Broadcom Inc.

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Welcome to Broadcom's Inc.' 's first quarter fiscal year 2023 financial results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to GU, Head of Investor Relations of Broadcom Inc.

Thank you, Operator, and good afternoon, everyone. Joining me on today's call are Hoff Tan, President and CEO, Kirsten Spears, Chief Financial Officer, and and Charlie Coas, President, Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed, describing our financial performance for the first quarter fiscal year 2023. 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 an audio replay of the call can be accessed for one year through the investor section of Broadcom's website. During the prepared comments, Hawk and Kirsten will be providing details of our first quarter fiscal year 2023 results, guidance for our second 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. I'll now turn the call over to Hawk.

Thank you, Gee, and thank you, everyone, for joining us today. In our fiscal Q123 consolidated net revenue, revenue was $8.9 billion, up 16% year-on-year. semiconductor solutions revenue increased 21% year-on-year to $7.1 billion, while, as we expected, infrastructure software declined 1% year-on-year to $1.8 billion, even as our core software sustained growth of 5% year-on-year. Stepping back, let me sum up what happened in Q1. From our view, infrastructure spending continues to be up, particularly in service providers, even as hyperscale and enterprise sustain. Spending in technology for infrastructure has been strong, showing double-digit growth for nine consecutive quarters. We continue to be booked for fiscal 23, and our lead times and visibility on semiconductors remain largely at 50 weeks. While there have been a small number of requests to push out certain orders, we note that these are the exceptions and they have not had a material impact on our business. Because we ship linearly throughout the quarter to our customers, inventory on our books has been consistent around 80 days. And the overall inventory of Broadcom products across the ecosystem remains very well managed. We continue, needless to say, to be very disciplined in shipping our backlog only as and when needed by our end customers. With that, let me now provide more color on each of our end markets. Starting with networking, networking revenue was $2.3 billion and was up 20% year-on-year in line with guidance, representing 32% of our semiconductor revenue. We see continued deployment of our advanced Tomahawk switches by hyperscalers in their leaf and spine architectures. Even as we deliver on increased bandwidth for the hyperscalers, having said that, power remains a major challenge. So just this week, we announced the industry's first integrated silicon photonics networking solution, codename Bayley, which integrates the active optical interconnects with our next generation Tomahawk 500 switch at 51.2 terabits per second. Barely doubles switching performance, but it will reduce total system power. Keep in mind that at hyperscalers, a growing portion of our switches have been deployed within the AI networks, which are separate from the traditional x86 CPU scale out running existing workloads. Now, this is today. Tomorrow, with generative AI using large scale, large language, I should say, models with billions of parameters, we have to run thousands of AI engines in parallel, enabling large and synchronize bursts of data at speeds of 400 and 800 gig. The networks to support this massive processor density is critical and as important as the AI engines. Such networks have to be lossless, low latency, and be able to scale. So as you know, such AI networks are already been deployed at certain hyperscalers through our Jericho 2 switches and Ramon fabric. In fact, in 2022, we estimated our Ethernet switch shipments deployed in AI was over $200 million. With the expected exponential demand from our hyperscale customers, we forecast that this could grow to well over $800 million in 2023. We anticipate this trend will continue to accelerate. And mindful that we need even more higher performance networks in the future, we have been investing in a new generation of this lossless, low latency Ethernet fabric designed specifically to handle such data and compute intensive AI workloads. Of course, additionally, the exciting growth prospects for generative AI are driving our compute offload accelerated business at hyperscalers. As we have indicated to you last quarter, this business achieved over $2 billion in revenue in 2022, We are on track to exceed $3 billion in revenue in our fiscal 23. In Q2, looking forward short term, we expect these tailwinds to drive our networking revenue to grow about another 20% year over year. Moving on next to our server storage connectivity revenue, there was a record $1.3 billion or 18% of semiconductor revenue, and up 57% year-on-year. Once again, as we discussed in preceding quarters, the rapid transition to next-generation mega-rate solutions drove this substantial year-on-year content increase. After four consecutive quarters of such increases, This transition, however, is significantly complete, and we expect that in Q2 on a year-on-year basis, server storage connectivity revenue will moderate towards 20% year-on-year growth. Moving on to broadband, revenue grew 34% year-on-year to a record $1.2 billion and represented 17% of semiconductor revenue. During this quarter, our broadband business particularly benefited from robust deployments by telcos of 10G PON and cable operators of DOCSIS 3.1. These gateways have high attach rates of Wi-Fi 6 and 6E. And in Q2, we expect the secular drivers behind broadband to sustain momentum on a sequential basis. And year on year, broadband will grow a solid 10%. Moving on to wireless, Q1 revenue of $2.1 billion represented 29% of semiconductor revenue. Demand from our North American customer drove wireless revenue up 4% year on year, Reflecting content increases, which we had previously indicated last quarter. Sequentially, wireless was flattish compared to Q4. And seasonally, we expect wireless to be down sequentially in Q2 and down high single digit percentage year on year. Finally, Q1 industrial resale of $229 million decreased 4% year over year, as softness in China offset strength in renewable energy and medical. And in Q2, we forecast industrial resales to be down low single-digit percentage year on year on continuing softness in China. So in summary, Q1 semiconductor solutions revenue was up 21% year-on-year, and in Q2, we expect semiconductor revenue growth of high single-digit percentage year-on-year. Turning to software, in Q1, infrastructure software revenue of $1.8 billion declined 1% year-on-year, and represented 20% of total revenue. While core software revenue grew 5% year-on-year, the brocade business declined because of lumpiness in enterprise consumption in this very narrow vertical of same storage. For core software, consolidated renewal rates averaged 119% over expiring contracts and Within our strategic accounts, we average 129%. And within the strategic accounts, annualized bookings of $536 million included $197 million, which represents 37% of cross-selling of our portfolio products to these same core strategic customers. Over 90 percent of the renewal value represented recurring subscription and maintenance. Now, by way of comparison, over the last 12 months, consolidated renewal rates averaged 119 percent over expiring contracts, and in our strategic accounts, we averaged 134 percent. Because of this, our ARR The indicator of forward revenue at the end of Q1 was $5.3 billion, which was up 3% from a year ago. In Q2, we expect our infrastructure software segment revenue to be up low to mid-single-digit percentage year-on-year, as the stable core software growth continues to be partially offset now by weakness in brocades. So in summary, we are guiding consolidated Q2 revenue for the company to be $8.7 billion, up 8% year-on-year. Before Kirsten tells you more about financial performance for the quarter, let me provide a brief update on our pending acquisitions of VMware.

We continue.

to make progress with our various regulatory filings around the world, having now received legal merger clearance in Brazil, South Africa, and Canada, and foreign investment control clearance in Germany, France, Austria, Denmark, Italy, and New Zealand. As we stated on our last earnings call, we continue to anticipate that the timeline for the review process will be extended in other key regions, especially given the size of this transaction. Having said that, we continue to expect the transaction to close within our fiscal 2023. We believe the combination of Broadcom and VMware is about enabling enterprises to accelerate innovation and expand choice by addressing their most complex technology challenges in this multi-cloud era. And we are confident regulators will see this when they conclude their review. Finally, Broadcom recently published its third annual ESG report available on our corporate citizenship website, which discusses the company's ESG initiatives. As a global technology leader, We recognize Broadcom's responsibility to have a positive impact on our customers, employees, and communities. Through our product and technology innovation and operational excellence, we remain committed to this mission. With that, let me turn the call over to Kirsten.

