Category: Semiconductor Stocks

Lam Research FQ4 Earnings Preview: Eyes on 2025 Outlook

Posted on by io-fund

Lam Research reports its fiscal Q4 (June quarter) earnings next week on July 31, following a dismal market reaction to peer ASML’s report last week. Estimates are rather muted heading in to Lam’s report, though sentiment seems to have drifted sharply lower as semiconductor stocks declined 9% through the end of the week of July 19th.

Management has guided to $3.8 billion in revenue in Q4, approximately flat QoQ but up 18.5% YoY against weak comps from the rapid downturn in the memory market in 2023. Lam is expected to close the year with revenue and EPS both declining in the mid-teens YoY, with Q4’s strong YoY growth offsetting first half softness.

Revenue and EPS

Lam is expected to break its five-quarter streak of declining revenue on a YoY basis in Q4, with revenue growth accelerating more than 20 percentage points to ~18.5% YoY. EPS growth is expected to follow suit, with management guiding for operating margin to expand sequentially.

Analysts project Lam to report 19.4% revenue growth in the quarter to $3.83 billion, at the very high end of management’s guided range. This would represent a revenue acceleration of 2140 bp QoQ. Raymond James last month said that it expects “sector fundamentals to remain strong into 2025 due to secular growth from Gen AI, aggressive government subsidies around the world, multiple technology transitions, and intensifying competition among foundry suppliers.” Revenue is expected to increase sequentially by more than $200 million in each quarter in fiscal 2025.

  • For Q4, management guided revenue at $3.8 billion, +/- $300 million, for a YoY increase of 18.5% and approximately flat QoQ growth.
  • Management guided for GAAP EPS of $7.20, +/- $0.75 and adjusted EPS of $7.50, +/- $0.75, for adjusted EPS growth of 25.4% YoY. Analysts expect Lam to report $7.58 in adjusted EPS in Q4.
  • For FY24, revenue is expected to be $14.87 billion, for a YoY decline of (14.7%).
  • For FY24, adjusted EPS is expected to $29.75, down (12.8%) YoY.
  • Current estimates for FY25 point to revenue of $17.66 billion, up 18.8% YoY, and adjusted EPS of $36.56, up 22.9% YoY.

As we had noted in April, Lam’s rebound through 2025 is primarily dependent on NAND recovering. Discussions around the incoming NAND rebound will be important, as well as discussions on DRAM given the surge in HBM we’ve seen to accompany rising GPU shipments.

Margins

Though management guided for gross margin to decline sequentially in Q4, there is some strength down the line, with operating margin expected to expand. China mix is also impacting margin positively, with Lam seeing gross margin as high as 48% compared to normalized levels of 46% when China’s revenue share is high.

  • For Q4, management guided GAAP operating margin (above) at 46.7%, +/- 1%, implying a slight 80 bp QoQ contraction but a YoY expansion of 120 bp. Adjusted gross margin was guided at 47.5%, +/- 1%, a 120 bp QoQ contraction.
  • GAAP operating margin was guided at 28.3%, +/- 1%, a 40 bp QoQ and 170 bp YoY expansion. Adjusted operating margin was guided at 29.5%, +/- 1%.
  • Lam’s net margin has remained strong, with GAAP net margin at 25.4% to 25.5% in each quarter of FY24 so far.

Management shed some light on margins in the longer term as it begins to ramp up output in Malaysia, which is expected to be margin accretive due to cost advantages:

CEO Timothy Archer: “I think that we've built now a global footprint for our manufacturing and supply chain that makes us significantly more resilient. It allows us to scale much faster to the demand that we see coming in the future. And also improve our gross margin looking forward. And I think that as we move through these next cycles of industry upturn, companies and our output hitting new highs, the real power of that new manufacturing and supply chain infrastructure will really start to come to bear in our profitability.”And also improve our gross margin looking forward. And I think that as we move through these next cycles of industry upturn, companies and our output hitting new highs, the real power of that new manufacturing and supply chain infrastructure will really start to come to bear in our profitability.”

Cash and Debt

Cash flows have been strong for Lam despite the tough macro backdrop in the first half of the fiscal year.

