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Broadcom (AVGO -1.39%)
Q4 2024 Earnings Call
Dec 12, 2024, 5:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Welcome to the Broadcom Inc. fourth quarter and fiscal year 2024 financial results conference call. For opening remarks and introductions, I would like to turn the call over to Ji Yoo, head of investor relations of Broadcom, Inc.
Ji Yoo — Director, Investor Relations
Thank you, and good afternoon, everyone. With me today are Hock Tan, president and CEO; Kirsten Spears, chief financial officer; and Charlie Kawwas, president of the semiconductor solutions group. Broadcom has released a press statement and financial tables detailing our performance during the fourth quarter and fiscal year 2024. If you have not received it, you can find it in the Investor section of Broadcom’s website at broadcom.com.
This call is being webcast live, and an audio replay will be available for one year in the investor section of Broadcom’s website. In today’s prepared remarks, Hock and Kirsten will discuss our results for the fourth quarter and fiscal year 2024, guidance for the first quarter of fiscal year 2025, and provide insights about the current business environment. Following these remarks, we will address questions. Please review our press release and recent SEC filings for specific risk factors that could lead to actual results differing from the forward-looking statements made in this call.
Broadcom reports certain financial measures on a non-GAAP basis in addition to U.S. GAAP reporting. You can find reconciliations between GAAP and non-GAAP measures in the tables attached to today’s press release. Most of our comments will refer to our non-GAAP financial results.
I will now hand the call over to Hock.
Hock E. Tan — President, Chief Executive Officer, and Director
Thank you, Ji, and thank you everyone for joining us today. This year has truly transformed Broadcom. Our consolidated revenue for fiscal year 2024 rose by 44% year over year to an all-time high of $51.6 billion.
Excluding the impact of our acquisition of VMware, our organic revenue growth was over 9%. Operating profit for fiscal 2024, excluding transition costs, grew by 42% compared to the previous year. Additionally, we returned a record $22 billion in cash to our shareholders, an increase of 45% year on year through various means such as dividends, buybacks, and eliminations. Two significant factors contributed to this transformation.
First, we completed the acquisition of VMware early in fiscal 2024, enhancing VMware’s focus on leading technology in data center virtualization. The integration of VMware is nearly finalized, with revenue poised for growth and operating margins reaching 70% as we ended the fiscal year. We are well on track to achieve increased adjusted EBITDA significantly exceeding the previously communicated target of $8.5 billion, anticipated to be reached much earlier than the original three-year timeline.
The second major contributor to our success in 2024 was the growth of our AI segment. Revenue from our AI solutions, driven by demand for custom AI accelerators and networking, surged by 220% from $3.8 billion in fiscal 2023 to $12.2 billion in fiscal 2024, representing 41% of our semiconductor revenue. This surge pushed semiconductor revenue to a record $30.1 billion for the year.
Now, let’s examine the fourth quarter in more detail. Our consolidated net revenue for Q4 reached $14.1 billion, up by 51% year on year, excluding VMware. Organic growth stood at 11%, while operating profit amounted to $8.8 billion, marking a 53% increase from the same quarter last year.
In Q4, our infrastructure software segment reported $5.8 billion in revenue, reflecting a remarkable increase of 196% year over year, although it was flat sequentially due to several deals transitioning into Q1.
In VMware, we recorded $21 million in total XPU costs during the quarter, a modest increase from $19 million in the previous quarter, with about 70% of these costs attributed to VMware Cloud Foundation or vSphere, which virtualizes entire data centers. Annualized booking value for VMware in Q4 increased to $2.7 billion, rising from $2.5 billion in Q3. Since finalizing the acquisition just over a year ago, we have signed over 4,500 of our largest 10,000 customers for VCF, providing them a means to deploy private cloud environments on-premises as an alternative to public cloud solutions.
In terms of spending, we managed to decrease VMware’s expenditure to $1.2 billion in Q4, down from $1.3 billion in Q3. By comparison, VMware’s average spending prior to our acquisition exceeded $2.4 billion per quarter, with operating margins below 30%.
