The News: Broadcom reported Q2 2024 earnings earlier this week and these numbers represented the first time that VMware was included in the numbers. Read the announcement here.

By the Numbers:

Revenue: $12.487 billion, up 43% year-over-year
GAAP Net Income: $2.121 billion
Non-GAAP Net Income: $5.394 billion
Free Cash Flow: $4.448 billion, 36% of revenue

Broadcom Inc. Reports Strong Q2 2024 Earnings with AI and VMware Boost

Analyst Take: Broadcom is strategically positioning itself as a comprehensive technology leader, with a robust portfolio spanning semiconductors, mainframe software, and now VMware. This integration highlights Broadcom is looking to further its pivot from being solely a semiconductor business with the recent acquisition of VMware, building on previous moves such as CA and Symantec.

Broadcom Inc. reported a 43% year-over-year revenue increase to $12.487 billion for Q2 2024, driven by strong AI product demand and the integration of VMware. GAAP net income was $2.121 billion, with non-GAAP net income at $5.394 billion. VMware’s contribution was $2.7 billion, boosting the infrastructure software segment by 175%. AI product revenue surged 280% to $3.1 billion due to hyperscalers’ demand.

Broadcom’s focus on AI infrastructure and VMware integration has solidified its market position. The shift to a subscription model for VMware products and operational efficiencies have enhanced customer adoption. Broadcom projects annual revenue of approximately $51 billion with an adjusted EBITDA margin of 61%, supported by ongoing AI demand and VMware synergies. The upcoming ten-for-one stock split in July 2024 is expected to increase stock accessibility and liquidity.

First Post-VMware Quarter

Market chatter around Broadcom’s acquisition of VMware has been abuzz with speculation around product rationalization and its impact on customers. Industry insiders are keenly observing how Broadcom is streamlining VMware’s extensive product portfolio to align with its existing offerings. Additionally, there is significant anticipation regarding the go-to-market (GTM) strategy alignment, with analysts keenly watching a strategic overhaul to leverage synergies and enhance market penetration. With all this going on Broadcom was able

This quarter marks the first full quarter with VMware’s financials included in Broadcom’s results. VMware contributed significantly to the revenue, particularly within the infrastructure software segment. The revenue from this segment jumped to $5.3 billion, a 175% year-over-year increase, with VMware contributing $2.7 billion. This integration has streamlined Broadcom’s product offerings, reducing VMware’s product SKUs from over 8,000 to four core products, and simplified the go-to-market strategy by eliminating channel conflicts.

VMware’s annualized booking value (ABV) also saw a substantial increase, from $1.2 billion in Q1 to $1.9 billion in Q2, reflecting growing customer adoption of VMware products. This growth is expected to accelerate, with VMware revenue projected to reach a $4 billion per quarter run rate.

AI as a Significant Growth Driver

AI demand has emerged as a critical tailwind for Broadcom. Revenue from AI products reached a record $3.1 billion during the quarter, representing a 280% year-over-year increase. This surge is attributed to strong demand from hyperscalers for AI networking and custom accelerators. Broadcom’s networking revenue, driven by AI, grew 44% year-over-year to $3.8 billion, highlighting the company’s dominant position in the AI data center market.

Broadcom’s AI strategy is centered around its leading Ethernet solutions, which are used by seven of the largest eight AI clusters in deployment. The company is developing next-generation switches, DSPs, and optics to drive the ecosystem towards higher bandwidth connectivity, which is essential for scaling AI clusters.

Strategic Considerations

Broadcom’s strategic focus on AI and software integration sets it apart in the technology sector. The company’s ability to deliver comprehensive solutions that cater to the evolving needs of data centers and enterprises positions it for sustained growth. Broadcom’s investments in AI infrastructure and custom solutions will likely yield significant returns as AI continues to transform various industries.

Additionally, the successful integration of VMware not only diversifies Broadcom’s revenue streams but also enhances its value proposition in the enterprise software market. The company’s proactive approach to simplifying VMware’s offerings and transitioning to a subscription model aligns with current market trends, ensuring long-term customer retention and recurring revenue.

Looking Ahead

Broadcom’s Q2 2024 results underscore its strategic execution and strong market positioning. The substantial contributions from AI and VMware highlight the company’s ability to adapt and thrive in a rapidly changing technological landscape. With a solid financial foundation and a clear strategic vision, Broadcom is well-positioned to continue its growth trajectory and deliver value to its shareholders. Broadcom’s forward guidance for fiscal year 2024 is optimistic, with projected annual revenue of approximately $51 billion and an adjusted EBITDA margin of 61%.

Several factors contribute to this positive outlook. The company expects AI-related revenues to exceed $11 billion for the year. The demand for AI networking and custom accelerators remains strong, driven by hyperscalers’ investments in scaling their AI clusters. Broadcom’s leadership in Ethernet solutions and ongoing development of next-generation connectivity products position it well to capitalize on this growing market.

The VMware integration is progressing, despite the significant chatter in the market, and already Broadcom has realized significant operational synergies. Broadcom has reduced VMware’s operational costs and streamlined its product offerings. The transition to a subscription licensing model for VMware products is being deployed, which is expected to drive sustained revenue growth. Broadcom’s strategic move to offer VMware’s entire software stack at a compelling price point is attracting substantial interest from enterprises looking to build private clouds.

Looking ahead, VMware’s prospects are promising as the company plans to radically simplify its product portfolio and pivot its strategy. Simplifying the go-to-market (GTM) model will enhance customer engagement and operational efficiency. This strategic pivot is expected to streamline product offerings, reduce complexity for customers, and drive faster adoption of VMware solutions. These efforts will likely result in increased market penetration and sustained revenue growth, further solidifying VMware’s position in the cloud computing sector.

Broadcom’s mainframe and infrastructure software segments continue to perform robustly beyond VMware. The company’s mainframe solutions, which cater to large enterprises’ critical workloads, remain a stable and profitable segment. Now bolstered by VMware, the infrastructure software segment is expected to contribute significantly to revenue growth and margin expansion.

The ten-for-one forward stock split, effective in mid-July 2024, aims to make Broadcom’s stock more accessible to a broader range of investors. This move will likely enhance liquidity and attract more retail investors, potentially driving up the stock price.

With AI providing significant tailwinds, if the company can ensure the VMware business doesn’t hit a roadblock Broadcom is poised for continued success in the technology sector.

Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discusses Broadcom’s earnings in their latest episode. Check it out here and be sure to subscribe to The Six Five Webcast so you never miss an episode.

Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.