  • Operating cash flow was $1.38 billion in Q3, a 36.5% margin. YTD operating cash flow is $3.79 billion, down (6.6%) YoY, and for a margin of 34.3%. Operating cash flow for FY24 is projected to be $5.04 billion, implying $1.25 billion in OCF in Q4, a 11.3% YoY increase and representing a 32.9% margin.
  • Free cash flow was $1.28 billion in Q3, a 33.7% margin. YTD free cash flow is $3.49 billion, down (3.9%) YoY, and for a margin of 31.6%.
  • Cash and equivalents totaled $5.67 billion.
  • Debt totaled $4.98 billion.

Key Metrics

For Lam’s upcoming Q4 report, memory sales mix will be closely watched, as non-volatile memory (NVM) recovers, a sign of the upcoming recovery in NAND.

Memory accounted for 44% of systems revenue in Q3, down from 48% in Q2, but up from 32% in the year ago quarter. DRAM accounted for 23%, with NVM accounting for 21%. NVM has recovered from 15% in Q2, but it remains far below its peak at the 40% range, seen during the prior cyclical peak in 2022.

In terms of geographic concentration, similar to its WFE peers, Lam has high exposure to China currently, with the nation accounting for more than 40% of revenue each quarter this year. While this has provided some margin tailwinds, it also presents a real headwind as export restriction tensions escalate.

It was discussed in-depth in Q3’s earnings call that China revenue is first-half weighted and revenue is expected to decline as the year progresses. Also, in the Q&A, it was brought up that management is possibly expecting more weakness as the year progresses due to customers being blacklisted – this was not confirmed directly but also was not denied.

Second to China in terms of revenue contribution is Korea, at 24%, followed by Japan and Taiwan at 9% each and the US at 6%. Korea is a key geographic market to track, given its significant global share in both DRAM and NAND. Over the past two quarters, Korea has increased its revenue share, rising to that 24% level from 19% in Q2 and 16% in Q1, hinting at NAND spending resuming and utilization ticking higher.

Noteworthy Points to Watch

As just mentioned, NAND’s recovery looks as if it is beginning to unfold with the first signs in NVM revenue share ticking higher. Management offered some perspective last quarter on what 2025 could look like for NAND, stating the following:

“I mean, clearly, we all know that the NAND spending has been incredibly weak for the last 12 to 18 months. And so we're in the very early stages of starting to see that recover. And I think if you look at what most of our — we rely on our customer commentary that they make publicly for a lot of this, but they talk about the fact that maybe 90% of the bits they're shipping are at the leading edge.

But when we look at the installed base of our systems, that was my comment. I believe that there is still going to be a large portion of the installed base that will move forward to the next technology nodes. It's the most efficient way for our customers to to do that is to upgrade what they already have. And I think you'll see that move forward and therefore, NAND WFE move up in '25. But because it comes through a large — to a large degree, through upgrades, Lam's capture rate of every dollar of WFE spend will be much higher than in a greenfield capacity added. So when I think about Lam's opportunity to outperform in 2025, in NAND, I think it is obviously with high confidence because of the type of spending we would expect to be seen in 2025. And in the other market segments, it's also pretty high because of the — as I mentioned, the technology inflections that are occurring […] And so I just feel like there are a number of growth drivers for the company besides the one that is the most obvious, which is a NAND recovery in 2025.”I believe that there is still going to be a large portion of the installed base that will move forward to the next technology nodes. It's the most efficient way for our customers to to do that is to upgrade what they already have. And I think you'll see that move forward and therefore, NAND WFE move up in '25. But because it comes through a large — to a large degree, through upgrades, Lam's capture rate of every dollar of WFE spend will be much higher than in a greenfield capacity added. So when I think about Lam's opportunity to outperform in 2025, in NAND, I think it is obviously with high confidence because of the type of spending we would expect to be seen in 2025. And in the other market segments, it's also pretty high because of the — as I mentioned, the technology inflections that are occurring […] And so I just feel like there are a number of growth drivers for the company besides the one that is the most obvious, which is a NAND recovery in 2025.”

In the upcoming report, management’s commentary on the NAND recovery will be closely watched, as will NVM’s revenue share, given the emphasis placed on NAND as one of the primary growth drivers in 2025.