Looking ahead to Q1 2025, we expect infrastructure software revenue to increase to $6.5 billion, representing an 11% sequential growth and a 41% year-on-year increase, while our VMware annualized booking value is projected to surpass $3 billion.
For our semiconductor markets, the Q4 revenue breakdown shows that the networking segment generated $4.5 billion, a 45% increase from last year. In this segment, AI-driven networking revenue constituted 76% and saw a year-over-year growth of 158%, driven by doubled AI XPU shipments to our primary hyperscale customers and quadrupled AI connectivity revenue thanks to Tomahawk and Jericho shipments globally.
Looking forward, we anticipate that the momentum in AI connectivity will persist as more hyperscalers implement Jericho3AI in their infrastructures. Our next-generation XPUs, utilizing three-nanometer technology, will be the first to market in this specific process node, with volume shipments expected to commence with our hyperscale customers in the latter half of fiscal 2025.
In server storage, after hitting a low point six months ago, Q4 revenue for server storage connectivity rebounded about 20% to $992 million, with growth expected to continue into Q4.
In our wireless segment, seasonal launches by a North American customer boosted Q4 wireless revenue to $2.2 billion, which was a 30% increase sequentially and a 7% increase year on year due to greater content. We remain engaged with this customer on multiyear road maps across different technologies such as RF, Wi-Fi, Bluetooth, sensing, and touch. For Q1, while we expect a seasonal decline in wireless revenues, we believe it will remain flat year on year.
In broadband, after bottoming out at $465 million, down 51% year on year, we have garnered significant orders across various service providers this quarter and now project a recovery starting in Q1. Lastly, in the industrial sector, which comprises only 1% of total revenues, Q4 industrial resales fell to $173 million, down 27% year on year, with expectations for recovery not materializing until the second half of 2025.
Before I conclude and share our guidance for Q1 fiscal 2025, I’d like to present a broader perspective on how we anticipate our semiconductor business will evolve over the next three years. We observed a cyclical low in our non-AI semiconductor business during fiscal 2024, which totaled $17.8 billion. We expect a recovery from this point at the industry’s historical growth rate within the mid-single digits. Conversely, our prospects within AI are massive.
Several hyperscalers are actively pursuing the development of custom AI accelerators and networking them with open, scalable Ethernet connectivity. For these hyperscalers, this journey represents a multiyear strategy, rather than short-term gains. By 2027, we anticipate that each one plans to deploy one million XPU clusters within a single fabric. This poses a serviceable addressable market (SAM) for XPUs and networking estimated between $60 billion to $90 billion just for the fiscal year 2027. We believe we are positioned to capture a significant share within this emerging opportunity, driving a strong ramp from our 2024 AI revenue base of $12.2 billion.
It is crucial to note that while this growth will not follow a linear trajectory and will exhibit quarterly variability, we have already been selected by two additional hyperscale customers and are advancing development for their next-generation AI XPUs, potentially expanding our SAM further before 2027.
Looking at Q4 results, semiconductor revenue reached $8.2 billion, a 12% year-on-year increase. AI revenue surged by 150% year on year, totaling $3.7 billion in Q4, while non-AI semiconductor revenue experienced a year-on-year decline of 23% to $4.5 billion, although a 10% recovery from its lowest point six months prior was noted.
As for our Q1 outlook, we project semiconductor revenue to increase approximately 10% year on year to $8.1 billion. AI demand remains robust, with expectations of a 65% year-on-year increase in AI revenue to $3.8 billion. Non-AI semiconductor revenue is expected to decline in the mid-teens percentage range year on year. Therefore, our overall guidance for Q1 indicates consolidated revenue of around $14.6 billion, marking a 22% year-over-year increase, alongside expectations for Q1 adjusted EBITDA of approximately 66% of revenue.
With that, I will turn the call over to Kirsten.
