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pww.comBroadcom Inc., Q1 2024 Earnings Call, Mar 07, 2024 - NasdaqGS:AVGO

NasdaqGS:AVGO

Ji Yoo [Director of Investor Relations] 💬

Ji Yoo, the Director of Investor Relations for Broadcom Inc., made the following statements during the Q1 2024 Earnings Call:

  1. Opening Remarks:

    • Thanked the operator and greeted everyone.
    • Introduced Hock Tan, President and CEO, Kirsten Spears, Chief Financial Officer, and Charlie Kawwas, President, Semiconductor Solutions Group, who were present on the call.

  2. Information Access:

    • Noted that Broadcom had distributed a press release and financial tables after the market closed, detailing the financial performance for the first quarter of fiscal year 2024.
    • Mentioned that if anyone did not receive a copy, they could obtain the information from the Investors section of Broadcom's website at broadcom.com.
    • Stated that the conference call was being webcast live and that an audio replay of the call could be accessed for 1 year through the Investors section of Broadcom's website.

  3. Forward-Looking Statements:

    • Advised listeners to refer to Broadcom's press release and recent filings with the SEC for information on specific risk factors that could cause actual results to differ materially from the forward-looking statements made on the call.

  4. Non-GAAP Financial Measures:

    • Mentioned that in addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis.
    • Noted that a reconciliation between GAAP and non-GAAP measures was included in the tables attached to the day's press release.
    • Indicated that comments made during the call would primarily refer to non-GAAP financial results.

  5. Transition to Hock Tan:

    • Turned the call over to Hock Tan, President and CEO of Broadcom Inc.

  6. Closing Remarks:

    • Highlighted Broadcom's upcoming "Enabling AI in Infrastructure Investor Meeting" scheduled for Wednesday, March 20, 2024, at 9:00 a.m. Pacific, 12:00 p.m. Eastern Time.

    • Noted that Charlie Kawwas, President of Broadcom's Semiconductor Solutions Group, and several general managers would present on Broadcom's merchant silicon portfolio.

    • Mentioned that the live webcast and replay of the investor meeting would be available at investors.broadcom.com.

    • Announced that Broadcom planned to report its earnings for the second quarter of fiscal 2024 after the close of the market on Wednesday, June 12, 2024.

    • Indicated that a public webcast of Broadcom's earnings conference call would follow at 2:00 p.m. Pacific Time.

    • Concluded the call by thanking everyone for joining and turning the call back over to the operator.

Hock E. Tan [President, CEO & Executive Director] 💬

Hock E. Tan, President and CEO of Broadcom Inc., provided extensive insights during the Q1 2024 Earnings Call. Below is a detailed summary of his statements:

Consolidated Net Revenue

  • Q1 2024: $12 billion, up 34% YoY.
  • VMware Contribution: 10.5 weeks of contribution.
  • Excluding VMware: Consolidated revenue up 11% YoY.

Semiconductor Solutions Revenue

  • Q1 2024: $7.4 billion, up 4% YoY.
  • AI Revenue: Quadrupled YoY to $2.3 billion, offsetting the cyclical slowdown in enterprise and telcos.

Infrastructure Software Revenue

  • Q1 2024: $4.6 billion, up 153% YoY.
  • VMware Contribution: Drove a sequential jump in revenue by 132%.
  • Bookings Growth: From less than $600 million to $1.8 billion in Q1, expected to grow to over $3 billion in Q2.
  • Revenue Growth: Double-digit percentage sequentially quarter-over-quarter through FY 2024.

VMware Strategy

  • Focus: Upselling customers to upgrade to VMware Cloud Foundation (VCF).
  • VCF: Complete software stack integrating compute, storage, and networking.
  • Private AI Foundation: Partnership with NVIDIA enabling VCF to run GPUs, allowing customers to deploy AI models on-prem without compromising privacy.

Full-Year Guidance

  • Software Revenue: Reiterated guidance of $20 billion for FY 2024.

Semiconductors Overview

  • Networking Revenue: $3.3 billion, up 46% YoY, driven by strong demand for custom AI accelerators at 2 hyperscale customers.
  • Wireless Revenue: $2 billion, down 1% sequentially and 4% YoY.
  • Server Storage Connectivity Revenue: $887 million, down 29% YoY.
  • Broadband Revenue: $940 million, down 23% YoY.
  • Industrial Resales: $215 million, down 6% YoY.

Full-Year Guidance (Semiconductors)

  • Revenue: Mid- to high single-digit percentage growth YoY.
  • AI Revenue: Expected to represent 35% of semiconductor revenue at over $10 billion, offsetting the weakness in broadband and server storage.

Full-Year Guidance (Consolidated)

  • Revenue: Reiterated guidance of $50 billion, 40% YoY growth.
  • Adjusted EBITDA: Reiterated guidance of 60%.

ESG Report

  • Published: Fourth annual ESG report, highlighting the company's sustainability initiatives.

VMware Bookings

  • Q2 Expectation: Bookings expected to rise to $3 billion, attributed to the successful push initiative on private cloud (VCF).

AI Outlook

  • Increased: From over $7.5 billion to $10 billion+, driven by strong demand for custom ASIC AI accelerators and networking components.
  • Mix: Approximately 70% AI accelerators and 30% networking components.
  • Design Win Pipeline: Focused on two hyperscale customers, no new production ramp customers at this point.

Switching

  • Tomahawk 5: Strong demand for 51 terabit per second switches, driven by AI data center expansion.