While this may seem a bit obvious, ultimately, Lam’s revenue guide for fiscal Q1 2025 will be a crucial data point for both Lam and the WFE manufacturers. ASML’s results, which sparked that sharp selloff across semis last week, saw strong net bookings but a Q3 revenue guide short of consensus, with the EUV maker expecting €6.7B to €7.3B in revenue versus the €7.5B consensus estimate. Analysts are expecting a strong report for Lam, with the consensus estimate at the high end of management’s guidance, and Q1’s estimate for $4.03 billion pointing to a 5.2%, or $200 million, sequential increase.

Valuation

Lam is trading above its median top line and bottom-line valuations, even with its steep sell-off after ASML’s earnings.

On the top-line, Lam trades at 8.9x trailing sales, and 7.1x forward sales with the rebound in sight. Looking back to 2021, Lam peaked at a trailing 7x sales multiple, so it’s currently trading above its peak multiples withheld historically as well as more than 40% higher than its 5-year average multiple of 5.2x for both trailing and forward sales.

Lam’s bottom line strength offers a bit more breathing more in the valuation, though it does remain stretched with a thin margin for error. Lam is trading at 35.3x trailing PE and 26.3x forward PE, again with EPS expected to rebound 23% YoY to $36.56. Again, while these multiples are elevated compared to Lam’s 5-year average in the 20x to 21x range, on a forward basis, Lam is trading at the same valuation as it entered 2024, around 26x, despite a nearly 30% YTD rally.

Conclusion

Lam’s fiscal Q4 report next week will hopefully show more growth and progress in the unfolding NAND rebound, which we had said we were a tad early to in April this year.  We still see DRAM and HBM as a major growth opportunity in the AI semiconductor space, with Nvidia and AMD showing no signs of slowing in GPU development or revenue growth; however, NAND is expected to be a core growth driver for Lam moving through 2025.

Revenue growth is expected to be flat sequentially in Q4, before rising sequentially in each quarter of fiscal 2025, with earnings growth to follow. Cash flows also have remained quite strong despite the weak first half of the year. We’ll be keeping track of how this recovery will unfold next week, even if this report may not be enough to justify Lam’s elevated valuations in the near-term.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.

Recommended Reading:

Aehr Fiscal Q4 Earnings: Soaring on AI-Related Acquisition

Posted on by io-fund

Last week, Aehr’s stock surged after providing a preliminary look at fiscal 2025’s revenue and net profit before tax, guiding to $70 million in revenue, for a YoY gain of ~5.7%, as well as net profit before tax of at least10%. However, $10 million in revenue would be coming from Incal, meaning organic revenue would be $60 million, or a YoY decline of just over (9.3%).

Today, the stock surged again due to an AI-related acquisition announced yesterday in the official earnings report. We’ve had close eyes on this stock as it was a former I/O Fund holding in the tough market of 2022, and was our highest performing stock that year, before it turned sharply downward in 2023. We ultimately closed the position around the time the EV market softened and bellwether Tesla sold off. As a reminder, AEHR supplies wafer burn-in testing systems for silicon carbide to ON Semi, who in turn, supplies silicon carbide inverters to Tesla and other EV OEMs. However, AEHR has discussed for some time that their end markets are diversifying. This report points toward progress in these new end markets.

The positive price action this week is not based on fundamental strength. Under the hood, AEHR is quite weak. The $70M guidance includes $10M per year from the acquisition. Therefore, organic revenue for FY2025 of $60M would represent a decline of (-9.3%) from the $66.2 million AEHR reported this past fiscal year (FY2024). Keep in mind, that a few months ago, AEHR was forecasting revenue of $100M for FY2024 ending in May. Despite the positive price action, this company will not return to growth in the next four quarters and the $100M is more than two years out, per current consensus.

With that said, AEHR is trading at a low valuation, and even after the 66% power move off the low, there’s still quite a bit of room in the valuation due to the ongoing, steep selloff over the past year. Of the stocks we monitor, this one has substantial room. Valuation alone may be enough to justify this price action.

AEHR Q4 Earnings Report:

Aehr Test Systems reported preliminary Q4 revenue and net income figures last week, with both figures exceeding management’s guided range. Management noted that while Aehr “saw customer push outs of our products for silicon carbide devices due to slowing electric vehicle (EV) demand in the second half of our fiscal year, we still achieved another record year for annual revenue.”

Management also provided a quick look into the trends driving fiscal 2025: while SiC is expected to remain a core part of Aehr’s revenue, management sees bookings and revenue from new markets and customers, including silicon photonic ICs, flash memory and SSDs, AI processors, and GaN power chips for data centers and solar.