Kirsten M. Spears — Chief Financial Officer and Chief Accounting Officer
Thank you, Hock. Let’s delve into the details of our Q4 financial performance. For the quarter, consolidated revenue reached $14.1 billion, reflecting a remarkable 51% year-over-year increase. Excluding VMware’s contributions, this figure represents an 11% increase year on year.
Gross margins for the quarter stood at 76.9%, a gain of 260 basis points from last year. Research and development expenses totaled $1.4 billion, while consolidated operating expenses reached $2 billion, which represented a year-over-year increase primarily attributed to the integration of VMware. Operating income for Q4 was $8.8 billion, up by 53% year over year, resulting in an operating margin of 63% relative to revenue. Adjusted EBITDA reached $9.1 billion or 65% of revenue.
Now, let’s examine our performance across segments, starting with semiconductors. Revenue from our semiconductor solutions segment stood at $8.2 billion, accounting for 59% of total revenue for the quarter and reflecting a 12% year-on-year increase. Gross margins for this segment were approximately 67%, which is a decrease of 220 basis points year on year, primarily due to a higher composition of AI XPUs. Operating expenses for the semiconductor segment increased by 11% to $914 million, largely due to elevated investments in R&D, resulting in semiconductor operating margins of 56%.
Turning to infrastructure software, we reported revenue of $5.8 billion, up 196% year on year mainly due to VMware’s contributions, representing 41% of total revenue. Gross margins in this segment reached 91%, with operating expenses amounting to $1.1 billion, leading to an operating margin of 72%. When excluding transition costs, the operating margin was 73%.
In terms of cash flow, our free cash flow for the quarter was $5.5 billion, equating to 39% of revenue. Excluding cash utilized for restructuring and integration costs of $506 million, our free cash flows increased by 22% year on year to $6 billion, representing 43% of revenue. This figure illustrates a decrease from last year’s Q4 due to elevated cash interest expenses from debt incurred during the VMware acquisition, higher tax payments resulting from a greater share of U.S. taxable income, and delays associated with the reinstatement of Section 174 and new regulations regarding corporate Alternative Minimum Tax.
Our capital expenditures amounted to $122 million during the quarter. Days sales outstanding were recorded at 29 days in Q4, compared to 31 days the previous year. By the end of Q4, our inventory totaled $1.8 billion, a 7% decline sequentially, reflecting our disciplined inventory management approach across the ecosystem. We finished Q4 with $9.3 billion in cash and a gross principal debt of $69.8 billion.
In Q4, we replaced $5 billion of floating-rate debt with new senior notes and utilized cash on hand to settle a portion of senior notes maturing in Q4 and further floating-rate debt, effectively reducing our overall debt by $2.5 billion. Post these transactions, the weighted average coupon rate and years to maturity of our fixed-rate debt (totaling $56 billion) is 3.7% with a maturity of 7.6 years. Conversely, our floating-rate debt (amounting to $14 billion) stands at a weighted average coupon rate of 5.9% with a maturity period of 3.2 years. In Q1, we plan to repay approximately $495 million of fixed-rate senior notes as they come due.
Now, let me summarize our achievements for fiscal year 2024. We reached a record revenue of $51.6 billion, reflecting a 44% year-on-year growth, which includes VMware, and a 9% organic growth excluding VMware. Our semiconductor revenue totaled $30.1 billion, marking a 7% year-on-year increase.
Infrastructure software revenue amounted to $21.5 billion, a staggering 181% year-over-year increase, and a 19% increase excluding VMware’s contributions. Our fiscal 2024 adjusted EBITDA was $31.9 billion, equivalent to 62% of revenue. Additionally, free cash flow grew by 10% year on year to $19.4 billion and increased by 22% year on year to $21.9 billion when excluding restructuring and integration costs.
In terms of capital allocation, we invested $22.2 billion in fiscal 2024, which covered $9.8 billion in cash dividends and $12.4 billion in share repurchases. We are pleased to announce an increase in our quarterly common stock cash dividend for Q1 fiscal 2025 to $0.59 per share, reflecting an 11% increase from the previous quarter. We intend to maintain this dividend target throughout fiscal 2025, pending quarterly board approval. This increase signifies our 14th consecutive annual dividend hike since we initiated our dividend program in fiscal 2011.
