Broadcom Inc.

Welcome to Broadcons, Inc.' 's VMware Transaction and Second Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ji Yu, Director of Investor Relations at Broadcons, Inc.

Thank you, Operator, and good morning, everyone. Joining me on today's call are Hawk Tan, President and CEO, Kirsten Spears, Chief Financial Officer, Tom Krause, President, Broadcom Software Group, and Charlie Kawas, Chief Operating Officer. This morning, Broadcom issued a press release and presentation regarding our announced agreement to acquire VMware. We also distributed our fiscal second quarter 22 results and financial tables. 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 Investors section of our website at Broadcom.com.

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During the prepared remarks, Hop, Tom, and Kirsten will be providing details regarding our announced acquisition of VMware and Broadcom's second quarter fiscal year 22 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 and presentation 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. I'll now turn the call over to Hawk.

Thank you, G. and thank you everyone for joining today if you could indulge me let me start off by reviewing our fiscal q2 results and our outlook for on q3 and the broader markets of course we play in so in fiscal q2 22 consolidated net revenue revenue was a record 8.1 billion dollars up 23% year-on-year. Semiconductor solutions revenue growth accelerated to 29% year-on-year to $6.2 billion, and infrastructure software revenue grew 5% year-on-year to $1.9 billion. Demand, as referenced by consolidated bookings, continued to be strong. even as our lead times remain unchanged but extended. In hardware, backlog at the end of Q2 was over $29 billion compared to $25 billion the preceding quarter and $21 billion a year ago. In software, backlog grew as well and ended the quarter at over $15 billion compared to $14 billion a year ago. Let me provide more color by end markets. Starting with networking, networking revenue was a record $2.2 billion with growth accelerating to 44% year on year. There were two major drivers. We saw substantial deployment by hyperscalers of their AI engines and networks using our silicon during this quarter. More importantly, we saw adoption of a next generation merchant switching and routing continuing to accelerate in hyperscale enterprises and service providers at the expense of proprietary solutions. This fundamental transition to make merchant silicon based on Broadcom's platform will continue in Q3, and as a result, we expect in excess of 25% year-over-year growth in networking.

