Broadcom Inc.

Welcome to Broadcom's Inc. Second Quarter Fiscal Year 2025 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 Quaz, 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 2025. If you did not receive a copy, you may obtain the information from the investor section of the 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 second quarter fiscal year 2025 results, guidance for our third quarter of fiscal year 2025, 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 table attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. I will now turn the call over to Hawks.

Thank you. Thank you, Gee. And thank you, everyone, for joining us today. In our fiscal Q2 2025, total revenue was a record $15 billion, up 20% year on year. This 20% year-on-year growth was all organic, as Q2 last year was the first full quarter with VMware. Now, revenue was driven by continued strength in AI semiconductors and the momentum we have achieved in VMware. Now, reflecting excellent operating leverage Q2 consolidated adjusted EBITDA was $10 billion, up 35% year on year. Now let me provide more color. Q2 semiconductor revenue was $8.4 billion, with growth accelerating to 17% year on year, up from 11% in Q1. And of course, driving this growth was AI semiconductor revenue of over $4.4 billion, which was up 46% year on year and continues the trajectory of nine consecutive quarters of strong growth. Within this, custom AI accelerators grew double digits year on year, while AI networking grew over 170% year on year. AI networking, which is based on Ethernet, was robust and represented 40% of our AI revenue. As a standards-based open protocol, Ethernet enables one single fabric for both scale out and scale up and remains the preferred choice by our hyperscale customers. Our networking portfolio of Tomahawk switches, Jericho routers, and NICs is what's driving our success within AI clusters in hyperscale. And the momentum continues with our breakthrough Tomahawk 6 switch just announced this week. This represents the next generation 102.4 terabits per second switch capacity. Tomahawk 6 enables clusters of more than 100,000 AI accelerators to be deployed in just two tiers instead of three. This flattening of the AI cluster is huge because it enables much better performance in training next generation frontier models through a lower latency, higher bandwidth, and lower power. Turning to XPUs or custom accelerators. We continue to make excellent progress on the multi-year journey of enabling our three customers and four prospects to deploy custom AI accelerators. As we had articulated over six months ago, we eventually expect at least three customers to each deploy 1 million ai accelerated clusters in 2027 largely for training their frontier models and we forecast and continue to do so a significant percentage of these deployments to be custom xpus these partners are still unwavering in their plan to invest despite this certain economic environment. In fact, what we've seen recently is that they are doubling down on inference in order to monetize their platforms. And reflecting this, we may actually see an acceleration of XPU demand into the back half of 2026. to meet urgent demand for inference on top of the demand we have indicated from training. And accordingly, we do anticipate now our fiscal 2025 growth rate of AI semiconductor revenue to sustain into fiscal 2026. Turning to our Q3 outlook, as we continue our current trajectory of growth, we forecast AI semiconductor revenue to be $5.1 billion, up 60% year on year, which would be the 10th consecutive quarter of growth. Now turning to non-AI semiconductors in Q2. Revenue of $4 billion was down 5% year-on-year. Non-AI semiconductor revenue is close to the bottom and has been relatively slow to recover. But there are bright spots. In Q2, broadband, enterprise networking, and server storage revenues were up. sequentially. However, industrial was down, and as expected, wireless was also down due to seasonality. In Q3, we expect enterprise networking and broadband to continue to grow sequentially, but server storage, wireless, and industrial are expected to be largely flat. And overall we forecast non AI semiconductor revenue to stay around $4 billion. Now let me talk about our infrastructure software segment. Q2 infrastructure software revenue of 6.6 billion was up 25% year on year above our outlook of $6.5 billion. As we have said before, This growth reflects our success in converting our enterprise customers from perpetual vSphere to the full VCF software stack subscription. Customers are increasingly turning to VCF to create a modernized private cloud on-prem, which will enable them to repatriate workloads from public clouds. while being able to run modern container based applications and AI applications. Of our 10,000 largest customers, over 87% have now adopted VCF. The momentum from strong VCF sales over the past 18 months since the acquisition of VMware has created annual recurring revenue or otherwise known as ARR growth of double digits in our core infrastructure software. In Q3, we expect infrastructure software revenue to be approximately $6.7 billion, up 16% year-on-year. So in total, we're getting Q3 consolidated revenue to be approximately $15.8 billion, up 21% year-on-year. We expect Q3 adjusted EBITDA to be at least 66%. With that, let me turn the call over to Kirsten.

