1 3 billion run rate exiting Q4.
Better than our previous $1 4 billion plan.
And we will likely stabilize at $1 2 billion post integration.
Vmware revenue in Q1 was $2 1 billion.
It grew to $2 7 billion in Q2.
We will accelerate towards a $4 billion per quarter run rate.
We therefore expect operating margins for Vmware to begin to converge towards stent of classic Broadcom software.
By fiscal 2025.
Turning to semiconductors, let me give you more color by end markets.
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 Hyperscale is for both.
Networking and <unk>.
Customer accelerators.
It's interesting to note that as AI data center clusters continue to deploy.
Our revenue mix.
<unk> been shifting towards an increasing proportion of networking.
We doubled the number of switches, we sold year on year, particularly tomo five and Jericho three.
Which we deploy successfully in close collaboration with partners like Arista networks down Juniper and supermicro.
Additionally, we also doubled our shipments of PCI express switches and mix in the AI backed in fabric.
We're leading the rapid transition of optical interconnects in AI data centers, two 800 gigabit bandwidth.
Which is driving accelerated growth for our dsp's optical lasers and Pete in diodes.
And we are not standing still.
Together with the same partners, we're developing the next generation switches.
<unk> and upticks that will drive the ecosystem towards one six terabits connectivity.
To scale out larger AI accelerated customers clusters.
Talking of AI accelerators.
No our hyperscale customers.
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.
Net working this AI accelerators.
It's very challenging.
What the technology does exist today.
In Broadcom, where the deepest.
Around us understanding of what it takes for complex large workloads to be scale out in an AI fabric proof in point.
Seven of the largest eight AI clusters in deployment today use Broadcom Ethernet solutions.
Next year, we expect all Mega scale GPU deployments to be on Ethernet.
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.
Moving to wireless.
Q2 wireless revenue of $1 6 billion grew 2% year on year, while seasonally down 19% quarter on quarter and represents 22% of semiconductor revenue.
And in fiscal 'twenty for <unk>.
By content increases.
We reiterate our previous guidance for wireless revenue to be.
Essentially flat year on year.
This trend is wholly consistent with that.
Our continued engagement with our North American customer.
Which is deep strategic and multi year.
Represents all of our wireless business.
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 in server storage and based on updated demand forecast and bookings, we expect a modest recovery in the second half of the year and.
And accordingly, we forecast fiscal 'twenty phone server storage revenue to decline around the 20% range year on year.
Moving onto 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.
We expect broadcom to bottom in the second half of the year.
Wafer recovery in 2025.
Accordingly, we are revising our outlook for fiscal 'twenty for broadband revenue to be down high <unk> year on year from our prior guidance for a decline of just over 30% year on year.
Finally, Q2 industrial Rev resale of Turing $34 million declined 10% year on year.
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.
Decline.
So to sum it all up here's what we have seen.
For fiscal 'twenty, four we expect revenue from AI to be much stronger.
At over $11 billion.
Non semiconductor revenue has bottomed in Q2.
And is likely to recover modestly for the second half of fiscal 'twenty four.
On infrastructure software.
We're making very strong progress in integrating Vmware.
And accelerating its growth.
Pulling all of these three key factors together.
We are raising our fiscal 'twenty for revenue guidance too.
The $1 billion and with that let me turn the call over to Kiss.
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 was $12 5 billion for the quarter up 43% from a year ago.
Excluding the contribution from Vmware Q2 revenue increased 12% year on year.
Kiss: 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 cost 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 of depreciation.
Now a review of the P&L for our two segments, starting 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% 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 on increased investment in R&D, resulting in semiconductor operating margins of 55%.
Now moving on to infrastructure software.
Revenue for infrastructure software was five 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.
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 operating margin was 64%.
Now moving onto cash flow free.
Free cash flow in the quarter was $4 4 billion and represented 36% of revenue excluding.
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 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 in the reenactment of section 174.
Kiss: We spent 132 million on capital expenditures.
Days 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.
Kiss: 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 in years to maturity of our 48 billion in fixed rate debt is three 5% and eight two years respectively.
<unk> average coupon rate in years to maturity of our 28 billion in floating rate debt is six 6% and two eight years respectively.
During the quarter, we repaid 2 billion of our floating rate debt and we intend to maintain this payment.
Payment of debt throughout fiscal 2024.
Turning to capital allocation.
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.
In Q2, 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 withholding taxes due on vesting of employee equity, resulting in the elimination of $1 2 million <unk> shares.
Kiss: Today.
