Broadcom's FY24Q1 covers November 2023 through January 2024.
Broadcom FY24Q1 Earnings:
Revenue $11.961B, up 34.2% year over year, up 28.7% sequentially; ex-VMware, up ~11% year over year.
GAAP gross margin 62%, operating margin 17%, mainly impacted by VMware acquisition; Non-GAAP gross margin 75%, operating margin 57%.
GAAP net income $1.325B, down 60% year over year, GAAP net margin 11%, mainly impacted by VMware acquisition; Non-GAAP net income $5.254B, up 16% year over year, up 9% sequentially, third consecutive quarter of record highs, Non-GAAP net margin 44% (prior quarter 52%).
This quarter repurchased $7.176B, dividends $2.4B.
Q1 Segment Results:
Semiconductor revenue $7.39B, up 4% year over year, 62% of revenue; semiconductor gross margin 67%, down 1.9 percentage points year over year, operating margin 56%; AI growth offset declines in enterprise and telecom.
Software revenue $4.57B, up 105% year over year, 38% of revenue; VMware consolidated for 10.5 weeks, contributed $2.1B revenue; software gross margin 88%, operating margin 64%; ex-VMware, software revenue $2.47B, up 37% year over year; driven by VMware, software bookings grew from $600M to $1.8B sequentially, next quarter to exceed $3B.
Semiconductor Segment Q1 Details:
Networking revenue $3.3B, up 46% year over year, 45% of semiconductor revenue, driven by two large customers' custom compute offload chip growth; FY24 networking revenue expected up 35%+ year over year; AI-related PAM4 DSPs/optical components/retimers still small vs Tomahawk switches/Jericho routers; traditional enterprise networking to continue declining.
Notably, per NVIDIA Q4 earnings (calendar timing aligns with Broadcom Q1), NVIDIA Q4 networking revenue was ~$3.25B, already catching up to Broadcom. Its Spectrum-X for traditional Ethernet users just started ramping, likely to take the networking chip top spot from Broadcom this year.
Wireless revenue was $2.0B, down 4% year over year, accounting for 27% of semiconductor revenue; FY24 wireless revenue is expected to be flat year over year.
Broadband revenue was $940M, down 23% year over year, accounting for 13% of semiconductor revenue; telecom business is expected to remain weak through year-end, with broadband revenue down 30% year over year in FY24.
Storage connectivity revenue was $887M, down 29% year over year, accounting for 12% of semiconductor revenue; weakness is expected to persist through the first half of FY24 with a rebound in the second half, resulting in full-year storage connectivity revenue down in the mid-20s percentage range year over year.
Industrial revenue was $215M, down 6% year over year; FY24 industrial revenue is expected to decline high single digits year over year.
Outlook:
VMware revenue is expected to grow sequentially by double digits in each remaining quarter of the fiscal year, contributing over $12B in FY24; FY24 semiconductor revenue is expected to grow mid-to-high single digits year over year; FY24 total revenue is guided at $50B with adjusted EBITDA of $30B.
VMware is currently focused on the top 2,000 strategic customers out of its 300,000 customer base; some customers still want to maintain on-premises distributed data centers, which are not growing much but remain sizable; on the hybrid cloud front, VMware is promoting its VMware Cloud Foundation (VCF) business.
No supply chain bottlenecks have been encountered; lead times for most products remain at 52 weeks.
Carbon Black within the VMware business will be combined with Symantec to form an enterprise security group.
AI Exposure:
FY24 Q1 AI revenue was approximately $2.3B, representing 31% of semiconductor revenue, up from 20% last quarter; management targets AI revenue to exceed 35% in FY24, implying FY24 AI revenue scale above $10B (previous guidance was $7.5B), representing year-over-year growth of roughly 133%.
Within the FY24 AI revenue target of over $10B, custom compute offload chips account for approximately $7B, 20% is switches/routers chips, and 10% is optical and interconnect chips; the increase in AI targets from last quarter comes primarily from 70% compute and 30% networking.
Unlike Tomahawk 3/4 which are used in cloud computing, Tomahawk 5 demand comes primarily from AI; current AI revenue is driven mainly by hyperscalers (ASIC custom + networking) and enterprises (networking), with the former being larger; custom compute offload chip gross margin is lower mainly due to the storage portion, while the compute portion chip gross margin is at the company average.
Full-year AI growth offset declines in enterprise and telecom businesses.
Overall, Broadcom's earnings were better than the previous few quarters; although traditional businesses again declined more than expected, AI also grew more than expected, and the combination kept the full-year $50B revenue guidance unchanged.
As previously written, Broadcom remains the second-largest beneficiary of AI among chip companies at this stage. Last quarter management guided FY24 AI revenue at $7.5B; this quarter it was raised significantly to $10B, but full-year revenue guidance did not change; considering VMware's better-than-expected growth, this implies Broadcom's non-AI, non-VMware traditional businesses are declining sharply.
In data center networking chips, Broadcom's dominant position has been shaken. Currently, Broadcom's AI growth comes mainly from custom compute offload chips (Google TPU + suspected Meta ASIC), but NVIDIA will also participate in this custom chip market, warranting continued monitoring.