Broadcom Inc.

Second quarter fiscal year 2020 financial results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Beatrice Rosado, Director of Investor Relations of Broadcom, Inc. Please go ahead, ma'am.

Thank you, Operator, and good afternoon, everyone. Joining me on today's call are Hock Tan, President and CEO, and Tom Krause, Chief Financial Officer of Broadcom. After the market closed, Broadcom distributed a press release and financial tables describing our financial performance for the second quarter of fiscal year 2020. If you did not receive a copy, you may obtain the information from the investor section of Broadcom's website at broadcom.com. This conference call is being webcast live, and a recording will be available via telephone playback for one week. It will also be archived in the investor section of our website at broadcom.com. During the prepared comments, Hawk and Tom will be providing details of our second quarter fiscal year 2020 results, guidance for our third quarter, as well as commentary regarding the business environment. We'll take questions after the end of our prepared comments. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. In addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. So with that, I'll now turn the call over to Hawk.

All right. Thank you, Bea, and thank you, everyone, for joining us today. Before I provide our quarterly results, I do want to take a moment to acknowledge and thank all of the healthcare professionals and essential workers on the front lines who are showing incredible courage during these unprecedented times. I speak for all of Broadcom when I say we are very grateful for their work. I also especially want to thank our team of more than 20,000 employees working all over the world to keep our business running. I'm proud of their tireless efforts to preserve and protect our enterprise. Now, more than ever, our customers and communities are counting on us to continue to deliver the essential technologies that enable the continuity of functions critical to daily life. So now let me turn to our second quarter results and our outlook for the third quarter. We delivered second quarter net revenue of $5.7 billion, very much in line with our guidance, down 2% sequentially, up 4% year on year. Semiconductor solutions revenue was $4 billion. declining 2% year-on-year. Infrastructure software revenue was $1.7 billion, up 21% year-on-year, which of course includes contribution from cementing. On a sequential basis, semiconductors were down 4% while software was up 3%. So on to more colors, starting with semiconductors. We face a very interesting demand environment in the midst of a challenging supply chain ecosystem. Let me provide more color on various semiconductor end markets, beginning with networking. Q2 reflected an expected recovery and was up 11% sequentially. Demand was healthy. as we began to ram our next generation Tomahawk 3 and Trident 3 switch products at our various cloud customers. And in network routing, Jericho 2 at our telco customers. This daily recovery, which we saw in Q2, is now turning into a demand surge in Q3. as we are seeing strength for existing generation products in addition to these next generation RAMs. We are also seeing a strong uplift in demand from the RAM of next generation deep learning inference chips for our lead cloud customer. In server storage connectivity, We note a similar situation. From a 14% sequential revenue decline in Q2, demand in Q3 has turned around and is accelerating. Demand from enterprise customers for rate data protection controllers has recovered and is showing considerable strength. Demand from cloud service providers for our PCI Express switches that drive solid state memory and AI applications has been particularly strong. Turning on to broadband, which was flat sequentially in Q2, we expect approximately 10% revenue growth quarter over quarter in Q3, driven by strong adoption of Wi-Fi 6 in next generation access gateways, not only from enterprises, but also from telcos and other service providers. We're also seeing increased demand for broadband DSL and PON, and next generation cable DOCSIS 3.1. That being said, we expect this to be partially offset by a sharp decline in video particularly in satellite set-top boxes, given the current constraints on live sporting events. Then moving on to wireless. Wireless saw typical seasonality in Q2, was down 14% sequentially, much like last year. In Q3, we would normally expect to see a double-digit sequential uplift in revenue from the RAM of next-generation phone at our large North American mobile phone customer. However, this year, we do not expect to see this uptake in revenue until our fourth fiscal quarter. So, accordingly, We expect our wireless revenue in Q3 will be down sequentially as it was down in Q2. Turning last to industrial. We began to see recovery in Q2 and revenue was up 13% sequentially, consistent with recovery in resales to end market. Even as we expect resales in Q3 to be flat, Given the current market uncertainty arising from the COVID-19 pandemic, we are aggressively moving to bring down channel inventory globally, especially in Europe and Japan. As a result, we expect a double-digit sequential decline in recognized shipping revenue in the third quarter. I would note resales in Asia Pacific, in particular China, are expected to be up quarter over quarter while other regions, all other regions are expected to be down. So that's the demand picture. Now, on the supply chain side, we have experienced and continue to do so some challenges, some of which are unique to us. Lead times, especially in leading edge processes, have extended and are running at historical highs. Coupled with this, we have significant test capacity. We have positioned significant test capacity in Malaysia where we also have a centralized warehouse. And this is a location which has experienced intermittent COVID-19 lockdowns and significant logistical delays. Bottom line, in Q3, we really have much more demand than we can supply, and this may very well continue beyond Q3. In summary, we clearly see significant puts and takes. On the positive side, a surge of demand in networking, storage, and broadband. On the negative side, supply chain constraints and the product cycle delay in wireless. Therefore, we forecast our semiconductor solution revenue to be up 3% sequentially, but only down 5% year-on-year for the third quarter, despite the major product cycle delay in wireless. All right, now turning to software. CA was up 2% year-on-year and flat sequentially. Bookings and account grew double-digit annually, which was offset by the expected reduction in revenue.