Broadcom’s fiscal Q2 2024 financial results reveal substantial growth driven by the integration of VMware and increasing AI revenue. The company reported consolidated net revenue of $12.5 billion, a 43% year-on-year increase, largely due to VMware’s full-quarter contribution. Excluding VMware, revenue grew 12% year-on-year, bolstered by an 80% increase in AI revenue. The Infrastructure Software segment saw a 175% year-on-year revenue increase, primarily from VMware, and the company has streamlined VMware’s product offerings and adopted a subscription licensing model.

Networking revenue rose by 44% year-on-year, driven by strong demand for AI networking solutions. However, the wireless, server storage connectivity, and broadband segments showed mixed performance, with varying degrees of decline and expected recovery. Broadcom’s Q2 operating income was $7.1 billion, with a 57% operating marginThe operating margin is a critical financial metric that measures a company's ability to generate profit through its core operations. It provides valuable insights into a company's... More. The company reported $4.4 billion in free cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More and plans to continue debt repayment and capital allocation strategies, including a 10-for-1 stock split. Broadcom has raised its fiscal 2024 revenue guidance to $51 billion, highlighting strong AI revenue growth and ongoing integration of VMware.

Consolidated Revenue and Growth

In fiscal Q2 2024, Broadcom reported consolidated net revenue of $12.5 billion, marking a 43% year-on-year increase, largely attributed to a full quarter contribution from VMware. Excluding VMware, Broadcom’s consolidated revenue still exhibited a robust 12% year-on-year growth, primarily driven by an 80% year-on-year increase in AI revenue to $3.1 billion, which helped offset the ongoing cyclical weakness in semiconductor revenue from enterprises and telecommunications companies.

Infrastructure Software Segment

VMware Integration

The Infrastructure Software segment recorded a remarkable revenue increase of 175% year-on-year, reaching $5.3 billion. This growth included $2.7 billion from VMware, up from $2.1 billion in the previous quarter. Broadcom has made substantial progress in integrating VMware, modernizing product SKUs from over 8,000 to just four core offerings, and simplifying the go-to-market strategy, thereby reducing channel conflicts. The transition to a subscription licensing model for VMware products is also underway, with approximately 3,000 of the largest 10,000 customers signed up for multi-year contracts, normalizing to an annualized booking value (ABV).

The infrastructure software market is projected to experience strong growth in the coming years:

Infrastructure Software Market Size and Growth Forecast

• The global infrastructure software market size was valued at around $238.51 billion in 2023.[1]
• It is expected to grow to $249.79 billion in 2024, at a compound annual growth rateThe world of finance is replete with complex concepts, but one that stands as a cornerstone for investors seeking to gauge returns is the Compound Annual Growth Rate (CAGR). Often ... More (CAGR) of 4.7%.[1]
• Over the next few years, the market is forecast to reach $316.91 billion by 2028, growing at a CAGR of 6.1% during 2024-2028.[1]
• For the United States market specifically, revenue in the system infrastructure software segment is projected to reach $74.88 billion in 2024.[5]

Key Growth Drivers

• Legacy system modernization and increasing remote work trends are driving demand for infrastructure software solutions.[1]
• Rising cybersecurity concerns, need for automation/orchestration, and regulatory compliance are other key growth factors.[1][2]
• Expansion of edge computing, focus on zero trust security models, containerization, microservices, and emphasis on DevOps practices will further fuel market growth.[1][2]
• Adoption of technologies like hybrid/multi-cloud management, container orchestration, user-centric design, digital experience monitoring, and serverless computing will be major trends.[1][2]
• The proliferation of smart buildings, data centers, and the rollout of 5G connectivity are expected to create robust opportunities.[2]

So in summary, driven by digital transformation initiatives, cloud adoption, security needs, and emerging technologies, the infrastructure software market is poised for strong growth over the next few years, with projected CAGRs ranging from 4.7% to 8.5% depending on the forecast period and region.[1][2][3][5]

Annualized Booking Value

For VMware products, ABV accelerated from $1.2 billion in Q1 to $1.9 billion in Q2. Broadcom’s consolidated software portfolio saw ABV grow from $1.9 billion to $2.8 billion over the same period. Additionally, the integration of SG&A across the platform and the elimination of redundant functions have resulted in significant cost savings. Broadcom has incurred about $2 billion in restructuring and integration costs year-to-date, reducing VMware’s spending run rate from $2.3 billion per quarter pre-acquisition to $1.6 billion in Q2. This rate is expected to decline further to $1.3 billion by Q4, stabilizing at $1.2 billion post-integration.