We are announcing a 10 for one forward stock split of Broadcom 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 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 commence at market open on July 15th 2024.
In Q3, reflecting a post split basis, we expect share count to be approximately $4 92 billion shares.
Now onto guidance.
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.
Thank you as a reminder to ask a question you will need to press star one one on your telephone to withdraw your question Press Star one again.
Speaker Change: MS. James we ask that you. Please limit yourself to one question. Please standby, 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.
Alright, Thanks for taking my question Hock I would.
To get your perspective on it.
Emerging competition between Broadcom Nvidia across both.
<unk> and Ethernet switching so on the accelerator side.
They're going to launch their Blackberry product that many of the same customers that you have a very large position in the custom computers I'm curious how you think customers are going to do that 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 poses.
Increasing competition for Broadcom in the Ethernet switching side.
Speaker Change: AI for next year. Thank you.
Speaker Change: Okay.
Interesting question Vivek.
On AI accelerators I think.
Operating on a different.
To start with scale much as different model.
It is.
And on that the Gpus, which are the AI accelerator of choice.
<unk> merchant merchant environment.
Is something that is extremely powerful as a model is something that.
Nvidia.
Great.
Operating in a very very effective manner, we don't even thinking about competing against them in that space.
That's where they are very good at and we know where we stand with respect to debt no. What we do for a very selected our selective.
Hyperscale us is if they have the scale.
Speaker Change: 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 custom ASIC AI accelerators, so I do not see them as truly compete.
Competing against each other.
And final for me for me to say I am trying to position myself to be a competitor on.
On a basically gpus in this market. We're not we are not competitor to them, we don't try to be either.
Now on net looking maybe that's different but again.
People may be approaching and Dave maybe approaching it from different angles.
Well as I indicated all along very deep in Ethernet.
<unk>.
Speaker Change: We've been doing Ethernet for over 25 years Ethernet networking.
And we have gone through a lot of market transitions and we have captured a lot of market transitions from cloud scale.
Networking to routing.
Speaker Change: Now AI. So it's a natural extension for us to go into AI, we also recognize that beating the.
AI compute engine of choice in merchant sell in.
But in the ecosystem, which is gpus.
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.
And hopefully complement those gpus in with.
Speaker Change: We have customers, who are building bigger and bigger GPU clusters.
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.
Hi, guys. Thanks, you May ask your 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 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 broad comment as well.
While they don't say your question on the mix you are right.
We don't really.
Predict very well know understand completely except in hindsight, because it's tied to some extent to the cadence of deployment.
<unk>.
When they put in.
Speaker Change: AI accelerators versus when they put in the infrastructure that puts it together the networking.
We don't really quite understand at 100% all we know it used to be 80% accelerators, 20%.
Networking is.
Now running closer to 132.
Two thirds accelerators, one third networking and we're probably head towards 60 40 by the close of the year.
Speaker Change: Thank you.
Thank you one moment for our next question.
And that will come from the line of Stacy <unk> with Bernstein. Your line is open.
Hi, guys. Thanks for taking my question I wanted to ask about the $11 billion AI Guide.
Speaker Change: You'd be at 11, six 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 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.
Alright.
Cause I guided just over eight eight over 11 billion Stacey could be what do you think it is.
Yes.
It's <unk>.
Quarterly shipments get sometimes very lumpy and it depends on rate of deployment and depends a lot of things. So you may be right. You may be you may get you may ask.
Speaker Change: Estimated better than I do but.
Speaker Change: The general trend trajectory is.
Getting better.
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 getting back out so far.
Speaker Change: Correct.
[laughter], Okay. So I guess, we just take that that's a very good that.
If I'm reading it wrong, but that's just a very conservative number.
That's the best forecast I have at this point.
Okay.
Alright. Thank.
Thank you I appreciate it thank you.
Speaker Change: Thank you one moment for our next question.
And that will come from the line of Harlan sur with Jpmorgan. Your line is open.
Yes. Good afternoon, thanks for taking my question.
On cloud and AI networking silicon.
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 you layer on top of that your GPU TPU customers are accelerating their cadence of new product introductions and deployment there.
Alex So as 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 Tomahawk five product introduction, which if I look back historically means you have silicon and are getting.
Ready to introduce your next generation domain nanometers, Tomahawk six products, which I think puts you at two to three years ahead of your competitors can you just give us an update there.
Speaker Change: A pretty insightful, yes, we launched <unk> five.
23.
So you're right by late 2005, the time, we should be coming out with Tomahawk six.
Speaker Change: Which is the 100 therapy switch yes.
And as and as D.
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.