Concerning guidance, it’s important to note that Q1 of fiscal 2024 consisted of a 14-week period, while Q1 of fiscal 2025 will be a 13-week quarter. Following our acquisition of VMware and starting in Q1 of fiscal 2025, we will no longer break out VMware’s revenue and costs separately. Nonetheless, we will continue to report on the infrastructure software segment’s revenue and profitability, including Brocade Fiber Channel SAN, CA Mainframe Enterprise Security, and VMware.
Our Q1 guidance projects consolidated revenue of $14.6 billion, with semiconductor revenue expected to reach $8.1 billion, increasing roughly 10% year on year, and infrastructure software revenue estimated at $6.5 billion, reflecting a 41% year-on-year rise. We anticipate Q1 adjusted EBITDA margins to be a record 66%, with a non-GAAP diluted share count around 4.9 billion shares. For modeling purposes, we expect Q1 consolidated gross margins to increase by 100 basis points sequentially due to a favorable revenue mix in infrastructure software and our product offerings within semiconductors.
Please note that consolidated gross margins over the year will be influenced by the revenue mix between infrastructure software and semiconductors, as well as the product mix within the semiconductor segment. We anticipate a non-GAAP tax rate of around 14.5% for fiscal year 2025 due to reduced tax deductions related to interest expenses as we continue to pay down and refinance our debt under more favorable terms. Additionally, GAAP net income and cash flows for Q1 will be affected by higher taxes along with restructuring and integration-related costs tied to the VMware acquisition.
This concludes my prepared remarks. Operator, please open the line for questions.
Questions & Answers:
Operator
Thank you. [Operator instructions] Again, due to time constraints, we ask that you please limit yourselves to one question. Please hold while we compile the Q&A roster. Our first question will come from Blayne Curtis with Jefferies.
Your line is open.
Blayne Curtis — Analyst
Hi, thank you for taking my question. I have a query for clarification and a follow-up. I thought I heard you mention that AI networking revenue constituted 76% of networking revenue. I can’t quite reconcile that, but more broadly, could you discuss the performance of ASICs versus networking and the trends you are noticing from October to January?
Hock E. Tan — President, Chief Executive Officer, and Director
That’s an intriguing question. Both segments are experiencing growth, albeit at different rates. We have been shipping significantly more AI connectivity components during the second half of this fiscal year compared to the first half, and we anticipate that momentum will carry into the first half of next fiscal year as well. The new generation of three-nanometer XPUs is on track to ramp up in the latter half of FY25.
Blayne Curtis — Analyst
Understood, thank you.
Operator
Thank you. Please hold for our next question, which will come from C.J. Muse with Cantor Fitzgerald. Your line is open.
C.J. Muse — Analyst
Good afternoon, and thank you. Hock, could you elaborate on the $60 billion to $90 billion revenue forecast for fiscal 2027 for AI? I’m particularly interested in the mix between XPU and networking within that range, as well as whether this encompasses all types of customers in hyperscale and vertically integrated sectors.
Hock E. Tan — President, Chief Executive Officer, and Director
Thank you for that question. To clarify, the total revenue figure is not an actual revenue forecast but rather our serviceable addressable market (SAM). We are specifically considering three of our hyperscale customers here. AI connectivity is expected to represent approximately 15% to 20% of the dollar content within that SAM.
Operator
Thank you. Please hold for the next question from Joe Moore with Morgan Stanley. Your line is open.
Joe Moore — Analyst
Thank you. Can you comment on how your customers are responding to some of the rack-scale products from competitive firms like NVIDIA? How do they see the connectivity to multiple XPUs within a single rack, and how does that affect your competitive positioning?
Hock E. Tan — President, Chief Executive Officer, and Director
The challenge lies in connecting clusters within a fabric of 10,000 XPUs or GPUs and scaling that connectivity to greater numbers, which is quite different from traditional architectures. Our hyperscale customers are actively identifying solutions to connect extensive clusters, leading to continued growth in the architecture, with a roadmap that supports scaling from 100,000 to 1 million XPU clusters over the next few years.