Thank you, Hawk. Let me now provide additional detail on our Q2 financial performance. Consolidated revenue was a record 15 billion for the quarter, up 20% from a year ago. Gross margin was 79.4% of revenue in the quarter, better than we originally guided on product mix. Consolidated operating expenses were 2.1 billion, of which 1.5 billion was related to R&D. Q2 operating income of 9.8 billion was up 37% from a year ago, with operating margin at 65% of revenue. Adjusted EBITDA was 10 billion or 67% of revenue above our guidance of 66%. This figure excludes 142 million of depreciation. Now a review of the P&L for our two segments. Starting with semiconductors. Revenue for our semiconductor solution segment was $8.4 billion, with growth accelerating to 17% year-on-year driven by AI. Semiconductor revenue represented 56% of total revenue in the quarter. Gross margin for our semiconductor solution segment was approximately 69%, up 140 basis points year-on-year driven by product mix. operating expenses increased 12% year-on-year to $971 million on increased investment in R&D for leading edge AI semiconductors. Semiconductor operating margin of 57% was up 200 basis points year-on-year. Now moving on to infrastructure software. Revenue for infrastructure software of $6.6 billion was up 25% year-on-year and represented 44% of total revenue. Gross margin for infrastructure software was 93% in the quarter compared to 88% a year ago. Operating expenses were $1.1 billion in the quarter, resulting in infrastructure software operating margin of approximately 76%. This compares to operating margin of 60% a year ago This year-on-year improvement reflects our disciplined integration of VMware. Moving on to cash flow. Free cash flow in the quarter was $6.4 billion and represented 43% of revenue. Free cash flow as a percentage of revenue continues to be impacted by increased interest expense from debt related to the VMware acquisition and increased cash taxes. we spent $144 million on capital expenditures. Day sales outstanding were 34 days in the second quarter compared to 40 days a year ago. We ended the second quarter with inventory of $2 billion, up 6% sequentially in anticipation of revenue growth in future quarters. Our days of inventory on hand were 69 days in Q2 as we continue to remain disciplined on how we manage inventory across the ecosystem. We ended the second quarter with $9.5 billion of cash and $69.4 billion of gross principal debt. Subsequent to quarter end, we repaid $1.6 billion of debt, resulting in gross principal debt of $67.8 billion. The weighted average coupon rate and years to maturity of our $59.8 billion in fixed rate debt is 3.8% and seven years, respectively. the weighted average interest rate and years to maturity of our $8 billion in floating rate debt is 5.3% and 2.6 years, respectively. Turning to capital allocation, in Q2, we paid stockholders $2.8 billion of cash dividends based on a quarterly common stock cash dividend of $0.59 per share. In Q2, we repurchased 4.2 billion or approximately 25 million shares of common stock. In Q3, we expect the non-GAAP diluted share count to be approximately 4.97 billion shares, excluding the potential impact of any share repurchases. Now moving on to guidance. Our guidance for Q3 is for consolidated revenue of 15.8 billion of 21% year-on-year. We forecast semiconductor revenue of approximately $9.1 billion of 25% year-on-year. Within this, we expect Q3 AI semiconductor revenue of $5.1 billion of 60% year-on-year. We expect infrastructure software revenue of approximately $6.7 billion of 60% year-on-year. For modeling purposes, we expect Q3 consolidated gross margin to be down approximately 130 basis points sequentially, primarily reflecting a higher mix of XPUs within AI revenue. As a reminder, consolidated gross margins through the year will be impacted by the revenue mix of infrastructure software and semiconductors. We expect Q3 adjusted EBITDA to be at least 66%. We expect the non-GAAP tax rate for Q3 and fiscal year 2025 to remain at 14%. And with this, 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 our first question will come from the line of Ross Seymour with Deutsche Bank. Your line is open.