Aehr also announced that it received $12.7 million in FOX WaferPak orders from an SiC customer, with WaferPaks expected to be delivered over the course of the next three months. This likely will provide a large boost to fiscal Q1’s results. The company also expects to receive orders “from a significant number” of SiC customers by the end of this fiscal year.

There was mention of a hard disk drive customer that is forecast to ramp in the current fiscal year, “most likely the second half.” This customer will be up to 10% of revenue. Management also discussed a silicon photonics customer that will ship in the third fiscal quarter of this year. GaN is expected to penetrate power conversion in EVs, solar and the data center. AEHR received “a significant number of WaferPak orders through the year” for GaN.

Revenue and EPS

  • Aehr reported Q4 revenue of $16.6 million, for a YoY decline of (25.5%), and a QoQ increase of 120%.
  • Aehr reported Q4 GAAP net income of $23.9 million, which includes a $20.8 million tax benefit from the release of Aehr’s full income tax valuation allowance. Excluding this impact, net income would normalize to $3.1 million.
  • GAAP EPS was $0.81, including the $0.61 impact from the tax allowance. Adjusted EPS was $0.84.
  • For fiscal 2024, revenue was $66.2 million, up 1.4% YoY and above prior guidance for $65 million.
  • For fiscal 2024, GAAP net income is $33.2 million, including Q4’s tax benefit; excluding that, GAAP net income is $12.4 million.
  • GAAP EPS was $1.12 for FY24; non-GAAP EPS was $1.21.

Margins

Aehr’s preliminary results offered no insights as to how margins would look, after taking a hit in fiscal Q3 as revenue declined substantially on a QoQ basis. Margins recovered sequentially in Q4, but operating margin remained substantially lower on a YoY basis.

  • Q4’s gross margin was 50.9%, up 820 bp from 41.7% in Q3, but down 60 bp from 51.5% in the year ago quarter.
  • FY24’s gross margin was 49.1%, down 130 bp from 50.4% in FY23.
  • Q4’s operating margin was 15.3%, up from (27.1%) in Q3, but down from 25.3% in the year ago quarter. As discussed in the call, management believes they will reach an operating margin of 20% when they return to an annual run rate of $80M+.
  • FY24’s operating margin was 15.2%, down 540 bp from 20.6% in FY23.
  • Excluding the income tax valuation benefit, Q4’s net margin would be ~18.8%, versus 30.4% in Q4 2023.
  • For the full year, net margin was 50.1% including Q4’s tax benefit; excluding that, net margin would be ~18.8%.

Cash and Debt

Cash flows have struggled this year, with Q3 seeing significant net outflows at nearly 40% of revenue.

  • Q4 operating cash flow is $1.23 million, or a margin of 7.4%. This is down from an OCF margin of 26.4% in the year ago quarter.
  • FY24 OCF was $1.76 million, down nearly (82%) YoY, for a margin of 2.7%.
  • Cash and equivalents totaled $49.2 million in Q4, and debt remained zero.

Key Metrics

  • Inventory was $37.5 million in Q4, down from $38.1 million in Q3, but up from $23.9 million in the year ago quarter.
  • Bookings were $4 million in Q4, down from $24.5 million in Q3.
  • Backlog was $7.3 million in Q4, down from $20 million in Q3. Effective backlog was $20.8 million.

To note, Aehr’s largest customer accounted for 59.6% of revenue in Q3 2024, and its second largest customer accounted for 19.3% of revenue.

Acquisition of Incal and Wafer Burn-in for AI Accelerators

Aehr also announced that it was acquiring Incal to expand its presence in the burn-in market for AI accelerators, which it believes is a $100 million annual market with the potential to capture “meaningful share” in fiscal 2025. Aehr purchased Incal for $21 million, or ~1.75x TTM revenue of $12 million (or ~2.1x forward revenue of $10 million). The purchase price is split between $14 million in cash and more than 552K shares, convertible at $12.673 per share.

The goal is to combine Incal’s high-power test solutions with AEHR’s wafer-level testing to sell FOX-XP systems to AI chip companies for wafer testing up to 3,500 watts. According to management, the opportunity size is $100 million “and with this combined product portfolio, we have the opportunity to capture a meaningful share of this market within this fiscal year.” This naturally led to questions in the Q&A as to why the guide is weak for next year. I’ve included the response in the section below.