Thank you, Hawk. Let me now provide additional detail on our financial performance. Broadcom had another great quarter with robust financials. Consolidated revenue was 8.9 billion for the quarter, up 16% from a year ago. Gross margins were 74% of revenue in the quarter, about 10 basis points higher than we expected. Operating expenses were 1.1 billion, down 1% year on year. R&D of 929 million was also down 1% year-on-year, primarily from streamlined project and other variable spending, offset in part by higher people costs resulting from increased headcount as we are hiring. Operating income for the quarter was $5.4 billion and was up 17% from a year ago. Operating margin was 61% of revenue, up approximately 50 basis points year-on-year. Adjusted EBITDA was $5.7 billion, or 64% of revenue. This figure excludes $127 million of depreciation. Now a review of the P&L for our two reportable segments. Revenue for our semiconductor solution segment was $7.1 billion and represented 80% of total revenue in the quarter. This was up 21% year-on-year. As Hawk discussed, this came from strength across all of our semiconductor end markets. Gross margins for our semiconductor solution segment were approximately 69%, down approximately 160 basis points year-on-year, driven primarily by product mixed within our semiconductor end markets. Operating expenses were $802 million in Q1, down 2% year-on-year. R&D was $716 million in the quarter, down 1% year-on-year. Q1 semiconductor operating margins were 58%. So while semiconductor revenue was up 21%, operating profit grew 23% year-on-year. Moving to the P&L for our infrastructure software reportable segment. Revenue for infrastructure software was 8%. 1.8 billion, down 1% year-on-year, and represented 20% of revenue. Gross margins for infrastructure software were 91% in the quarter, and operating expenses were 346 million in the quarter, down 1% year-over-year. Infrastructure software operating margin was 72% in Q1, and operating profit was stable year-on-year. Moving to cash flow. Free cash flow in the quarter was $3.9 billion, representing a 16% increase year over year. Free cash flow represented 44% of revenues in Q123, consistent with what we achieved the same quarter last year. We spent $103 million on capital expenditures. Day sales outstanding were 33 days in the first quarter, compared to 30 days in the fourth quarter. We ended the first quarter with inventory of $1.9 billion, down 1% from the end of the prior quarter, or 78 days on hand. Overall, inventory of Broadcom's products across the ecosystem, as Hawk indicated, remains well managed. We ended the first quarter with $12.6 billion of cash and $39.3 billion of gross debt, of which $1.1 billion is short-term. During the quarter, we repaid $260 million in senior notes that were due on maturity. The weighted average coupon rate and years to maturity of our fixed rate debt is 3.61% and 10.2 years, respectively. Turning to capital allocation. In the quarter, we paid stockholders $1.9 billion of cash dividends. Consistent with our commitment to return excess cash to shareholders, we repurchased $1.2 billion of our common stock and eliminated $333 million of common stock for taxes due on vesting of employee equity, resulting in the repurchase and elimination of approximately 2.7 million AVGO shares. The non-GAAP diluted share count in Q1 was $434 million. As of the end of Q1, $11.8 billion was remaining under the share repurchase authorization. Excluding the potential impact of any share repurchases, in Q2, we expect the non-GAAP diluted share count to be $438 million. Based on current business trends and conditions, our guidance for the second quarter of fiscal 2023 is for consolidated revenues of $8.7 billion and adjusted EBITDA of approximately 64.5% of projected revenue. In forecasting such profitability, we expect gross margins to be up approximately 150 basis points sequentially on product mix and R&D spending to be up sequentially on continuing hiring of engineers and seasonal payroll tax step-ups. 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 1-1 on your telephone. To withdraw your question, press star 1-1 again. Due to time restraints, we ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question will come from the line of Harsh Kumar with Piper Sandler. Your line is open.

Yeah, hey, guys. Congratulations on yet another solid quarter and guide, and thanks for all the color you guys provided. Huck, you mentioned generative models in your commentary. I wanted to understand the difference between what you're doing in AI so far versus maybe what our understanding of generative is. You talked about $200 million in Ethernet related to AI, is that largely generative? Because we've heard other companies say that for a large part, you know, the generative models are using, it's sort of banned. And then you talked about 2 billion in compute offload going to sort of 3 billion. My understanding was that was mostly for video processing. Maybe help us think about how we think of Abago's place or Broadcom's place in the generative process. Well,

Thank you for that question and opportunity to clarify why I highlighted it very purposefully. In 2022, generative is just barely starting to kick off. But there exists AI networks within the hyperscalers particularly in fairly significant volume. And what we're trying to say is Very similar to CPUs, traditional CPUs in traditional workloads in those same data centers. You know, we've constrained on performance of those silicon CPUs. And on Moore's Law, we're starting to see scale-out by positioning rows and rows of servers, CPUs, and networking them together to work closely in parallel. As we step up to large language models in AI, generative AI in particular coming to play, GPUs are starting to be strung together in hundreds, soon to be thousands of racks and working in parallel. And you know how that goes. And basically those GPUs work in parallel in a fairly synchronous manner to basically run and do what you call bulk parametric exchange. Basically, you run GPUs together or AI engines together, whether they're GPUs, AI, TPUs, or other AI engines. You run them together. It becomes network. The network becomes now potentially a critical part of this whole AI phenomenon in hardware. To make it work, you've got to put together many racks of AI engines in parallel, very similar to what we have been doing, hyperscalers have been doing on CPUs to make them run faster, higher performance as Moore's law come to an end. And it doesn't make any difference here in the form of AI engine. They come from silicon, they face similar constraints. So network becomes the constraint, network becomes a very key part of fulfilling generative AI dream. And what we are saying here, what I'm saying in my comments is last year, 2022, these are more what you call the AI workloads that are running in hyperscale. And the advent of generative AI is still relatively fresh and new. We're doing $200 million as far as we could estimate of silicon internet switches and fabric that goes into those AI networks as far as we could identify in hyperscalers. With generative AI and the urgency and excitement of it coming in that we are seeing today, we are seeing that increase very, very dramatically. And we're seeing urgency in our hyperscale customers coming to us to secure products, to secure ability to put in place those very, very lossless, I would call, very low latency networks that can scale. And Ethernet is what makes those networks scale.

Understood. Thanks, Harlan.

Thank you. One moment for our next question. And that will come from the line of Harlan Sir with J.P. Morgan. Your line is open.

Good afternoon. Thanks for taking my question. Hawk, you know, as your cloud customers are now aggressively focused on generative AI development and deployment across their data center footprints, right, this is driving strong AI-focused Ethernet switch port demand and demand for your compute offload ASICs like TPU for this year, as you mentioned. But from a new product ramp and design wind funnel perspective, is this also causing your cloud customers to want to pull forward some of your future programs like Tomahawk 5 or Jericho 3 next-gen switching and routing products and or pulling the design and tape out of their next-generation compute offload AI ASIC programs.

