Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Broadcom's AI revenue quadrupled year-on-year to $2.3 billion during the quarter, driven by strong demand for custom AI accelerators from two hyperscale customers. AI revenue is expected to exceed $10 billion in fiscal 2024, representing 35% of semiconductor revenue, up from the previous guidance of 25%.
- Networking revenue grew 46% year-on-year to $3.3 billion, leading Broadcom to increase its fiscal 2024 networking revenue growth outlook to over 35% year-on-year, up from prior guidance of 30%. This growth is due to continued strength in AI networking demand and strong demand for its latest generation products, including Tomahawk 5 800G switches and Thor 2 Ethernet NICs.
- The integration and focused sales strategy with VMware is driving significant growth in software bookings, expected to grow from $1.8 billion in Q1 to over $3 billion in Q2. Broadcom is upselling customers to VMware Cloud Foundation to meet the demand for on-premises private cloud solutions and AI workloads.
- AVGO is experiencing cyclical weakness in broadband and server storage markets, leading to revised outlooks for fiscal 2024: broadband revenue is now expected to decline by 30% year-on-year (from prior guidance of mid-teens decline), and server storage revenue is expected to decline by mid-20% range year-on-year (from prior guidance of high teens decline).
- The company's AI revenue growth is heavily dependent on only two hyperscale customers for custom AI accelerators, posing a risk if these customers reduce orders or if competitors gain share. Hock Tan admits, "I only have 2, really only have 2 seriously. I don't count anybody... at this point."
- AVGO's acquisition of VMware may lead to increased operating expenses due to the need to support a larger customer base, including smaller commercial customers, which could pressure margins. Hock Tan acknowledges, "My costs of my spend, OpEx spend... will increase."
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AI Revenue Outlook Increased
Q: Why is AI revenue outlook raised from $7.5B to over $10B?
A: Hock Tan explained that the AI revenue outlook increased to over $10 billion due to strong demand for AI accelerators and networking components. Approximately 70% of this increase comes from custom AI accelerators for two hyperscaler customers, and 30% from networking components like switches and routers. This nearly $3 billion boost reflects the scaling out of AI data centers to enable generative AI functionality. , -
AI Customers and Market
Q: Are other hyperscalers adopting custom silicon too?
A: Hock Tan noted that Broadcom currently has only two major hyperscaler customers for custom AI accelerators. Creating custom silicon takes years of collaboration; they've engaged with one customer for eight years. Other hyperscalers haven't ramped up due to the significant time and effort required to develop and integrate custom silicon solutions for AI. -
Competitive Position in Custom Compute
Q: Competitor claims share at your largest customer—your thoughts?
A: Hock Tan dismissed the competitor's claims as "trash talking" and expressed confidence in maintaining Broadcom's position. He emphasized their deep, strategic, and multiyear relationships with customers, suggesting the numbers will speak for themselves. -
VMware Integration and Growth Strategy
Q: How are you managing VMware's go-to-market strategy?
A: Hock Tan stated that they're focusing on engineering an improved VMware Cloud Foundation (VCF) stack and deploying it with the largest 2,000 strategic customers who desire significant on-premises data centers. This approach has been very successful in selling and helping customers deploy private cloud solutions since acquiring VMware approximately three months ago. , -
Software Bookings and One-Time Boost
Q: Core software grew sharply—is this sustainable?
A: Hock Tan acknowledged that strong contract renewals, especially in mainframes, boosted software results but cautioned not to overemphasize this growth. The main focus is the accelerating bookings and backlog from VMware. He agreed that the core business strength was more of a one-time event and that modeling it to taper off is appropriate, with overall software growth remaining at 20%. , -
Operating Expenses with VMware
Q: Will VMware's broader customer base increase OpEx?
A: Hock Tan agreed that spending on go-to-market and support will increase due to VMware's 300,000 customers. They stratify the market by focusing on strategic customers for VCF and supporting smaller customers with vSphere. Despite higher OpEx, he expects operating leverage through revenue growth over the next three years, generating better shareholder value without proportionally increasing spend. -
AI Accelerator Margins
Q: How does custom silicon affect your margins?
A: Hock Tan explained that AI accelerators incorporate expensive high-bandwidth memory, which cannot carry the same margin as logic components. Consequently, the overall gross margin of AI accelerators is naturally lower than traditional silicon products. However, for the logic part, they command margins similar to the corporate gross margin due to their cutting-edge IP and technology. -
Optical Components Contribution
Q: How significant is optical in AI networking growth?
A: Hock Tan clarified that while components like PAM-4 DSPs and optical components are growing due to AI networking demand, they are still small compared to switches, routers, and AI accelerators. In the over $10 billion AI revenue, about 20% comes from switches and routers, and the rest from other components like optical. He emphasized they are not vertically integrated in optical transceivers but provide key components. -
Broadband, Server, and Storage Outlook
Q: When will these markets recover?
A: Hock Tan indicated they are near the trough in broadband, server, and storage markets. The first half of 2024 is expected to be the trough, with uncertainty in the second half. He noted they've seen bookings lately significantly up from a year ago, suggesting potential recovery ahead. -
Carbon Black Divestiture Plans
Q: Why did you decide to keep Carbon Black?
A: Hock Tan explained they determined they could generate more shareholder value by integrating Carbon Black into Symantec, rather than divesting it. By doing so, they expect to generate better value than a one-time divestiture of this not particularly large asset.