On the note of wafer burn-in for AI accelerators, this comment was key in the opening remarks – I’m quoting it in full so our Members understand the full effect of the comment that has led to today’s price action as the comment implies AI revenue will come to fruition this year:

“Now let me talk about the AI processor market. Last month, we announced we're working with an AI accelerator company to move their AI processor test and burn-in to wafer level and have secured a commitment from them to evaluate our FOX Solution for production level test and burn-in of their high power processors. This company recognizes the potential of the significant benefits of production test and burn-in of their accelerators while still in wafer form before they're integrated into the end application product, which would prove to be more cost effective and significantly more scalable than doing the screening later in their manufacturing process.

We think this is an amazing opportunity to displace the current package and system level tests for AI processes for large language model development and we believe we can meet this enormous challenge with the current capabilities of our new high power FOX-XP system with up to 3,500 watts per wafer testing. We're working on this benchmark as I speak here in the lab right now and expect to complete the evaluation in the next couple of months. Upon successful demonstration of wafer level test results and throughput, we expect they will utilize our new high-power FOX-XP systems for production of their next generation AI processors, starting this fiscal year.”

It was later clarified the customer is “not Nvidia.” It’s also important to emphasize the qualification is not complete yet: “I've got my fingers crossed that we can work through all this stuff. And we think we are pretty confident that we can make this work. And the customer is hoping and cheering us on to make it work.”

Lack of Revenue Growth in FY2025:

The obvious issue is management’s opening comments do not match the revenue guide. There is a stark contrast between the bullish earnings call/commentary and the weak guide. The issue is the weak EV market, as despite AEHR seeing promising signs of new end markets, the fact remains that SiC is AEHR’s primary market as it stands today. The new markets are not able to offset the softness in EVs (yet).

Here was a question to that effect:

Jon Gruber

Yeah, yeah, I mean good presentation, a lot of prospects, but what I don't understand is with the acquisition, all these prospects, you get flash member 30% in new things, the disk drive, why is there no revenue growth excluding the acquisition?

Gayn Erickson

[…] It's really about the push-outs that we saw with respect to the silicon carbide ramps, things we were expecting people to be coming in pretty strong. And we're just looking at soft forecasts right now.

[…] But I think if you look at the top four silicon carbide customers, they all guided down this year. And so, there have been people that are — we're wondering how bad it was going be for us, and can we even continue to maintain our growth while they're having a soft year followed by a strong year. So I think we're — it's the right thing to do right now is to communicate this. If we see strength in the second half come in harder than we are currently conservatively forecasting, then we'll guide up at that time.

Valuation:

Aehr’s valuation is low if we look at its historic trend. Granted, the stock had stronger fundamentals at the time, it’s important to note this small cap remained GAAP profitable even after a 36% reduction in its expected annual revenue. The company also held onto a thin cash flow margin, yet to Aehr’s credit, remained FCF positive for FY2024.

Conclusion:

Small caps are being hyped in the market; this makes sense because many are on sale. We began to sniff this out with entries into AOSL but we certainly wouldn’t mind more exposure if this rotation is confirmed.

Due to a lack of fundamental strength, we will only consider AEHR a quality stock once the company has returned to growth. Aehr will one day report real AI revenue, but for now, the price action is exuberant in nature. We want to be clear as day quality fundamentals are not in the driver’s seat at this time, rather, pure speculation is driving the price action. In the meantime, it’s under consideration for a momentum play only. If we re-enter, the position will come with a tight stop.

Damien Robbins, Equity Analyst at I/O Fund, contributed to this analysis

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Revisiting TSMC: Sales Update, Buy Plan

Posted on by io-fund

TSMC is a foundry that manufactures the world’s most advanced chips, designated by node size. The most advanced node in production today is the 3nm and is primarily used by Apple in iPhones and MacBooks. The 5nm/4nm is used by Nvidia and others for AI accelerators, with high-performance computing quickly moving to 3nm and even 2nm.

Taiwan Semiconductor reported earnings on April 18th. The company topped analyst estimates and its internal guide with revenue growth of 12.9% YoY growth for US$18.9 billion. EPS beat by 4.4% at $1.38 reported compared to $1.32 expected.