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$939 million, and as we guided, accelerated to 66% year-on-year growth. While service storage spending in enterprise was strong, our content increase in next-generation mega-rate drove a substantial portion of this growth. Additionally, hyperscalers are aggressively adopting our next generation server storage solutions to scale their massive consumption of nearline hard disk drive arrays. So in Q3, we expect these same drivers to continue with revenue to grow over 60% year on year. Now moving on to broadband. Q2 revenue of 1.1 billion grew 24% year on year, Deployment during the quarter of next generation PON and cable modem with high attach rate of Wi-Fi 6 and 6E continue to be good among major service providers globally. Just as a reminder, however, expansion in broadband investments arising particularly from COVID-19 pandemic lockdowns is a multi-year phenomenon. Investments are measured and we are still in the early innings. Accordingly, in Q3, we do expect broadband revenue to sustain a growth rate around 20% year on year. On wireless, Q2 revenue of $1.7 billion was up 6% from a year ago. and as guided, declined a seasonal 14% quarter-on-quarter. In Q3, we expect wireless revenue to be flat to slightly down quarter-on-quarter, but up meeting percentage from a year ago, reflecting an increase in content. Finally, in industrial, Q2 resales of 254 million grew 14% year over year, driven by strong demand from electric vehicles, renewable energy, factory automation, and healthcare. Reflecting such strong resales, our inventory in the channel continued to be very lean at around one month. And in Q3, we expect industrial resales to remain stable and inventory levels to continue to be lean. So in summary, Q2 semiconductor solutions revenue was up 29% year-on-year, step up from the 20% year-on-year growth the preceding quarter. As I highlighted above, content increase in service storage and the fundamental shift to merchant silicon in switching and routing drove this accelerated growth. This will continue in Q3, And accordingly, we expect semiconductor revenue in Q3 to grow 31% year on year. Now turning to software. In Q2, infrastructure software revenue of $1.9 billion grew 5% year on year and represented 23% of total revenue. Core software revenue grew 5% year on year. In dollar terms, consolidated renewal rates average 120% over expiring contracts, while in strategic accounts, we average 136%. Within our strategic accounts, $641 million of represented renewals and expiring contracts, of which $117 million represented cross-selling, including PLAs, of our portfolio products to these same customers. Over 90% of the renewal value represented recurring subscription and maintenance. ARR at the end of Q2 was $5.4 billion, which was up 4% from a year ago. And in Q3, We expect our infrastructure software revenue to sustain and meet single digit percent growth year over year. In summary, our outlook for Q3, semiconductor revenue growth will continue to be strong, up 31% year on year. Layering on our stable software business, we expect Q3 consolidated revenue growth of 24% year-on-year to $8.4 billion. Well, that concludes my discussion of our second quarter results. I will now turn to what perhaps you all have been waiting to hear more about. Now please refer to our accompanying slides regarding our agreement to acquire VMware. As you know, we never embark on an acquisition unless we feel our core is very strong and solid. Irrespective of what you might think of where we are in the semiconductor cycle today, I do want to reassure you the fundamentals of our business, both in semiconductors and in software, have never been stronger. We have just reviewed how solidly grounded these businesses are. So let me discuss now what we believe is a very unique opportunity to take our company and its business to the next level. Starting with slide number four, by adding VMware, we will bring significant scale to Broadcom's software business. and reinforce our position as a premier provider of mission-critical platform solutions to enterprises globally. VMware is an iconic company providing core cloud infrastructure that powers modern enterprises. The company began as the virtualization pioneer, bringing revolutionary levels of efficiency to on-premise data centers. VMware extended its platform to the private cloud, giving enterprise customers unmatched levels of security, performance, and control over their applications and underlying infrastructure. And most exciting, Today, VMware is now powering solutions for multi-cloud, hybrid cloud future, one where it will be possible for enterprises to develop and run their apps anywhere, everywhere, with no trade-offs, in a truly cloud-neutral fashion. One of the reasons we became very interested in VMware was because of its world-class team engineering-centric culture, and strong customer and partner relationships. As shown in slide five, VMware importantly aligns incredibly well with the Broadcom strategy, and it has all the attributes we seek in the platforms we operate. VMware is the leader in big, growing, and global markets The company is an indispensable provider of mission critical platform technology with a blue chip customer base and an incredible innovation engine. As Tom will discuss next in more detail, together with Broadcom's existing software portfolio, we are positioned to create a uniquely powerful value proposition for enterprises, enabling them to develop deploy and manage their applications securely, seamlessly across every type of cloud, and to accelerate the application lifecycle for their workloads. And in addition to adding new dimensions of value for customers, VMware also has an ideal profile that will enable us, Broadcom, to create compelling value for our shareholders. As part of Broadcom, our target is for VMware to contribute approximately $8.5 billion of EBITDA once we have fully integrated the company onto our platform. Slide six shows that with more than $40 billion of pro forma revenue, and this is performer on fiscal 21. We are creating one of the world's largest infrastructure technology companies. Our semiconductor business is one of the largest semiconductor businesses globally with 17 key franchises. It is highly profitable, and as I just reviewed, continues to pose very strong organic growth. Revenues have grown from $15.6 billion 2017 following the acquisition of Classic Broadcom to $20.4 billion in fiscal 21. All this growth being organic. With the addition of VMware, our software business will now represent close to half of a total pro forma revenue with approximately $20 billion of software revenue for fiscal 21. With this type of scale and a continuing commitment to R&D and innovation, we will be able to significantly invest and fund new innovative solutions that will support our customer base. To now dive deeper into the VMware market opportunity and products, I'll hand the call over to Tom.

