Broadcom Inc. held a conference call to discuss their third quarter fiscal year 2023 financial results. Ji Yoo, Head of Investor Relations, was joined by Hock Tan, President and CEO; Kirsten Spears, Chief Financial Officer; and Charlie Kawwas, President, Semiconductor Solutions Group. The conference call was webcast live and an audio replay was available. The press release and financial tables are available on Broadcom's website. Hock Tan reported that their consolidated net revenue was $8.9 billion, up 5% year-on-year.

In Q3, semiconductor revenue was approximately flat year-on-year, excluding AI revenue. Networking revenue was up 20% year-on-year to $2.8 billion, driven by switches and routers and custom silicon AI engines. AI investments are driving the continued strength in hyperscale spending.

Broadcom is a founding member of the Ultra Ethernet Consortium and is working to drive Ethernet for scaling deployments in large language model networks. They have already received substantial orders for their next-generation Tomahawk 5 switch and Jericho3-AI routers and will be shipping these products to hyperscale customers over the next six months. Additionally, they are in the process of developing the Tomahawk 6 switch which will have 200G SerDes generating throughput capacity of over 100 terabit per second. Broadcom is investing in fundamental technologies to enable hyperscale customers with the best hardware capabilities to scale generative AI, such as 200G SerDes, high-bandwidth memory access, and chip-to-chip connectivity.

In Q4, Intel expects its networking revenue to increase by over 20% year-on-year, driven by generative AI deployments. Wireless revenue is expected to grow by over 20% sequentially and down low-single digit percent year-on-year. Server storage connectivity revenue is expected to be down mid-teens percent year-on-year, and broadband revenue is expected to decline high-single digits year-on-year. Industrial resales are expected to improve with an increase of low-single digit percentage year-on-year.

In Q3, semiconductor solutions revenue was up 5% year-on-year and expected to be flat sequentially. Infrastructure software revenue was $1.9 billion, up 5% year-on-year, and ARR was $5.3 billion. For Q4, infrastructure software segment revenue is expected to be up mid-single digit year-on-year and consolidated revenue of $9.27 billion, up 4% year-on-year. The pending acquisition of VMware has received legal merger clearance in multiple countries and the Hart-Scott-Rodino pre-merger waiting periods have expired, with the remaining required regulatory approvals expected to be received before October 30th.

Broadcom reported an overall revenue of $8.9 billion for the quarter, up 5% from a year ago. Gross margins were 75.1% of revenue in the quarter. Operating expenses were $1.1 billion, down 8% year-on-year. The semiconductor solutions segment reported revenue of $6.9 billion, up 5% year-on-year, and gross margins of 70%. The infrastructure software segment reported revenue of $1.9 billion, up year-on-year, and gross margins of 92%. Operating expenses for both segments were down year-on-year. Operating margin for the semiconductor solutions segment was 59%, and operating profit for the infrastructure software segment grew 13% year-on-year.

In the third quarter, Broadcom had $4.6 billion in free cash flow, and spent $122 million on capital expenditures. Inventory was $1.8 billion, and days sales outstanding were 30 days. They had $12.1 billion of cash and $39.3 billion of gross debt, with a weighted average coupon rate of 3.61% and years to maturity of 9.7 years. Broadcom paid $1.9 billion of cash dividends, repurchased 1.7 billion of common stock, and eliminated 460 million of common stock due to taxes. The non-GAAP diluted share count in Q3 was $436 million, and they expect it to be $435 million in Q4. The repurchase program was suspended in early August due to the VMware transaction.

Hock Tan was asked about the company's large AI ASIC compute offload contract and the visibility to hold onto it for the next several years. He declined to discuss specifics, but broadly stated that the company has long-term, multiyear, strategic engagements with large North American OEM customers for multiple leading-edge technologies. These engagements are very broad and deep.

Hock Tan is asked by Harlan Sur if the team can sustain a stable $6 billion revenue profile ex-AI over the next few quarters. Hock Tan responds that it is beyond his pay grade, but he does point out that they have promised a soft landing in late fiscal '22 and likely '23. Ross Seymore then asks Hock Tan for more color on the AI demand that was growing significantly in the fourth quarter, and Hock Tan responds that AI engines are deployed in large clusters and that networking and compute offload go hand-in-hand.

Hock Tan indicates that AI revenue has been increasing on an accelerating trajectory due to urgent deployment and strong demand. He also expects the trend to continue through the end of 2023 and into 2024. He does not provide any guidance on the percentage of semiconductor revenue that AI will represent in the future.

Hock Tan explains that the products for generative AI, such as networking and customer engines, require long lead times and cutting-edge silicon products. As a result, there are supply chain constraints for these products, and Broadcom is trying to work within the constraints.

Hock Tan addresses Karl Ackerman's question about headwinds to gross margins this year due to elevated logistics and substrate costs, and explains that the answer is more holistic. He states that the company has multiple products and each product runs on its own cadence, with the revenue averaging around $6 billion per quarter. Tan adds that the company's portfolio is broad and diversified, and that they do not have any one product in any one end market.

The main factor that drives gross margin for the company is the product mix and the pace of adoption of next-generation products. During 2021 and 2022, the semiconductor industry experienced an up cycle and a shortage of supply to demand, leading to an accelerated adoption of products and an increase in gross margin across the board.

Hock Tan is asked to predict when the upcycle will happen. He explains that the company has seen a long-term expansion of gross margin on a consolidated basis for semiconductors that ranges from 50 to 150 basis points on an annual basis, but there have also been years where the gross margin expansion was much less. He cautions that it is difficult to predict when the upcycle will happen, but that it will work itself out over time. He also clarifies that China approval is not needed for VMware.

Hock Tan is asked about Ethernet's potential to take hold in the East-West traffic layer of AI networks. Tan remarks that InfiniBand has been the choice for years in high-performance computing, but he believes Ethernet could start to take hold with the introduction of Tomahawk5 and Jericho3.

Hock Tan clarifies that Broadcom is not a GPU company and does not do much compute, other than offload computing. He explains that there is one large customer for their AI engines, and that the recent surge in Gen AI spending has widened the aperture of their appetite to take on big projects for other large customers. Tan also notes that they are focused on merchant switching and routing products, rather than custom products for customers.

Broadcom has seen surprising success in two areas: their Artificial Intelligence (AI) capabilities, and the resilience of their core business, especially in the storage and broadband sectors. This is in contrast to their competitors, who have seen a downturn in their businesses.

Hock Tan emphasizes that they only ship to end demand of customers, and that the numbers in broadband and service storage may not seem as flat when taken out of the context of the whole portfolio of products. He explains that this is due to timing of shipments, and that in each quarter there may be differences in the numbers. He calls this a soft landing, and that they are currently on a plateau.

Hock Tan encourages listeners to pay attention to the integrated optics solutions his company is offering, which offer significant improvements in performance and size compared to existing solutions. He mentions that his company has not been in this market before, but he has personally invested in it and suggests that others should do the same.

In this paragraph, the speaker discusses the advantages of silicon photonics, which is being utilized in their next-generation Tomohawk5 switch. They explain that this integrated solution is more reliable than the conventional approach, and that it offers a significant power reduction of 30-40%. They are currently in the process of proving the efficiency of the switch to hyperscale customers, and hope that once they do, it will become more widely adopted.

Broadcom will be attending the Goldman Sachs Communacopia and Technology Conference on September 7th and plans to report its earnings for the fourth quarter of fiscal '23 on December 7th, 2023. A webcast of the earnings conference call will follow at 2:00 P.M. Pacific. The call concluded with the operator thanking all participants.

This summary was generated with AI and may contain some inaccuracies.