Yes, we're seeing all of the foregoing, by the way, and that happened over the last 90 days. We have seen a lot of that urgency, a lot of that, you might call it excitement, but you hit it right on. Yes, which is accounting for the color in my commentary about both generative AI-based networks and pushing us to develop a new generation altogether of Ethernet switching that can support this kind of very compute and data-intensive workloads. So that's one side of it. And the other side of it, you're right. We typically not want to talk much about compute offload, which is another way of saying, yeah, these are very related to some of the engines that are fairly customized, dedicated to certain hyperscalers.

Thank you, Hock.

Thank you. One moment for our next question. And that will come from the line of Vivek Arya with Bank of America. Your line is open.

Thank you for taking my question. Hawk, I'm just curious to understand just the views about the second half. If I look at the last few years, Broadcom has managed to grow semiconductor sales right anywhere between five to kind of double digit second half, half over half. Just the broader business environment, so it's kind of more of a broader business environment question, not guidance per se. What could change that trend for Broadcom in a positive or negative way this year?

In a sort of broadly conceptual, not a guidance, as you said, but trend this way, we're kind of getting rather hopeful that it would be a soft landing. There will be moderation, as we are indicating in this Q2 quarter, moderating growth. But we see, nonetheless, as probably leading to a soft landing of still a year-on-year improvement in the second half.

Thank you.

Thank you. One moment for our next question. And that will come from the line of Stacy Raskon with Berenstein. Your line is open.

Hi, guys. Thanks for taking my question. I just wanted to verify and conclude this. Did you say that you started hearing urgency from your hyperscale customers around the AI in the last 90 days? And given that, how do I think about that in the context of lead times that are still 50 weeks? You've got like sounds like $1.6 billion in incremental networking growth in year over year in 23 from these AI across both Ethernet and the ASICs. I guess given the lead times, is that more of a second half kind of thing when that contributes to the model or does it contribute more linearly to the year? I guess just how do I think about the timing of all this in the wake of the strong demand right now just given the broader lead times?

Stacy, thank you for your question. Very perceptive. And as I say, we're not guiding you guys what happens beyond the second quarter, not the second half of this year.

You did give us some guidance for the year on this, right?

No guidance. Sorry. I give you a conceptual trend. How's that? But having said that, no, we're still working through timing of... when our customers need those urgent, those products in a fairly urgent manner. And our ability to obviously want to be very, very helpful to help customers launch aggressively into generative AI. So we're in the midst of that.

Because like the networking implied guide for Q2 has got to be up like, you know, call it mid-teens sequentially. Is that some of that contributing, or do I get even more, I guess, as we go beyond? Because once you get through this quarter, we're already through the first half, right?

So I guess it has to hit in the second half, right?

Stacy, I wish you guys would not do too much analysis, but I know that won't happen. I'm only guiding Q2. I let you figure out what happens in the second half. I think you're probably better off at it than I am.

Got it. Okay. Thank you so much, Huck. Thank you.

Thank you. One moment for our next question. And that will come from the line of CJ Muse with Evercore ISI. Your line is open.

Yeah, good afternoon. Thank you for taking the question. And I know that it might be difficult to share too much on the ongoing review from the European Commission. But I was hoping maybe you could speak a little bit about, you know, where they're concerned, i.e., NICS, fiber channel host bus adapters and other storage adapters. Do you view these as core businesses within Broadcom? Are they easy to extract out of your portfolio? And is there IP that is critical for these businesses that are clearly used by your other larger core businesses? Anything to kind of help us understand would be grateful. Thank you.

CJ, I appreciate the fact that you have been definitely reading a lot of those Reuters and Bloomberg and Lexicon reports. Appreciate that fact. And you equally know that I cannot and will not comment on any of this as we are working very, very positively and progressively with regulators on all the issues related to our clearance. So sorry, I can't comment. But just to let you know, we're making good progress. Thank you.

Thank you. One moment for our next question. And that will come from the line of Vijay Rakesh with Mizuho. Your line is open.

Yeah, hi, Hawk. Just a quick question on, you talked about generative AI. Just wondering, as you look at the workload, what percent of workload would be on generative AI, like exiting calendar 23 or 24? And also I want to hit on the silicon photonics side. I think you briefly mentioned the silicon photonics cable with integrated switch, the 51.2 terabyte switch. When do you see this ramping and what's the power advantage on that? Thanks.

Okay. Well, I'm sure I don't need to elaborate on what we all hear about on generative AI. And I think it's still early innings on generative AI. But We obviously are also indicating, we are seeing a very strong and a strong sense of urgency among our customers, especially in the hyperscale environment, to not miss out not to be late in this trend. And what regenerative AI, as I said, with many more, much more, billions of parameters that come into the models that they're doing. You're talking about scale-out of data centers driving AI engines networked together in a manner that we probably have not seen before. It's not a problem that's not solvable. It is very, very clearly solvable as evidenced by the fact that we have and deploy technology to support AI networks even today to certain hyperscalers where we're talking about at least hundreds if not thousands of AI engines, AI servers networked together and working in a synchronous manner. So this is about ability to scale out in a fairly substantial manner. And that was the color I was providing. And it's really about trying to make sure that happens and not be the bottleneck to our ability to get the best system performance, and I emphasize the word, system performance of an AI data center. And where it's coming from right now is frankly how to network them and how to do those massive parametric exchange, so to speak, when you run large numbers of engines or machines in parallel as you grind through this huge database that we need to do. So we are in early innings, which is why we think we have time to start to work on even a new generation of switches in Ethernet that are specifically designed, dedicated to this kind of workloads. which are very different from the normal workloads that we see today traditionally in data centers. And we have to address that. They have to be, as I say, literally lossless, virtually lossless, very low latency, and be able to scale into thousands of engines. And that's the main three criteria we are aware of. And we're driving solutions, silicon solutions that enable that. We have it, but we think we need to improve the performance of what we have in anticipation of a trend that we foresee over the next several years. And so we're putting a lot of investment in that direction.

On the silicon photonics cable, just wondering when the time of ramp and power advantage is there. Thanks.

Well, we intend to launch Tomahawk 5, early 24, as we indicated previously. And that's the conventional silicon base with pluggable optics switch, top of the rack switch, Tomahawk 5, 51.2 terabits per second. Bailey, which is the fully integrated silicon photonic version, You don't fully integrate the active components, active elements of those pluggable optics into the switch. We anticipate launching that shortly thereafter. Power-wise, you can see silicon photonics does a lot. Tomahawk 5 compared to what we have today is 2x the performance of Tomahawk 4. But we believe we can do Tomahawk 5 at the same power, close to the same power, if not lower, than a Tomahawk 4. Great. Thank you. Sure.

Thank you. One moment for our next question. And that will come from the line of Ross Seymour with Deutsche Bank. Your line is open.

Thanks for letting me ask the question. I wanted to go into the compute offload number that you talked about, Hawk, the $2 billion last fiscal year going to $3 billion this year. I know it's a touchy subject and so no customer specifics, of course, but generally speaking, can you just talk about the breadth and types of compute offload and how that's changing in the mix from the $2 billion last year to $3 billion this year?

Well, you know, I'd rather not answer that question, Ross. Highly sensitive to some of my very limited customer base. But as I said, it includes some of the engines, the compute engines, and some related components that support this engine.

Is the concentration changing? So are you broadening customers in that growth?

No, very concentrated. Okay, thank you.

Thank you.

Thank you. One moment for our next question. And that will come from the line of Edward Snyder with Charter Equity. Your line is open.

