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    Broadcom Inc (AVGO)

    Q3 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$128.62May 4, 2024
    Final Price$143.82August 4, 2024
    Price Change$15.20
    % Change+11.82%

    What went well

    • Broadcom's AI revenue is projected to exceed $12 billion for the full year, driven by strong demand from hyperscalers in both AI accelerators and networking segments.
    • Q3 consolidated revenue reached $13.1 billion, up 47% year-on-year, with a robust gross margin of 77.4%, highlighting the company's strong financial performance.
    • Anticipated continued strong growth in AI revenue into fiscal 2025, supported by a substantial backlog and increasing orders from hyperscalers aiming to expand AI capacity, suggests sustained demand for Broadcom's solutions.

    What went wrong

    • Broadcom incurred a significant $4 billion noncash charge due to the relocation of IP back to the U.S., resulting in a deferred tax liability .
    • Hyperscalers are developing their own custom AI accelerators (ASICs), which may reduce demand for Broadcom's merchant silicon solutions .
    • Broadcom is not directly participating in NVIDIA's upcoming Blackwell product cycle, potentially missing opportunities in a significant AI market segment .

    Q&A Summary

    1. AI Revenue Growth and Outlook
      Q: Can you discuss the AI revenue mix, growth expectations, and outlook for fiscal '25?
      A: Management confirmed that AI revenue was approximately $3.1 billion in Q3, with a mix of two-thirds in compute and one-third in networking. They expect similar proportions in Q4, with AI revenue increasing to $3.5 billion. Looking ahead, they anticipate strong growth in AI revenue continuing into fiscal '25, driven by backlog and ongoing demand from hyperscalers and cloud customers.

    2. Non-AI Semiconductor Recovery
      Q: Will non-AI semiconductor revenues recover to prior levels once the cycle improves?
      A: Management believes the non-AI semiconductor business has passed the bottom of the cycle. Bookings in Q3 for non-AI semiconductors were up 20%, indicating a recovery. They expect revenues to return to previous levels as enterprise IT spending rebounds, potentially even surpassing prior peaks due to increased demand from AI-related infrastructure upgrades.

    3. VMware Integration and Software Business
      Q: How is the VMware integration progressing, and what is the outlook for the software business?
      A: VMware is performing well, with Q3 revenue of $3.8 billion and operating expenses of $1.3 billion, indicating strong operating margins. Management expects continued revenue growth and expense reduction in Q4 and into fiscal '25. The non-VMware software business has stabilized at around $2 billion per quarter, providing a solid base for future growth.

    4. Shift in AI Market from Cloud to Enterprise
      Q: Are you seeing a shift in AI demand from cloud service providers to enterprise customers, and how does this affect your outlook?
      A: Management does not focus on the enterprise AI market and is primarily concentrated on hyperscalers and large cloud platforms. They have not observed the reported shift towards enterprise in their business and do not see it impacting their revenue outlook.

    5. Trend Towards Custom AI Accelerators
      Q: How do you view the trend towards custom ASICs in AI compute versus GPUs, and what is your positioning?
      A: Management acknowledges a shift towards custom ASICs (XPUs) among large hyperscalers, driven by the need for performance and efficiency in AI workloads. While they previously believed merchant GPUs would dominate, they now see hyperscalers investing in custom silicon to control their destiny. Broadcom is well-positioned to support this transition, providing custom accelerators and networking solutions.

    6. Ability to Meet Upside Demand for AI XPUs
      Q: Are you able to meet the increased demand for AI XPUs and networking, given supply constraints?
      A: Management confirmed they are seeing upside orders and increased demand for AI XPUs and networking equipment. They are able to meet these upsides and expect this trend to continue into 2025 as customers accelerate AI data center deployments.

    7. M&A Strategy
      Q: Do you have any plans for further M&A, either in software or semiconductors?
      A: Management is currently focused on the transformation and integration of VMware and has no immediate plans for additional acquisitions. They anticipate it may take another one to two years to complete the VMware integration.

    8. Participation in NVIDIA's Blackwell Cycle
      Q: Will Broadcom participate more deeply in NVIDIA's upcoming Blackwell product cycle?
      A: Management stated that they are not directly participating in NVIDIA's product roadmap. While their base technology could be applied to support products like Blackwell, such as in optical components or DSPs, they are not directly engaged in that market.

    9. Seagate's HDD SoC Assets Acquisition
      Q: What does the acquisition of Seagate's HDD SoC assets mean for Broadcom?
      A: The acquisition is a partnership focused on advancing hard disk drive technology. Broadcom believes in the long-term sustainability of HDDs as a storage medium for hyperscalers. They aim to collaborate on technology to increase HDD capacities to 50 terabytes within five years, reinforcing their commitment to HDD storage.

    10. Relocation of IP and Tax Liability
      Q: Does the $4.5 billion tax liability from relocating IP indicate asset sales or debt reduction plans?
      A: The IP relocation was a timing decision and is not related to any asset sales or efforts to pay down debt. The $4 billion charge is offset by a deferred tax liability, making it a noncash event with minimal cash impact.

    11. Profitability and Margins of VMware
      Q: Will VMware achieve similar operating margins as your other software businesses post-integration?
      A: Management implied that VMware's operating margins are improving, with Q3 revenue of $3.8 billion and operating expenses of $1.3 billion. They expect continued revenue growth and expense reductions, suggesting margins could align with their other software businesses over time.

    12. Software Gross Margin Trajectory
      Q: How should we think about the gross margin trajectory for the software business as revenue grows?
      A: Management indicated that software gross margins are expected to be around 90% at least. They noted that gross margin is less relevant unless running SaaS at scale, and most of their products are not SaaS.

    13. Contribution from Other AI Customers
      Q: How meaningful are contributions from AI customers other than your largest one?
      A: Management now has three meaningful AI customers, all deploying production accelerators in their AI data centers. This diversification contributes to their AI revenue growth and outlook.

    14. Non-AI Networking and Other Businesses
      Q: Is there any reason non-AI networking and other businesses shouldn't return to prior levels?
      A: Management expects these businesses to recover as the cycle improves. There is no reason they shouldn't return to previous levels, especially with potential upcycles driven by broader infrastructure upgrades related to AI.

    15. Supply Constraints in AI Accelerators
      Q: Is AI demand outpacing your supply capacity in the second half?
      A: They are able to meet the increased demand and do not face supply constraints. Management is confident in their ability to fulfill upside orders for AI accelerators and networking equipment.

    16. Outlook for Non-VMware Software Business
      Q: Has the non-VMware software business bottomed, and what is the expected growth?
      A: The non-VMware software business has stabilized at around $2 billion per quarter. Management believes this represents a level of clear stability and provides a solid foundation for future growth.

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