Operating Margins and Revenue Projections

VMware’s revenue is projected to accelerate towards a $4 billion per quarter run rate, with operating margins expected to converge with Broadcom’s classic software margins by fiscal 2025.

Semiconductor Segment

Networking

Networking revenue for Q2 2024 was $3.8 billion, a 44% year-on-year increase, accounting for 53% of semiconductor revenue. This growth was driven by strong demand from hyperscalers for AI networking and custom accelerators. Broadcom has doubled the number of switches sold year-on-year, particularly the Tomahawk 5 and Jericho 3, in collaboration with partners like Arista Networks, Dell, Juniper, and Super Micro. The company also saw a doubling of shipments for PCI Express switches and NICs in the AI backend fabric.

Optical Interconnects

Broadcom is leading the transition of optical interconnects in AI data centers to 800 gigabit bandwidth, driving growth for their DSPs, optical lasers, and pin diodes. The development of next-generation switches, DSP, and optics is set to drive the ecosystem towards 1.6 terabit connectivity, scaling larger AI-accelerated clusters. Broadcom’s Ethernet solutions are used in seven of the largest eight AI clusters in deployment today, with expectations for all mega-scale GPU deployments to be on Ethernet next year. Networking revenue is projected to grow 40% year-on-year, up from the prior guidance of over 35% growth.

Wireless

Q2 wireless revenue was $1.6 billion, up 2% year-on-year but seasonally down 19% quarter-on-quarter, representing 22% of semiconductor revenue. Broadcom expects wireless revenue to remain flat year-on-year for fiscal 2024, consistent with their strategic engagement with their North American customer.

Server Storage Connectivity

Server storage connectivity revenue for Q2 was $824 million, or 11% of semiconductor revenue, down 27% year-on-year. However, Broadcom anticipates a modest recovery in the second half of the year, forecasting a fiscal 2024 revenue decline of around 20% year-on-year.

Broadband

Broadband revenue declined 39% year-on-year to $730 million, representing 10% of semiconductor revenue. Broadcom expects broadband to bottom out in the second half of the year, with recovery anticipated in 2025. The fiscal 2024 broadband revenue outlook has been revised to a high 30s year-on-year decline.

Industrial Resale

Q2 industrial resale revenue was $234 million, down 10% year-on-year. For fiscal 2024, Broadcom expects industrial resales to decline by double digits year-on-year, compared to the prior guidance of a high single-digit decline.

Financial Performance

Operating Income and Margins

Q2 operating income was $7.1 billion, up 32% year-on-year, with an operating margin of 57%. Excluding transition costs, operating profit was $7.4 billion, up 36% year-on-year, with an operating margin of 59%. Adjusted EBITDAUnderstanding Adjusted EBITDA: A Comprehensive Guide In the world of finance and business valuation, financial metrics play a crucial role in assessing a company's health, performa... More was $7.4 billion, or 60% of revenue, excluding $149 million of depreciation.

Cash Flow and Debt Management

Free cash flow for the quarter was $4.4 billion, representing 36% of revenue. Excluding restructuring and integration costs of $830 million, free cash flow was $5.3 billion, up 18% year-on-year, representing 42% of revenue. Broadcom ended the quarter with $9.8 billion in cash and $74 billion in gross debt. The company repaid $2 billion of floating rate debt in the quarter and plans to maintain this quarterly repayment throughout fiscal 2024.

Capital Allocation and Stock Split

Broadcom paid $2.4 billion in cash dividends during the quarter, based on a quarterly common stock cash dividend of $5.25 per share. Additionally, Broadcom announced a 10-for-1 forward stock split to make ownership of Broadcom stock more accessible. Stockholders of record after the close of market on July 11, 2024, will receive an additional nine shares of common stock, with trading on a split-adjusted basis commencing on July 15, 2024.

Insights

1. Broadcom’s AI revenue surged by 80% year-on-year.
2. Integration of VMware significantly boosted Infrastructure Software segment revenue.
3. Networking revenue driven by hyperscaler demand for AI solutions.
4. Mixed performance in wireless, server storage connectivity, and broadband segments.
5. Broadcom announced a 10-for-1 forward stock split to increase stock accessibility.

The Essence (80/20)The Origins and Evolution of the 80/20 Principle The Discovery by Vilfredo Pareto In 1897, Italian economist Vilfredo Pareto uncovered a striking pattern in his study of wealth and... More

Core Topics:

1. AI Revenue Growth: AI revenue increased by 80%, reaching $3.1 billion, highlighting the growing importance of AI in Broadcom’s portfolio.
2. VMware Integration: Successful integration of VMware contributed significantly to revenue and operational efficiency, with streamlined product offerings and a shift to subscription licensing.
3. Segment Performance:
   • Networking: Revenue grew by 44%, driven by AI networking demand.
   • Wireless and Server Storage Connectivity: Mixed results with some declines but potential recovery in the second half.
   • Broadband: Notable decline with recovery expected in 2025.

