Broadcom (AVGO) This fall 2024 Earnings Name Transcript

Broadcom (AVGO -1.39%)
This fall 2024 Earnings Name
Dec 12, 2024, 5:00 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Contributors

Ready Remarks:

Operator

Welcome to the Broadcom Inc. fourth quarter and monetary yr 2024 monetary outcomes convention name. At the moment, for opening remarks and introductions, I wish to flip the decision over to Ji Yoo, head of investor relations of Broadcom, Inc.

Ji Yoo — Director, Investor Relations

Thanks, Sheri, and good afternoon, everybody. Becoming a member of me on in the present day’s name are Hock Tan, president and CEO; Kirsten Spears, chief monetary officer; and Charlie Kawwas, president, semiconductor options group. Broadcom distributed a press launch and monetary tables after the market closed describing our monetary efficiency for the fourth quarter and monetary yr 2024. When you didn’t obtain a duplicate, chances are you’ll get hold of the knowledge from the Investor part of Broadcom’s web site at broadcom.com.

This convention name is being webcast dwell and an audio replay of the convention name could be accessed for one yr by the investor part of Broadcom’s web site. In the course of the ready feedback, Hock and Kirsten will likely be offering particulars of our fourth quarter and monetary yr 2024 outcomes, steerage for our first quarter of fiscal yr 2025, in addition to commentary relating to the enterprise atmosphere. We’ll take questions after the tip of our ready feedback. Please seek advice from our press launch in the present day and our current filings with the SEC for data on the particular threat elements that might trigger our precise outcomes to vary materially from the forward-looking statements made on this name.

Along with U.S. GAAP reporting, Broadcom reviews sure monetary measures on a non-GAAP foundation. A reconciliation between GAAP and non-GAAP measures is included within the tables hooked up to in the present day’s press launch. Feedback made throughout in the present day’s name will primarily seek advice from our non-GAAP monetary outcomes.

I’ll now flip the decision over to Hock.

Hock E. Tan — President, Chief Govt Officer, and Director

Thanks, Ji. And thanks everybody for becoming a member of us in the present day. Effectively, this has been a transformative yr for Broadcom. Our fiscal yr 2024 consolidated income grew 44% yr over yr to a document $51.6 billion.

Now, excluding VMware, our income grew over 9% organically. So, fiscal ’24 working revenue, excluding transition prices grew 42% yr over yr. And we returned a document $22 billion in money to our shareholders, up 45% yr on yr by dividends, buybacks, and eliminations. There have been two vital drivers of this transformation this yr.

First, we closed the acquisition of VMware within the early weeks of fiscal ’24 after which targeted VMware on its know-how management in knowledge middle virtualization. The mixing of VMware is essentially full. Income is on a progress trajectory and working margin reached 70% exiting 2024. We’re effectively on the trail to delivering incremental adjusted EBITDA at a degree that considerably exceeds the $8.5 billion we communicated once we introduced the deal.

We’re planning to attain this a lot sooner than our preliminary goal of three years. The second driver in 2024 was AI. Our AI income, which got here from energy in customized AI accelerators or XPUs and networking, grew 220% from $3.8 billion in fiscal 2023 to $12.2 billion in fiscal 2024 and represented 41% of a semiconductor income. This drove semiconductor income as much as a document $30.1 billion in the course of the yr.

OK, now let’s transfer on to the fourth quarter and provide you with extra shade. Consolidated web income of $14.1 billion was up 51% yr on yr, excluding VMware. Natural progress was 11%, and working revenue of $8.8 billion was up 53% yr on yr. For the small print on infrastructure software program in This fall, this infrastructure software program section income was $5.8 billion, up 196% yr on yr, flat sequentially, at the same time as a number of offers slipped over into Q1.

In VMware, we booked $21 million complete XPU prices in 1 / 4 versus $19 million 1 / 4 in the past. Of those, about 70% represented VMware Cloud Basis or vSphere, the complete software program stack virtualizing the whole knowledge middle. And this translated into annualized reserving worth, or ABV as we name it, of $2.7 billion for VMware in This fall up from $2.5 billion in Q3. Since closing the acquisition simply over a yr in the past, we have signed up over 4,500 of our largest 10,000 clients for VCF.

VCF enabled clients to deploy personal cloud environments on-prem, as an alternative choice to operating their purposes within the public cloud. And in doing all this, we continued to drive down spending in VMware. We introduced spending all the way down to $1.2 billion in This fall, down from $1.3 billion in Q3. By reference, VMware spending was averaging over $2.4 billion per quarter previous to the acquisition with working margin lower than 30%.