Thank you very much. Good quarter, Hawk. So apparently over the last quarter you were getting out of wireless, you were getting into wireless, or handset guys are going to start doing wireless. So I wanted to get a couple of updates so maybe you could set the record straight. First of all, even if you see a sea change in, let's say, silicon, mixed silicon baseband providers in the next year or two, does that fundamentally change your opinion of your wireless group? And either way, actually, does it get better or does it get worse? Because obviously if architectures change, it has a big impact on supply chain. And I know historically you've worked very closely with them. key players in helping develop all the other pieces of the puzzle like transceivers that are required if you're going to do your own. So maybe you can just kind of reset the bar on what you expect for, without guides, but in general, the wireless division in the next year or two. Does it, you know, does it at your fear get greater? Thanks.

Thanks. Good question. And as you know, our wireless division, division, a group as you call it, not division. It's really not one single product line or one single division. It's not one homogenous group either. It is a few key products that comprises this wireless division, all selling, you're right, you're correct, to the same application and very high-end flagship status handset and largely focused on one key customer, our North American, our much beloved North American OEM customer. So in that sense, it's one single focus area. And to answer your question, while we're mounting these multiple products, and they tend to keep, you know, progress as each new generation happens, may not be every year, but it happens fairly regularly frequency on a cadence that is pretty predictable after a while, each on its own cadence. It's a very, very good business for us. And to answer your question directly, no, nothing significant, meaningful has changed. Our relationship, our strategic engagement continues very much the same. as it has for the last multiple years. And we see that to continue in a fairly predictable, stable manner.

And just to remind if we could, three-year roadmap, I mean, you see stuff pretty far out, right?

Yes. Great. Thank you. Thank you.

Thank you. One moment for our next question. That will come from the line of Pierre Faragu with New Street Research. Your line is open.

Hey, thank you for taking my question. Can you hear me well?

Yes.

Yes. Great. So I'm trying to put together a perspective of what's happening at hyperscale clients this year. So if I look at your networking division, if you grow like at least $600 million this year in our in AI and if your computer flow division grows by a billion, that might well represent all your growth in networking. So that would mean the only thing that is really growing and that is growing a lot this year in that space is AI. And when I look at outside of Botcom, what we've seen is memory and the X86 CPU servers are having a very difficult time at the moment, expect a recovery in the second half, while the GPU segment of the market is actually in very, very good shape and growing very well and accelerating again. So my question at the end of the day is, is it fair to say that in this large data center this year, only AI is growing? And is that a sign of... you know, what the future will be or do you think the general purpose part of the infrastructure like centered around x86 or similar general purpose CPUs still is a very good growth market?

You know, you pose very, very interesting and good questions, Pierre. The problem is I do not get, my customers, hyperscale customers, do not necessarily honor me by sharing all those insights that you are, and on those questions you are asking. I do not know. I do not know. All I know, and what I do know, because I don't sell them CPUs, I don't even sell them GPUs, by the way. But I know what you know out there, which is in certain areas of their business, We're seeing some of these hyperscalers bringing on a sense of urgency and focus and, of course, spending to be up to speed, if not to not be left behind, as we see the excitement, hype, perhaps, in pushing applications and and put our workloads in generative AI. That's what we see driving a lot of this excitement. And all we are saying is we're seeing some of that effect on our networking business with those hyperscalers. That's what it is. Beyond that, we unfortunately, other than the backlog we get in normal in normal networking switches, routers, and key components. We see that, and as I indicated in this last quarter's results, we continue to see sustained strength. Now, last quarter and continuing as we indicate this particular quarter Q2. Beyond that, we don't get to see, we do not want to guide what we're going to see beyond that. But right now, last quarter, this quarter, yeah, traditional data centers scale out in networking, in deployment in networking, continues to be strong and sustained in hyperscalers as well, I might indicate, in enterprises.

Okay, great. And just to clarify specifically on what you are doing, is that fair to assume that a majority, a very large majority of your growth this year in networking is going to come from AI, which you have 600 million coming from AI Ethernet and a billion coming from offload chips? Or is that not the right way to think about it? Just for your business, not looking at anything else?

I would not think about it at this point. It might be a bit too mature. Don't forget, generative AI is still early stage.

Yes. Okay. That's very clear. Thanks, Arab. Thank you.

Thank you. And we do have time for one final question, and that will come from the line of Carl Ackerman with BNP Paribas. Your line is open.

Thank you for taking my question. There were many great questions, quite frankly, on the networking business, which I think is quite significant for you. Maybe if I could, a clarification on that and then a broader question that I want to address on broadband. On the networking piece, I was curious if you could discuss the growth opportunity in your Tomahawk portfolio now that a peer has elected to stop investing in their switch divisions. And then as well as the broadband, several companies across the broadband ecosystem have guided a softer outlook due to a buildup of inventory. But quite frankly, that's been on the customer premise side. You obviously have more weighting towards fiber and sell into the infrastructure portion. And so I was hoping you could discuss how you're thinking about the growth of your fiber business within broadband, both from an infrastructure side and a consumer equipment standpoint as governments begin to deploy funds for broadband infrastructure? Thank you.

Thank you for that question. Yes, broadband is to us a very, very good business and very sustaining. It used to be boring. Boring is good at this point. And last quarter, Q1, as I reported, we actually grew 34% year on year. In my view, that's That's rather exceptional, even though in broadband, we have been seeing year-on-year growth now at least for the past four, five quarters. But still, 34% was rather exceptional. And sure enough, Q2, it normalizes to a more sedate level, but still growing. And the growth in that is simply because we're very well-positioned with respect to next-generation pond, 10-gig pond. which has been deployed in big volumes now by telcos, supported by their governments and countries all over Europe, and even in North America, not to mention other nations beyond that. Basically, it is about reaching these key utility broadband service to every household, and we see a lot of deployment. And then more vertical market, we also see simultaneous with PON or fiber as you call it, a large, a strong continued deployment of cable, DOCSIS, so it's very coaxial, to the home because the cable operators, a few of them, who are on the scale of the telcos and who need to maintain competitiveness as the telcos launch 10 gigabit PON, that cable has to update DOCSIS to be able to compete and not lose subscribers in the same market they compete against each other. So we see strength, both in cable, DOCSIS 3.1, as I call it, and potentially next generation, not yet happening, but hopefully within the next couple of years, DOCSIS 4.0. Meanwhile, PON is happening, which accounts for the strength we saw last quarter and continuing strength over the last several quarters. And content increases come to not just unit deployment of those gateways and infrastructure, but also the fact that a lot of these deployments come with very high attach rates of Wi-Fi, six, and succeed. And that provides additional boost, content increases, more what I'll call it, to our revenue growth in broadband. So that's quietly still chugging along very nicely for us. All right.

Thank you. As I'm showing no further questions in the queue at this time, I would now like to turn the call back over to GU for any closing remarks.

Thank you, Cherie. In closing, we would like to highlight that Broadcom will be attending the Morgan Stanley Technology, Media, and Telecom Conference on Tuesday, March 7th. Broadcom currently plans to report its earnings for the second quarter of fiscal 23 after close of market on Thursday, June 1st 2023. 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. Cherie, you may end the call.

Thank you all for participating. This concludes today's program. You may now disconnect.

