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Welcome to the Friday edition of How They Make Money.
Over 120,000 subscribers turn to us for business and investment insights.
In case you missed it:
For the past few weeks, we've been working on something special to help investors, analysts, and market enthusiasts like you approach earnings season with confidence and get market analysis in real time.
We can't wait to share it with you. Stay tuned for an exciting announcement next week. You’re not going to want to miss this!
Broadcom (AVGO) is riding high on the AI wave, with its stock nearly doubling in the past year, propelling it to become the 11th largest company globally by market cap.
The company's recent earnings report revealed a 12% organic revenue growth, excluding the impact of its recent VMware acquisition. Fueling this performance is a staggering 280% surge in AI revenue, reaching $3.1 billion. Broadcom's success story is a testament to its strategic acquisitions and relentless focus on cutting-edge technology.
Let’s dive deeper into this tech giant.
Today at a glance:
Broadcom: A brief history.
Q2 FY24 Earnings.
Key quotes from the earnings call.
What to watch moving forward.
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1. Broadcom: A brief history
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2009: Avago Technologies, formed initially from Hewlett-Packard's Semiconductor Products Group, goes public and embarks on a series of strategic acquisitions
2013: Acquisition of LSI Corporation, a leading chipmaker, for $6.6 billion.
2015: In a transformative merger valued at $37 billion, Avago Technologies acquires Broadcom Corporation, a major player in wired infrastructure and wireless communication chips. The combined company adopts the Broadcom name, creating a semiconductor powerhouse with a diversified product portfolio.
2016: Acquisition of Brocade Communications Systems, a major player in storage networking, for $5.5 billion.
2017: Attempted acquisition of Qualcomm, a giant in the mobile chip industry, for $130 billion (deal blocked).
2019: Acquisition of Symantec's enterprise security business for $10.7 billion, marking a diversification into cybersecurity.
2023: Acquisition of VMware, a leader in cloud computing and virtualization, for $61 billion, signaling a significant push into the software market.
Today: Broadcom has become a global semiconductor and infrastructure software giant with a market cap of over $700 billion.
Some of these deals rank among the largest tech acquisitions in history, as illustrated in the chart below. This highlights Broadcom's aggressive growth strategy and commitment to expanding its reach.
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Broadcom now operates across two primary segments:
Semiconductor Solutions: This segment covers a wide range of products, including chips for networking, server storage, broadband, wireless communication, and industrial applications. As the visual below illustrates, this has traditionally been Broadcom's core strength.
Infrastructure Software: Historically a smaller part of Broadcom's business, this segment experienced an explosive leap with the acquisition of VMware. The acquisition was completed in November 2023, impacting Q1 FY24 (ending in January 2024). A leader in cloud computing and virtualization, VMware brought its software solutions into Broadcom's portfolio, propelling the segment's revenue to $5.3 billion in Q2 FY24.
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VMware: A Game-Changer for Broadcom
The VMware acquisition diversifies the company's revenue streams and positions it as a major player in the infrastructure software market. The integration of VMware's offerings, which cater to enterprise cloud infrastructure needs, has been swift and successful.
As the visual above illustrates, VMware's contribution is nearly a quarter of Broadcom's overall revenue. This diversification into software has boosted growth and offers the potential for more predictable, recurring revenue through subscription-based models.
2. Broadcom Q2 FY24
Income statement:
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Revenue breakdown:
Revenue grew 43% Y/Y to $12.5 billion ($480 million beat).
Semiconductor solutions grew 6% to $7.2 billion: Driven by strong demand for AI-related products.
Infrastructure software grew 175% Y/Y to $5.3 billion: Primarily thanks to the VMware acquisition.
Gross margin was 62% (-8pp Y/Y).
Operating margin was 24% (-22pp Y/Y).
Adjusted EBITDA margin was 59% (-6pp Y/Y).
Non-GAAP EPS: $10.96 ($0.12 beat)
Cash flow:
Operating cash flow was $4.6 billion (37% margin).
Free cash flow was $4.4 million (36% margin).
Balance sheet:
Cash, cash equivalent, and marketable securities: $10 billion.
