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    Broadcom Inc (AVGO)

    Q2 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$122.70February 4, 2024
    Final Price$127.81May 4, 2024
    Price Change$5.11
    % Change+4.16%

    What went well

    • Strong Growth in AI Revenue: Broadcom expects AI revenue to exceed $11 billion in fiscal 2024, driven by significant demand for their AI accelerators and networking solutions.
    • Robust Product Roadmap in AI Networking: Broadcom is maintaining a consistent two-year cadence of new product introductions, with plans to launch the Tomahawk 6, a 100-terabit switch, by late 2025, positioning them ahead of competitors.
    • Successful Integration of VMware: The integration of VMware is progressing well, with customers adopting subscription models and VMware Cloud Foundation, aiming to accelerate VMware's revenue towards a $4 billion per quarter run rate.

    What went wrong

    • Potential pressure on gross margins due to increased competition in the custom AI accelerator business and the dilutive effect of including third-party high-bandwidth memory (HBM). Hock Tan acknowledged that selling accelerators with attached memory "will dilute the margin of these AI accelerators when you sell them with memory, which we do."
    • Uncertainty in predicting the AI revenue mix and growth, particularly between AI accelerators and networking products. Hock Tan admitted, "We don't really quite understand it 100%." This unpredictability may affect the accuracy of their AI revenue forecasts.
    • Challenges in sustaining non-VMware software revenue and integrating VMware. Hock Tan noted that the increased revenue from Brocade is unlikely to continue: "But will that sustain? Hell no, you know that." Additionally, adopting VMware Cloud Foundation in existing data centers is "sometimes that's more challenging for us to get that adopted."

    Q&A Summary

    1. AI Revenue Guidance
      Q: Is the $11B AI revenue guidance conservative?
      A: The CEO acknowledged that the $11 billion AI revenue guidance might be conservative, suggesting actual revenues could be higher. He emphasized that quarterly shipments can be lumpy, but the overall trajectory is improving.

    2. AI Revenue Mix
      Q: How are AI accelerators and networking revenue split?
      A: The mix of AI revenues is shifting from 80% accelerators and 20% networking to approximately 66% accelerators and 33% networking now, expected to move toward 60% accelerators and 40% networking by year-end.

    3. VMware Progress
      Q: Is VMware integration exceeding expectations?
      A: VMware integration is progressing well and on track, with strong customer interest in moving to subscription models due to compelling pricing for the full software stack.

    4. $4 Billion VMware Target
      Q: Are you on track for $4B VMware quarterly revenue?
      A: While not specifying a timeframe, the CEO indicated they are on track toward achieving a $4 billion quarter with VMware.

    5. Competition with NVIDIA
      Q: How do you view competition with NVIDIA in AI?
      A: Broadcom operates differently and does not compete directly with NVIDIA in GPUs. They provide custom ASIC AI accelerators for select hyperscalers and complement GPUs in networking, enabling them to work efficiently.

    6. Custom AI Accelerators
      Q: Can you discuss AI ASIC profitability and competition?
      A: The custom AI accelerator business is very profitable, with operating margins as good or better than other segments. Though gross margins appear diluted due to including third-party memory, overall profitability is strong. The CEO emphasized that "there's only one Broadcom."

    7. Product Cadence
      Q: Update on Tomahawk 6 and product cadence?
      A: Broadcom plans to launch Tomahawk 6, a 100-terabit switch, by late 2025, maintaining their consistent two-year product introduction cadence and staying ahead of competitors.

    8. Non-AI Networking Outlook
      Q: Is the non-AI networking business bottoming?
      A: The non-AI networking business is following a similar trajectory to server storage, which bottomed in Q2 and is expected to recover modestly in the second half of the year.

    9. Growth Strategy Beyond VMware
      Q: Do you need more acquisitions for growth?
      A: With 12% organic growth year-over-year without VMware, there is no rush to acquire another company, but they remain open to acquisitions to create shareholder value.

    10. GPU Demand Mapping
      Q: How does GPU spend relate to your networking?
      A: Approximately 25% to 30% of the value spent on GPUs translates to networking infrastructure, including optical interconnects and switching.

    11. Software Run Rate Sustainability
      Q: Is the higher software run rate sustainable?
      A: Brocade is having a strong year, but the CEO acknowledged it may not sustain at this level due to cyclical enterprise purchasing patterns.

    12. VMware Channel Strategy
      Q: How are you handling VMware's channel conflict?
      A: Broadcom has invested significantly in VMware's reseller network, supporting both direct sales and a network of distributors and VARs, providing customers with multiple consumption options and simplifying offerings.

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