Key highlights from Broadcom Inc (AVGO) Q3 2023 Earnings Concall
Management Update:
- [00:02:35] AVGO said Hyperscale continued to grow double-digits year-on-year, but enterprise and telcos spending moderated. Generative AI investments are driving the continued strength in hyperscale spending.
- [00:03:45] AVGO said that without the benefit of generative AI revenue in 3Q, its semiconductor business was approximately flat year-on-year.
- [00:05:03] In 4Q, AVGO expects its networking revenue to accelerate in excess of 20% year-on-year, driven by the strength in generative AI deployments. The company forecasts generative AI revenue to grow about 50% sequentially and almost 2x year-on-year in 4Q.
Q&A Highlights:
- [00:22:08] Vivek Arya with Bank of America asked if AVGO has the visibility to maintain its large AI ASIC compute offload contract over the next several years, despite facing competition from domestic and Taiwan-based ASIC competitors. Hock Tan CEO said that dealings with specific customers cannot be disclosed, but it has long-term strategic engagements with multiple leading-edge technology companies. These engagements are broad and deep, and they involve multiple technologies.
- [00:24:25] Harlan Sur of J.P. Morgan asked that given the current macro environment, can AVGO sustain its $6 billion revenue run rate ex-AI over the next few quarters. Hock Tan CEO answered that the company cannot guide beyond the next quarter, but can confirm that AVGO is seeing a soft landing in 2023, as promised.
- [00:25:48] Ross Seymore from Deutsche Bank queried if the significant sequential growth in AI demand in the networking segment coming from the compute offload side or the networking side. Hock Tan CEO replied that the demand for AI engines and networking solutions are closely linked. AI engines are typically deployed in large clusters, needs networking solutions to connect them together. AVGO’s AI and networking solutions are complementary, and the company’s growth is driven by both.
- [00:27:56] Stacy Rasgon at Bernstein asked if the previously mentioned 25% of semiconductor revenue from AI is still accurate for next year and how it can be achieved with the two moving pieces of AI and non-AI revenue. Hock Tan CEO replied that AVGO expects AI revenue to continue to accelerate in 2023 and 2024, and the company still believes that AI revenue will be over 25% of semiconductor revenue in 2024.
- [00:30:06] Toshiya Hari with Goldman Sachs asked if the supply environment is a constraining factor for AVGO’s AI business, and what’s the expectation for capacity growth in fiscal ’24. Hock Tan CEO replied that AVGO is facing supply constraints for its AI products due to long lead times. The company is also seeing some softness in demand for its non-AI products, but it is still relatively stable.
- [00:34:10] Karl Ackerman with BNP Paribas asked about the headwinds to GM this year from elevated logistics costs and supply chain constraints, and how these factors could change in 2023. Hock Tan CEO answered that the main driver of AVGO’s GM is the pace of adoption of next-generation products. The company expects to see some slowdown in the adoption rate in the near term, but it believes that GM will continue to expand over the long term.
- [00:39:18] Harsh Kumar of Piper Sandler asked if AVGO is starting to see growth in backlog about a year out, and is China approval needed for VMware. Hock Tan CEO clarified that it is too early to predict when the upcycle will happen, but AVGO is seeing some positive signs, such as increased bookings for generative AI and wireless products.
- [00:44:06] Matt Ramsay at TD Cowen asked if the recent surge in Gen AI spending and enthusiasm widen AVGO’s appetite to take on big projects for other large customers in that arena and consider custom switching routing products? Hock Tan CEO said that AVGO has only one large customer for its custom AI engines, and the company does not expect this to translate to significant revenue. AVGO believes that merchant silicon is a better solution for switching and routing than custom silicon.
- [00:48:13] Christopher Rolland from Susquehanna asked what the company means by soft landing for the storage and broadband businesses, and whether he expects these businesses to bottom out in Q4. Hock Tan CEO clarified that soft landing means reaching a plateau and AVGO’s non-AI revenue has been flat around $6 billion for three quarters in a row, and the company believes this is a “soft landing” rather than a trend.
- [00:52:09] Edward Snyder with Charter Equity queried about AVGO’s expectations for its integrated optics solutions, which will start shipping next year, and why investors should be interested in this new market. Hock Tan CEO answered that AVGO is pioneering the use of silicon photonics in its next-generation Tomahawk 5 switch, which will start shipping in the middle of next year. This technology offers significant power savings and reliability improvements over traditional optical networking solutions.