Transferring on to Q1 outlook for infrastructure software program, we count on Q1 income to develop to $6.5 billion, up 11% sequentially and 41% up yr on yr. For VMware, ABV is predicted to exceed $3 billion in comparison with $2.7 billion within the previous quarter. Turning to semiconductors, let me provide you with extra particulars by finish markets. Networking This fall income of $4.5 billion grew 45% yr on yr.

AI networking income, which represented 76% of networking, grew 158% yr on yr. This was pushed by a doubling of our AI XPU shipments to our three hyperscale clients and 4 instances progress in AI connectivity income pushed by our Tomahawk and Jericho shipments globally. In Q1, we count on the momentum in AI connectivity to be as sturdy as extra hyperscalers deploy Jericho3AI of their materials. Our next-generation XPUs are in three nanometers and would be the first of its form coming to market in that course of node.

We’re on observe for quantity cargo at our hyperscale clients within the second half of fiscal 2025. Turning on to server storage. From its backside six months in the past, This fall server storage connectivity income has recovered some 20% to $992 million. And in This fall, we count on server storage income to proceed to develop.

Turning to wi-fi, as we anticipated, seasonal launch by our North American buyer drove This fall wi-fi income to $2.2 billion, up 30% sequentially. This was up 7% yr on yr due to increased content material. We proceed to be very engaged with this buyer in multiyear highway maps throughout numerous applied sciences we’ve got management in, together with RF, Wi-Fi, Bluetooth, sensing, and contact. In Q1, reflecting seasonality, we count on wi-fi to be down sequentially, however nonetheless be flat yr on yr.

In This fall, Broadband reached backside at $465 million, down 51% yr on yr. We’ve seen vital orders throughout a number of service suppliers throughout this quarter. And reflecting this pattern, we now count on broadband to indicate restoration starting in Q1. Lastly, on to industrial, which solely represents 1% of the entire revenues.

Measure on resales, This fall industrial resales of $173 million declined 27% yr on yr. We solely count on a restoration within the second half of 2025. Earlier than I sum up and supply you Q1 fiscal 2025 steerage, let me define a longer-term perspective on how we see our semiconductor enterprise evolving over the following three years. On the broad portfolio of non-AI semiconductors with its a number of finish markets, we noticed a cyclical backside in fiscal 2024 at $17.8 billion.

We count on a restoration from this degree on the trade’s historic progress fee of mid-single digits. In sharp distinction, we see our alternative over the following three years in AI as huge. Particular hyperscalers have begun their respective journeys to develop their very own customized AI accelerators or XPUs, in addition to community these XPUs with open and scalable Ethernet connectivity. For every of them, this represents a multiyear, not a quarter-to-quarter journey.

As , we at present have three hyper-scale clients who’ve developed their very own multi-generational AI XPU highway map to be deployed at various charges over the following three years. In 2027, we consider every of them plans to deploy a million XPU clusters throughout a single cloth. We count on this to characterize an AI income serviceable addressable market, or SAM, for XPUs and community within the vary of $60 billion to $90 billion in fiscal 2027 alone. We’re very effectively positioned to attain a number one market share on this alternative and count on this may drive a robust ramp from our 2024 AI income base of $12.2 billion.

Take into accout although, this won’t be a linear ramp. We’ll present quarterly variability. To compound this, we’ve got been chosen by two further hyperscalers and are in superior growth for their very own next-generation AI XPUs. We’ve line of sight to develop these prospects into revenue-generating clients earlier than 2027 and will subsequently increase the SAM considerably.

So, the truth going ahead for this firm is that the AI semiconductor enterprise will quickly outgrow the non-AI semiconductor enterprise. Recognizing this, we are going to now shift to guiding our semiconductor enterprise by AI and non-AI income segments. So, summarizing This fall. Semiconductor income of $8.2 billion grew 12% yr on yr and 13% sequentially.

This fall AI income grew a robust 150% yr on yr to $3.7 billion. Non-AI semiconductor income declined by 23% yr on yr to $4.5 billion, however nonetheless a ten% restoration from the underside of six months in the past. Now shifting on to our outlook for Q1. We count on semiconductor income to develop roughly 10% yr on yr to $8.1 billion.

AI demand remained sturdy and we count on AI income to develop 65% yr on yr to $3.8 billion. We count on non-AI semiconductor income to be down about mid-teens % yr on yr. And so, in complete, summing this all up, we’re guiding consolidated Q1 income to be roughly $14.6 billion, up 22% yr on yr, and we count on this may drive Q1 adjusted EBITDA to roughly 66% of income. With that, let me flip this name over to Kirsten.