Thanks, Hock. Now turning to slide seven. As Hock previewed, VMware sits at the nexus of the largest opportunity in enterprise infrastructure today. In essence, VMware is a foundational platform that enables enterprises to drive competitive advantage with technology by leveraging two operational modes to develop and run their applications. First, VMware serves many of the same types of customers that we have worked with at Broadcom, large multinational organizations with complex IT challenges. These enterprises want to move fast and innovate, but also mitigate risk by retaining control of their underlying infrastructure and data. To do this, enterprises are deploying applications in their own data centers but need software to enable them to develop and run these applications in a flexible, agile, and cost-effective fashion. This private cloud market is very large, and workload growth in the private cloud continues to grow. Beyond the private cloud, as we all know, public cloud workloads are growing rapidly. The public cloud brings unprecedented scalability and cost benefits, and also enables enterprises to leverage cutting-edge technologies to drive their business forward. So we think it is clear that both of these modes, private cloud and public cloud, are going to be important for enterprises going forward. Turning to slide eight, VMware is a truly foundational infrastructure software platform that is critical for enterprises to leverage the benefits of both the private and public cloud. We have tremendous respect for the leading platform VMware has built, supported by an incredible team of R&D talent. By bringing our teams together, we will deliver even more innovation to our customers. As we think about it, VMware's platform really consists of three pillars. First, within the core private cloud infrastructure pillar is the category-defining vSphere server virtualization platform, vSAN data storage virtualization solution, vRealize cloud management platform that provides automation, analytics, and lifecycle management for private cloud workloads, and NSX, which enables enterprises to manage their entire physical network as a single entity from a single pane of glass. Next, VMware's Tanzu platform provides an end-to-end modern application management platform for building, deploying, securing, and operating applications in private, hybrid, or public cloud environments. Finally, VMware has a robust portfolio of end user and security solutions that enable employees to securely work from anywhere, anytime, and with seamless employee experiences. On slide nine, let me double click on the first pillar as this makes up the bulk of VMware's revenue contribution today and is positioned to continue to grow well going forward. VMware pioneered the concept of virtualization, and today this technology is foundational to the development and computing operations of basically all enterprises in the world. Over time, VMware has evolved its value proposition from core server virtualization to enabling one to virtualize the underlying compute resources of the entire data center, which is the private cloud. They further extended this value proposition with NSX, and vSAN by enabling software-defined networks and storage. Then with vRealize, VMware made it extremely easy to manage and operate the entire data center infrastructure. With these products, VMware offers a complete platform that delivers the scalability, flexibility, and cost benefits of virtualizing the underlying infrastructure across servers, networking, and storage. In concert with this private cloud capability, VMware also offers a seamless way to evolve the enterprise infrastructure to embrace the benefits of the public cloud with VMware Cloud Foundation. VMware Cloud Foundation gives the same operating environment for developers, letting them write the code once and deploy it anywhere they want, whether it's in the private cloud, in AWS, Azure, GCP, or even across clouds. This simplicity is unique to VMware in ushering in the coming age of mass cloud adoption. Stepping back on slide 10 and thinking about our existing software portfolio, we are incredibly excited about the opportunity to marry our products with the VMware platform to deliver more end-to-end capabilities to our enterprise customers. As we all know, enterprises need to manage a constantly changing portfolio of thousands of applications that reside on a wide variety of underlying infrastructures, from mainframe to client-server to hybrid and public cloud. And all of these applications are operating in different stages of their lifecycle. And we think together, Broadcom's software assets for the distributed enterprise can seamlessly complement and augment VMware's multi-cloud offerings in the areas of operation management, value stream and DevOps management, and security to address the entire application lifecycle. Starting with application development, we bring significant value to help accelerate the development of applications through VMware's Tanzu products and our value stream management products like Rally and Clarity. Once developed, VMware's vSphere and Cloud Foundation can deploy these apps across a wide variety of environments. We can secure these applications with the combined capabilities of Symantec's leading security portfolio along with Carbon Black's cloud-native endpoint security products. Now, given the hybrid working environment we're all in today, it's critical for enterprise to be able to enable seamless, highly performant, and ubiquitous access to these applications and VMware has a leading set of products to enable this. Finally, to optimize and monitor these apps, Broadcom's existing portfolio of AIOps observability, enterprise automation, and continuous delivery can ensure these applications are running well. Since these applications are constantly changing, it's exciting to be able to close the loop and feed any runtime operational issues right back into the application development step. So what's exciting is that when you put the two portfolios together, we're delivering an end-to-end solution that enables enterprises to support the three major types of application paradigms, including applications that run critical business functions that will remain in private cloud data centers, applications that are being ported to run in the public cloud, and new generation applications that are written natively for one or several of the public cloud providers. We do this across the entire application lifecycle, and we can support any underlying IT infrastructure. That's unique to us, and we think this adds massive value to enterprise customers. Moving to the next slide. When I think about this deal, it reminds me of when, as Avago, we acquired Classic Broadcom. This really transformed the time and modernized our semiconductor business. And ultimately, this is why we renamed ourselves Broadcom. As we come together with VMware, this represents the same level of transformation for our software business, and we stand to benefit from VMware's unparalleled brand, trusted apps, a long-standing position as an iconic software platform within a robust, vibrant ecosystem of hyperscalers, solutions, and cloud providers and channel partners, among others. We're excited to announce that following the closing of the transaction, Broadcom Software Group, will rebrand and operate as VMware, incorporating Broadcom's existing infrastructure and security software solutions into the VMware platform. Together, we will deliver the broadest range of platforms and tools to accelerate our combined customers' digital transformation. Turning to slide 12. Together, Broadcom and VMware cover all major industry verticals and sell to all enterprises globally. And with this transaction, we are focused on serving all customers via a combination of our collective direct sales organizations, as well as through our important channel partners. When we look at the majority of our revenues, they are derived from the largest global multinationals, and they fit six key attributes. These customers are usually highly regulated and risk averse. with large and expanding IT budgets. They also have complex and heterogeneous environments that are built around hybrid and multi-cloud strategies. While many of these companies want to explore moving more workloads to the public cloud, they are held back by many factors, including the number of applications that they have, the unfavorable economics of the public cloud for certain workload types, the sensitive data they handle, and or regulation. As a result, these companies will have to keep complex operating environments containing a private cloud and over time to increasingly leverage the benefits of the public cloud as well. The amount of operational complexity created here is a challenge that we are uniquely qualified to partner with our customers to solve. In summary, together with VMware, we are best positioned to help the world's largest enterprises to embrace a hybrid and multi-cloud environment. As shown on slide 13, we have a proven track record of creating shareholder value by applying Broadcom's disciplined business model built on significant R&D investment and customer focus. Applying this same model to VMware, we are targeting to increase VMware's standalone EBITDA of approximately $4.7 billion to approximately $8.5 billion in pro forma run rate EBITDA within three years of closing. Driving this are some material tailwinds to revenue growth and multiple knobs that we can turn on profitability. Some of these opportunities include focusing on research and development to support efforts where we can uniquely deliver customer value. driving sales and marketing efficiency gains by focusing on our installed base, and eliminating duplicative general and administrative functions. We envision a long-term model for software where we can grow our top line revenues at mid-single digits on a recurring basis, if not faster, while driving EBITDA margins in the mid-60s. Given our scale, This will allow us to reinvest very significant dollars back into the business, both via R&D as well as sales and marketing. Now on slide 14, let's talk about the deal structure. We are acquiring all of VMware's outstanding shares for approximately $61 billion in a 50% cash, 50% stock transaction. Additionally, we are assuming VMware's $8 billion of net debt. VMware shareholders will have the option to elect between receiving $142.50 in cash or 0.252 shares of Broadcom common stock for each of their shares. We expect VMware shareholders to own approximately 12% of the pro forma company at close. The transaction will be financed with 32 billion in new fully committed debt financing from a consortium of banks. We are committed to a strong balance sheet, and we remain steadfastly committed to our investment grade rating. The acquisition is subject to regulatory approvals and other customary closing conditions, including approval of VMware shareholders. Michael Dell and Silver Lake have agreed to vote in favor of the transaction, and we expect the transaction to close in our fiscal 2023. The merger agreement does include a 40-day go shop provision. I'll hand it over to Kirsten, who's going to go through the financial results of the quarter and provide an update on our capital allocation policy.

