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    AVGO
    Earnings call· Feb 2025(Q1 FY25)

    Broadcom Inc. AVGO

    Mar 6, 2025 Source

    Executive summary

    Broadcom Q1 FY25 — AI Revenue and Software Segment Drive Record Performance

    Broadcom delivered record Q1 FY25 results, primarily fueled by robust AI demand and strong performance in its infrastructure software segment following the VMware acquisition. The company is strategically investing in next-generation AI hardware and expanding its custom silicon partnerships with hyperscalers, while also driving the virtualization of data centers through its VCF and Private AI Foundation offerings. Despite a slower recovery in non-AI semiconductors, the company maintains a positive outlook on its core growth drivers.

    Highlights

    5

    • Total revenue reached a record $14.9 billion, up 25% year-on-year.

    • Consolidated adjusted EBITDA hit a record $10.1 billion, up 41% year-on-year, with a 68% margin, exceeding guidance.

    • AI revenue was $4.1 billion, up 77% year-on-year, surpassing guidance of $3.8 billion.

    • Infrastructure software revenue grew 47% year-on-year to $6.7 billion, driven by VMware integration and VCF adoption.

    • The company is expanding custom AI accelerator engagements with four additional hyperscalers, beyond the initial three.

    Concerns

    4

    • Non-AI semiconductor revenue saw a slow recovery, down 9% sequentially in Q1.

    • Enterprise networking revenue remained flattish in the first half of fiscal '25 due to customers working through channel inventory.

    • Resales in the industrial segment were down double digits in Q1 and are expected to decline further in Q2.

    • Free cash flow was impacted by cash interest expense from debt related to the VMware acquisition and cash taxes due to the delay in Section 174 reenactment and corporate AMT.

    Guidance & targets

    17
    CategoryTargetConfidence
    Q2 Consolidated Revenue
    $14.9 billion
    high materiality
    High
    Q2 Semiconductor Revenue
    $8.4 billion
    medium materiality
    High
    Q2 AI Revenue
    $4.4 billion
    high materiality
    High
    Q2 Non-AI Semiconductor Revenue
    $4 billion
    medium materiality
    High
    Q2 Infrastructure Software Revenue
    $6.5 billion
    medium materiality
    High
    Q2 Adjusted EBITDA Margin
    approximately 66%
    medium materiality
    High
    FY25 Non-GAAP Tax Rate
    approximately 14%
    low materiality
    High
    Serviceable Addressable Market (SAM) from 3 Hyperscale Customers
    $60 billion to $90 billion
    high materiality
    High
    Hyperscale XPU Clusters Scaling
    1 million XPUs
    high materiality
    High
    Tomahawk 6 Switch Samples Delivery
    samples to customers
    medium materiality
    High
    New Hyperscaler XPU Tape-outs
    on track to tape out their XPUs
    medium materiality
    High
    Non-AI Semiconductor Bookings Growth
    continue to grow year-on-year
    low materiality
    Medium
    Broadband Sequential Recovery
    up similarly
    low materiality
    Medium
    Server Storage Sequential Growth
    up high single digits sequentially
    low materiality
    Medium
    Wireless Revenue Growth
    flat year-on-year
    low materiality
    Medium
    Industrial Resales Trend
    down
    low materiality
    Medium
    Q2 Consolidated Gross Margin
    down approximately 20 basis points sequentially
    low materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    Semiconductor Solutions
    Growth driven by AI revenue. Increased R&D investment in leading-edge AI. AI revenue was $4.1 billion, up 77% YoY. Non-AI semiconductor revenue was $4.1 billion, down 9% sequentially.
    Gross margin: 68% (up 70 bps YoY)Operating expenses: $890 million (up 3% YoY)
    		$8.2 billion11%—57% operating margin
    Infrastructure Software
    Primarily due to increased revenue from VMware. Improved operating margin reflects disciplined integration and VCF strategy. Q1 FY25 is the first quarter where year-on-year comparables include VMware in both periods.
    Gross margin: 92.5% (vs 88% a year ago)Operating expenses: $1.1 billion
    		$6.7 billion47%15%76% operating margin

    Operational metrics

    25
    Consolidated Adjusted EBITDA
    $10.1 billionup 41% year-on-year
    Q1 FY25

    A record for the company.