Hi, guys. Thanks for letting me ask a question. Huck, I wanted to jump onto the AI side and specifically some of the commentary you had about next year. Can you just give a little bit more color on the inference commentary you gave? And is it more the XPU side, the connectivity side, or both that's given you the confidence to talk about the growth rate that you have this year being matched next fiscal year?

Thank you, Ross. Good question. I think we're indicating that what we are seeing and what we have quite a bit of visibility increasingly is increased deployment of XP use next year and much more than we originally thought and hand-in-hand with it of course more more and more networking so it's a combination of both in the imprint side of things Yeah, we're seeing much more inference now.

Thank you. 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 and great job on the quarterly execution. Hawk, you know, good to see the positive growth instruction quarter to quarter. year-over-year growth rates in your AI business. As the team has mentioned, right, the quarters can be a bit lumpy. So if I smooth out kind of first three quarters of this fiscal year, your AI business is up 60% year-over-year. It's kind of right in line with your three-year kind of SAM growth CAGR, right? Given your prepared remarks and, you know, knowing that your lead times remain at 35 weeks or better, do you see the Broadcom team sustaining the 60% year-over-year growth rate exiting this year, and I assume that that potentially implies that you see your AI business sustaining the 60% year-over-year growth rate into fiscal 26, again, based on your prepared commentary, which again is in line with your SAM growth taker. Is that kind of a fair way to think about the trajectory this year and next year?

Colin, that's a very insightful set of analysis here, and that's exactly what we're trying to do here, because Over six months ago, we gave you guys a point, a year, 2027. As we come into the second half of 2025, and we've improved visibility and updates we're seeing in the way our hyperscale partners are deploying data centers, AI clusters, We are providing you some level of guidance, visibility, what we are seeing, how the trajectory of 26 might look like. I'm not giving you any update on 27. We're just still establishing the update we have in 27 six months ago. But what we're doing now is giving you more visibility into where we're seeing 26 headings.

But is the framework that you laid out for us, like second half of last year, which implies 50% kind of growth in your SAM opportunity, is that kind of the right way to think about it as it relates to the profile of growth in your business this year and next year?

Yes.

Okay. Thank you, Hawk.

Thank you. One moment for our next question. And that will come from the line of Ben Rietzes with Mellius Research. Your line is open.

Hey, how you doing? Thanks, guys. Hey, Hawk. Networking, AI networking was really strong in the quarter. And it seemed like it must have beat expectations. I was wondering if you could just talk about the networking in particular. What caused that? And how much of that is your acceleration into next year? And when do you think you see Tomahawk kicking in as part of that acceleration? Thanks.

Well, I think the network, AI networking, as you probably would know, goes pretty hand in hand with deployment of AI accelerator clusters. It doesn't deploy on a timetable that's very different from the way that accelerators get deployed whether they are XPUs or GPUs it does happen and they deploy a lot in scale out where Ethernet of course is the choice or protocol but it's also increasingly moving into the space of what we all call scale up within those data centers where you have much higher, more than we originally thought, consumption or density of switches than you have in the scale-out scenario. It's, in fact, the increased density in scale-up is five to ten times more than in scale-out. And that's the part that kind of pleasantly surprises, which is why in this past quarter Q2, uh the ai networking portion continues at about 40 percent from when we reported a quarter ago for q1 and at that time i said i expect it to drop it hasn't and and your thoughts on tomahawk driving acceleration for next year and when it kicks in oh tomahawk six oh yeah that's extremely strong interest uh now We're not shipping big orders or any orders other than basic proof of concepts out to customers, but there is tremendous demand for this new 102 terabit per second Tomahawk switches.

