Broadcom Inc (AVGO)

• Broadcom projects a massive AI serviceable addressable market (SAM) of $60-$90 billion by fiscal 2027 with just three hyperscale customers, highlighting significant growth potential in AI semiconductors. -
• The company has strong technology leadership in custom AI accelerators (XPUs) and AI connectivity, positioning it to capture a leading market share. - -
• Broadcom expects its AI semiconductor revenue to rapidly outgrow its non-AI semiconductor business, becoming a significant growth driver in the coming years. -

• Reliance on a Few Large Customers for AI Revenue May Lead to Revenue Volatility: Broadcom's AI revenue growth is heavily dependent on just three hyperscale customers. Hock Tan acknowledged that "there could be quarter-to-quarter variability, given there are only 3 customers and the fact that deployment comes in big chunks." -
• Growth in AI Revenue Could Dilute Semiconductor Gross Margins: As AI becomes a larger portion of semiconductor revenue, gross margins may decline. Hock Tan stated, "Gross margin in semiconductors will dilute, you're correct in saying that." -
• High Debt Levels Due to VMware Acquisition Could Pose Financial Risk: Broadcom has significant debt following the acquisition of VMware. Hock Tan mentioned, "We do intend to use part of that 50% free cash flow that's not used for dividends to go de-lever ourselves, given the size of the debt load we are taking on." -

1. AI Opportunity in 2027
   Q: What is the $60-90 billion AI SAM in 2027?
   A: Hock Tan explained that the $60 to $90 billion figure represents Broadcom's serviceable addressable market (SAM) for AI products in fiscal 2027, specifically for XPUs and AI connectivity with three hyperscale customers. This is a one-year opportunity, not cumulative revenue. - -

2. Current SAM and Growth
   Q: What is the current SAM, and how will share and margins evolve?
   A: The current SAM for AI in 2024 is estimated at $15 to $20 billion, growing to $60 to $90 billion by 2027. While semiconductor gross margins may dilute as AI grows, the substantial revenue increase will improve operating margins overall. -

3. Gross Margin Impact
   Q: How will AI growth affect gross margins?
   A: As AI becomes a larger part of semiconductors, gross margins may dilute. However, the significant revenue from AI is expected to leverage operating margins, improving them beyond current levels. -

4. Capital Allocation Plans
   Q: How will you use the other 50% of cash generated?
   A: The company plans to use the remaining 50% of free cash flow to pay down debt, focusing on reducing interest expense by targeting term loans. This is due to the debt taken on from acquiring VMware. -

5. M&A Strategy
   Q: Does organic growth change your M&A focus?
   A: Broadcom's interest in acquisitions remains unchanged. They continue to seek strong franchise assets in semiconductors or infrastructure software that meet their demanding criteria, to add to their portfolio. -

6. Competition with NVIDIA
   Q: How do NVIDIA's rack-scale products affect you?
   A: Hock Tan noted that as clusters scale to hundreds of thousands or millions of XPUs or GPUs, architecture becomes complex. Their hyperscale customers have figured out how to scale up, with roadmaps to grow from 100,000 to 1 million XPU clusters over the next 3 to 4 years. -

7. AI Connectivity Ratio
   Q: What is the network-to-XPU ratio?
   A: Currently, networking represents 5% to 10% of AI silicon content. As clusters expand to 500,000 to 1 million XPUs or GPUs, this ratio increases to 15% to 20%. -

8. ASIC vs Networking Trends
   Q: How are ASIC and networking trends evolving?
   A: Both ASICs and networking components are growing, though not at the same rate. Broadcom has shipped more network AI connectivity components in the back half of this year, and expects this trend to continue into next fiscal year before more XPUs ramp in the back half of '25. -

9. Software Revenue Impact
   Q: Will software pushouts affect revenue and margins?
   A: Hock Tan stated it's merely a slip between quarters, with no material impact on the rest of fiscal '25. Concerns about lower Q2 software revenue and gross margin trajectory were dismissed, noting guidance is only provided for Q1. -

10. AI Growth vs CapEx Trends
    Q: Should AI growth mirror hyperscaler CapEx trends?
    A: Hyperscalers provide overall CapEx numbers without breaking out AI spending. AI CapEx outstrips non-AI, so the AI business does not necessarily mirror the overall CapEx growth trends. -

11. Other CSPs Ramping
    Q: When will other cloud providers ramp?
    A: Broadcom is working to bring other cloud service providers into production over the next three years. Deep engagement is ongoing, but software readiness and testing are needed before ramping can occur. -

12. TAM vs SAM Clarification
    Q: What's the AI TAM in 2027 compared to your SAM?
    A: Hock Tan doesn't know the total addressable market (TAM) beyond their customers. They build their SAM from the ground up based on customers' roadmaps and consumption patterns, aiming to gain their fair share in a substantial market. -

Quarterly guidance for Q1 2025:

• Consolidated Revenue: $14.6 B - (raised from $14 B - - )
• Adjusted EBITDA: 66% of revenue - (raised from 64% - - )
• Semiconductor Revenue: $8.1 B, up 10% year-on-year - (raised from $8 B, up 9% year-on-year - )
• Infrastructure Software Revenue: $6.5 B, up 41% year-on-year - (raised from $6 B - )
• Consolidated Gross Margins: up 100 basis points sequentially - (raised from down 100 basis points sequentially - )
• GAAP Net Income and Cash Flows: impacted by higher taxes, restructuring, and integration-related costs - (no change from prior guidance - )
• Non-GAAP Diluted Share Count: ~4.9 B shares - (no prior guidance)

Annual guidance for FY 2025:

• Non-GAAP Tax Rate: 14.5% - (no prior guidance)