Joe Moore — Analyst
Great, thank you.
Operator
Thank you. Please hold for our next question from Harlan Sur with J.P. Morgan. Your line is open.
Harlan Sur — Analyst
Good afternoon, and thank you for taking my question. Hock, I understand your team has been preparing an AI guide for fiscal 2025 and has provided a multiyear outlook on the SAM opportunity. However, regarding the current year, what insights can you share about customer capex spending in networking and custom accelerators? Latest data suggests that top hyperscalers may increase their capex by 35% to 40% in fiscal 2025. Should we anticipate that your AI business will mirror or potentially exceed that trend?
Hock E. Tan — President, Chief Executive Officer, and Director
Capex figures do provide a broad perspective, but hyperscalers typically do not break out spending between AI and non-AI components. The reality is that AI spending tends to surpass non-AI spending. Thus, while broader capex trends may give some insight, we will not stop our projections at that point.
Harlan Sur — Analyst
Thank you.
Operator
Thank you. Please hold for our next question from Stacy Rasgon with Bernstein. Your line is open.
Stacy Rasgon — Analyst
Thank you for taking my question. I have a tactical query on the software pushouts into Q1. Should we expect these pushes to roll off as we move toward Q2 and further analyzed their implications for software performance and gross margins throughout the year? Do you foresee software revenue potentially weakening later in the year against stronger XPU performance?
Hock E. Tan — President, Chief Executive Officer, and Director
No, I believe your analysis might be overly complex. The pushout was simply a slip, with visible differences in growth as we transition from Q4 into Q1. I don’t expect this to affect Q2 materiality.
Stacy Rasgon — Analyst
So, is there an expectation for software revenue to maintain or grow from the $6.5 billion levels throughout the year?
Hock E. Tan — President, Chief Executive Officer, and Director
I won’t provide guidance beyond what’s been shared for Q1.
Stacy Rasgon — Analyst
Thank you.
Operator
Thank you. Please hold for our next question from Benjamin Reitzes with Melius. Your line is open.
Ben Reitzes — Analyst
Hello, and thank you for the insightful updates. I’d like to gain further clarity on the $60 billion to $90 billion SAM range. Is this an annual run rate target or cumulative, and are we to factor in growth from the current $12.2 billion and project from there? What about the two new customers joining—what’s their potential SAM relatively speaking?
Hock E. Tan — President, Chief Executive Officer, and Director
No, the figure of $60 billion to $90 billion is not cumulative. It defines a specific target we anticipate achieving around 2027, centered on the deployment of large AI clusters for three hyperscale customers. However, I ask that you avoid directly tallying assumed figures for the other two customers until we sufficiently validate them in our model.
Ben Reitzes — Analyst
Thank you.
Operator
Thank you. Please hold for our next question from Ross Seymore with Deutsche Bank. Your line is open.
Ross Seymore — Analyst
Thank you for allowing me to ask a question. I want to focus on cash returns. Congratulations on the dividend increase. Regarding the remaining 50% of cash—will fiscal 2025 be primarily focused on debt repayment, share repurchases, or might we see new acquisition interests arise, considering the successful integration of VMware?
Hock E. Tan — President, Chief Executive Officer, and Director
We will consider the use of that cash in two main areas. Initially, we are focused on retaining a financial cushion for potential acquisitions, though our acquisitions generally require more than 50% capacity. The primary objective is to repay debt to alleviate our financial obligations stemming from the VMware acquisition.
Kirsten M. Spears — Chief Financial Officer and Chief Accounting Officer
Yes, we aim to prioritize reducing interest expenses through the repayment of term loans.
Ross Seymore — Analyst
Thank you.
Operator
Thank you. Next, we have a question from Vivek Arya with Bank of America. Your line is open.