Thanks, Hock.

Thank you. One moment for our next question. And that will come from the line of Blaine Curtis with Jefferies. Your line is open.

Hey, thanks, and great results. I just want to ask, maybe following up on the scale-out opportunity, so today I guess your main customer is not really using an MVLink switch-style scale-up. I'm just kind of curious your visibility or the timing in terms of when you might be shipping a switched Ethernet scale-up network to your customers.

The talking scale-up?

Scale-up. Scale up.

Yeah. Well, scale up is very rapidly converting to Ethernet now. Very much so. For our fairly narrow band of hyperscale customers, scale up is very much Ethernet.

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

Hi, guys. Thanks for taking my questions. Hawk, I still wanted to follow up on that AI 2026 question. I want to just put some numbers on it just to make sure I've got it right. So if you did 60% in the first three quarters of this year, if you grow 60% year over year in Q4 and put you at like, I don't know, 5.8 billion, something like 19 or 20 billion for the year, And then are you saying you're going to grow 60% in 2026, which would put you $30 billion plus in AI revenues for 2026? Is that the math that you're trying to communicate to us directly?

I think you're doing the math. I'm giving you the trend. But I did answer that question I think Holland asked earlier. The rate we are seeing now so far in fiscal 25, and will presumably continue. We don't see any reason why it doesn't given lead time visibility in 25. What we're seeing today based on what we have visibility on 26 is to be able to ram up this AI revenue in the same trajectory. Yes.

So is the SAM going up So is the SAM going up as well? Because now you have inference on top of training. So is the SAM still 60 to 90 or is the SAM higher now as you see it?

I'm not playing a SAM game here. I'm just giving a trajectory towards where we drew the line on 27 before. So I have no response to is the SAM going up or not. Stop talking about SAM now.

Thanks. Okay. 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.

Thanks for taking my question. I had a near and then a longer term question on the XPU business. So Hawk, for near term, if you're networking upside in Q2 and overall AI was in line, it means XPU was perhaps not as strong. I realize it's lumpy, but Anything more to read into that, any product transition or anything else? So just a clarification there. And then long-term, you have outlined a number of additional customers that you're working with. What milestones should we look forward to and what milestones are you watching to give you the confidence that you can now start adding that addressable opportunity into your 27 or 28 or other numbers? How do we get the confidence that these projects are going to turn into revenue in some reasonable timeframe from now. Thank you.

Okay, on the first part that you're asking, it's like you're trying to count how many angels on the head of a pin here. I mean, whether it's XPU or networking. Networking is hard, but that doesn't mean XPU is any software. It's very much along the trajectory we expect it to be. and there's no lumpiness, there's no softening. It's pretty much what we expect the trajectory to go so far and into next quarter as well and probably beyond. So we have a fairly, it's a fairly, I guess in our view, a fairly clear visibility on the short-term trajectory. In terms of going on to 27, no, we are not updating any numbers here. Six months ago, we drew a sense for the size of the SAM based on a million GPU, XPU clusters for three customers. That's still very valid at that point, that you'll be there. We have not provided any further updates here, nor are we intending to at this point. When we get a better visibility, clearer sense of where we are, and that probably won't happen until 26, we'll be happy to give an update to the audience. But right now, though, in today's prepared remarks and answering a couple of questions, we have, we are, as we are doing, as we have done here, we are intending to give you guys more visibility what we've seen, the growth trajectory in 26.

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

Yeah, good afternoon. Thank you for taking the question. I was hoping to follow up on Ross's question regarding inference opportunity. Can you discuss workloads that are optimal that you're seeing for custom silicon and that over time, what percentage of your XPU business could be inference versus training? Thank you.