We'll begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. You can dial star one one. The conference will begin shortly. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Milestar 11. Thank you. Thank you. Thank you.

Welcome to Broadcom's Inc.' 's first quarter school year 2023 financial results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to GU, Head of Investor Relations of Broadcom Inc.

Thank you, Operator, and good afternoon, everyone. Joining me on today's call are Hoff Tan, President and CEO, Kirsten Spears, Chief Financial Officer, and Charlie Kawaz, President Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed, describing our financial performance for the first quarter fiscal year 2023. 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 an audio replay of the call can be accessed for one year through the investor section of Broadcom's website. During the prepared comments, Hawk and Kirsten will be providing details of our first quarter fiscal year 2023 results, guidance for our second 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 US 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, Gee, and thank you, everyone, for joining us today. In our fiscal Q123 consolidated net revenue, revenue was $8.9 billion, up 16% year-on-year. semiconductor solutions revenue increased 21% year-on-year to $7.1 billion, while, as we expected, infrastructure software declined 1% year-on-year to $1.8 billion, even as our core software sustained growth of 5% year-on-year. Stepping back, let me sum up what happened in Q1. From our view, infrastructure spending continues to be up, particularly in service providers, even as hyperscale and enterprise sustain. Spending in technology for infrastructure has been strong, showing double-digit growth for nine consecutive quarters. We continue to be booked for fiscal 23, And our lead times and visibility on semiconductors remain largely at 50 weeks. While there have been a small number of requests to push out certain orders, we note that these are the exceptions and they have not had a material impact on our business. Because we ship linearly throughout the quarter to our customers, inventory on our books is has been consistent around 80 days. And the overall inventory of Broadcom products across the ecosystem remains very well managed. We continue, needless to say, to be very disciplined in shipping our backlog only as and when needed by our end customers. With that, let me now provide more color on each of our end markets. Starting with networking, networking revenue was $2.3 billion and was up 20% year-on-year in line with guidance, representing 32% of our semiconductor revenue. We see continued deployment of our advanced tomahawk switches by hyperscalers in their leaf and spine architectures. Even as we deliver on increased bandwidth for the hyperscalers, having said that, power remains a major challenge. So just this week, we announced the industry's first integrated silicon photonics networking solution, codenamed Bayley, which integrates the active optical interconnects with our next generation Tomahawk 500. switch at 51.2 terabits per second. Barely doubles switching performance, but it will reduce total system power. Keep in mind that at hyperscalers, a growing portion of our switches have been deployed within the AI networks, which are separate from the traditional x86 CPU scale out running existing workloads. Now, this is today. Tomorrow, with generative AI using large scale, large language, I should say, models with billions of parameters, we have to run thousands of AI engines in parallel, enabling large scale and synchronize bursts of data at speeds of 400 and 800 gig. The networks to support this massive processor density is critical and as important as the AI engines. Such networks have to be lossless, low latency, and be able to scale. So as you know, such AI networks are already been deployed at certain hyperscalers through our Jericho 2 switches and Ramon fabric. In fact, in 2022, we estimated our Ethernet switch shipments deployed in AI was over $200 million. With the expected exponential demand from our hyperscale customers, we forecast that this could grow to well over $800 million in 2023. We anticipate this trend will continue to accelerate, and mindful that we need even more higher-performance networks in the future, we have been investing in a new generation of this lossless, low-latency Ethernet fabric designed specifically to handle such data and compute intensive AI workloads. Of course, additionally, the exciting growth prospects for generative AI are driving our compute offload accelerator business at Hyperscalers. As we have indicated to you last quarter, this business achieved over $2 billion in revenue in 2022, We are on track to exceed $3 billion in revenue in our fiscal 23. In Q2, looking forward short term, we expect these tailwinds to drive our networking revenue to grow about another 20% year over year. Moving on next to our server storage connectivity revenue, there was a record $1.3 billion or 18% of semiconductor revenue, and up 57% year-on-year. Once again, as we discussed in preceding quarters, the rapid transition to next-generation mega-rate solutions drove this substantial year-on-year content increase. After four consecutive quarters of such increases, This transition, however, is significantly complete, and we expect that in Q2 on a year-on-year basis, server storage connectivity revenue will moderate towards 20% year-on-year growth. Moving on to broadband, revenue grew 34% year-on-year to a record $1.2 billion and represented 17% of semiconductor revenue. During this quarter, our broadband business particularly benefited from robust deployments by telcos of 10G PON and cable operators of DOCSIS 3.1. These gateways have high attach rates of Wi-Fi 6 and 6E. And in Q2, we expect the secular drivers behind broadband to sustain momentum on a sequential basis. And year on year, broadband will grow a solid 10%. Moving on to wireless, Q1 revenue of $2.1 billion represented 29% of semiconductor revenue. Demand from our North American customer drove wireless revenue up 4% year on year, reflecting content increases, which we had previously indicated last quarter. Sequentially, wireless was flattish compared to Q4. And seasonally, we expect wireless to be down sequentially in Q2 and down high single-digit percentage year on year. Finally, Q1 industrial resale of $229 million decreased 4% year over year, as softness in China offset strength in renewable energy and medical. And in Q2, we forecast industrial resales to be down low single-digit percentage year-on-year on continuing softness in China. So in summary, Q1 semiconductor solutions revenue was up 21% year-on-year, and in Q2, we expect semiconductor revenue growth of high single-digit percentage year-on-year. Turning to software, in Q1, infrastructure software revenue of $1.8 billion declined 1% year-on-year, and represented 20% of total revenue. While core software revenue grew 5% year-on-year, the brocade business declined because of lumpiness in enterprise consumption in this very narrow vertical of sand storage. For core software, consolidated renewal rates averaged 119% over expiring contracts and Within our strategic accounts, we average 129%. And within the strategic accounts, annualized bookings of $536 million included $197 million, which represents 37% of cross-selling of our portfolio products to these same core strategic customers. Over 90 percent of the renewal value represented recurring subscription and maintenance. Now, by way of comparison, over the last 12 months, consolidated renewal rates averaged 119 percent over expiring contracts, and in our strategic accounts, we averaged 134 percent. Because of this, our ARR The indicator of forward revenue at the end of Q1 was $5.3 billion, which was up 3% from a year ago. In Q2, we expect our infrastructure software segment revenue to be up low to meet single-digit percentage year-on-year, as the stable core software growth continues to be partially offset now by weakness in Brocade. So in summary, we are guiding consolidated Q2 revenue for the company to be $8.7 billion, up 8% year-on-year. Before Kirsten tells you more about financial performance for the quarter, let me provide a brief update on our pending acquisitions of VMware.

We continue.

to make progress with our various regulatory filings around the world, having now received legal merger clearance in Brazil, South Africa, and Canada, and foreign investment control clearance in Germany, France, Austria, Denmark, Italy, and New Zealand. As we stated on our last earnings call, we continue to anticipate that the timeline for the review process will be extended in other key regions, especially given the size of this transaction. Having said that, we continue to expect the transaction to close within our fiscal 2023. We believe the combination of Broadcom and VMware is about enabling enterprises to accelerate innovation and expand choice by addressing their most complex technology challenges in this multi-cloud era. And we are confident regulators will see this when they conclude their review. Finally, Broadcom recently published its third annual ESG report available on our corporate citizenship website, which discusses the company's ESG initiatives. As a global technology leader, We recognize Broadcom's responsibility to have a positive impact on our customers, employees, and communities. Through our product and technology innovation and operational excellence, we remain committed to this mission. With that, let me turn the call over to Kirsten.