Vivek Arya — Analyst
Thank you for your time. Hock, could you provide insights on SAM for 2024 so we can gauge what the $12.2 billion signifies? Are you expecting to maintain or even grow share, and how might this affect semiconductor gross margins if AI continues to proliferate?
Hock E. Tan — President, Chief Executive Officer, and Director
For 2024, I estimate the AI SAM would be around $15 billion to $20 billion, but we anticipate significant growth as we reach $60 billion to $90 billion. While AI may dilute gross margins, the revenue growth should ultimately enhance operating margins through effective spending management.
Vivek Arya — Analyst
Thank you.
Operator
Thank you. Please hold for our next question from Harsh Kumar with Piper Sandler. Your line is open.
Harsh Kumar — Analyst
Hi, congratulations on the seamless integration of VMware ahead of schedule. I have a two-part question. Is there a straightforward dollar figure we can use for networking tied to XPUs, say, is it $1 of networking for every $1 of XPUs? Additionally, can you elaborate on whether there’s room for Broadcom outside of the software space in relation to sovereign data centers?
Hock E. Tan — President, Chief Executive Officer, and Director
Regarding sovereign data centers, they prefer standard merchant silicon due to lacking the capabilities needed to develop custom hardware and associated software layers for AI applications.
In terms of networking costs relative to XPUs, while the numbers fluctuate as expansion continues, scaling begins to place more emphasis on the networking aspect as the clusters increase over time. Presently, the content for AI connectivity within silicon is estimated at around 5% to 10%, which could rise to 15% to 20% when clusters scale to that size.
Harsh Kumar — Analyst
Thank you.
Operator
Thank you. Please hold for our next question from Toshiya Hari with Goldman Sachs. Your line is open.
Toshiya Hari — Analyst
Good afternoon, and thank you for this opportunity. Regarding the $60 billion to $90 billion SAM for fiscal 2027, could you offer perspective on how it relates to the total addressable market? Additionally, while trying to achieve leading market share, what dynamics might affect your assumption of not capturing 100% of that potential value?
Hock E. Tan — President, Chief Executive Officer, and Director
We do not have a clear vision of the total addressable market, as we focus on internal strategies and established customer relationships rather than external estimations. Our goal is to gain our fair market share while recognizing that successfully penetrating this market involves collaborating deeply with our key customers to align their technology ambitions with our capabilities.
Toshiya Hari — Analyst
Thank you.
Operator
Thank you. Please hold for our final question from William Stein with Truist Securities. Your line is open.
William Stein — Analyst
Thanks for giving me the chance to ask a question. I want to commend you on your impressive results this year as well as the outlook. Hock, considering the shift towards organic growth with emerging AI capabilities—does this alter your acquisition strategy or potential areas of focus for M&A ventures in the future?
Hock E. Tan — President, Chief Executive Officer, and Director
No, it does not. Our strategy remains unchanged, and we are always open to enhancing our portfolio with valuable assets—be it in semiconductors or software—provided they meet our stringent criteria.
William Stein — Analyst
Thank you.
Operator
Thank you. Unfortunately, we have reached the conclusion of our question-and-answer session. I will now pass the call back to Ji Yoo for closing remarks.
Ji Yoo — Director, Investor Relations
Thank you for joining us today. Broadcom plans to report its earnings for the first quarter of fiscal year 2025 after the market closes on Thursday, March 6th, 2024. A public webcast will follow at 2:00 p.m. Pacific Time.
That concludes our earnings call today. Thank you all for participating. Operator, you may end the call.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Ji Yoo — Director, Investor Relations
Hock E. Tan — President, Chief Executive Officer, and Director
Kirsten M. Spears — Chief Financial Officer and Chief Accounting Officer
Blayne Curtis — Analyst
C.J. Muse — Analyst
Joe Moore — Analyst
Harlan Sur — Analyst
Stacy Rasgon — Analyst
Ben Reitzes — Analyst
Ross Seymore — Analyst
Vivek Arya — Analyst
Harsh Kumar — Analyst
Toshiya Hari — Analyst
William Stein — Analyst
Vijay Rakesh — Analyst
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