I think there's no differentiation between training and inference in using merchant accelerators versus custom accelerators. I think the whole premise behind going towards custom accelerators continues, which is not a matter of cost alone. is that as custom accelerators get used and get developed on a roadmap with any particular hyperscaler, that's a learning curve. A learning curve on how they could optimize the way the algorithms on their large language models gets written and tied to silicon. And that ability to do so is a huge value added in creating algorithms that can drive their LLMs to higher and higher performance. Much more than basically a segregation approach between hardware and the software. is that you literally combine end-to-end hardware and software as they take that journey. And it's a journey. They don't learn that in one year. Do it a few cycles, get better and better at it, and there lies the fundamental value in creating your own hardware versus using a third-party merchant silicon, that you are able to optimize your software to the hardware and eventually achieve way high performance than you otherwise could. And we see that happening.

Thank you. One moment for our next question. And that will come from the line of Carl Ackerman with BNP Paribas. Your line is open.

Thank you. Hawk, you spoke about the much higher content opportunity in scale-up networking. I was hoping you could discuss how important is demand adoption for co-package optics in achieving this 5 to 10x higher content for scale-up networks, or should we anticipate much of the scale-up opportunity will be driven by Tom Hawk and Thor Nix? Thank you.

I'm trying to decipher this question of yours, so let me try to answer it perhaps in a way I think you want me to clarify. First and foremost, I think most of what's scaling up, there are a lot of the scaling up that's going on, as I call it, which means a lot of XPU or GPU to GPU interconnects is done on copper interconnects. because you know that's the size of the size of this in of this scale up cluster still not that huge yet they can get away with copper using copper interconnects and they're still doing it mostly they're doing it today at some point soon I believe when you start trying to go beyond maybe 72 GPU to GPU interconnects, you may have to push towards a different protocol by protocol mode at a different medium from copper to optical. And when we do that, yeah, perhaps then things like exotic stuff like cold packaging of silicon with optical might become relevant. But truly what we really are talking about is that at some stage as the clusters get larger, which means scale up becomes much bigger and you need to interconnect GPU or XPU to each other and scale up many more than just 72 or 100. maybe even 128, you start going more and more, you want to use optical interconnects simply because of distance. And that's when optical will start replacing copper. And when that happens, the question is what's the best way to deliver on optical. And one way is called package optics. But it's not the only way. You can just simply use, continue to use perhaps pluggables. low-cost optics in which case then you can interconnect the band with the radix of a switch and our switch is now 512 connections so you can now connect all these XP use GPUs 512 for scale up phenomenon and that was huge but then it's when you go to optical that's going to happen I said within a my view, a year or two, and we'll be right in the forefront of it. And it may be co-packaged optics, which we are very much in development, but it's a lock-in co-package, or it could just be, as a first step, pluggable optics. Whatever it is, I think the bigger question is, when does it go from optical and from copper connecting GPU to GPU to optical? connecting it. And the stamp in that move will be huge. And it's not necessary to go package optics, though that's definitely one path we are pursuing.

Very clear. Thank you.

And one moment for our next question. And that will come from the line of Joshua Buckhalter with TD Cowan. Your line is open.

guys thank you for taking my question um i realize it's a bit nitpicky but i wanted to ask about gross margins and the guide um so your revenue implies sort of 800 million dollar incremental increase but gross profit up i think 400 to 450 million which is kind of pretty well below corporate average fall through um appreciate that semis is dilutive and custom is probably diluted within semis but anything else going on with margins that we should be aware of and And how should we think about the margin profile of custom longer term as that business continues to scale and diversify? Thank you.

Yeah, we've historically said that the XPU margins are slightly lower than the rest of the business, other than wireless. And so there's really nothing else going on other than that. It's just exactly what I said, that the majority of it, quarter over quarter, the 130 basis point decline is being driven by more XPUs.

You know, they're moving... parts here, then your simple analysis proves it. And I think your simple analysis is totally wrong in that regard.

All right, and thank you.