Thank you, Hawk. Let me now provide additional detail on our financial performance. Broadcom had another great quarter with robust financials. Consolidated revenue was 8.9 billion for the quarter, up 16% from a year ago. Gross margins were 74% of revenue in the quarter, about 10 basis points higher than we expected. Operating expenses were 1.1 billion, down 1% year on year. R&D of 929 million was also down 1% year on year, primarily from streamlined project and other variable spending, offset in part by higher people costs, resulting from increased headcount as we are hiring. Operating income for the quarter was 5.4 billion and was up 17% from a year ago. Operating margin was 61% of revenue, up approximately 50 basis points year on year. Adjusted EBITDA was $5.7 billion, or 64% of revenue. This figure excludes $127 million of depreciation. Now a review of the P&L for our two reportable segments. Revenue for our semiconductor solution segment was $7.1 billion and represented 80% of total revenue in the quarter. This was up 21% year-on-year. As Hawk discussed, this came from strength across all of our semiconductor end markets. Gross margins for our semiconductor solution segment were approximately 69%, down approximately 160 basis points year-on-year, driven primarily by product mixed within our semiconductor end markets. Operating expenses were $802 million in Q1, down 2% year-on-year. R&D was $716 million in the quarter, down 1% year-on-year. Q1 semiconductor operating margins were 58%. So while semiconductor revenue was up 21%, operating profit grew 23% year-on-year. Moving to the P&L for our infrastructure software reportable segment. Revenue for infrastructure software was 8%. 1.8 billion, down 1% year-on-year, and represented 20% of revenue. Gross margins for infrastructure software were 91% in the quarter, and operating expenses were 346 million in the quarter, down 1% year-over-year. Infrastructure software operating margin was 72% in Q1, and operating profit was stable year-on-year. Moving to cash flow. Free cash flow in the quarter was $3.9 billion, representing a 16% increase year over year. Free cash flow represented 44% of revenues in Q123, consistent with what we achieved the same quarter last year. We spent $103 million on capital expenditures. Day sales outstanding were 33 days in the first quarter, compared to 30 days in the fourth quarter. We ended the first quarter with inventory of $1.9 billion, down 1% from the end of the prior quarter, or 78 days on hand. Overall, inventory of Broadcom's products across the ecosystem, as Hawk indicated, remains well managed. We ended the first quarter with $12.6 billion of cash and $39.3 billion of gross debt, of which $1.1 billion is short-term. During the quarter, we repaid $260 million in senior notes that were due on maturity. The weighted average coupon rate and years to maturity of our fixed rate debt is 3.61% and 10.2 years, respectively. Turning to capital allocation. In the quarter, we paid stockholders $1.9 billion of cash dividends. Consistent with our commitment to return excess cash to shareholders, we repurchased $1.2 billion of our common stock and eliminated $333 million of common stock for taxes due on vesting of employee equity, resulting in the repurchase and elimination of approximately 2.7 million AVGO shares. The non-GAAP diluted share count in Q1 was $434 million. As of the end of Q1, $11.8 billion was remaining under the share repurchase authorization. Excluding the potential impact of any share repurchases, in Q2, we expect the non-GAAP diluted share count to be $438 million. Based on current business trends and conditions, our guidance for the second quarter of fiscal 2023 is for consolidated revenues of $8.7 billion and adjusted EBITDA of approximately 64.5% of projected revenue. In forecasting such profitability, we expect gross margins to be up approximately 150 basis points sequentially on product mix and R&D spending to be up sequentially on continuing hiring of engineers and seasonal payroll tax step-ups. 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 1-1 on your telephone. To withdraw your question, press star 1-1 again. Due to time restraints, we ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question will come from the line of Harsh Kumar with Piper Sandler. Your line is open.

Yeah, hey, guys. Congratulations on yet another solid quarter and guide, and thanks for all the color you guys provided. Huck, you mentioned generative models in your commentary. I wanted to understand the difference between what you're doing in AI so far versus maybe what our understanding of generative is. You talked about $200 million in Ethernet related to ai is that largely generated because we've heard other companies say that for a large part you know the generated models are using it for the band and then you talked about 2 billion in compute offload going to sort of 3 billion my understanding was that was mostly for video processing maybe help us think about how we think of avago's place or broadcom's place in in the generative process well

Thank you for that question and opportunity to clarify why I highlighted it very purposefully. You know, in 2022, generative is just barely starting to kick off. But there exists AI networks within the hyperscalers particularly in fairly significant volume. And what we're trying to say is Very similar to CPUs, traditional CPUs in traditional workloads in those same data centers. You know, we've constrained on performance of those silicon CPUs. And on Moore's Law, we're starting to see scale-out by positioning rows and rows of servers, CPUs, and networking them together to work closely in parallel. As we step up to large language models in AI, generative AI in particular coming to play, GPUs are starting to be strung together in hundreds, soon to be thousands of racks and working in parallel. And you know how that goes. And basically those GPUs work in parallel in a fairly synchronous manner to basically run and do what you call bulk parametric exchange. Basically, you run GPUs together or AI engines together, whether they're GPUs, AI, TPUs, or other AI engines. You run them together. It becomes network. The network becomes now potentially a critical part of this whole AI phenomenon in hardware. To make it work, you've got to put together many racks of AI engines in parallel, very similar to what we have been doing, hyperscalers have been doing on CPUs to make them run faster, higher performance as Moore's law come to an end. And it doesn't make any difference here in the form of AI engine. They come from silicon, they face similar constraints. So network becomes the constraint, network becomes a very key part of fulfilling generative AI dream. And what we are saying here, what I'm saying in my comments is last year, 2022, these are more what you call the AI workloads that are running in hyperscale. And the advent of generative AI is still relatively fresh and new. We're doing $200 million as far as we could estimate of silicon internet switches and fabric that goes into those AI networks as far as we could identify in hyperscalers. Regenerative AI and the urgency and excitement of it coming in that we are seeing today. We are seeing that increased very, very dramatically. And we're seeing urgency in our hyperscale customers coming to us to secure products, to secure ability to put in place those very, very lossless, I would call, very low latency networks that can scale. And Ethernet is what makes those networks scale.

Understood. Thanks, Harlan.

Thank you. One moment for our next question. And that will come from the line of Harlan Sir with J.P. Morgan. Your line is open.

Good afternoon. Thanks for taking my question. Hawk, you know, as your cloud customers are now aggressively focused on generative AI development and deployment across their data center footprints, right, this is driving strong AI-focused Ethernet switch port demand and demand for your compute offload ASICs like TPU for this year, as you mentioned. But from a new product ramp and design wind funnel perspective, is this also causing your cloud customers to want to pull forward some of your future programs like Tomahawk 5 or Jericho 3 next-gen switching and routing products and or pulling the design and tape out of their next-generation compute offload AI ASIC programs.