Kirsten M. Spears — Chief Monetary Officer and Chief Accounting Officer

Thanks, Hock. Let me now present further element on our This fall monetary efficiency. Consolidated income was $14.1 billion for the quarter, up 51% from a yr in the past. Excluding the contribution from VMware and This fall income elevated 11% yr on yr.

Gross margins had been 76.9% of income within the quarter, up 260 foundation factors from the year-ago quarter. R&D was $1.4 billion, and consolidated working bills had been $2 billion, up yr on yr primarily because of the acquisition and consolidation of VMware. This fall working revenue was $8.8 billion and was up 53% from a yr in the past, with working margin at 63% of income. Adjusted EBITDA was $9.1 billion or 65% of income.

This determine excludes $156 million of depreciation. Now a evaluate of the P&L for our two segments, beginning with semiconductors. Income for our semiconductor options section was $8.2 billion and represented 59% of complete income within the quarter. This was up 12% yr on yr.

Gross margins for our semiconductor options section had been roughly 67%, down 220 foundation factors yr on yr, pushed primarily by a better mixture of AI XPUs. Working bills elevated 11% yr on yr to $914 million on elevated funding in R&D, leading to semiconductor working margins of 56%. Now, shifting on to infrastructure software program. Income for infrastructure software program was $5.8 billion, up 196% yr on yr primarily because of the contribution of VMware and represented 41% of income.

Gross margins for infrastructure software program had been 91% within the quarter and working bills had been $1.1 billion within the quarter, leading to infrastructure software program working margin of 72%. Excluding transition prices, working margin was 73%. Transferring on to money movement. Free money movement within the quarter was $5.5 billion and represented 39% of revenues.

Excluding money used for restructuring and integration of $506 million, free money flows of $6 billion had been up 22% yr on yr and represented 43% of income. Free money movement as a proportion of income has declined from the identical quarter a yr in the past, as a result of increased money curiosity expense from debt associated to the VMware acquisition, increased money taxes as a result of a better mixture of U.S. taxable revenue, the continued delay within the reenactment of Part 174 and up to date proposed laws on company AMT. We spent $122 million on capital expenditures.

Days gross sales excellent had been 29 days within the fourth quarter in comparison with 31 days a yr in the past. We ended the fourth quarter with stock of $1.8 billion, down 7% sequentially. We proceed to stay disciplined in how we handle stock throughout the ecosystem. We ended the fourth quarter with $9.3 billion of money and $69.8 billion of gross principal debt.

In the course of the quarter, we changed $5 billion of floating-rate debt with new senior notes. We use money readily available to pay a mixture of senior notes, which got here due in This fall and extra floating fee debt, lowering debt by $2.5 billion. Following these actions, the weighted common coupon fee and years to maturity of our $56 billion in fixed-rate debt is 3.7% and seven.6 years, respectively. The weighted common coupon fee and years to maturity of our $14 billion in floating fee debt is 5.9% and three.2 years, respectively.

We count on to repay roughly $495 million of fixed-rate senior notes coming due in Q1. Now let me recap our monetary efficiency for fiscal yr 2024. Our income hit a document $51.6 billion, rising 44% yr on yr, together with VMware, and 9% organically, excluding VMware. Semiconductor income was $30.1 billion, up 7% yr over yr.

Infrastructure software program income was $21.5 billion up 181% yr on yr and up 19% yr on yr, excluding VMware. Fiscal 2024 adjusted EBITDA was $31.9 billion and represented 62% of income. Free money movement grew 10% yr on yr to $19.4 billion and up 22% yr on yr to $21.9 billion, excluding restructuring and integration prices. Turning to capital allocation.

For fiscal 2024, we spent $22.2 billion, consisting of $9.8 billion within the type of money dividends and $12.4 billion in share repurchases and eliminations. Aligned with our potential to generate elevated money flows within the previous yr and off of a bigger share depend base from the acquisition of VMware, we’re saying a rise in our quarterly frequent inventory money dividend in Q1 fiscal 2025 to $0.59 per share on a split-adjusted foundation, a rise of 11% from the prior quarter. We intend to keep up this goal quarterly dividend all through fiscal ’25, topic to quarterly board approval. This suggests that our fiscal 2025 annual frequent inventory dividend to be a document $2.36 per share on a split-adjusted foundation, a rise of 12% yr on yr.

I wish to spotlight that this represents the 14th consecutive enhance in annual dividends, since we initiated dividends in fiscal 2011. Now shifting on to steerage. From a year-on-year comparable foundation, understand that Q1 of fiscal ’24 was a 14-week quarter and Q1 of fiscal ’25 is a 13-week quarter. As we at the moment are previous one yr following the shut of the VMware acquisition beginning in Q1 of fiscal 2025, we are going to not get away VMware income and prices on a stand-alone foundation.