Well you know what sometimes you have to let things take its time, but its two year cadence so were right on.
Late June.
23 was when we showed it out.
Five.
Adopters adoption Youre correct with AI has been tremendous because of that it ties in with the need for very large bandwidth.
Speaker Change: The networking in the fabric for AI clusters, AI data data centers, but.
He got liss, we've always targeted tomo six to be out two years after that which we should put it into late 'twenty five.
Okay. Thank you.
Thank you one moment, Sir our next question.
And that will come from the line of Ben Reitzes with Melius. Your line is open.
Hey, Thanks, a lot and congrats on the quarter and guide.
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.
The customer willingness to move to subscription.
Speaker Change: And also just a little more color on cloud Foundation.
You have cut the price there and are you seeing that beat expectations. Thanks a lot.
Thanks, and thanks for your kind regards on on a quarter, but.
Speaker Change: And as far as <unk> is concerned.
We're making good progress the journey is not all of them by any means but it's pretty much very much to expectation.
Moving to subscription.
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, but 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.
Speaker Change: Offering.
Can you update it.
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 printed manner. Once a week that's how.
Now I compare perpetual to subscription so it's it's very interesting for people to wonder.
Speaker Change: Dead on and so no surprise.
We are getting they are getting on very well the big selling point, we have as I indicated is the fact that we're not just.
Trying to keep customers.
Speaker Change: Kind of.
Stop on just server compute virtualization, that's great products, great technology, but that's been out for 20 years.
What we are offering now at a very compelling.
Compelling price point compelling been very attractive price point.
Speaker Change: Whole stack software stack to use these field and is basic fundamental technology to virtualized.
Speaker Change: Networking storage.
Operation and management, the entire data center and greatly cell service private client and thanks for saying it Youre right.
Have price it down.
Speaker Change: To the point, where it's comparable.
Just compute 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.
But.
Speaker Change: Cloud.
Speaker Change: Our own private cloud on Prem.
Yes.
Nice complement maybe even alternative all hybrid to public clouds.
As the selling point and we're getting a lot of interest from our customers in doing that.
Great and then it's on track for four Bill by the fourth quarter still which is reiterated.
Well I didn't give a specific timeframe deny but it's on track.
We see this process growing towards a $4 billion quarter.
Okay. Thanks, a lot hock.
Thanks.
Thank you one moment our next question.
And that will come from the line of Joe <unk> with Goldman Sachs. Your line is open.
Joe <unk>: 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.
Hock you seem to have pretty good visibility into hitting that $4 billion run rate.
Over the medium term, perhaps you also talked about your operating margins in that business converging to classic broadcom levels.
No.
<unk> not done and you're still kind of a 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.
Interesting question.
And.
Right.
As I indicated in my remarks, even without the contribution from Vmware.
Joe <unk>: This this past quarter.
You know, we have AI, helping us.
But we have no non AI semiconductors sort of bottoming out.
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 so there's no but.
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.
Alternative because our strategy our long term model has always been to grow through a combination of.
Acquisition, but also on the on the assets, we acquire to really improve invest and operate them better to show.
Organic growth as well, but again organic growth often enough.
Is is determined very much by <unk>.
Fancier market would grow so well.
Do look towards acquisitions now in that.
Great. Thank you.
Thank you one moment for our next question.
And that will come from the line of Blayne Curtis with Jefferies. Your line is now open.
Hey, Thanks for taking my question I wanted to ask you hock on the networking business kind of ex AI, obviously, 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.
The perspective, I think it's down about 60% year over year that business finding a bottom I know you said overall whole semi business should not I should say.
The recovery or are you expecting there and any perspective on just customer inventory levels in that segment.
We see it behaving.
Joe <unk>: Particularly call it out obviously, because because more than anything else.
Kind of link it very much to server storage.
Non AI that is.
We call server storage as at a bottom Q2.
And we call it to Rick.
Recover modestly second half of the year we.
We see the same thing in networking, which is combination of enterprise networking as well as the Hyperscale is who run their traditional.
Workloads on dose always hard to figure out sometimes but it is so we see the same trajectory as we.
Calling out on server storage.
Speaker Change: 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.
Speaker Change: Mr. <unk> your line is open.
Hi, Hi, sorry.
Is there is there a way to sort of that.
<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 infrastructure most of which is not working so 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 for that but back to what the opportunity will be for you.
There is but it is so complex.
<unk>, creating such a model.
Speaker Change: But there is because one would say that.
Yes for every you know you won't say for every billion dollars is spent on GPU.
Probably would span.