Yes, we're seeing all of the foregoing, by the way, and that happened over the last 90 days. We have seen a lot of that urgency, a lot of that, you might call it excitement, but you hit it right on. Yes, which is accounting for the color in my commentary about both generative AI-based networks and pushing us to develop a new generation altogether of Ethernet switching that can support this kind of very compute and data-intensive workloads. So that's one side of it. And the other side of it, you're right. We typically not want to talk much about compute offload, which is another way of saying, yeah, these are very related to some of the engines that are fairly customized, dedicated to certain hyperscalers.

Thank you, Hock.

Thank you. One moment for our next question. And that will come from the line of Vivek Arya with Bank of America. Your line is open.

Thank you for taking my question. Hawk, I'm just curious to understand just the views about the second half. If I look at the last few years, Broadcom has managed to grow semiconductor sales right anywhere between five to kind of double digit second half, half over half. Just the broader business environment, so it's kind of more of a broader business environment question, not guidance per se. What could change that trend for Broadcom in a positive or negative way this year?

In a sort of broadly conceptual, not a guidance, as you said, but trend this way, we're kind of getting rather hopeful that it would be a soft landing. There will be moderation, as we are indicating in this Q2 quarter, moderating growth, but we see it nonetheless as probably leading to a soft landing of still a year-on-year improvement in the second half.

Thank you.

Thank you. One moment for our next question. And that will come from the line of Stacy Raskon with Berenstain. Your line is open.

Hi, guys. Thanks for taking my question. I just wanted to verify and conclude this. Did you say that you started hearing urgency from your hyperscale customers around the AI in the last 90 days? And given that, how do I think about that in the context of lead times that are still 50 weeks? You've got like sounds like $1.6 billion in incremental networking growth in year over year in 23 from these AI across both Ethernet and the ASICs. I guess given the lead times, is that more of a second half kind of thing when that contributes to the model or does it contribute more linearly to the year? I guess just how do I think about the timing of all this in the wake of the strong demand right now just given the broader lead times?

Stacy, thank you for your question. Very perceptive. And as I say, we're not guiding you guys what happens beyond the second quarter, not the second half of this year.

You did give us some guidance for the year on this, right?

No guidance. Sorry. I give you a conceptual trend. How's that? But having said that, no, we're still working through timing of... when our customers need those urgent, those products in a fairly urgent manner. And our ability to obviously want to be very, very helpful to help customers launch aggressively into generative AI. So we're in the midst of that.

Okay. Because like the networking implied guide for Q2 has got to be up like, you know, call it mid-teens sequentially? Is that some of that contributing, or do I get even more, I guess, as we go beyond? Because once you get through this quarter, we're already through the first half, right?

So I guess it has to hit in the second half, right?

Stacy, I wish you guys would not do too much analysis, but I know that won't happen. I'm only guiding Q2. I let you figure out what happens in the second half. I think you're probably better off at it than I am.

Got it. Okay. Thank you so much, Huck. Thank you.

Thank you. One moment for our next question. And that will come from the line of CJ Muse with Evercore ISI. Your line is open.

Yeah, good afternoon. Thank you for taking the question. And I know that it might be difficult to share too much on the ongoing review from the European Commission. But I was hoping maybe you could speak a little bit about, you know, where they're concerned, i.e., NICS, fiber channel host bus adapters and other storage adapters. Do you view these as core businesses within Broadcom? Are they easy to extract out of your portfolio? And is there IP that is critical for these businesses that are clearly used by your other larger core businesses? Anything to kind of help us understand would be grateful. Thank you.

CJ, I appreciate the fact that you have been definitely reading a lot of those Reuters and Bloomberg and Lexicon reports. Appreciate that fact. And you equally know that I cannot and will not comment on any of this as we are working very, very positively and progressively with regulators on all the issues related to our clearance. So sorry, I can't comment. But just to let you know, we're making good progress. Thank you.

Thank you. One moment for our next question. And that will come from the line of Vijay Rakesh with Mizuho. Your line is open.

Yeah, hi, Hawk. Just a quick question on, you talked about generative AI. Just wondering, as you look at the workload, what percent of workload would be on generative AI, like exiting calendar 23 or 24? And also I want to hit on the silicon photonics side. I think you briefly mentioned the silicon photonics cable with integrated switch, the 51.2 terabyte switch. When do you see this ramping and what's the power advantage on that? Thanks.

Okay. Well, I'm sure I don't need to elaborate on what we all hear about on generative AI. And I think it's still early innings on generative AI. But We obviously are also indicating we are seeing a very strong and a strong sense of urgency among our customers, especially in the hyperscale environment, to not miss out not to be late in this trend. And what regenerative AI, as I said, with many more, much more, billions of parameters that come into the models that they're doing. You're talking about scale-out of data centers driving AI engines networked together in a manner that we probably have not seen before. It's not a problem that's not solvable. It is very, very clearly solvable, as evidenced by the fact that we have and deploy technology to support AI networks even today to certain hyperscalers, where we're talking about at least hundreds, if not thousands, of AI engines, AI servers networked together and working in a synchronous manner. So this is about ability to scale out in a fairly substantial manner. And that was the color I was providing. And it's really about trying to make sure that happens and not be the bottleneck to our ability to get the best system performance And I emphasize the word system performance of an AI data center. And where it's coming from right now is, frankly, how to network them and how to do those massive parametric exchange, so to speak, when you run large numbers of engines or machines in parallel as you grind through this huge database that we need to do. So we are in early innings, which is why we think we have time to start to work on even a new generation of switches in Ethernet that are specifically designed, dedicated to this kind of workloads, which are very different from the normal workloads that we see today traditionally in data centers. And we have to address that. They have to be, as I say, literally lossless, virtually lossless, very low latency, and be able to scale into thousands of engines. And that's the main three criteria we are aware of, and we're driving solutions, silicon solutions that enable that. We have it, but we think we need to improve the performance of what we have in anticipation of a trend that we foresee over the next several years. And so we're putting a lot of investment in that direction.

On the silicon photonics cable, just wondering when the time of ramp and power advantage is there. Thanks.

Well, we intend to launch Tomahawk 5, early 24, as we indicated previously. And that's the conventional silicon base with pluggable optics switch, top of the rack switch, Tomahawk 5, 51.2 terabits per second. Bailey, which is the fully integrated silicon photonic version, You don't fully integrate the active components, active elements of those pluggable optics into the switch. We anticipate launching that shortly thereafter. Power-wise, you can see silicon photonics does a lot. Tomahawk 5, compared to what we have today, is 2x the performance of Tomahawk 4. But we believe we can do Tomahawk 5 at the same power, close to the same power, if not lower, than a Tomahawk 4. Great. Thank you. Sure.

Thank you. One moment for our next question. And that will come from the line of Ross Seymour with Deutsche Bank. Your line is open.

Thanks for letting me ask the question. I wanted to go into the compute offload number that you talked about, Hawk, the $2 billion last fiscal year going to $3 billion this year. I know it's a touchy subject and so no customer specifics, of course, but generally speaking, can you just talk about the breadth and types of compute offload and how that's changing in the mix from the $2 billion last year to $3 billion this year?

Well, you know, I'd rather not answer that question, Ross. highly sensitive to some of my very limited customer base. But as I said, it includes some of the engines, the compute engines, and some related components that support these engines.

Is the concentration changing? So are you broadening customers in that growth?

No, no, very concentrated. Okay, thank you.

Thank you.