We’ll proceed to report infrastructure software program section income and profitability which incorporates brocade fiber channel SAN, CA mainframe enterprise safety, and VMware. Our steerage for Q1 is for consolidated income of $14.6 billion, with semiconductor income of $8.1 billion, up roughly 10% yr on yr, and infrastructure software program income of $6.5 billion, up 41% yr on yr. We count on Q1 adjusted EBITDA to be a document 66% and Q1 non-GAAP diluted share depend to be roughly 4.9 billion shares. For modeling functions, we count on Q1 consolidated gross margins to be up 100 foundation factors sequentially on the upper income mixture of infrastructure software program and product combine inside semiconductors.

Be aware that consolidated gross margins by the yr will likely be impacted by the income mixture of infrastructure software program and semiconductors and product combine inside semiconductors. We count on the non-GAAP tax fee in fiscal yr 2025 to be roughly 14.5% as tax deductions associated to curiosity expense are decreased, as we pay down and refinance debt underneath extra favorable curiosity phrases. GAAP web revenue and money flows in Q1 will likely be impacted by increased taxes, restructuring, and integration-related money prices because of the VMware acquisition. That concludes my ready remarks.

Operator, please open up the decision for questions.

Questions & Solutions:

Operator

Thanks. [Operator instructions] Once more, as a result of time constraints, we ask that you just please restrict your self to 1 query. Please stand by whereas we compile the Q&A roster. And our first query will come from the road of Blayne Curtis with Jefferies.

Your line is open.

Blayne Curtis — Analyst

Hello, thanks a lot for taking my query. It is form of a clarification and a query. I assumed I heard you say that AI networking income was 76% of networking. I simply could not get that math proper, however perhaps the broader query is you’ve got seen progress of that low level in April in AI.

Are you able to simply discuss ASIC energy versus networking, the tendencies you are seeing in October into January?

Hock E. Tan — President, Chief Govt Officer, and Director

Effectively, that is a really fascinating query. Each had been rising, not on the identical fee, however we have been delivery, I consider much more of community AI connectivity, networking parts within the again half of this yr, in comparison with the primary half of this fiscal yr. And we suspect lots of that can proceed within the first half of subsequent fiscal yr earlier than extra XPUs naturally, as I indicated, extra of the brand new era of three-nanometer XPUs, will begin ramping very a lot within the again half of ’25.

Blayne Curtis — Analyst

Very clear. Thanks lots.

Operator

Thanks. One second for our subsequent query, and that can come from the road of C.J. Muse with Cantor Fitzgerald. Your line is open.

C.J. Muse — Analyst

Yeah, good afternoon. Thanks for taking my query. I suppose, Hock I wished to hit on the $60 billion to $90 billion income vary for fiscal ’27 for AI. I hoped you would communicate to the combination you see there between XPU and networking.

And inside that assemble, are you together with all types of the shoppers that you just see on the market in hyperscale and vertically built-in shoppers? Or any type of assist when it comes to what you are together with in that potential combine could be very useful. Thanks.

Hock E. Tan — President, Chief Govt Officer, and Director

Thanks. Effectively, thanks for the query. Give me a possibility right here to make clear and be very particular. First, on the entire {dollars}, this isn’t income, by the best way.

It is the income alternative for us. It is what I name a serviceable addressable market, as all of us time period SAM. Not TAM, SAM. And it is a serviceable addressable marketplace for three of our hyperscale clients.

That is it. It is a very slim serviceable addressable market we’re speaking about. And we’re speaking about XPUs and AI connectivity at that scale. AI connectivity may in all probability be estimated to run roughly shut to fifteen% to twenty% of the greenback content material.

Operator

Thanks. One second for our subsequent query. And that can come from the road of Joe Moore with Morgan Stanley. Your line is open.

Joe Moore — Analyst

Nice. Thanks. I’m wondering if you happen to may speak to the XPU market. How are your clients type of reacting to among the rack scale merchandise out of your, the service provider competitor from NVIDIA? How do they type of get the connectivity to a number of XPUs contained in the rack? Simply how does that current a aggressive dynamic for you? Thanks.

Hock E. Tan — President, Chief Govt Officer, and Director

Effectively, all people is making an attempt to determine once you begin — once you join a cluster on a single cloth of 10,000 XPUs or GPU, a GPU and scale it as much as 100,000 and on to 500,000 and 1 million is an entire new recreation when it comes to structure. And so, you guys hear the variations of once you do these racks, you could have what you name scale up. After which you could have becoming a member of rack to rack as a result of you don’t have any selection. You possibly can’t get to 1,000,000 or for that matter, 100,000.