    Consolidated Adjusted EBITDA margin
    68%above guidance of 66%
    Q1 FY25

    Excludes $142 million of depreciation.

    Consolidated Operating Margin
    66%up from 59% a year ago
    Q1 FY25

    Operating income was $9.8 billion, up 44% from a year ago.

    Consolidated Gross Margin
    79.1%better than originally guided
    Q1 FY25

    Improved due to favorable revenue mix.

    Consolidated Operating Expenses
    $2 billion
    Q1 FY25

    Includes R&D investment.

    Free Cash Flow margin
    40%
    Q1 FY25

    As a percentage of revenue.

    Capital Expenditures
    $100 million
    Q1 FY25

    Total capital expenditures for the quarter.

    Days Sales Outstanding (DSO)
    30 daysvs 41 days a year ago
    Q1 FY25

    Improved from prior year.

    Cash and investments balance
    $9.3 billion
    Q1 FY25

    Cash balance at the end of the first quarter.

    Gross Principal Debt
    $68.8 billion
    Q1 FY25

    Total gross principal debt at quarter end.

    Net Debt Reduction
    $1.1 billion
    Q1 FY25

    Achieved through repayment of fixed and floating rate debt with new senior notes, commercial paper, and cash on hand.

    Fixed Rate Debt
    $58.8 billion
    Q1 FY25

    Remaining fixed rate debt after repayments.

    Floating Rate Debt
    $6 billion
    Q1 FY25

    Remaining floating rate debt after repayments.

    Commercial Paper
    $4 billion
    Q1 FY25

    Commercial paper outstanding.

    Cash Dividends Paid
    $2.8 billion
    Q1 FY25

    Quarterly common stock cash dividend.

    Shares Repurchased
    8.7 million
    Q1 FY25

    Shares repurchased from employees.

    Non-GAAP Diluted Share Count
    approximately 4.95 billion
    Q2 FY25

    Expected for Q2 FY25.

    Total Revenue
    $14.9 billionup 25% year-on-year
    Q1 FY25

    A record for the company.

    Infrastructure Software Revenue
    $6.7 billionup 47% year-on-year
    Q1 FY25

    Exaggerated by deals that slipped from Q4 to Q1.

    Software Subscription Conversion
    over 60%
    Q1 FY25

    Percentage of perpetual licenses converted to subscription for the software segment.

    VCF Adoption by Large Customers
    approximately 70%
    Q1 FY25

    Percentage of the largest 10,000 customers who have adopted VCF.

    VMware Private AI Foundation Customers
    39
    Q1 FY25

    Number of enterprise customers for the VMware Private AI Foundation, in collaboration with NVIDIA.

    Inventory
    $1.9 billionup 8% sequentially
    Q1 FY25

    To support revenue in future quarters.

    Days of Inventory on Hand
    65 days
    Q1 FY25

    Reflects disciplined inventory management.

    Q1 Quarter Length
    13-weekvs 14-week in Q1 FY24
    Q1 FY25

    Comparison of fiscal quarter length.

    Industry KPIs

    5
    MetricValueDetails
    Ai data center revenue$4.1 billionUSD
    Design wins socket pipeline4 additional hyperscalerscustomers
    Inventory channel inventory$1.9 billionUSD
    Node platform ramp schedule2-nanometer AI XPU; 100-terabit Tomahawk 6 switch
    End market segment revenue mixAI revenue $4.1 billion; non-AI semiconductors $4.1 billionUSD

    Product announcements

    3
    ProductTypeDetails
    2-nanometer AI XPU packaging 3.5Dmilestone
    100-terabit Tomahawk 6 switchmilestone
    VMware Private AI Foundationlaunch

    Deals & partnerships

    1
    NVIDIACollaboration on VMware Private AI Foundation

    Partnership to develop and offer the VMware Private AI Foundation, a platform that virtualizes GPUs for on-prem AI workloads.

    Risks & headwinds

    5
    Slow recovery in non-AI semiconductorsQ1 FY25, expected to be flattish sequentially in Q2 FY25

    Revenue down 9% sequentially in Q1

    Mitigation: Bookings continue to grow year-on-year; broadband and server storage expected to recover in Q2.