Thank you. One moment for our next question. And that will come from the line of Edward Snyder with Charter Equity. Your line is open.

Thank you very much. Good quarter, Hawk. So apparently over the last quarter you were getting out of wireless or getting into wireless or handset guys are going to start doing wireless. So I wanted to get a couple of updates so maybe you could set the record straight. First of all, even if you see a sea change in, let's say, silicon, mixed silicon baseband providers in the next year or two, does that fundamentally change your opinion of your wireless group? And either way, actually, does it get better or does it get worse? Because obviously if architectures change, it has a big impact on supply chain. And I know historically you've worked very closely with them. key players in helping develop all the other pieces of the puzzle like transceivers that are required if you're going to do your own. So maybe you can just kind of reset the bar on what you expect for, without guides, but in general, the wireless division in the next year or two. Does it, you know, does it at your fear get greater? Thanks.

Thanks. Good question. And as you know, our wireless division, division group, as you call it, not division. It's really not one single product line or one single division. It's not one homogenous group either. It is a few key products that comprises this wireless division, all selling, you're right, you're correct, to the same application and very high-end flagship status handset and largely focused on one key customer, our North American, our much beloved North American OEM customer. So in that sense, it's one single focus area. And to answer your question, while we're mounting these multiple products, and they tend to keep, you know, progress as each new generation happens, may not be every year, but it happens fairly regular frequency on a cadence that is pretty predictable after a while, each on its own cadence. It's a very, very good business for us. And to answer your question directly, no, nothing significant, meaningful has changed. Our relationship, our strategic engagement continues very much the same. as it has for the last multiple years. And we see that to continue in a fairly predictable, stable manner.

And just to remind if we could, three-year roadmap, I mean, you see stuff pretty far out, right?

Yes. Great. Thank you. Thank you.

Thank you. One moment for our next question. That will come from the line of Pierre Faragu with New Street Research. Your line is open.

Hey, thank you for taking my question. Can you hear me well?

Yes.

Yes. Great. So I'm trying to put together a perspective of what's happening at hyperscale clients this year. So if I look at your networking division, if you grow like at least $600 million this year in our in AI and if your computer flow division grows by a billion, that might well represent all your growth in networking. So that would mean the only thing that is really growing and that is growing a lot this year in that space is AI. And when I look outside of Botcom, what we've seen is memory and the X86 CPU servers are having a very difficult time at the moment, expect a recovery in the second half, while the GPU segment of the market is actually in very, very good shape and growing very well and accelerating again. So my question at the end of the day is, is it fair to say that in these large data centers this year, only AI is growing? And is that a sign of... you know, what the future will be or do you think the general purpose part of the infrastructure like centered around x86 or similar general purpose CPUs still is a very good growth market?

You know, you pose very, very interesting and good questions, Pierre. The problem is I do not get, my customers, hyperscale customers, do not necessarily honor me by sharing all those insights that you are, and on those questions you are asking. I do not know. I do not know. All I know, and what I do know, because I don't sell them CPUs, I don't even sell them GPUs, by the way. But I know what you know out there, which is in certain areas of their business, We're seeing some of these hyperscalers bringing on a sense of urgency and focus and, of course, spending to be up to speed, to not be left behind, as we see the excitement, hype, perhaps, in pushing applications and and put our workloads in generative AI. That's what we see driving a lot of this excitement. And all we are saying is we're seeing some of that effect on our networking business with those hyperscalers. That's what it is. Beyond that, we unfortunately, other than the backlog we get in normal in normal networking switches, routers, and key components. We see that, and as I indicated in this last quarter's results, we continue to see sustained strength. Now, last quarter and continuing as we indicate this particular quarter Q2. Beyond that, we don't get to see, we do not want to guide what we're going to see beyond that. But right now, last quarter, this quarter, yeah, traditional data centers scale out in networking, in deployment in networking, continues to be strong and sustained in hyperscalers as well, I might indicate, in enterprise.

Okay, right. And just to clarify specifically on what you are doing, is that fair to assume that a majority, a very large majority of your growth this year in networking is going to come from AI, which you have 600 million coming from AI Ethernet and a billion coming from offload chips? Or is that not the right way to think about it? Just for your business, not looking at anything else.

I will not think about it at this point. It might be a bit too mature. Don't forget, generative AI is still early stage.

Yes. Okay. That's very clear. Thanks a lot. Thank you.

Thank you. And we do have time for one final question, and that will come from the line of Carl Ackerman with BNP Paribas. Your line is open.

Thank you for taking my question. There were many great questions, quite frankly, on the networking business, which I think is quite significant for you. Maybe if I could, a clarification on that and then a broader question that I want to address on broadband. On the networking piece, I was curious if you could discuss the growth opportunity in your Tomahawk portfolio now that a peer has elected to stop investing in their switch divisions. And then as well as the broadband, you know, several companies across the broadband ecosystem have guided a softer outlook due to a buildup of inventory. But quite frankly, that's been on the customer premise side. You obviously have more weighting towards fiber and sell into the infrastructure portion. And so I was hoping you could discuss how you're thinking about the growth of your fiber business within broadband, both from an infrastructure side and a consumer equipment standpoint as governments begin to deploy funds for broadband infrastructure? Thank you.

Thank you for that question. Yes, broadband is to us a very, very good business and very sustaining. It used to be boring. Boring is good at this point. And last quarter, Q1, as I reported, we actually grew 34% year on year. In my view, that's That's rather exceptional, even though in broadband, we have been seeing year-on-year growth now at least for the past four, five quarters. But still, 34% was rather exceptional. And sure enough, Q2, it normalizes to a more sedate level, but still growing. And the growth in that is simply because we're very well-positioned with respect to next-generation PON, 10-gig PON. which has been deployed in big volumes now by telcos, supported by their governments and countries all over Europe, and even in North America, not to mention other nations beyond that. Basically, it is about reaching this key utility broadband service to every household, and we see a lot of deployments. And then more vertical market, we also see simultaneous with PON or fiber as you call it, a strong continued deployment of cable, DOCSIS, so it's very coaxial, to the home because the cable operators, a few of them, who are on the scale of the telcos and who need to maintain competitiveness as the telcos launch 10 gigabit PON, that cable has to update DOCSIS to be able to compete and not lose subscribers in the same market they compete against each other. So we see strength, both in cable, DOCSIS 3.1, as I call it, and potentially next generation, not yet happening, but hopefully within the next couple of years, DOCSIS 4.0. Meanwhile, PON is happening, which accounts for the strength we saw last quarter and continuing strength over the last several quarters. And content increases come to not just unit deployment of those gateways and infrastructure, but also the fact that a lot of these deployments come with very high attach rates of Wi-Fi, six and succeed, and that provides additional boost, content increases, more what I'll call it, to our revenue growth in broadband. So that's quietly still chugging along very nicely for us.

All right.

Thank you. As I'm showing no further questions in the queue at this time, I would now like to turn the call back over to GU for any closing remarks.

Thank you, Cherie. In closing, we would like to highlight that Broadcom will be attending the Morgan Stanley Technology, Media, and Telecom Conference on Tuesday, March 7th. Broadcom currently plans to report its earnings for the second quarter of fiscal 23 after close of market on Thursday, June 1st 2023. 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. Cherie, you may end the call.

Thank you all for participating. This concludes today's program. You may now disconnect.