In any other case, you name it scale out. And that is a seamless, evolving structure. However I believe every of those hyperscale clients of ours have, at this level form of discovered the right way to get there. Therefore, a highway map that can continue to grow from 100,000 to 1 million XPU clusters.

On just about, comparable structure foundation over the following three, 4 years.

Joe Moore — Analyst

Nice. Thanks.

Operator

Thanks. One second for our subsequent query. And that can come from the road of Harlan Sur with J.P. Morgan.

Your line is open.

Harlan Sur — Analyst

Hello, good afternoon. Thanks for taking my query. Hock, I do know the staff has been placing out an AI information for fiscal ’25. And I admire the multiyear type of SAM alternative outlook.

However for this yr, can we take a look at what your clients on the networking and customized accelerators are serious about from a knowledge middle capex spending perspective? So, for instance, our newest roll up is that the highest 4 cloud and hyperscalers are going to develop their capex, 35%, 40% in fiscal ’25. I’d count on that your AI enterprise would type of intently mirror this pattern, perhaps even give it some thought as a base case once we take into consideration Ethernet taking share from InfiniBand, ASICs rising sooner than service provider GPUs, perhaps the profile of your AI enterprise can go even sooner than the capex pattern, both method, plus or minus, is that how we should always take into consideration the expansion within the AI enterprise roughly in step with capex progress tendencies of your massive cloud and hyperscale clients?

Hock E. Tan — President, Chief Govt Officer, and Director

Harlan. No, it does not I imply, I believe the hyperscalers have a tendency to offer you an total capex numbers. I am undecided they actually get away between what’s AI and what’s non-AI on the market, and clearly, the spend in AI outstrips, the spend in non-AI even on the capex. And so no, I will not essentially cease at that.

Harlan Sur — Analyst

OK. Thanks, Hock.

Operator

Thanks. One second for our subsequent query, and that can come from the road of Stacy Rasgon with Bernstein. Your line is open.

Stacy Rasgon — Analyst

Hello, guys. Thanks for taking my query. I’ve a extra tactical query. So, you could have software program pushouts into Q1, which is elevating it.

Ought to we take into consideration that, these pushouts are rolling off as we get into Q2 and the again half of the yr? And like what are the implications on the form of software program for the yr, in addition to gross margins? As a result of I suppose perhaps within the again half, you may have like software program a little bit weaker versus Q2, in addition to the XPU stronger. So, ought to we be serious about the gross margin trajectory of the present elevated base form of like easing as we get within the again half? So, simply something you possibly can inform us across the form of the software program across the pushouts and implications for revenues and gross margins?

Hock E. Tan — President, Chief Govt Officer, and Director

Effectively, primary, it is a slip. And I believe you are overthinking this complete undertaking. It is only a slip, decide it up, and also you see the variations between This fall progress and Q1 reacceleration. That is all it’s.

Stacy Rasgon — Analyst

Ought to Q2 be decrease since you had pushed out into Q1 is what I am asking.

Hock E. Tan — President, Chief Govt Officer, and Director

No, it does not. Not Q2. No. I do not — it will not have a fabric impression on the remainder of the fiscal ’25.

Stacy Rasgon — Analyst

So, do you assume software program can form of maintain at these ranges and even develop off of those like $6.5 billion ranges as we undergo the yr?

Hock E. Tan — President, Chief Govt Officer, and Director

I am not giving steerage. I’d remind you for the remainder of the yr. I am simply providing you with a steerage for Q1. However I am simply telling you your evaluation is, form of, faulty.

Stacy Rasgon — Analyst

I have been advised that earlier than. OK. Thanks, Hock.

Hock E. Tan — President, Chief Govt Officer, and Director

Thanks.

Operator

Thanks. And one second for our subsequent query. and that can come from Benjamin Reitzes with Melius. Your line is open.

Ben Reitzes — Analyst

Hello, thanks lots. And good quarter there, Hock. I wished to ask you in regards to the $60 billion to $90 billion with a little bit extra readability. Beforehand, you’ve got talked a few cumulative TAM out of your clients.

So, and that’s this a run fee TAM or a cumulative TAM? Form of that means will we take the $12.2 million, then add some progress for the following two years after which consider it that method? Or will we consider we take a share of like a $75 billion TAM and what your income yield is? After which I simply additionally hoped you would make clear, you are not together with these two new clients. Do these two clients have the identical $20 billion to $30 billion TAM every that the present three do? Or do you assume they’re smaller or greater? Sorry in regards to the multipart query there.