Kirsten Stilwell- Thank you, Tom. Let me now provide additional detail on our financial performance. Revenue was $8.1 billion for the quarter, up 23 percent from a year ago. Gross margin was 76 percent of revenue in the quarter, and up 145 basis points year-on-year. Operating expenses were $1.2 billion, up 8 percent year-on-year, driven by investment in R&D. Operating income for the quarter was $4.9 billion and was up 30 percent from a year ago. Operating margin was 61 percent of revenue up approximately 345 basis points year-on-year. Adjusted EBITDA was $5.1 billion, or 63.1 percent of revenue. This figure excludes $135 million of depreciation. Now a review of the P&L for our two segments. Revenue for our semiconductor solutions segment was $6.2 billion and represented 77 percent of total revenue. This was up 29 percent year-on-year. Gross margins for our semiconductor solution segment was approximately 72 percent, up 290 basis points year-on-year, driven by favorable product mix and content growth in next-generation products across our extensive product portfolio. Operating expenses were $873 million in Q2, up 10% year-on-year. R&D was $772 million in the quarter, up 10% year-on-year. Q2 semiconductor operating margins increased to 58%. So while semiconductor revenue was up 29%, operating profit grew 42%. Moving to the P&L for our infrastructure software segment. Revenue for infrastructure software was 1.9 billion and represented 23% of revenue. This was up 5% year on year. Gross margin for infrastructure software was 90% in the quarter, up 10 basis points year over year. Operating expenses were $374 million in the quarter, up 5% year-over-year. Infrastructure software operating margin was 70% in Q2, and operating profit grew 5%. Moving to cash flow. Free cash flow in the quarter was $4.2 billion, representing 51% of revenue. We spent $85 million on capital expenditures. Day sales outstanding were 35 days in the second quarter, and we ended the second quarter with inventory of $1.7 billion. We also ended the second quarter with $9 billion of cash and $39.5 billion of gross debt, of which $302 million is short term. With liability management activities during the quarter, we were able to extend our weighted average debt maturity from 10.4 to 10.9 years. with the weighted average interest rate relatively unchanged at 3.6%. Turning to capital allocation, in the quarter we paid stockholders $1.8 billion of cash dividends. Consistent with our commitment to return excess cash to shareholders, we repurchased $2.8 billion in common stock and eliminated $514 million of common stock for taxes due on vesting of employee equity resulting in the elimination of approximately 6 million ABGO shares. The non-GAAP diluted share count in Q2 was 441 million. Based on current business trends and conditions, our guidance for the third quarter of fiscal 2022 is for consolidated revenues of 8.4 million and adjusted EBITDA of approximately 63.5 percent of projected revenue. Note that we expect Q3 non-GAAP diluted share count to be 439 million. With the acquisition of VMware, let me now share our thinking on capital allocation policy going forward. Historically, over the last six years, we have grown free cash flow to increase at a 41% CAGR organically and through acquisitions. With the acquisition of VMware, we expect to enhance our already strong organic earnings and free cash flow growth. The Board of Directors has approved a third quarter cash dividend on our common stock of $4.10 per share. Following the acquisition of VMware, we remain committed to our dividend policy of returning 50% of prior year's free cash flows as dividends. We are also committed to maintaining our investment grade rating and plan to rapidly delever from approximately three and a half times gross debt to EBITDA at closing to normalized leverage ratios of less than two and a half times gross debt to EBITDA within approximately two years post deal close. Between now and deal close, we expect to generate considerable free cash flow. As it relates to the buyback, we have $3 billion remaining under the current authorization to date. In addition, we are announcing today an incremental $10 billion authorization to buy back shares through the end of December of 2023. That concludes my prepared remarks. Operator, please open up the call for questions.