Advanced node revenue continues to remain strong, though 3nm revenue dipped sequentially. Per the opening remarks: “3-nanometer process technology contributed 9% of wafer revenue in the first quarter.” This is down from 15% last quarter. The decline is temporary with Trend Force expecting 3nm production capacity utilization to be up 80% by year end. This quarter, revenue from 5nm and 7nm both expanded 2 points.

Despite warning of a slowdown in the broader semiconductor industry this year, TSMC’s April sales surged to NT$236 billion for growth of 60% YoY and 21% MoM. This marks a positive start to the 20-percentage point acceleration to 33% revenue growth that analysts expect as soon as the September quarter.

May sales grew by 30.1% YoY to NT$229.6 billion and June sales grew by 32.9% YoY to NT$207.87 billion, primarily due to the strong demand for AI chips.

We’ve provided an important foundry update on TSMC in early June, which you can find here. Ultimately, we feel obliged to cover TSMC again for our premium members as it’s truly the one that got away from us in H1 2024.

We feel some of the most important work we can do as investors is to look at the stocks that got away from us. The team is continually looking to improve, and thus we present you with an update on the financials as we look for an entry again.

Market Dominance

According to Trend Force research, TSM is the leading global foundry in terms of revenue. It has a market share of 61.7% in Q1 2024, up from 61.2% in Q4 2023. Samsung ranks a distant second with a market share of 11%, down from 11.3% in Q4 2023. SMIC and UMC rank third and fourth with a market share of 5.7%.

Most importantly, the company has over 90% market share in the manufacturing of advanced AI chips.

Financials Update: Strong Q2 Sales due to AI

The company’s June monthly sales grew by 32.9% YoY to NT$207.87 billion. May monthly revenue grew 30.1% YoY to NT$229.6 billion and April monthly revenue grew 59.6% YoY to NT$236 billion. Q2 revenue grew by 40.1% YoY to NT$673.51 billion. In USD, it grew by 32.9% YoY to $20.83 billion using the average exchange rate of 1 US dollar to 32.33 NT dollars. We will get the official USD numbers when the results are announced on July 18th. The monthly numbers suggest that Q2 revenue will easily beat the management guide of $19.6 billion to $20.4 billion. The company is benefiting from the strong demand for Artificial Intelligence chips and a recovery in the PC market.

The company reported its Q1 2024 results on April 18th. Revenue grew 12.9% YoY and down (-3.8%) QoQ to $18.87 billion and beat management guidance of $18 billion to $18.8 billion. The recent quarter showed an acceleration of revenue from a decline of (-1.5%) in the previous quarter. Management guidance for the next quarter is $19.6 billion to $20.4 billion, representing YoY growth of 27.6% at the midpoint.

The analyst consensus estimates are trending higher. They expect revenue to grow 29.8% YoY in the next quarter, up from the 20.6% YoY growth expected in mid-October and are expected to accelerate to 32.7% YoY growth in the September quarter.

Note: The below figures will differ slightly from our reports/the company IR due to the currency conversion. However, we use the estimates below to understand the expected growth rates.

Margins

The Q1 gross margin improved 10 bps sequentially to 53.1%, but it was down 320 bps YoY. The gross margin was down YoY as the company is witnessing higher costs due to the increase in electricity costs and due to a higher contribution from the 3nm node. This is expected, given that TSMC has historically seen headwinds in the initial ramp phase before ultimately realizing higher margins once the node has scaled.

The gross margin guide for the next quarter is 51% to 53%. The gross margin is expected to decline 110 bps sequentially at the mid-point primarily due to the impact of the earthquake on April 03rd in Taiwan and due to another hike in the electricity prices in April this year.

Wendell Huang, CFO of the company, said in the Q1 earnings call, “After last year's 17% electricity price increase from April 1, TSMC's electricity price in Taiwan has increased by another 25% starting April 1 this year. This is expected to take out 70 to 80 basis points from our second quarter gross margin. Looking ahead to the second half of the year, we expect the impact from higher electricity cost to continue and dilute our gross margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemical and gases and other variable costs.

In addition, we expect our overall business in the second quarter of the year to be stronger than the first half. And the revenue contribution from 3-nanometer technologies is expected to increase as well, which will dilute our gross margin by 3 to 4 percentage points in second half of '24 as compared to 2 to 3 percentage points in first half of '24.”