Probably on.
Speaker Change: Sure.
Speaker Change: Networking and if you include.
The optical interconnects as part of it though we are not totally dead market, except for the components <unk> Dsp's.
Lasers been dyes that go into those.
High bandwidth optical connect but if you just take optical connectivity in totality switching all day and all the networking component that goes into attaches itself too clustering.
A bunch of Gpus.
I, probably would say that about 25%.
Of the value of the GPU goes to networking.
The rest of the networking now not entirely all of it is mine.
Available market I don't do the optical connect but I do the few components that are bound but roughly the simple way to look at it is probably about 25% maybe 30% of all this infrastructure.
Bonus.
Speaker Change: Is kind of attached to.
The GPU valuable Valuepoint itself.
But having said that it's never one.
Never that precise that deployment is the same way. So you may see the deployment of GPU or purchase of GPU much earlier and the networking comes later, sometimes less the other way around which is why youre seeing the mix going on within my AI revenue mix, but typically.
Speaker Change: You run towards that range over time.
Perfect. Thank you so much.
Thank you one moment our next question.
Yeah.
And that will come from the line of Thomas O'malley with Barclays. Your line is open.
Hey, guys. Thanks for taking my question and nice results, but my question regards to the customer.
Talk to you had a long run here.
Successful business, particularly with one customer if you look in the market today, you have a new entrance who's 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 theres been profitability questions around the sustainability.
<unk> 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.
You would see kind of.
Speaker Change: That additional entrants maybe attack any of those in the future.
Hmm.
Let me take the second part first which is our AI is salaried customers accelerate the business.
It is a very profitable business and let me put the scaling.
Examined from a model point of view.
Speaker Change: Yeah.
Yes.
Each of this AI accelerators no different from a GPU.
Speaker Change: The way this.
Speaker Change: This large 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.
Speaker Change: How powerful those accelerators.
But also in the way the models are run.
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 and AI accelerators of Gpus.
Speaker Change: So we supply both in our custom business.
In the.
The logic side of it.
And on the way you just where the compute function is on doing the chips.
Speaker Change: The margin, they're no different than the margin in any in most of any Av.
Speaker Change: Semiconductor.
Speaker Change: Silicon chip business, but when you attach to it a huge amount of memory memory comes from third party. There are a few memory makers to make this specialized thing we don't we don't.
<unk> margins, taking on debt bonds, so by almost.
Speaker Change: Almost buying basic math.
Dilute the margin.
Of this.
AI accelerators, when you sell them with memory, which we do.
It does put some revenue somewhat higher but it is diluted the margin by.
Speaker Change: <unk>.
Regardless the <unk>.
The R&D the Opex that goes to support this.
As a percent of the revenue, which has 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.
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.
And this is more than a game, it's a very difficult.
Yes.
And to answer your first question there is only one broadcom.
Period.
Thanks Hock.
Thank you one moment our next question.
And that will come from the line of Karl Ackerman with BNP. Your line is open.
Yes, Thank you and good afternoon.
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 then 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.
I asked because one of your custom silicon business continues to broaden it would be helpful to better understand the growing mix of your 11 billion AI.
AI networking portfolio.
Speaker Change: Combined this year. Thank you.
Yes.
Let me have Charlie addressed this question is the expert.
Thank you so.
Two quick things on this one is the youre exactly right that the portfolio we have.
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 eight type of scanners use our portfolio and they use it specifically because it provides that flexibility. So whether you have an architecture that is based on an endpoint and <unk>.
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 <unk>.
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 there was and if they decide to build their own mix their own 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.
Thank you.
Thank you one moment for our next question.
Okay.
And that will come from the line of C. J Muse with Cantor Fitzgerald. Your line is open.
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 considering.
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 saying is they repurpose their budgets or is.
That business, so less discretionary that it's just not an impact to you. Thanks so much.
Speaker Change: Well on the second one.
I don't know about any crowding out to be honest, it's not Huawei offering obviously is not something that they need.
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 contained today than most people do a lot of people do.
They have best of breed, what I mean was the creator data center that is.
Compute.
Speaker Change: 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 best of breed on networking and best of breed on.
Storage with a common management and operations layer, which summed up very often is also vmware.
We realize.
And what we're trying to say is this makes bank and what they see is this makes bank. That's a brief data center very heterogeneous is.
Is that driven.
Of highly resilient.
Data center.
Speaker Change: You have a mixed bag.
Speaker Change: Goes down.
Where do you find it quickly root cause everybody's pointing fingers at the other so we got a problem not very resilient.
