The Six Five team discusses Broadcom Q2FY24 earnings.
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Transcript:
Patrick Moorhead: So first of all, beat-beat raise. VMware is making it happen big time From a financial point of view, data center AI is propelling the company. Remember, there’s two ways that Broadcom makes money in chips and AI. They connect AI compute and the compute itself. So, some pretty interesting stuff came out on the call. First of all, VMware, they have taken 8,000 disparate SKUs and narrowed that down to four distinct offerings. I know the company’s taking a lot of heat for it, but this is a required thing for the company to do and they’re behind. Well how about VCF, right? They’re putting VCF full cloud and full virtualization into one package. They signed nearly 3,000 of their top 10,000 customers to do what Hock said is build a self-service, virtual private cloud on-prem. I think that’s pretty darn good where we are today.
Financially VMware, there’s a new metric called annual booking value that’s essentially taking a long-term. Let’s say you’ve got a three-year contract and annualizing it. With VMware, it’s up going from 1.2 billion to 1.9 billion in the second quarter. So that was quarter on quarter. And Hock really kind of ended, in my opinion, talking about the full stack value prop, right? Compelling price point, very attractive price point, whole stack, vSphere plus networking, storage ops, and cloud. Real quick, switches. Kind of victory lap here. They doubled the amount of switches they sold year on year with PAM5, Jericho3, citing Arista Networks, Dell, Juniper, Supermicro. They doubled their shipments of PCI Express switches and NICs in the AI backend, and that’s inside of the rack.
And then finally, this is kind of a victory lap on AI versus fiber channel. Seven of the largest AI clusters and deployment use Broadcom Ethernet, but this is the kicker. Next year we expect all 100% of mega scale GPU deployments to be on Ethernet. Hock Tan, Charlie Kawwas are making it happen.
Daniel Newman: Yeah, that’s good analysis there. I mean I always say when their earnings come out that Broadcom just does what Broadcom does. I mean everything kind of up and to the right directionally, going well. I don’t know if you saw the question that Stacy Rasgon asked this really long deep dive question into the company and it’s basically asking if he was underestimating the impact of AI. Hock gave him a two word answer, very Hock like, basically it is what it is. I mean that’s not what he said, but more or less, this is what I can tell you. And when you’re Hock and you’re generating something like 60% of revenue as EBITDA, you can pretty much do anything you want.
The 10 for one splits, interesting, timely, the stock was really expensive. I mean on a dollar per share standpoint, it’s 1600 and I think there’s this trend line with companies of making shares more accessible to retail investors as that continues to expand. And Pat, you covered a lot of the ground, but what I said in my social commentary, that’s my new blogging by the way, I just Tweet. By the way, it’s not Tweeting, I X now because apparently Twitter’s not a thing anymore, but look, Broadcom may be the second most interesting play for AI, literally the second most interesting near term play for AI.
There are a lot of other companies sort of in the mix, but if you look across portfolio from everything from enterprise software, like what you talked about with VMware, to integration with network to the implementation development and deployment of XPUs, which are AI accelerators, which a lot of people don’t understand, but when you hear about these AI accelerators from hyperscale cloud providers, there’s really only two companies that are partnering with these companies to build them. It’s Marvell and it’s Broadcom.
And so Broadcom has a number of the wins. They’ve got a huge upside on it. And the fact is, whether it’s ultra ethernet or just traditional networking for AI, huge, huge opportunity. We’ve heard numbers like 25% of the spend on AI infrastructure is going to be in the network. These massive clusters create more back-end and front-end needs for networking and Broadcom is one of the only places to get this stuff. And so it’s a really, really compelling story for those that are kind of trying to get on this front-loaded hardware wave of buying and investing in AI.
So, there’s a lot to like there. The company is so well-run, it’s so efficient. And by the way, the initial sort of results it’s getting with VMware are impressive. I mean it’s growing faster. Straight out the gate, they cut two thirds of the workforce, they cut hundreds of partners. It may have been more than that. They cut all kinds of unnecessary spending and then here they grow again. And so isn’t the most Hock thing ever though, Pat? Basically everybody says it’s going to be completely culture killing, channel killing. You and I were the only ones that basically came out and said, “I don’t see it.” I just don’t think people get it. I mean he’s got the history. He did it with CA, he’s done it with Brocade-
Patrick Moorhead: Santech.
Daniel Newman: Santech. I’m just trying to think down the line. All of them got better after the acquisition and why everybody thought this wouldn’t, and I hate to say it, but everybody’s wrong. Everybody’s wrong. So far it’s only taken a few quarters, Pat.
Patrick Moorhead: Well, sometimes people confuse churn and angst with doing the wrong thing. Hock was really clear on where he thought they were with subscriptions. I’m going to quote him here. “Moving to subscription. Well, in VMware we are very slow compared to, I mean a lot of guys, Microsoft, Salesforce, and Oracle.” That was his quote basically and they could be a company that doesn’t change, but they’ve decided that they need to modernize and modernization, everybody’s not a fan every time it happens. So, stuff happens. I think you and I-
Daniel Newman: All I’ll say… Yeah, go ahead. Go ahead.
Patrick Moorhead: I think you and I were never saying there’d never be churn or some angst across some customers. I think what we were saying is that, A, and I said this in my first write-up, if you’re not part of where Broadcom makes money with VMware, things are going to change. And Hock didn’t raise prices. What he did is he combined the entire stack and if you were paying a million dollars for 50,000 VMs over annual, that was a ridiculous sweetheart deal that makes no financial sense for the company and things are going to change.
Daniel Newman: Absolutely. And just to be clear, I am 100% in line with you. We were not ignoring the fact there would be angst or there would be churn. We were just saying that it will work.
Patrick Moorhead: Exactly.
Daniel Newman: It will work and it is working and he’s okay to, even if it was a little smaller, if it was more profitable. The fact is though it’s getting bigger and it’s going to be more profitable and it’s more efficient. This is kind of like all the Musk hatred about X. He got rid of, what? 80% of the workforce. And although it’s a private company, there was so much media that it’s losing all its revenue, but it’s not actually correct and engagement’s actually rising. So, a lot of times people want things to be true, so they find an angle to make them true. Analysts are pretty good at this too, by the way. Anyway, all right, so that’s it. That was my take. Good results and very Broadcom of them.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