The operating margin improved 40 bps sequentially to 42% and was down 350 bps YoY due to the points discussed above. The company is working on tighter cost controls and has helped to reduce operating expenses to 11.1% of revenue in the recent quarter from 11.4% in the December quarter. The operating margin guide for the next quarter is 40% to 42%. 

The net margin declined 20 bps sequentially to 38% and down 270 bps YoY. GAAP EPS came at $1.38 compared to $1.31 in the same period last year and beat estimates by 4.4%. The analysts expect GAAP EPS to grow 21.1% YoY to $1.38 in the next quarter and accelerate to 34.1% growth to $1.73 in Q3.

Management is confident of achieving a “long-term gross margin of 53% and higher and sustainable ROE of greater than 25%.”

Due to the economies of scale and its leadership position in the foundry industry, the company maintained good profitability. Many companies have struggled with rising costs, while TSM has successfully navigated these challenges by controlling costs and negotiating better prices with its customers.

Cash Flows and Balance Sheet

The operating cash flow was $13.9 billion or 74% of revenue compared to $12.66 billion or 76% of revenue in the same period last year.

The company’s financial stability is evident in its free cash flow growth, which has more than doubled YoY. Free cash flow was $8.12 billion or 43% of revenue compared to $2.72 billion or 16% of revenue last year. The foundry industry is capital-intensive, and the company is witnessing a stabilization in capital investments that led to higher free cash flow in the recent quarter.

The company has cash and marketable securities of $60 billion and debt of $30.25 billion compared to $54.89 billion and $30.03 billion in the December quarter. The company paid $2.48 billion in cash dividends in the recent quarter.

Advanced Nodes and AI revenue

The Advanced nodes are defined as 7-nanometer and below. We discussed in our recent editorial on the advanced nodes and AI-related revenue reaching fresh records. Most of the AI chips produced by the company utilize 5-nanometer and 4-nanometer process technology. However, 3-nanometer revenue is expected to triple this year. Volume production for 2-nanometer is expected in Q4 of 2025 and should have a meaningful revenue contribution in the first half of 2026.

We mentioned, “Currently, AI accelerators use TSMC’s 5nm process. Nvidia’s Hopper and Blackwell are built with a N4X process that is tailored for high-performance computer applications. This is a customized variant called “4N” that Nvidia uses, yet TSMC recognizes this as 5nm revenue in their earnings report. AI accelerators are expected to quickly move to smaller nodes to help lower power consumption. TSMC’s 3nm process is more energy efficient, and energy efficiency will improve further with the 2nm process.”N4X process that is tailored for high-performance computer applications. This is a customized variant called “4N” that Nvidia uses, yet TSMC recognizes this as 5nm revenue in their earnings report. AI accelerators are expected to quickly move to smaller nodes to help lower power consumption. TSMC’s 3nm process is more energy efficient, and energy efficiency will improve further with the 2nm process.”

Due to its leadership position, management has been optimistic about the long-term opportunity in the manufacturing of AI chips. “In summary, our technology leadership enable TSMC to win business and enables our customer to win business in their end market. Almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing power. We forecast the revenue contribution from several AI processors to more than double this year and account for low-teens percent of our total revenue in 2024.Almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing power. We forecast the revenue contribution from several AI processors to more than double this year and account for low-teens percent of our total revenue in 2024.

For the next 5 years, we forecast it to grow at 50% CAGR and increase to higher than 20% of our revenue by 2028. Several AI processors are narrowly defined as GPUs, AI accelerators and CPU's performing, training and inference functions and do not include the networking edge or on-device AI. We expect several AI processors to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years.”For the next 5 years, we forecast it to grow at 50% CAGR and increase to higher than 20% of our revenue by 2028. Several AI processors are narrowly defined as GPUs, AI accelerators and CPU's performing, training and inference functions and do not include the networking edge or on-device AI. We expect several AI processors to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years.”

According to the Commercial Times report, the company is planning to increase the price of 3 nanometer chips by 5% and price of advanced packaging by 10-20% next year. This should help to clear up some of the margin worries caused by the increase in electricity prices and the increased costs of operations of overseas fabs.

Nvidia’s CEO Jensen Huang replied to a question from Morgan Stanley analyst on Nvidia’s opinion on raising prices saying “The price of TSMC's services was too low, and that TSMC's contribution to the world and to the technology industry was not adequately reflected in its financial reports.” It shows the immense pricing power of TSMC.