Hock E. Tan — President, Chief Govt Officer, and Director

No. I believe you requested the primary half was similar to an earlier query, however I would be happy to make clear. No, the $60 billion to $90 billion, it’s not, we aren’t speaking cumulative SAM or TAM anymore. We’re placing for you a vacation spot, so to talk, a milestone which occurs to be three years therefore, 2027, presumably slip a bit a part of ’28, however 2027.

We’re seeing a vacation spot 2027 or milestone, higher one, the place the deployment of these large-scale AI clusters every on single cloth just about to run these massive LLM fashions, will come to $60 billion to $90 billion in that one-year interval and collectively, all three of them. And to reply the second half too. Presumably, sure, at the least one in all them, we consider, sure. However what I do not need you including one plus one equals two right here.

These will not be validated in our view and our mannequin as clients. So, please do not do your addition to the $60 million to $90 million SAM that I’ve postulated in my remarks.

Ben Reitzes — Analyst

Thanks a lot.

Operator

And one second for our subsequent query, and that can come from the road of Ross Seymore with Deutsche Financial institution. Your line is open.

Ross Seymore — Analyst

Hello, thanks for letting me ask a query. I wish to speak in regards to the money return facet of issues, a fantastic job on the dividend enhance. The opposite 50%, is fiscal ’25 a yr the place you are going to nonetheless be paying down debt? Share repurchases within the combine? Or Hock, you talked about that VMware, the combination is essentially now behind you. Often that places you on the prowl searching for offers.

Is that one thing we should always, normally, take into consideration or the regulatory points which are nonetheless a priority? Simply making an attempt to determine what that different 50% goes to go towards this yr.

Hock E. Tan — President, Chief Govt Officer, and Director

Effectively, to begin with, yeah, the opposite 50% of money that will likely be generated, we’re not utilizing that’s past dividends. We solely have one use or two makes use of for it. We have all the time stated one is parking on our steadiness sheet for the chance to purchase another person. However in actuality, we’re shopping for large enough firms you nearly say that fifty% money is sitting there, it isn’t enough.

So, the seemingly use of that fifty% money is, as Kirsten indicated in her ready remarks, pay down debt. We do intend to make use of a part of that fifty% free money movement that is not used for dividends to go delever ourselves, given the dimensions of the debt we’re taking up or we’ve got taken on since we acquired VMware.

Kirsten M. Spears — Chief Monetary Officer and Chief Accounting Officer

Sure, Ross, it is Kirsten. We wish to give attention to lowering curiosity expense. So, we’ll go after these time period loans. So, sure, the main target will likely be on paying down debt.

Ross Seymore — Analyst

Thanks.

Operator

And one second for our subsequent query. That may come from the road of Vivek Arya with Financial institution of America. Your line is open.

Vivek Arya — Analyst

Thanks for taking my query. Hock again to AI. What do you assume is the SAM in 2024, so we are able to get a baseline view of what your $12.2 billion in gross sales characterize and is your assumption that you just keep the share, proper? You develop it? Or what occurs to that share over time? After which type of associated query to that’s what occurs to your semiconductor gross margins if AI grows, proper to such an extent? Since you gave us a mid-single digit for non-AI and I am questioning if AI will get to be such a giant a part of semis, what occurs to gross margin? So, each form of the baseline of what SAM was this yr and what occurs to your share and margins over time?

Hock E. Tan — President, Chief Govt Officer, and Director

OK. That is a really insightful query on the primary one, which on the primary one, anyway, the place we’re saying what’s the baseline on the $60 billion to $90 billion in three years’ time, the place we’re specifying down to those three clients of ours. And I’d estimate this 2024 for that to be about lower than $20 billion, $15 billion to $20 billion at this level, in 2024, $15 billion to $20 billion going to $60 billion to $90 billion, proper? And when it comes to margins, effectively do not get too hung up about gross margin, please, Vivek, since you’re not unsuitable gross margin in semiconductors will dilute you are not saying that. However see, the sport right here is the income will leverage a lot on the spending we’ve got to do to generate it that the working margin will enhance from the place we’re in the present day.

Vivek Arya — Analyst

Thanks.

Operator

Thanks. One second for our subsequent query. And that can come from the road of Harsh Kumar with Piper Sandler. Your line is open.

Harsh Kumar — Analyst

Sure. Hello. To start with, guys, big congratulations on efficiently integrating VMware a lot forward of your time-frame. And Hock, I had a two-part query.

