Broadcom FY23Q3 corresponds to May/June/July 2023.
Broadcom FY23Q3 Earnings:
Revenue was $8.876B, up 5% year over year and 2% sequentially; growth slowed to single digits for the second consecutive quarter.
GAAP gross margin 69%, holding at historical highs.
GAAP net income was $3.303B, up 31% year over year and down 5% sequentially, GAAP net margin 37.2%; non-GAAP net income was $4.596B, up 15% year over year and up slightly sequentially, with non-GAAP net margin reaching an exaggerated 51.8%.
This quarter repurchased $2.2B, paid $1.9B in dividends.
Broadcom's net margin remains firmly in the semiconductor industry's first tier (NVIDIA 47%, TSMC/TI 38%).
Q3 by Segment:
Semiconductor revenue was $6.941B, up 5% year over year, 78% of revenue; hyperscale continued double-digit year-over-year growth, but enterprise and telco were weak, wireless business stable; ex-AI, semiconductor revenue was flat year over year.
Software revenue was $1.935B, up 5% year over year, 22% of revenue; Q3 ARR $5.3B, essentially flat sequentially.
Semiconductor Specific Businesses Q3:
Networking revenue was $2.8B, up 20% year over year, accounting for 40% of semiconductor revenue; AI-related switches, routers, and custom compute offload chips grew strongly; management believes Ethernet remains the best choice for AI; over the past several quarters Tomahawk 5 switches and Jericho3-AI routers have won a number of large deals, and will ship to several hyperscale customers over the next six months, replacing existing 400G with 800G networking; the 1.6T Tomahawk 6 switch with 200G SerDes is slated to ship mid next year.
Wireless revenue was $1.6B, flat year over year, up 4% sequentially, accounting for 24% of semiconductor revenue; the multi-year supply agreement with Apple covers Wi-Fi, Bluetooth, touch, RF front-end, and inductors.
Broadband revenue was $1.1B, up 1% year over year, accounting for 16% of semiconductor revenue; telco 10G PON penetration is increasing.
Storage connectivity revenue was $1.1B, flat year over year, accounting for 17% of semiconductor revenue.
Industrial revenue was $260M, down 3% year over year, primarily due to weak China demand.
Outlook:
Q4 wireless revenue is expected to grow 20% sequentially due to the iPhone 15 launch, but decline low-single-digits year over year; networking revenue is expected to grow 20% year over year, driven primarily by AI, with AI-related revenue doubling year over year and growing 50% sequentially; broadband revenue is expected to decline high-single-digits year over year; storage connectivity revenue is expected to decline mid-teens year over year; industrial revenue is expected to grow low-single-digits year over year; Q4 overall semiconductor revenue is expected to grow low-to-mid-single-digits year over year, and would be flat excluding AI.
Q4 software revenue is expected to grow mid-single-digits year over year.
Inventory levels are relatively healthy, with days of inventory (DOI) reduced to 80 days; even in a semiconductor downcycle, the semiconductor business has achieved a soft landing, consistently maintaining a quarterly run rate of around $6B.
The VMware acquisition has received approvals from Australia, Brazil, Canada, the EU, Israel, South Africa, Taiwan, and the UK, and is expected to close before October 30.
Lead times for most products are around 50 weeks; many bookings come from AI, as well as wireless; AI capacity is also constrained.
AI Revenue Composition:
FY23 Q3 AI revenue was approximately $1.2B, representing 17% of semiconductor revenue, versus 10% in FY22, and expected to exceed 25% in FY24.
FY23 Q4 AI revenue is expected to grow 50% sequentially, implying a scale above $1.7B, or roughly 24% of semiconductor revenue.
Over the past several quarters, Tomahawk 5 switches and Jericho3-AI routers have won a number of large deals and will ship to hyperscale customers over the next six months.
Overall, Broadcom's earnings fell short of market expectations; although AI is poised to ramp, the traditional business has clearly stalled, failing to deliver on management's narrative of AI and traditional business growing on two legs. Of course, we are still at the bottom of the semiconductor cycle, so a sharp rebound in the traditional business is unrealistic.
The market wants an answer sheet like NVIDIA's, with AI revenue exploding, but there is only one NVIDIA.
Broadcom is already the second-largest beneficiary of AI among chip companies after NVIDIA. Based on next quarter's optimistic AI guidance, with Tomahawk 5 switches and Jericho3-AI routers set to ramp, AI revenue annualized should reach at least $7B by year-end. The key going forward is how large the Tomahawk/Jericho franchise can become.
From a valuation perspective, Broadcom's 5-year average P/E is 34x; given the rising software mix, the stock trades at a conservative 26x P/E on this year's $14B net income. The Apple exposure is a long-term risk, but near-term impact is manageable, as a new multi-year supply agreement was just signed last quarter.