Core Software Business

  • Strength: Due to strong contract renewals in mainframes and distributor software platforms.
  • VMware: Running at an $11 billion to $12 billion run rate, expected to accelerate.

Go-to-Market Strategy (VMware)

  • Focus: Selling and supporting VCF to the largest 2,000 strategic customers.
  • Hybrid Approach: Customers interested in a mix of on-prem and public cloud environments.

AI Customer Base

  • Segments:
    • Hyperscalers: Large consumer subscriber base and substantial data.
    • Enterprises: Companies pursuing AI initiatives on-prem.

Broadband, Server, and Storage Visibility

  • First Half 2024: Expected to be the trough.
  • Second Half 2024: Uncertain, but bookings significantly up from a year ago.

Optical Components

  • Context: Small compared to switches and routers, but growing alongside AI networking.

Custom Silicon

  • Dominance: Not dominant with only two major customers.
  • Ramp-Up Challenges: Requires years of development, heavy investment in software, and alignment with customer business models.
  • Competitors: No comment on competitors entering the market.

Custom Silicon Business Model

  • Margin Impact: Lower gross margin due to the inclusion of high-bandwidth memory, but strong margins on the logic part.

VMware Customer Segmentation

  • Strategic Customers: Focused on VCF sales.
  • Long-Tail Customers: Supported with improved versions of vSphere compute virtualization.

Carbon Black Decision

  • Value Creation: Decided to integrate Carbon Black into Symantec to generate more value for shareholders.

Kirsten M. Spears [CFO & Chief Accounting Officer] 💬

Kirsten M. Spears, the CFO and Chief Accounting Officer of Broadcom Inc., provided detailed financial information during the Q1 2024 Earnings Call. Here is a summary of her remarks:

  1. Financial Performance Overview:

    • Consolidated net revenue was $12 billion for the quarter, up 34% year-on-year.
    • Excluding the contribution from VMware, Q1 revenue increased 11% year-on-year.
    • Gross margins were 75.4% of revenue in the quarter.
    • Operating expenses were $2.2 billion, and R&D expenses were $1.4 billion, both up year-on-year primarily due to the contribution from VMware.

  2. Operating Income:

    • Q1 operating income, including VMware, was $6.8 billion and was up 26% from a year ago, with an operating margin of 57% of revenue.
    • Excluding transition costs of $226 million in Q1, operating profit of $7.1 billion was up 30% from a year ago, with an operating margin of 59% of revenue.
    • Adjusted EBITDA was $7.2 billion or 60% of revenue.

  3. Semiconductor Solutions Segment:

    • Revenue for the semiconductor solutions segment was $7.4 billion and represented 62% of total revenue in the quarter.
    • This was up 4% year-on-year.
    • Gross margins for the semiconductor solutions segment were approximately 67%, down 190 basis points year-on-year, driven primarily by product mix within the semiconductor end markets.
    • Operating expenses increased 8% year-on-year to $865 million, reflecting a 14-week quarter, resulting in semiconductor operating margins of 56%.

  4. Infrastructure Software Segment:

    • Revenue for infrastructure software was $4.6 billion, up 153% year-on-year, primarily due to the contribution of VMware and represented 38% of revenue.
    • Gross margins for infrastructure software were 88% in the quarter.
    • Operating expenses were $1.3 billion in the quarter, resulting in an infrastructure software operating margin of 59%.
    • Excluding transition costs, the operating margin was 64%.

  5. Cash Flow:

    • Free cash flow in the quarter was $4.7 billion and represented 39% of revenues off a higher revenue base.
    • Excluding restructuring and integration spend of $658 million, free cash flows were 45% of revenue.
    • Capital expenditures were $122 million.

  6. Balance Sheet:

    • Days sales outstanding were 41 days in the first quarter compared to 31 days in the fourth quarter on higher accounts receivable due to the VMware acquisition.
    • Inventory was $1.9 billion, up 1% sequentially.
    • Cash position was $11.9 billion, and gross debt was $75.9 billion.
    • The weighted average coupon rate and years to maturity of $48 billion in fixed-rate debt is 3.5% and 8.4 years, respectively.
    • The weighted average coupon rate and years to maturity of $30 billion in floating-rate debt is 6.6% and 3 years, respectively.

  7. Capital Allocation:

    • During the quarter, Broadcom repaid $934 million of fixed-rate debt that came due and repaid $2 billion of its floating-rate debt.
    • Broadcom intends to maintain this quarterly repayment of debt throughout fiscal 2024.
    • In the quarter, Broadcom paid stockholders $2.4 billion of cash dividends based on a quarterly common stock cash dividend of $5.25 per share.
    • Broadcom repurchased $7.2 billion of its common stock and eliminated $1.1 billion of common stock for taxes due on vesting of employee equity, resulting in the repurchase and elimination of approximately 7.7 million AVGO shares.

  8. Share Count:

    • The weighted effect of the 54 million shares issued for the VMware acquisition resulted in a sequential increase in Q1 to 478 million, with the Q2 non-GAAP diluted share count expected to increase to approximately 492 million as the shares issued are fully weighted in the second quarter.

  9. Guidance:

    • Reiterated guidance for fiscal year 2024 consolidated revenue of $50 billion and adjusted EBITDA of 60%.

    • Discussed the impact of the planned divestiture of the end-user computing division and the decision to retain the Carbon Black business and merge it with Symantec to form the enterprise security group.

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