    Channel inventory in enterprise networkingH1 FY25

    Enterprise networking remains flattish in H1 FY25

    Mitigation: Customers continue to work through channel inventory.

    Decline in industrial resalesQ1 FY25, expected to be down in Q2 FY25

    Down double digits in Q1

    Mitigation: Not explicitly stated, but part of broader non-AI semiconductor trends.

    Impact of cash interest expense and cash taxes on Free Cash FlowQ1 FY25

    Free cash flow impacted

    Mitigation: Due to debt related to VMware acquisition, continued delay in reenactment of Section 174, and corporate AMT.

    Geopolitical tensions and potential tariffsNext 3-6 months for clarity

    Too early to know where we all land

    Mitigation: Management is monitoring the situation but has no current concerns regarding existing AI design wins/shipments.

    What to watch in Q2 FY25

    5

    Q2 AI Revenue Growth

    Q2 FY25
    Current$4.1 billion (up 77% YoY in Q1)
    Target$4.4 billion (up 44% YoY)

    Why it matters

    AI revenue is a primary growth driver and key investment thesis for Broadcom, indicating continued hyperscaler demand.

    We expect Q2 AI revenue to grow to $4.4 billion, which is up 44% year-on-year.

    Q&A highlights

    7

    Can the 4 new hyperscaler engagements be as big as the current 3, and what does this mean for custom silicon and Broadcom's long-term business?

    Hock Tan clarified that the 4 new engagements are partners, not yet "customers" as defined by scaled deployment. He explained the long lead time from tape-out to production (1.5 years for first chip, 6-12 months to scale). He stated there's no reason these new partners wouldn't eventually create similar demand to the first three, but later.

    “there's no reason why these 4 guys would not create a demand in the range of what we're seeing with the first 3 guys but probably later.”

    asked by Benjamin Reitzes · answered by Hock Tan

    2 min read5 chapters

    Detailed Narrative

    01

    AI Custom Silicon Expansion

    Broadcom is expanding its custom AI accelerator engagements, now working with four additional hyperscalers beyond the initial three. These new partners are developing their own customized XPUs, with the first tape-outs expected this year. While these new engagements are not yet included in the previously estimated $60-$90 billion serviceable addressable market for 2027, they represent significant future growth potential as hyperscalers race towards 1 million XPU clusters.

    02

    Next-Gen AI Hardware Innovation

    The company is pushing the technological envelope in AI hardware, tapping out the industry's first 2-nanometer AI XPU with 3.5D packaging, aiming for a 10,000 teraflops XPU. Concurrently, Broadcom has tapped out its next-generation 100-terabit Tomahawk 6 switch, featuring 200G serdes and 1.6 terabit bandwidth, with samples expected within months to enable AI clusters to scale up to 1 million XPUs on Ethernet.

    03

    VMware Integration and Private AI Foundation

    The infrastructure software segment saw substantial growth, driven by the conversion of perpetual licenses to subscriptions (over 60% complete) and upselling customers to the full-stack VCF for data center virtualization. Approximately 70% of the largest 10,000 customers have adopted VCF. Broadcom, in collaboration with NVIDIA, has also launched the VMware Private AI Foundation, which virtualizes GPUs on a common platform for on-prem AI workloads, already securing 39 enterprise customers.

    04

    Non-AI Semiconductor Trends

    The non-AI semiconductor business experienced a slow recovery in Q1, with revenue down 9% sequentially. While broadband showed a double-digit sequential recovery and server storage is expected to improve in Q2, enterprise networking remains flat due to channel inventory. Industrial resales are declining. Overall, non-AI semiconductor revenue is expected to be flattish sequentially in Q2, despite growing bookings.

    05

    Strategic R&D Investment

    Broadcom is significantly increasing its R&D investments, particularly in leading-edge AI semiconductors. This focus is on developing advanced accelerators and networking solutions to meet the evolving demands of hyperscale customers for larger and more efficient AI clusters, aligning with their roadmaps for future XPU deployments. The R&D spend was $1.4 billion in Q1 and is expected to increase in Q2.

    AI-generated summary of the company’s earnings call. Not investment advice.