Thank you. As a reminder, to ask a question, you will need to press star and then one in your telephone. To withdraw your question, please press the pound key. And our first question comes from Ross Seymour from Deutsche Bank. Your line is open.

Hey, everyone. Thanks for letting me ask a question, and congratulations on the deal and the results. Tom, I wanted to ask a question on the VMware side of things. You gave a bit of a long-term model, mid-single-digit revenue growth and then mid-60s EBITDA. Can you talk a little bit about the revenue growth side of that equation? It seems like the VMware asset, according to the street, is growing a little bit faster than that. What are you doing and assuming as far as the growth rate of that piece? And then on the EBITDA side of things, Out of the levers you showed on, I think it's slide 13, can you just give us an idea of how those all fall in to get you to that mid-60s level overall?

Sure, Ross, and thanks for the question. Let me start, and then I'll let Hawk embellish. When we think about the top line, a number of things going on. But fundamentally, and this is actually back on slide 7 for everyone that's on the deck, it's all about workload growth. I mean, if you think about private cloud growing, you know, mid to high single digits, you'll get public cloud growing high double digits. That's what's really going to drive the top line fundamentally, and that's actually what got us comfortable with the business case here. I think in addition to that, we are going to focus on going through a transition and a rapid transition from perpetual licensing to subscription. As you know, with the software business, we've been totally focused on pretty much 100% recurring revenue, and we see ARR growth being able to sustain at 5%, if not faster, when we think about the combined business. When you think about EBITDA, there are multiple knobs. We covered that, and you can look at slide 13. In terms of R&D, we're going to reinvest back in the core business, the core franchises. If you think about the three different pillars of this business, and I went through it, but it's really the core infrastructure business, vSAN, vSphere, vRealize. These are the businesses that are core to driving the bulk of the revenues, and that's where the reinvestment is going to occur. We are going to focus on our common customers. We have a significant go-to-market engine here at Broadcom Software. Obviously, so does VMware in their own regard, actually much more significant than ours. And so we have a direct sales force. We're going to leverage the fact that we have common coverage in both of those areas and take advantage of getting synergies there. But beyond that, we also see a very valuable channel. I think there's some things we've learned relative to the CA and the Symantec acquisitions in terms of the value of the channel, and we want to continue to support that channel. That's going to allow us to support a lot more revenues in a cost-effective way, so we see some real opportunity to leverage that. And then, of course, as you all know, we run G&A at 1% of revenue. We've been integrating companies for a long time. We have tremendous scale. This is going to give us even more significant scale going forward, and we think there's a lot of opportunity there to drive synergies from the redundancies we see. Hawk, anything you want to add to that?