And not necessarily secure between <unk>.
Bare metal and one site in software on the other side. So it's a natural thinking on a bundle of many <unk>, we talked to to say, hey, I want to create one common.
Platform as opposed to just best of breed of age so that gets us into that so it is a greenfield.
Speaker Change: I'll bet they started from scratch.
Brown field that means they have existing data.
Centers trying to upgrade.
It's that.
Sometimes it's more challenging for us to get that adopted so I am not sure. There is a crowding out here and some competition, obviously on greenfield, where they can spend their budget on an entire platform versus best of breed, but on the existing data center, where youre trying to upgrade.
That's a tricky thing to do and it cuts the other way as well for us but.
Speaker Change: That's how I see it so in that sense.
Answer is I don't think we are seeing.
Level of crowding out that is.
That is in there.
It's very significant for me dimension.
In terms of the revenue mix no brocade is having a great great field year sofa, and still chunking, along but will that sustained hell. No. You know that brocade goes through cycles like most enterprise purchases. So we're enjoying it while it lasts.
Speaker Change: Thank you.
Thanks.
Thank you and we do have time for one final question.
And that will come from the line of William Stein with <unk> Securities. Your line is open.
Great. Thanks for squeezing me in.
Speaker Change: Congrats on the you.
We had another great quarter and strong outlook in AI I also wanted to ask about something you mentioned with Vmware and your <unk>.
Repaired remarks, you highlighted that you've eliminated tremendous amount of channel conflict I'm, hoping you can linger on this a little bit and clarify.
Speaker Change: Maybe what you did and specifically also what you did in the heritage.
Speaker Change: Okay.
Broadcom software business, where I think historically, you've shied away from the channel.
There was an idea that perhaps you.
Speaker Change: Reintroduce those products through the channel through a more unified.
Approach using Vmware.
Channel partners of resources, so any any sort of clarification here I think it would be helpful. Thank you.
Yes.
Speaker Change: That's a great question. It gives us Vmware taught me a few things there are 300000 customers.
300000.
Pretty interest amazing and we'll look at it.
I know on the CA, we took a position that lets speak and a less strategic guys and focus on it.
I can do that and Vmware.
Approach it differently and we start start to learn the value of.
A very strong bunch of partners, they had which are a network of distributors.
Speaker Change: And something like 15000 Vas value added resellers supported with this distributors. So we have <unk>.
Double down and invest in.
Speaker Change: In this reseller network in a big way for Vmware.
It's a great move I think about six months into the game, but we are seeing a lot more.
<unk> 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.
And who tend to they are very large enterprises, the largest bangs the largest health care companies and their view is one very be spot.
Service support engineering.
Solutions from us.
So we created a direct approach.
<unk> third waves.
Evolve choice, where they need to.
But on the long tail of 300000 customers. They get a lot of services too from the resale is value added resellers and so India way. So we know and strengthen that whole network of resellers. So that they can go direct.
<unk> supported financially with distributors and we don't try to challenge those guys unless our customers all in all both on the end of the day the cancer.
Speaker Change: Jos where they'd like to be supported.
And so we kind of simplified this together with the number of Skus there.
In the past.
What we're trying to do here.
Everybody is abundant.
I mean, you are talking a full range of partners and Evercore and whoever.
I'll make the biggest deal gets the lowest partner partner that make the biggest deal gets the biggest discount lowest priced and they are out there.
Basically kind of creating a lot of channel chaos and conflict in the marketplace here, we don't the customers.
Yeah.
Speaker Change: They get direct from Vmware to the direct sales force all they can easily move to the resellers to get it that way and as a third alternative which we offer.
They chose not they wanted to run their applications on Vmware.
And they want to run it efficiently on a full stack.
They have a choice now.
<unk> going to a hosted environment managed by a network of managed service providers, which we set up.
Globally that will run.
Infrastructure investing and operating infrastructure and this enterprise customers just.
I'll run their workloads in and get it as a service <unk> service that alternative and we are clear to make it very distinct and differentiated for our end use customers. They are available to all three is how they choose to consume.
Our technology.
Speaker Change: Great. Thank you.
Speaker Change: Thank you I would now like to hand, the call over to <unk> head of Investor Relations for any closing remarks.
Thank you Suri Broadcom currently plans to report its earnings for the third quarter of fiscal 'twenty four after close of market on Thursday September five 2024.
Public webcast that Broadcom is 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.
Thank you all for participating. This concludes today's program you may now disconnect.
Yes.
Okay.
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Speaker Change: Okay.
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Speaker Change: [music].
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