The Action Plan – What Broadcom Should Do

1. Focus on AI: Continue investing in AI technologies to maintain and enhance revenue growth in this segment.
2. Optimize VMware Integration: Complete the transition to a subscription licensing model and further streamline product offerings.
3. Segment-Specific Strategies:
   • Networking: Expand AI networking capabilities to meet increasing hyperscaler demands.
   • Wireless and Server Storage Connectivity: Implement targeted strategies to stabilize and boost these segments.
   • Broadband: Prepare for a gradual recovery by investing in next-gen broadband technologies.

Blind Spots

Potential Overlooked Detail: While focusing on AI and VMware integration, Broadcom should not underestimate the need to innovate and stabilize declining segments like broadband and server storage connectivity to ensure balanced overall growth.

Supply Chain Vulnerabilities: As Broadcom rapidly scales its AI and networking solutions, potential vulnerabilities in the supply chain for critical components could pose a risk. Ensuring a robust and diversified supply chain is essential to mitigate disruptions and maintain growth momentum.

Broadcom (AVGO) Technical Analysis

Price Movement and Moving Averages:

• The stock price has been trending sideways with some volatility. Recently, there is an upward move breaking through previous highs.
• The 50-day Moving Average (blue line) is at $1,364.13, and the 200-day Moving Average (red line) is at $1,142.75. The current price is above both moving averages, indicating a bullish trend.

Volume:

• Volume is relatively steady with occasional spikes. The recent upward movement is accompanied by an increase in volume, suggesting strong buying interest.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI):

• RSI is at 67.95, indicating the stock is approaching overbought territory but not quite there yet. This suggests continued upward momentum with some caution.

On-Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV):

• OBV shows a generally upward trend, confirming that volume is supporting the price increase. This is a positive sign for the bullish trend.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More:

• The Stochastic RSI is at 1.000, indicating the stock is overbought. This could mean a potential short-term pullback or consolidation period is likely.

Average Directional IndexThe Average Directional Index (ADX) stands as a cornerstone indicator in the toolkit of technical traders, offering insights into the strength of market trends. Developed by Welles... More (ADX):

• ADX is at 24.94, below 25, suggesting that the current trend is not particularly strong. This implies that while the price is increasing, the trend strength is moderate.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More:

• The Chaikin Oscillator is at 3,169,201, showing a strong positive reading, which suggests accumulation and strong buying pressure.

Analysis:

• 3-Month Horizon: Given the bullish signals from the moving averages and OBV, a “Buy” recommendation is appropriate, though with caution due to the overbought Stochastic RSI.
• 6-Month Horizon: The stock looks strong with its upward trend and volume support, hence a “Buy” is recommended.
• 12-Month Horizon: Provided the long-term bullish indicators and strong fundamentals, the stock could be a good investment, so a “Buy” is recommended.

However, it is important to keep an eye on potential short-term pullbacks and ensure stop-loss measures are in place due to the overbought conditions indicated by Stochastic RSI.

Remember, past performance is not an indication of future results. Always conduct your own research and consider consulting with a financial advisor before making any investment decisions. 🧡

Future Outlook and Guidance

Broadcom has raised its fiscal 2024 revenue guidance to $51 billion, with adjusted EBITDA expected to be 61%. The company anticipates stronger AI revenue, recovery in non-AI semiconductor revenue, and continued progress in integrating VMware. This strategic positioning underscores Broadcom’s commitment to delivering sustained growth and value to its shareholders.

In conclusion, Broadcom’s fiscal Q2 2024 results highlight the company’s strong performance, driven by the successful integration of VMware, robust AI revenue growth, and strategic advancements in the semiconductor and software segments. With a positive outlook for the remainder of the fiscal year, Broadcom is well-positioned for continued success and innovation in the technology industry.

Frequently Asked Questions – Broadcom Q2 Fiscal Year 2024 Financial Results

Citations:
[1] https://www.thebusinessresearchcompany.com/report/infrastructure-software-global-market-report
[2] https://www.grandviewresearch.com/industry-analysis/system-infrastructure-software-market-report
[3] https://www.kbvresearch.com/system-infrastructure-software-market/
[4] https://omdia.tech.informa.com/om021109/software-infrastructure-market-forecast-2020-25-report
[5] https://www.statista.com/outlook/tmo/software/system-infrastructure-software/united-states