Thanks, Tom. No, well done on that, on explaining it. But, Ross, to answer your question pointedly directly on the revenue side, and you can hear there are two dynamics going on. One is how we make the investment, where do we do the spending. The other top line is you can see that VMware has a perpetual model in a lot of their on-prem licenses. They have a substantial $3 billion perpetual, and we are converting that. over the next couple of years to subscription. That will likely take, from a reporting point of view, a slight dip, but within three years, a recovery, and a recovery back to a run rate that probably, as indicated, is probably much higher than mid-single digits. And we are structuring ourselves to go through that. Now, from an economics point of view, whether it's perpetual or subscription, frankly, it's the same. But we want to make it very consistent with the way we run the model. And based on this, we are, in a sense, restructuring the contracts, perpetual to subscription. And that's why, depending on where you see it, you'll see a slower growth at the beginning, if any, followed by a more rapid growth as we convert more to subscription.

Great. Thanks, guys.

Thank you. Our next question comes from Ambrish Srivastava from BMO. Your line is open.

Hi. Thank you very much. Excuse me, Tom. Just getting back to following up on what Ross was asking. This asset is very different than the other two in terms of growth rate, growth trajectory. It doesn't seem like you would need to divest pieces of the business like you had to in the other two. Can you just talk us through the synergies that you see in combining these businesses and if these businesses in parts have had partnerships in the past and how would you change that on a go-forward basis, getting back to Hart's comment, a longer term, this could be a faster-growing software business than what you're laying out today. Thank you.

Yeah, no, certainly. I mean, if you think about it, from a go-to-market standpoint, that's where software companies spend the bulk of their dollars. The fact that we're going to go from $5-plus billion of software revenue to much closer to $20 billion is a big deal. And the fact that we can leverage the combined go-to-market engine at that scale gives us huge economies. I think what we're going to be able to do is marry effectively a direct sales force, which covers the largest couple thousand customers. These are large multinationals across all the key verticals, primarily focused in North America and Europe, but also in parts of Asia, with a very significant channel partner arrangement. I think one thing we've learned is there's an opportunity to embrace the channel, the two-tier distribution model with distribution partners and key value-added resellers. There's also a big GSI opportunity. We work significantly with GSIs on our side. So does VMware. And so when I look at that in its totality, what we can't do today, given our scale, we can definitely take advantage of with the newfound scale between the two companies. Beyond that, when you think about the R&D side of the equation, to dig deeper into it and follow up when we talked about with Ross, when you think about what supports the development of software, there's a lot of What we refer to sometimes in the simulator side is central engineering, so software business operations. This is the continuous delivery, continuous testing capability, the ability to continuously develop applications on a consistent basis. That's expensive. It requires having your own private data centers or working with cloud providers, and having the scale to be able to drive that kind of R&D investment over a much larger portfolio is also going to drive significant benefits. So hopefully that helps answer your question. Hart, do you want to add anything to that?

Well, again, we're dancing around a central issue, which is we will keep it, and we have seen this, we invest in R&D. And hardware, we do a lot of that if we have to. And it's all, at the end of the day, this is a great franchise. In terms of monetization, it's all about execution. And that's, in a nutshell, what we're saying here. We believe we will execute much, much different, hopefully better, than what we have been seeing so far. That's a good bottom line. Thank you.

Thank you. Our next question comes from Stacey Raston from Bernstein Research. Your line is open.

Hi, guys. Thanks for taking my question. Tom, I found your comments on leveraging the new channel differently to be interesting because I guess I'm going to oversimplify, but your prior strategy was sort of to focus on the largest customers and kind of let the long tail sort of wither. Am I right in sort of thinking that you are sort of changing that now? You're going to be going after that long tail a little harder because now you actually have the channel to do it? And will that be like feeding into the other – it sounds like it will be feeding into the other businesses as well. I guess maybe could you talk a little bit more about – how that business model is changing, especially in that like tail smaller customers, what does that actually mean? For the degree of cost synergies and everything that can come out of this relative to what you've seen before. And it doesn't sound like you're seeing that driving upside to the growth rate, you're still talking about mid single digits, although again, maybe there's some conservatism in that number. But anything you can give us on maybe some of that change in the business model, especially around long tail customers be helpful.

