Broadcom(AVGO) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Consolidated net revenue for Q3 2024 was $13.1 billion, up 47% YoY, with operating profit up 44% YoY [5] - Q3 infrastructure software segment revenue was$ 5.8 billion, up 200% YoY, driven by $3.8 billion from VMware [7] - Q3 semiconductor revenue was$ 7.3 billion, up 5% YoY, with gross margins at 68%, down 270 basis points YoY [14] - Q3 free cash flow was $4.8 billion, representing 37% of revenue, and adjusted EBITDA was$ 8.2 billion or 63% of revenue [15] - Q4 guidance includes consolidated revenue of $14 billion, up 51% YoY, with adjusted EBITDA expected to be 64% of revenue [12][17] Business Line Performance - Networking revenue in Q3 was$ 4 billion, up 43% YoY, driven by strong demand for AI networking and custom AI accelerators [8] - Wireless revenue in Q3 was $1.7 billion, up 1% YoY, with expectations of over 20% sequential growth in Q4 [10] - Broadband revenue declined 49% YoY to$ 557 million in Q3, with continued weakness expected in Q4 [11] - Industrial resales in Q3 were $164 million, down 31% YoY, with a sequential recovery expected in Q4 [11] Market Performance - AI revenue in Q3 was$ 3.1 billion, with expectations of $3.5 billion in Q4, representing 10% sequential growth [9][12] - Non-AI networking revenue was up 17% sequentially in Q3, though down 41% YoY, with a moderated decline of 30% expected in Q4 [9] - Server storage connectivity revenue in Q3 was$ 861 million, up 5% sequentially but down 25% YoY, with mid to high-single-digit sequential growth expected in Q4 [10] Strategic Direction and Industry Competition - The company is focused on integrating VMware, with VMware Cloud Foundation (VCF) bookings reaching $2.5 billion in Q3, up 32% sequentially [7] - AI demand remains strong, with AI revenue expected to reach$ 12 billion for fiscal 2024, up from prior guidance of over $11 billion [12] - The company is reducing VMware spending, targeting adjusted EBITDA of$ 8.5 billion within three years of the acquisition [8] - The semiconductor segment is seeing a recovery in non-AI markets, with AI demand driving growth in custom accelerators and networking [9][12] Management Commentary on Business Environment and Outlook - The company expects strong growth in AI revenue in fiscal 2025, driven by hyperscalers and digital natives [21][36] - Non-AI semiconductor markets have bottomed out, with recovery expected in Q4 and into 2025 [31][32] - Broadband and industrial markets remain weak, but recovery is anticipated in 2025 [11][32] Other Important Information - The company ended Q3 with $10 billion in cash and$ 72.3 billion in gross principal debt, with plans to repay $1.9 billion of fixed-rate senior notes in Q4 [16] - Q3 cash dividends were$ 2.5 billion, with Q4 dividends expected to be $0.53 per share [17] - The company is focused on reducing floating-rate debt and managing inventory levels across the ecosystem [15][16] Q&A Session Summary Question: AI Revenue Mix and Growth Outlook - AI revenue in Q3 was$ 3.1 billion, with a mix of two-thirds compute and one-third networking, expected to continue in Q4 [20][21] - The company expects strong AI revenue growth in fiscal 2025, driven by hyperscalers and digital natives [21][36] Question: Shift in AI Revenue from Cloud to Enterprise - The company does not focus on the enterprise AI market, with products primarily targeting hyperscalers and cloud providers [23][24] Question: VMware Business Performance - VMware bookings are accelerating, with a focus on converting customers to subscription licenses and VCF, expected to continue into 2025 [26][27] Question: Non-AI Semiconductor Recovery - Non-AI semiconductor markets have bottomed out, with recovery expected in Q4 and into 2025, driven by enterprise data center spending [29][31] Question: AI Revenue Growth and Customer Base - AI revenue in Q3 was in line with expectations, with growth in Q4 driven by hyperscalers and digital natives [35][36] Question: VMware Profitability - VMware's operating margin is improving, with Q3 revenue of $3.8 billion and operating expenses of$ 1.3 billion, expected to continue improving in Q4 [49][50] Question: Custom AI Revenue and Customer Contribution - The company has three meaningful customers for custom AI accelerators, with production volumes expected to grow in 2025 [55][56] Question: Storage Business and Seagate Partnership - The company's partnership with Seagate focuses on advancing hard disk drive technology, with a goal of reaching 50 terabytes within five years [58][60] Question: Participation in NVIDIA's Blackwell Product Cycle - The company is not directly involved in NVIDIA's Blackwell roadmap but may provide optical components and DSPs for interconnects [62][63] Question: M&A Strategy - The company is focused on integrating VMware and does not anticipate further M&A in the near term [65][66] Question: AI Demand and Supply Constraints - The company is seeing upside demand for AI accelerators and networking, with the ability to meet supply requirements [68][69] Question: Trend Towards Custom ASICs in AI - The company believes hyperscalers will increasingly adopt custom ASICs for AI workloads, while enterprises will continue to rely on merchant silicon [72][76]