Broadcom Inc.

demanding and costly AI resources. These switches based on an open distributed disaggregated architecture won't support 32,000 GPU clusters running at 800 gigabit per second bandwidth. Ethernet fabric as we know it already supports multi-tenancy capability and end-to-end congestion management. This lossless connectivity with high QoS performance has been well proven over the last 10 years of network deployment in the public cloud and telcos. In other words, the technology is not new. And we are, as Broadcom, very well positioned to simply extend our best-in-class networking technology into generative AI infrastructure, while supporting standard connectivity, which enables vendor interoperability. In Q3, we expect networking revenue to maintain its growth year-on-year of around 20%. Our server storage connectivity revenue was $1.1 billion, or 17% of semiconductor revenue, and up 20% year-on-year. And as we noted last quarter, with the transition to next-generation mega-rate largely completed and enterprise demand moderating, we expect server storage connectivity revenue in Q3 to be up low single digits year-on-year. Moving on to broadband, revenue grew 10% year-on-year to $1.2 billion and represented 18% of semiconductor revenue. Growth in broadband was driven by continued deployments by telcos of next generation 10G PON and cable operators of DOCSIS 3.1. with high tax rates of Wi-Fi 6 and 6E. And in Q3, we expect our broadband growth to moderate to low single-digit percent year-on-year. And finally, Q2 industrial resales of $260 million increased 2% year-on-year as the softness in China was offset by strength globally in renewable energy and robotics. And in Q3, we forecast industrial resale to be flattish year-on-year on continuing softness in Asia offset by strength in Europe. So summary, Q2 semiconductor solutions revenue was up 9% year-on-year. And in Q3, we expect semiconductor revenue growth of mid-single-digit year-on-year growth. Turning to software, in Q2, infrastructure software revenue of $1.9 billion grew 3% year-on-year and represented 22% of total revenue. As expected, continuous softness in Brocade was offset by the continuing stable growth in core software. Relating to core software, consolidated renewal rates averaged 114% over expiring contracts, and in our strategic accounts, we averaged 120%. Within the strategic accounts, annualized bookings of $564 million included 133 million or 23% of cross-selling of other portfolio products to these same core customers. Over 90% of the renewal value represented recurring subscription and maintenance. And over the last 12 months, consolidated renewal rates averaged 117% over expiring contracts And among our strategic accounts, we averaged 128%. Because of this, our ARR, the indicator of forward revenue at the end of Q2 was 5.3 billion, up 2% from a year ago. And in Q3, we expect our infrastructure software segment revenue to be up low single digits percentage year on year as the Core software growth continues to be offset by weakness in Brocade. On a consolidated basis, we're guiding Q3 revenue of $8.85 billion, up 5% year on year. Before Kirsten tells you more about our financial performance for the quarter, Let me provide a brief update on our pending acquisition of VMware. We're making good progress with our various regulatory filings around the world, having received legal merger clearance in Australia, Brazil, Canada, South Africa, and Taiwan, and foreign investment control clearance in all necessary jurisdictions. We still expect the transaction will close in Broadcom's fiscal 2023. 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 that regulators will see this when they conclude their review. With that, let me turn the call over to Kirsten.

Thank you, Hawk. Let me now provide additional detail on our financial performance. Consolidated revenue was $8.7 billion for the quarter, up 8 percent from a year ago. Those margins were 75.6 percent of revenue in the quarter, about 30 basis points higher than we expected on product mix. Operating expenses were 1.2 billion, down 4% year-on-year. R&D of 958 million was also down 4% year-on-year on lower variable spending. Operating income for the quarter was 5.4 billion and was up 10% from a year ago. Operating margin was 62% of revenue, up approximately 100 basis points year-on-year. Adjusted EBITDA was $5.7 billion, or 65% of revenue. This figure excludes $129 million of depreciation. Now a review of the P&L for our two segments. Revenue for our semiconductor solution segment was $6.8 billion and represented 78% of total revenue in the quarter. This was up 9% year-on-year. Gross margins for our semiconductor solution segment were approximately 71%, down approximately 120 basis points year-on-year, driven primarily by product mix within our semiconductor and markets. Operating expenses were $833 million in Q2, down 5% year-on-year. R&D was $739 million in the quarter, down 4% year-on-year. Q2 semiconductor operating margins were 59%. So while semiconductor revenue was up 9%, operating profit grew 10% year on year. Moving to the P&L for our infrastructure software segment. Revenue for infrastructure software was $1.9 billion, up 3% year on year, and represented 22% of revenue. Gross margins for infrastructure software were 92% in the quarter, and operating expenses were $361 million in the quarter, down 3% year over year. Infrastructure software operating margin was 73% in Q2, and operating profit grew 8% year on year. Moving to cash flow. Free cash flow in the quarter was $4.4 billion and represented 50% of revenues in Q2. We spent $122 million on capital expenditures. Day sales outstanding were 32 days in the second quarter compared to 33 days in the first quarter. We ended the second quarter with inventory of $1.9 billion, down 1% from the end of the prior quarter. We ended the second quarter with $11.6 billion of cash and $39.3 billion of gross debt, of which $1.1 billion is short term. The weighted average coupon rate and years to maturity of our fixed rate debt is 3.61% and 9.9 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 $2.8 billion of our common stock and eliminated $614 million of common stock for taxes due on the vesting of employee equity, resulting in the repurchase and elimination of approximately 5.6 million AVGO shares. The non-GAAP diluted share count in Q2 was 435 million. As of the end of Q2, 9 billion was remaining under the share repurchase authorizations. Excluding the potential impact of any share repurchases in Q3, we expect the non-GAAP diluted share count to be $438 million. Based on current business trends and conditions, our guidance for the third quarter of fiscal 2023 is for consolidated revenues of $8.85 billion and adjusted EBITDA of approximately 65% of projected revenue. In Q3, we expect gross margins to be down approximately 60 basis points sequentially on product mix. That concludes my prepared remarks. Operator, please open up the call for questions.

Thank you. To ask a question, you will need to press star 1 1 on your telephone. To withdraw your question, please 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. And today's first question will come from the line of Ross Seymour with Deutsche Bank. Your line is open.