Is there a easy greenback metric that we are able to consider for community hooked up to XPUs, for instance, is $1 of networking to $1 of XPUs? After which for my query, in one in all your posts, you talked about sovereign knowledge facilities and VMware. I suppose my query is, is there a spot for Broadcom exterior of the software program piece? In different phrases, are you noticing that sovereign guys are wanting to make use of XPUs or are they strictly sticking to service provider silicon?

Hock E. Tan — President, Chief Govt Officer, and Director

Let me reply your query backwards, the simplest one first. Sovereign guys are like many of the, it is just about like enterprise market. which is solely service provider. Sovereign guys would not have the aptitude essentially to create first the {hardware}, however extra importantly, the software program stack to allow transistors in {hardware} to translate itself into high-level language which then the LLM, AP utility, massive language fashions, and AI purposes can function on.

So, do not follow what’s obtainable, which is service provider silicon and obtainable ecosystem of software program layers that enable that translation. So, it will likely be executed very a lot that method on XPUs. And in your first query of what is the ratio between AI connectivity, networking that’s you are saying to XPUs to compute. Effectively, it is a altering quantity.

Because the cluster expands although, there are some ratios to be checked out. And the straightforward ratio to take a look at is there’s scale up and there’s scale’s out. And as we increase right into a single cloth cluster of XPUs or GPU that grows greater and greater. Guess what’s extra necessary.

Scale-up turns into increasingly necessary. And the ratio we’re speaking about as we transfer up will increase nearly exponentially, which is why I am saying from in all probability networking, as a % of AI content material in silicon in the present day of between 5% to 10%, you are going as much as 15% to twenty% by the point you hit 500,000 to 1 million XPU GPU clusters.

Harsh Kumar — Analyst

Thanks.

Operator

One second for our subsequent query. And that can come from the road of Toshiya Hari with Goldman Sachs. Your line is open.

Toshiya Hari — Analyst

Hello, good afternoon. Thanks a lot for taking the query. The $60 billion to $90 billion SAM forecast for fiscal ’27, Hock, I am curious if you happen to guys have a view on the TAM. So, simply wish to understand how massive the SAM is as a proportion of the entire alternative set.

After which my principal query is you talked about going for main market share inside your SAM, which is sensible. I assume you are not assuming 100% share. So, the worth of that $60 billion to $90 billion that you just will not be capturing, is {that a} operate of a few of your hyperscale clients eager to seize worth internally? Or is that all the time having a backup or a second supply? Is there a low-margin enterprise that you just simply merely will not pursue? How ought to we take into consideration the a part of the $60 billion to $90 billion that you just will not be going after or will not be capturing? Thanks.

Hock E. Tan — President, Chief Govt Officer, and Director

OK. First, to reply the larger overarching query. I do not know the TAM. I do not make any half i do not assume too far and exhausting about them.

We do not assume in macro approaches, we’re taking a look at line of sight right here. So, I received clients, I strive to determine how a lot quantity the place the highway map of the shopper was, not simply product, know-how, however what they’re increase, what’s their consumption patterns like, that is how we created our SAM. Really, in a method, bottoms up, then prime down. So, I do not know what the TAM is past clients we’re serving intently, collaborating intently.

So, let’s make it clear. When it comes to market share, I do not know. However as you all can see, it is a very massive, substantial market alternative. There’s room for a lot of gamers.

All we’re going to do is achieve our fair proportion. We’re simply very effectively positioned in the present day having the most effective know-how, very related on this house. We’ve, by far, among the finest mixture know-how on the market to do XPUs and to attach these XPUs. The silicon know-how that allows it, we’ve got it right here in Broadcom by the boatloads, which is why we’re very effectively positioned with these three clients of ours.

So, we primarily based on that, we’re and primarily based on the depth of our engagement in the present day, this did not simply begin. This has been occurring now for some time when it comes to deep engagement with engineering groups from the opposite facet, every of the opposite facet, we’re very well-positioned and effectively underway to making a multiyear highway map to allow these few clients of ours to get to when their ambition leads them to be in. And it is due to the good know-how we’ve got, the place we are literally enabling within the areas we’re superb at. We’re speaking about silicon design, packaging design, and optical know-how.

Toshiya Hari — Analyst

Thanks.

Operator

One second for our subsequent query. And that can come from the road of William Stein with Truist Securities. Your line is open.

William Stein — Analyst

Nice. Thanks for taking my query. I wish to add my congrats to all the good outcomes this yr and for the quarter and outlook. However Hock, that is type of a shocking flip of occasions within the final yr with what we have been accustomed to pondering of as a type of mature, slow-growth enterprise at its core with all of the M&A tacked on to it.

