Broadcom's FY24Q2 corresponds to the February/March/April 2024 period.
Broadcom FY24Q2 Results:
Revenue reached $12.487B, up 43% year over year and 4.4% sequentially; excluding VMware, organic growth was 12%.
GAAP gross margin was 62%, operating margin 24%; non-GAAP gross margin 76%, operating margin 57%.
GAAP net income was $2.121B, down 44% year over year, with a GAAP net margin of 17%; non-GAAP net income was $5.394B, up 20% year over year and 3% sequentially, marking the fourth consecutive quarter of all-time highs, with a non-GAAP net margin of 43% (vs. 44% last quarter).
No share repurchases this quarter; dividends were $2.4B.
Q2 by Segment:
Semiconductor revenue was $7.2B, up 6% year over year, accounting for 58% of revenue; semiconductor gross margin was 67%, down 3.7 percentage points year over year due to custom AI accelerators, with an operating margin of 55%.
Software revenue was $5.3B, up 205% year over year, accounting for 42% of revenue, with VMware contributing $2.7B; software gross margin was 88%, operating margin 60%, or 64% excluding integration costs; excluding VMware, software revenue was $2.6B, up 37% year over year.
VMware's target is quarterly revenue of $4B; 3,000 of its top 10,000 customers have moved to subscription, with Annualized Booking Value rising from $1.2B in Q1 to $1.9B, and the company's total ABV rising from $1.9B to $2.8B; FY25 VMware margins are expected to reach the level of the company's other software businesses.
Semiconductor Segment Detail Q2:
Networking revenue was $3.8B, up 44% year over year, accounting for 53% of semiconductor revenue, driven by strong hyperscaler demand for AI networking chips and custom AI accelerators, with the former growing faster; switch chip shipments doubled year over year, particularly PAM4 and Jericho3; AI backend networking PCIe switch and NIC shipments doubled year over year; 7 of the 8 major global AI data centers use Broadcom's Ethernet solutions, and all hyperscale AI data centers are expected to adopt Ethernet next year; FY24 networking revenue is guided to grow 40% year over year; Tomahawk 6 is slated for late next year.
Notably, per Nvidia's Q1 results (which align with Broadcom's Q2 timing), Nvidia's Q1 networking revenue was ~$3.17B, already far exceeding Broadcom's networking chip portion (networking revenue / 3 = $1.3B). Nvidia's Spectrum-X, targeting traditional Ethernet users, has just begun ramping and already proven itself, with full-year contribution expected in the billions, far exceeding Broadcom's scale.
Wireless revenue was $1.6B, up 2% year over year and down 19% sequentially, accounting for 22% of semiconductor revenue; FY24 wireless revenue is guided to be flat year over year, primarily driven by Apple.
Broadband revenue was $730M, down 39% year over year, accounting for 10% of semiconductor revenue; FY24 telecom and service provider business is expected to weaken further, with broadband revenue down high-30s% year over year, recovering in 2025.
Storage connectivity revenue was $824M, down 27% year over year, accounting for 11% of semiconductor revenue; Q2 is expected to be the trough, with a modest recovery in the second half, and FY24 storage connectivity revenue guided down 20% year over year.
Industrial revenue was $234M, down 10% year over year; demand remains weaker than expected, with FY24 industrial revenue guided down double-digits year over year.
Outlook:
FY24 total revenue guidance raised from $50B to $51B, adjusted EBITDA guidance raised from $30B to $31.1B.
10-for-1 stock split effective July 12 after market close, trading on split-adjusted basis July 15.
AI Exposure:
FY24Q2 AI revenue was $3.1B, up 280% year over year, accounting for 43% of semiconductor revenue (vs. 31% last quarter); FY24 AI revenue target raised from over $10B to over $11B, with non-AI revenue bottoming in the first half; previously the AI revenue mix was roughly 80% custom AI accelerators and 20% networking chips, this quarter it approached 2/3 and 1/3, and is expected to reach 60%/40% by year-end.
Custom AI accelerator gross margin is lower mainly because the memory portion is sourced externally and uncontrollable; the logic portion carries normal margins, but lower R&D and opex keep the blended operating margin healthy.
Overall, this quarter was better than the prior few: although broadband and industrial disappointed again, AI continues to grow rapidly, especially networking chips, which will benefit from GPU volume ramps. Management raised the AI revenue target by $1B and total revenue guidance by $1B to $51B, but the increase still feels too modest, much like AMD.
In data center networking chips, Broadcom's dominance has been challenged. Its AI growth now comes mainly from custom compute offload chips, but Nvidia will also enter that custom chip market going forward, warranting close monitoring.
On valuation, assuming a conservative 43% non-GAAP net margin, FY24 net income would be ~$22B on $51B revenue; at Broadcom's 5-year average 38x P/E, that implies an $836B market cap, with a path to becoming the third trillion-dollar semiconductor company. The long-standing Apple exposure concern has diminished in significance amid the AI revenue explosion.