Yeah, no, you're picking up on it, Stacy. I think a lot of it's because of the portfolio and the fact that we, pardon me on the line. Yeah, Stacy, a lot of it's based on the portfolio and the breadth of capability that VMware has relative to where we sit today. You're right. When we bought CA, mainframe made up at least half the revenues. Today's mainframe is still about 50% of the overall software business at Broadcom. That very much levered toward about 500 accounts in what we call our strategic account area, which is a direct sales motion. And that's also where we saw a lot of opportunity to drive customer synergy with Symantec, particularly around some of the blue coat and DLP activities that we were driving. So that was the business model that made sense. That, of course, meant we could drive operating margins, frankly, slightly north of 70% because we didn't have to invest as much in our go-to-market motion. I think with VMware, when we look at it and we look at the fact that vSphere, going back to the core, serves over 300,000 customers, and we look at the growth and that the company is driving with their more modern applications, whether it be for private cloud or public cloud, we see a much bigger opportunity. And so to support that opportunity, we need to invest in sales and marketing. So when you think about the 60s EBITDA margins that I was discussing, and I think I said mid-60s, You know, that's on a much bigger scale, but at the lower EBITDA margin profile that we're running today. All of that variance is going back into the sales and marketing investment. And we think from learning about, you know, how we experience CA and Symantec and, frankly, you know, some of the revenues that we gave up, we think we can actually go back and reinvest in the channel and continue to drive revenue growth profitably. We don't want to walk away from the channel. We actually want to embrace it.

That's helpful. Thank you.

Thank you. Our next question comes from Vivek Arya from Bank of America Securities. Your line is open.

Thanks. I had a question on the process and then on the accretion side. So on the process side, which jurisdictions will you need approvals from? You know, do you see any product overlap that any regulator could push back against? And why is there a go shop provision? And then on the accretion side, will this be accretive in year one? And I think, Tom, you said mid-60s is the margin. Is that for VMware only, or is that for your entire software business? Because the rest of the software business is running closer to 70%, I believe. So just any thoughts on the process and the accretion would be very helpful. Thank you.

Yeah, sure. So this will be accretive out of the gate, and it'll get very accretive as we get through Our integration process, as you look at the aggregate value here and then you look at the EBITDA expectations, we expect to drive double-digit cash-on-cash returns. That's always been our criteria, and we think that's going to create a lot of value for shareholders. In jurisdictions, we're going to file in a number of areas. You'll see that in the filings around the merger agreement and everything else, but nothing unordinary there. And then, you know, I won't comment much on the go shop. I was going to say it was a highly negotiated deal, and there is a go shop for 40 days.

To clarify, the mid-60s referred to VMware standalone, where we're driving it. And just to make it clear on handling where the long tail is, I think our strategy of focusing, as Tom indicated very clearly, on selling new products, on supporting the largest enterprises in the world, create their private cloud, and beyond that, having a hybrid cloud structure will probably extend, as Tom indicated today, core 600 strategic accounts to a larger group of 1,500 accounts. This is what is enabling us to do with VMware. And that will be direct focus and a lot of attention and support to drive revenue growth and adoption of the various new products and software stacks that VMware has, especially in the realm of private cloud and software-defined networks. In terms of the longer tail of 300,000 customers, we do not as we perhaps had looked at before, we are looking at it very, very positively, too, in the sense that we will make sure these are well supported, this continues to be a business base that will grow, but we will go through it, we will handle these guys through partners, as Tom indicated. Distributors, resellers, GSI partners. These will be handled simplifying our business model. But we will now have a larger core group of global 1500, and we call it that, where VMware and its scale will now enable us to focus as we had focused on the last 600 before. Thank you.

Thank you. Our next question comes from Harsh Kumar from Piper Sandler. Your line is open.

Yeah, hey guys. First of all, congratulations on the deal. It sounds like an amazing deal. Huck, for a change, I've got a question on some of your business commentary related to organic Broadcom. You mentioned that in the networking business, you're seeing proprietary solutions from your customers losing out to merchant solutions and silicon that you guys sell. I was curious, has anything happened recently which is driving this shift over to your solutions? Or was this just something in the making a long time and it's just now happening? And also, if we can talk about supply concerns, you don't seem to be seeing any supply issues, whereas the other guys are. I'd be curious about color on that.

