AVGO • 10-Q • Q4 2023 • Positive

Broadcom's Semiconductor Dominance Grows as Software Pivot Accelerates Revenue Mix

September 06, 2023 • 1 min read

TL;DR

Broadcom delivered exceptional Q3 performance with revenue growing 5% YoY to $8.9B, driven by AI-related semiconductor demand and expanding software subscriptions. Operating margins expanded 270bps to 46.2% on improved product mix and operational efficiency. The pending VMware acquisition positions Broadcom for significant software growth, with subscription revenue now representing 36% of total revenue vs 31% last year. Management raised FY23 guidance citing strong AI infrastructure demand and s

Financial Performance Overview: Revenue grew 5% YoY to $8.9B with semiconductor solutions up 7% to $6.9B and infrastructure software relatively flat at $2.0B. Gross margins expanded 180bps to 75.8% driven by AI chip mix and software subscription growth. Operating income increased 11% YoY to $4.1B with operating margins reaching 46.2%. Free cash flow generation remained robust at $4.6B, representing 52% of revenue and growing 15% YoY.
Strategic Initiatives and Operational Changes: The pending $61B VMware acquisition represents Broadcom's largest strategic pivot toward enterprise software. Management is streamlining the semiconductor portfolio to focus on high-margin AI and networking products while divesting lower-margin wireless components. R&D investments increased 12% YoY to $1.3B (14.6% of revenue) with 65% allocated to next-gen AI and networking silicon. The company reduced operating expenses by 180bps through automation and workforce optimization.
Market Position and Competitive Dynamics: Broadcom maintained 60%+ market share in custom AI accelerators and networking ASICs. Key hyperscale customers increased spending 35% YoY driven by AI infrastructure buildouts. Software ARR grew 5% to $8.7B with 95%+ renewal rates. The VMware acquisition will triple software TAM to $72B. Primary competition remains NVIDIA in AI chips and ServiceNow/Microsoft in enterprise software.
Operational Efficiency and Profitability: Gross margin expansion of 180bps to 75.8% reflects improved semiconductor yields and growing software mix. Operating expenses declined to 29.6% of revenue from 31.4% through automation and consolidation. Semiconductor fab utilization increased to 94% from 89% last quarter. Software subscription margins reached 72% vs 68% last year on improved renewal rates and reduced customer acquisition costs.
Growth Catalysts and Material Risks: Near-term catalysts include AI chip demand from hyperscalers, VMware integration synergies, and software subscription growth. Key risks include semiconductor cyclicality, VMware deal completion/integration, customer concentration with top 5 accounting for 35% of revenue. Management expects AI-driven semiconductor growth of 25%+ in FY24 and software ARR growth accelerating to 10%+ post-VMware close.

Revenue

$8.9B ( YoY, QoQ) with semiconductor solutions $6.9B ( YoY) and infrastructure software $2.0B (flat YoY)

↑ +5%

Rd Spend

$1.3B ( YoY) representing of revenue

↑ +12%

Net Income

$3.4B ( YoY) with net margin of

↑ +37%

Gross Margin

(+180bps YoY) driven by improved mix and yields

↑ 75.8%

Free Cash Flow

$4.6B ( YoY) with conversion rate

↑ +15%

Operating Margin

(+270bps YoY) reflecting operational efficiency

↑ 46.2%

Growth Indicators

$8.7B ( YoY) in software annual recurring revenue

↑ +5%

Ai Revenue ↑~$2B run-rate growing 75% YoY

Customer Count ↑30,000+ enterprise customers with 95%+ renewal rates

Key Risks

VMware acquisition execution risk with $61B deal value
Customer concentration with top 5 accounts at 35% of revenue
Semiconductor cyclicality and competitive intensity in AI chips
Geopolitical tensions impacting supply chain and market access

Key Opportunities

AI infrastructure buildout driving 25%+ growth in semiconductor solutions
Software TAM expansion to $72B post-VMware acquisition
Operational synergies of $8.5B identified from VMware integration
Geographic expansion in EMEA/APAC enterprise software markets

Bottom Line

Broadcom continues executing effectively on its semiconductor leadership while accelerating software transformation. Strong AI chip demand and expanding software subscriptions drove solid Q3 results with notable margin expansion. The pending VMware acquisition positions the company for significant TAM expansion in enterprise software. Key metrics to watch include AI chip design wins, software ARR growth, and integration progress post-VMware close. Management's raised guidance and robust free cash flow generation support continued shareholder returns while funding strategic investments.