And one moment for our next question. And that will come from the line of Timothy Arcuri with UBS. Your line is open.

Thanks a lot. I also wanted to ask about scale up, Hawk. So there's a lot of competing ecosystems. There's UA Link, which of course you left. And now there's the big, you know, GPU company, you know, opening up NVLink. And they're both trying to build ecosystems. And there's an argument that you're an ecosystem of one. What would you say to that debate? Does opening up NVLink change the landscape? And sort of how do you

view of your ai networking growth next year do you think it's going to be primarily driven by scale up or would still be pretty scale out heavy things it's you know people do like to create platforms and new protocols and systems the fact of the matter is scale up can just be done easily and it's currently available it's open standards open source ethernet just as well just as well you don't need to create new systems for the sake of doing something that you could easily be doing in networking in Ethernet and so yeah I hear a lot of this interesting new protocols standards that are trying to be created and most of them by the way are proprietary much as they like to call it otherwise one is really open source and open standards is Ethernet. And we believe Ethernet will prevail as it does for the last 20 years in traditional networking. There's no reason to create a new standard for something that could be easily done in transferring bits and bytes of data.

Got it, Huck. Thank you.

And one moment for our next question. And that will come from the line of Christopher Rowland with Susquehanna. Your line is open.

Thanks for the question. Yeah, my question is for you, Hawk. It's kind of a bigger picture one here. And this kind of acceleration that we're seeing in AI demand, do you think... that this acceleration is because of a marked improvement in ASICs or XPUs closing the gap on the software side at your customers? Do you think it's these require tokenomics around inference, test time compute driving that, for example? What do you think is actually driving the upside here And do you think it leads to a market share shift faster than we were expecting towards XPU from GPU? Thanks.

Yeah, interesting question. But no, none of the foregoing that you outlined. It's very simple. The way inference has come out very, very hot lately is, remember, we're only selling to a few customers, hyperscalers. We've platforms and LLMs. That's it. There are not that many. And we told you how many we have, and we haven't increased any. But what is happening is these hyperscalers and those with LLMs need to justify all the spending they're doing. Doing training makes your frontier models smarter. That's no question. It's almost like science, research and science. Make your frontier models by creating very clever algorithms that consumes a lot of compute for training. Smarter, training makes it smarter. You want to monetize, inference. And that's what's driving it. Monetize, I indicated in my prepared remarks. The drive to justify a return on investment And a lot of that investment is training. And then return on investment is by creating use cases, a lot of AI use cases, AI consumption out there through availability of a lot of inference. And that's what we are now starting to see among our small group of customers.

Excellent. Thank you.

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

Yeah, thanks. Hi, Hawk. Just going back on the AI server revenue side, I know you said fiscal 25 kind of tracking to that up 60%-ish growth. If you look at fiscal 26, you know, you have many new customers ramping with a meta and probably, you know, you have the four of the six hyperscalers that you're talking about. Would you expect that growth to accelerate into fiscal 26, about that 60% we had talked about?

You know, my prepared remarks in which I clarified that the rate of growth we are seeing in 25 will sustain into 26 based on improved visibility and the fact that we're seeing inference coming in on top of the demand for training as the clusters get built up bigger and bigger still stands. I don't think we are getting very far by trying to pass through my words or data here. It's just a trajectory. And we see that going from 25 into 26 as the best forecast we have at this point.

Got it. And on the NVLink fusion versus the scale-up, do you expect that market to go the route of top of the rack where you're seeing some move to the internet side in kind of the scale out, do you expect scale up to kind of go the same route? Thanks.

Well, Broadcom do not participate in NVLink, so I'm really not qualified to answer that question, I think.

All right, thank you.

Thank you. One moment for our next question. And that will come from the line of Aaron Rakers with Wells Fargo. Your line is open.