And I’m wondering with the sudden acceleration of the natural enterprise, given your publicity to those capabilities in ASICs to deliver AI applied sciences to clients, does that change your curiosity degree in M&A? And does it change your focus space of potential M&A going ahead? Thanks.

Hock E. Tan — President, Chief Govt Officer, and Director

No, it does not. We’re open, nonetheless open, all the time open as a result of that is been a core a part of our technique enterprise mannequin of this firm for the final 10 years, which is we’re all the time considering including to our portfolio, superb franchise property, be they in semiconductors or be they in infrastructure software program. So long as they all the time say, they meet the factors, the pretty demanding standards we search for, we might all the time be open to buying these property and including to our portfolio. So, no, it hasn’t modified our pondering in any respect.

William Stein — Analyst

Nice. Thanks.

Operator

One second for our subsequent query. And that can come from the road of Vijay Rakesh with Mizuho. Your line is open.

Vijay Rakesh — Analyst

Hello, Hock. Nice outcomes right here. Only a query again on the AI customized silicon facet. I suppose it seems like, of the $17.5 billion TAM right here, SAM right here, you could have about 70% share.

So, assuming that 70% searching to ’27, your customized silicon AI income must be like $50 billion in fiscal ’27. So, do we’ve got a superb line of sight into fiscal ’26, displaying a fairly good ramp to hit? These numbers is likely to be with out trial flip and all that do the 1 million XPUs. How do you see that? Thanks.

Hock E. Tan — President, Chief Govt Officer, and Director

Thanks. We do not have actually a adequate line of signal to wish to share it with you. Now for that matter, do we’ve got a coverage of providing you with steerage past what we’re doing one quarter a yr, however we do wish to provide you with a way of the place this journey is headed. We wish to provide you with a way of the place this might lead us this firm when it comes to its AI semiconductor AI income trajectory.

On condition that we now made it very open official nearly that we’re going ahead solely are guiding AI income versus non-AI income. We figured, at the least, provide you with a way of what the AI trajectory is. On a non-AI you could have recognized it with us for a very long time. It is mature, steady, evolving, rising mid-single-digit GDP plus.

AI won’t ever provide you with that. So, that is why we take the step now unprecedented in some methods of laying that highway map when it comes to potential marketplace for AI. Now solely market we’ve got is the shoppers we’ve got and the tip markets we serve. So, we create this SAM and the readability we see is, to some extent in 2027.

How that journey progresses with every of our new clients is considerably variable. It is the speed of the adoption and of their very own XPUs and will likely be very a lot part of that journey. However due to that, we count on to see a state of affairs the place there may very well be quarter-to-quarter variability, given the one three clients, and the truth that deployment is available in massive chunks, usually. So, my greatest reply to you is I can not provide you with any readability past what I’ve given to this point.

Vijay Rakesh — Analyst

Bought it. And the opposite two CSPs, when do you see them ramping?

Hock E. Tan — President, Chief Govt Officer, and Director

Effectively, to begin with, I received to get into manufacturing, they received to get into manufacturing. So, why will we cross that bridge once we get to it? We’re working very exhausting with them to get it manufacturing stage. We’re fairly deeply engaged with desk chips. However they have to get their software program prepared, they received to get it examined and so they received to get occurring it.

So, now I am undecided however undoubtedly over the following three years.

Operator

Thanks. That’s on a regular basis we’ve got for our question-and-answer session. I’d now like to show the decision again over to Ji Yoo, head of investor relations for closing remarks.

Ji Yoo — Director, Investor Relations

Thanks, Sheri. Broadcom at present plans to report its earnings for the primary quarter of fiscal yr 2025 after shut of market on Thursday, March sixth, 2024. A public webcast of Broadcom’s earnings convention name will comply with at 2:00 p.m. Pacific Time.

That may conclude our earnings name in the present day. Thanks all for becoming a member of. Operator, chances are you’ll finish the decision.

Operator

[Operator signoff]

Length: 0 minutes

Name members:

Ji Yoo — Director, Investor Relations

Hock E. Tan — President, Chief Govt Officer, and Director

Kirsten M. Spears — Chief Monetary Officer and Chief Accounting Officer

Blayne Curtis — Analyst

Hock Tan — President, Chief Govt Officer, and Director

C.J. Muse — Analyst

Joe Moore — Analyst

Harlan Sur — Analyst

Stacy Rasgon — Analyst

Ben Reitzes — Analyst

Ross Seymore — Analyst

Kirsten Spears — Chief Monetary Officer and Chief Accounting Officer

Vivek Arya — Analyst

Harsh Kumar — Analyst

Toshiya Hari — Analyst

William Stein — Analyst

Vijay Rakesh — Analyst

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