Long-term debt: $72 billion.
FY24 Guidance (including the impact from VMware):
Revenue to grow 42% to $51 billion ($1 billion raise).
Adjusted EBITDA margin of ~61% (vs. ~60% previously).
So what to make of all this?
Broadcom had a stellar quarter with significant revenue growth, primarily driven by the surging demand for AI-related products and the successful integration of VMware.
VMware acquisition: The integration of VMware is significantly impacting Broadcom's top line. Excluding VMWare, revenue increased 12% Y/Y.
AI was a significant growth driver: $3.1 billion in revenue from AI products means roughly 26% of overall revenue. Based on the 280% growth discussed by management during the earning call, AI alone contributed to a $2.2 billion revenue increase year-over-year, offsetting cyclical weakness in semiconductor revenue from enterprises and telcos.
One-time items hurt margins: The margins were down significantly year-over-year, primarily due to expenses related to the VMware integration (amortization of intangible assets).
Not a clean balance sheet: With its history of jumbo acquisitions, Broadcom doesn’t look like the rest of big tech. The company has a gigantic net debt position of $62 billion.
Strong cash generation: The company generated $18 billion in free cash flow in the past 12 months, demonstrating its ability to handle its financial obligations and invest in future growth opportunities.
Stock split: An upcoming 10-for-1 stock split (July 15) aims to make the stock more accessible to a broader range of investors. While a stock split doesn't change a company's fundamental value, it can temporarily boost investor sentiment and the share price.
3. Key quotes from the earnings call
CEO Hock Tan on the VMware integration:
"The integration of VMware is going very well. Since we acquired VMware, we have modernized the product SKUs from over 8,000 disparate SKUs to four core product offerings and simplified the go-to-market flow, eliminating a huge amount of channel conflicts."
Broadcom's streamlined approach to VMware's product offerings and sales channels is expected to accelerate growth in the infrastructure software segment.
On AI and Networking:
"We expect the strength in AI to continue, and because of that, we now expect networking revenue to grow 40% year-on-year compared to our prior guidance of over 35% growth."
AI is a significant catalyst for Broadcom's networking growth, increasing confidence in the segment's future.
On Custom AI Accelerators:
"We have just been awarded the next generation custom AI accelerators for these hyperscale customers of ours."
This win further solidifies Broadcom's leadership in the AI accelerator market and demonstrates the company's ability to secure large-scale contracts.
On Broadcom's differentiated approach:
"There is only one Broadcom, period."
This confident statement emphasizes Broadcom's unique position in the market and its capacity to compete with new entrants, driven by a combination of technological innovation, strategic acquisitions, and effective execution.
Charlie Kawwas on Broadcom's Networking Portfolio:
"The combination of the portfolio plus the stack really differentiates the solution that we can offer to these hyperscalers. And if they decide to build their own NICs, their own accelerators are custom or use standard products, whether it is from Broadcom or other, that platform, that portfolio of infrastructure switching gives you that full flexibility."
Broadcom's comprehensive networking solutions and open software stack provide hyperscalers with the flexibility to customize their infrastructure according to their specific needs
4. What to watch looking forward
Continued AI Momentum: Broadcom's AI-related products are driving significant growth. Investors will closely watch if this momentum can be sustained as competition intensifies.
VMware Integration and Growth: The successful integration of VMware is crucial for Broadcom's continued success. Can the company maintain momentum for its infrastructure software segment?
Next-Generation Products: Broadcom is known for its regular cadence of product introductions. The most recent launches of Tomahawk and Jericho switching products will be vital to maintaining its leadership in networking.
Global Economic Conditions: The broader macroeconomic environment, including supply chain disruptions and inflation, could affect demand for Broadcom's products.
Regulatory Scrutiny: Broadcom's size and dominance in specific markets is attracting regulatory attention. Any potential antitrust concerns could impact the company's future acquisitions and growth strategies. The European Commission is conducting an investigation into the VMware acquisition.
With strong AI momentum and a diversified portfolio, Broadcom appears well-positioned for continued growth. But regulators may not see it this way
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