Okay. Well, a very interesting question on networking side. It has been a trend, obviously, that has been happening for the last for over five years, which is for us in networking, switching and routing, merchant silicon has been taking share over proprietary solutions, black boxes, so to speak. Merchant solutions enable disaggregation of hardware and software. And that always offers more resiliency, more flexibility for customers. Starts with hyperscale. We're now talking about service providers and enterprise. And what perhaps may be triggering an acceleration, which I indicated, is probably related to the fact that we're all, enterprises in particular, are now all in reinvesting, upgrading after hiatus, probably from 2019, cutting through to the pandemic timeframe. They're now investing in new data centers, and they're now investing in basically modernizing their data centers, and they're going for next generation. And that, we figure, is what's triggering it. We're seeing acceleration in our tomahawk 3s and 4s. We're seeing the leading edge product and the Trident versions correspondingly. We're seeing acceleration in Jericho 2C and the latest one at the edge, Qumran. All these are the big drivers. And it's almost a larger adoption than we would perceive under normal growth patterns. I'll put it bluntly, we're gaining market share in merchant silicons. over proprietary solution. And it's an acceleration of a trend that's been going on over five years. And that's why it's very clear. And in terms of supply chain question, I always get this question, and of course I'll answer that point blank, for over the past 12 months or so. We are challenged on making sure we meet demand. on a timely basis and just what they want. And if you look at it that way, we do not see a challenge necessarily in supply. Rather, we see it as a constant demand challenge in the sense that we have to pass through our backlog carefully, and as I indicated, in the last three months, we just bummed up our backlog substantially. And in spite of lead times, been unchanged, extended and unchanged. So there is demand out there that keeps coming in for products, and now it's particularly so in a couple of areas. It's not necessarily across the board, it's in a couple of areas. And we happen to be very lucky to be in those areas that are still strong, largely related to infrastructure. We are seeing that in networking, That includes both hyperscale, telcos, service providers, as well as enterprise. And particularly in enterprise, we are seeing it embellish a lot, I might add, by content increase in server storage connectivity, where we're now selling in the newer generation, as I indicated in the last earnings call, subsystems, where our customers prefer to buy subsystems from us rather than just a chip. And that step up content dramatically, and coupled that with still continuing strong demand in this tool space, we're seeing continuously not just revenue accelerating, but bookings accelerating. And these are real demand. And we have, of course, a supply to meet those critical needs as we see.

Fantastic. Congratulations, guys. Thank you. Thank you.

Thank you. And we'll take our last question from Toshi Yahari from Goldman Sachs. Your line is open.

Hi, good morning. Thank you so much for squeezing me in. So after the acquisition, your business is going to be roughly 50% semis and 50% software. I was hoping you could remind us some of the pros and cons for running these two businesses under one umbrella. And assuming the deal successfully closes would you ever consider splitting up to two businesses, particularly if you feel like you're not getting the valuation that you deserve? Thank you.

To answer right to the bottom line, we see a lot of benefits in putting all these various franchises we have, hardware and software, under one umbrella. Think of it this way, Toshia. It's like what Merchant Silicon is driving that trend. The old model is you sell a black box hardware and software system to a customer in the IT department, to JP Morgan IT department. That's what you do in the past. If something goes wrong, hell, you ask for support, you scream for help because you don't know what's going on inside the thing. We are creating a model of disaggregation. between hardware and software. We may still not know much about systems, but we sure know the technology that enables systems, whether they are switches, routers, compute, storage. And this is, Broadcom is a model of disaggregating hardware and software, and combined, I think we are stronger than divided. So I hope that answers your question.

Thank you. Thank you. And that does conclude our question and answer session for today's conference. I'd now like to turn the call back over to GEU for any closing remarks.

Thank you, operator. As we have released the results of Broadcom's second quarter of fiscal 22 today, we will no longer hold a conference call previously scheduled for Thursday, June 2nd. Broadcom currently plans to report its earnings for the third quarter of fiscal 22 after close of market on Thursday, September 1st, 2022. A public webcast of Broadcom's earnings conference call will follow at 2 p.m. Pacific time. That will conclude our earnings call today. Thank you all for joining. Operator, you may end the call.

Thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.