Broadcom Inc.

Welcome to Broadcom, Inc.' 's second quarter fiscal year 2024 financial results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to G.U., head of investor relations of Broadcom, Inc.

Thank you, operator, and good afternoon, everyone. Joining me on today's call are Hawk 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 second quarter of fiscal year 2024. 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 then 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 second quarter fiscal year 2024 results, guidance for our fiscal year 2024, 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 Hock.

Thank you, Chi, and thank you everyone for joining today. In our fiscal Q2 2024 results, consolidated net revenue was $12.5 billion, up 43% year-on-year as revenue included a full quarter of contribution from VMware. But if we exclude VMware, consolidated revenue was up 12% year-on-year. And this 12% organic growth in revenue was largely driven by AI revenue which step up 280% year-on-year to $3.1 billion, more than offsetting continued cyclical weakness in semiconductor revenue from enterprises and telcos. Let me now give you more color on our two reporting segments, beginning with software. In Q2, Infrastructure software segment revenue of $5.3 billion was up 175% year-on-year and included $2.7 billion in revenue contribution from VMware, up from $2.1 billion in the prior quarter. The integration of VMware is going very well. Since we acquired VMware, We have modernized the product SKUs from over 8,000 disparate SKUs to four core product offerings and simplified the go-to-market flow, eliminating a huge amount of channel conflicts. We are making good progress in transitioning all VMware products to a subscription licensing model. And since closing the deal, we have actually signed up close to 3,000 of our largest 10,000 customers to enable them to build a self-service virtual private cloud on-prem. Each of these customers typically sign up to a multi-year contract, which we normalize into an annual measure known as annualized booking value, or ABV. This metric ABV for VMware products accelerated from $1.2 billion in Q1 to $1.9 billion in Q2. For reference, for the consolidated Broadcom software portfolio, ABV grew from $1.9 billion in Q1 to $2.8 billion over the same period in Q2. Meanwhile, we have integrated SG&A across the entire platform and eliminated redundant functions. Year-to-date, we have incurred about $2 billion of restructuring and integration costs and drove our spending run rate at VMware to 1.6 billion this quarter, from what used to be 2.3 billion per quarter pre-acquisition. We expect spending will continue to decline towards a 1.3 billion run rate exiting Q4, better than our previous $1.4 billion plan, and will likely stabilize at 1.2 billion post-integration. VMware revenue in Q1 was $2.1 billion. It grew to $2.7 billion in Q2 and will accelerate towards a $4 billion per quarter run rate. We therefore expect operating margins for VMware to begin to converge towards that of classic Broadcom software by fiscal 2025. Turning to semiconductors. Let me give you more color by end markets. Networking. Q2 revenue of $3.8 billion grew 44% year-on-year, representing 53% of semiconductor revenue. This was again driven by strong demand from hyperscalers for both AI networking and custom accelerators. It's interesting to note that as AI data center clusters continue to deploy, our revenue mix has been shifting towards an increasing proportion of networking. We doubled the number of switches we sold year on year, particularly Tomahawk 5 and Jericho 3, which we deploy successfully in close collaboration with partners like Arista Networks, Dell, Juniper, and Supermicro. Additionally, we also double our shipments of PCI Express switches and NICs in the AI backend fabric. We're leading the rapid transition of optical interconnects in AI data centers to 800 gigabit bandwidth, which is driving accelerated growth for our DSPs, optical lasers, and pin diodes. And we are not standing still. Together with these same partners, we are developing the next generation switches, DSP, and optics that will drive the ecosystem towards 1.6 terabit connectivity to scale up larger AI accelerated clusters. Talking of AI accelerators, you may know our hyperscale customers are accelerating their investments to scale up the performance of these clusters. And to that end, we have just been awarded the next generation custom AI accelerators for these hyperscale customers of ours. Networking these AI accelerators is very challenging, but the technology does exist today. In Broadcom, we have the deepest and broadest understanding of what it takes for complex, large workloads to be scaled out in an AI fabric. Proven point, seven of the largest eight AI clusters in deployment today use Broadcom Ethernet solutions. Next year, we expect all mega-scale GPU deployments to be on Ethernet. We expect the strength in AI to continue, and because of that, We now expect net working revenue to grow 40% year-on-year compared to our prior guidance of over 35% growth. Moving to wireless. Q2 wireless revenue of $1.6 billion grew 2% year-on-year, was seasonally down 19% quarter-on-quarter, and represents 22% of semiconductor revenue. And in fiscal 24, helped by content increases, we reiterate our previous guidance for wireless revenue to be essentially flat year on year. This trend is wholly consistent with our continued engagement with our North American customer, which is deep, strategic, and multi-year, and represents all of our wireless business. Next, our Q2 server storage connectivity revenue was $824 million, or 11% of semiconductor revenue, down 27% year-on-year. We believe, though, Q2 was the bottom in server storage. And based on updated demand forecasts and bookings, we expect a modest recovery in the second half of the year. And accordingly, we forecast fiscal 24 service storage revenue to decline around the 20% range year-on-year. Moving on to broadband. Q2 revenue declined 39% year-on-year to $730 million and represented 10% of semiconductor revenue. Broadband remains weak on a continued pause in telco and service provider spending. We expect Broadcom to bottom in the second half of the year with a recovery in 2025. Accordingly, we are revising our outlook for fiscal 24 broadband revenue to be down high 30s year-on-year from our prior guidance for decline of just over 30% year-on-year. Finally, Q2 industrial resale of $234 million declined 10% year-on-year. And for fiscal 24, we now expect industrial resale to be down double-digit percentage year-on-year compared to our prior guidance for high single-digit decline. So to sum it all up, here's what we are seeing. For fiscal 24, we expect revenue from AI to be much stronger at over $11 billion. Non-AI semiconductor revenue has bottomed in Q2. and is likely to recover modestly for the second half of fiscal 24. On infrastructure software, we're making very strong progress in integrating VMware and accelerating its growth. Pulling all these three key factors together, we're raising our fiscal 24 revenue guidance to $51 billion. And with that, let me turn the call over to Kirsten.