Yeah, thanks for taking the question. I think all my questions on scale up have been asked. But I guess given the execution that you guys have been able to do with the VMware integration, looking at the balance sheet, looking at the debt structure, I'm curious if you could give us your thoughts on how the company thinks about capital return versus the thoughts on M&A and the strategy going forward. Thank you.

Okay, that's an interesting question, and I agree. Not too untimely, I would say. Because, yeah, we have done a lot of the integration of VMware now, and you can see that in the level of free cash flow we're generating from operations. And as we said, the use of capital has always been, we're very, I guess, measured and upfront with a return through dividends, which is half our free cash flow of the preceding year. And frankly, as Kirsten has mentioned, three months ago and six months ago during the last two earnings calls, the first choice typically of the other part of the free cash flow is to bring down our debt to a level that we feel closer to no more than two ratio of debt to EBITDA. And that doesn't mean that opportunistically we may go out there and buy back our shares as we did last quarter and indicated that by Kirsten when we did $4.2 billion of stock buyback. Now part of it is used to basically when employee RSUs, VEST, basically use, we basically buy back part of the shares for used to be paying taxes on the invested RSU. But the other part of it, I do admit, we use it opportunistically last quarter when we see an situation when basically we think that it's a good time to buy some shares back. We do. But having said all that, our use of cash outside of dividends would be, at this stage, used towards reducing our debt. And I know you're going to ask, what about M&A? Well, the kind of M&A we will do, in our view, would be significant, would be substantial enough that we need debt in any case. And it's a good use of our free cash flow to bring down debt to, in a way, expand, if not preserve, our borrowing capacity if we have to do another M&A deal.

Thank you. One moment for our next question. And that will come from the line of Srini Pajuri with Raymond James. Your line is open.

Thank you. Huck, a couple of clarifications. First, on your 2026 expectation, are you assuming any meaningful contribution from the four prospects that you talked about?

No comment. We don't talk about prospects. We only talk about customers.

Okay, fair enough. And then my other clarification is that I think you talked about networking being about 40% of the mix within AI. Is that the right kind of mix that you expect going forward, or is that going to materially change as we, I guess, see XPS ramping going forward?

No, I've always said, and I expect that to be the case going forward in 26 as we grow, that networking... should be a ratio to xpu should be closer in the in the range of less than 30 percent not the 40 percent thank you one moment for our next question and that will come from the line of joe moore with morgan stanley your line is open great thank you um you've said you're not going to be impacted by export controls on ai

I know there's been a number of changes in the industry since the last time you made the call. Is that still the case? Can you give people comfort that there's no impact from that down the road?

Nobody can give anybody comfort in this environment, Joe. You know that. Rules are changing quite dramatically as bilateral trade agreements continue to be negotiated in a very, very dynamic environment. So I'll be honest, I know as little as probably, you probably know more than I do maybe, in which case then I know very little about this whole thing about whether there's any export control, how the export control will take place, we're guessing. So I'd rather not answer that because no, I don't know whether it will be.

Thank you. And we do have time for one final question. And that will come from the line of William Stein with Truist Securities. Your line is open.

Great. Thank you for squeezing me in. I wanted to ask about VMware. Can you comment as to how far along you are in the process of converting customers to the subscription model? Is that close to complete or is there still a number of quarters that we should expect that that conversion continues?

That's a good question. And so let me start off by saying a good way to measure it is, you know, most of our VMware contracts are typically three years. And that was what VMware did before we acquired them. And that's pretty much what we continue to do. Three is very traditional. So based on that, the renewals were like two-thirds of the way, almost two-thirds, more than halfway through the renewals. So we probably have at least another year plus maybe a year and a half to go.

Thank you. And with that, I'd like to turn the call over to GU for closing remarks.

Thank you, operator. Broadcom currently plans to report its earnings for the third quarter of fiscal year 2025 after close of market on Thursday, September 4, 2025. A public webcast of Broadcom's earnings conference call will follow at 2 p.m. Pacific. That will conclude our earnings call today. Thank you all for joining. Operator, you may end the call.