Its customers Apple, Nvidia, Qualcomm, and AMD have booked the company’s 3nm process technology through 2026 amid the strong demand for AI chips. It further shows TSMC's leadership position in advanced nodes. TrendForce also reported that the company has received new orders from MediaTek and Google for the 3nm advanced chips.

The AI wave has also boosted the company’s advanced packaging business, particularly Chip-on-wafer-on-substrate (CoWoS) services. During the last earnings call, the management also highlighted that the demand for advanced packaging “is high, extremely high. And we do our best to increase the capacity to alleviate the shortage.” TSMC’s monthly CoWoS capacity is expected to expand to 60,000 wafers by the end of next year, up 300% from 15,000 at the end of 2023.

The company’s other advanced packaging technology, system-on-integrated chips (SoIC), is also in robust demand. According to TrendForce, the company is expected to increase the monthly capacity to 5,000 to 6,000 units by the end of this year, up 2.5x to 3x from 2,000 units in 2023. Furthermore, by the end of next year, it is expected to scale to 10,000 units. According to the Economic Daily News, the company has secured Apple as the second major customer of SoIC.

Valuation

The company is trading at a P/E ratio of 35.1 and a forward P/E ratio of 28.9. The P/S ratio is 13.4 and the forward P/S ratio of 11.3. In the last five years, the P/E ratio peaked at 41.8 in February 2021 and hit a low of 10.3 in November 2022. The stock is now trading above its five-year average P/E ratio of 23.7. However, with the expected growth from the increasing contribution of AI revenue and its leadership position in advanced nodes, the market will likely continue to reward with a premium valuation.

Conclusion

TSMC has good long-term revenue growth potential due to its leadership position in advanced technology nodes. The primary catalysts are HPC, particularly AI chips and the recovery in the smartphone market. It has been able to negotiate better prices with its customers, made cost improvements, and maintained strong margins and free cash flows. Here are some technical analysis notes from Portfolio Manager Knox Ridley:

There are times in which Technical Analysis can be quite accurate at nailing lows/highs and managing risk. We use it in conjunction with our outstanding fundamental process to increase our accuracy. However, there are times in which the technicals are at odds with the fundamentals, meaning one is wrong. This is exactly what happened in November of last year, as the technicals sensed risk while the fundamentals did not.

The below chart was posted in November.

The one in red was a 5 wave drop from the June high followed by a 3 wave bounce. More times than not, when we see this setup from a technical perspective, it tends to lead to more downside. This is not what happened, as TSM took the green path higher, and then exceeded it.

We decided to lock in +20% gains in TSM on this bounce, due to technical and geopolitical risk, leaving a lot on the table. This happens in investing, and it has led to the I/O Fund tightening up our process moving forward.

That being said, where TSM is today is much clearer now that we have a solid trend in place.

The near vertical move higher suggests that we are in an unfinished uptrend. This is unfolding as a 5 wave pattern, which still needs at least a 4th wave drop and a 5th wave push higher to complete. This is where the two counts in the chart diverge:

  • Red – We are completing the large 3rd wave, should see a sizable 4th wave correction soon, followed by one more large push to new highs.
  • Green – We are completing a minor 3rd wave soon. This would be followed by a smaller correction, which would then lead to at least two more swings higher.

Like most 3rd waves, they can continue to extend, which makes identifying a turning point challenging. But, at some point, this 3rd wave will need to correct which is why we plan to buy on a dip rather than a breakout. The best way to handle this is set up a moving support line that will signal the 3rd wave has ended and the 4th wave drop has begun. That level for TSM is $176.

Once we drop below $176, it will signal that the expected correction is underway, and we will setup our buy plan. 

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Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

AI PC Stocks: Emerging 2024 And 2025 Story

Posted on by io-fund

This article was originally published on Forbes on Jun 27, 2024,04:25pm EDTForbesForbes on Jun 27, 2024,04:25pm EDT

AI-capable PCs are expected to be an explosive trend through 2025 and beyond. The trajectory of AI will increase when more people can access AI-powered applications, which in turn, will help AI developers build a bigger ecosystem. Currently, there is a major bottleneck right now for AI applications to where client devices are not powerful enough or energy efficient enough to leverage AI capabilities at the edge.

We’ve discussed the PC rebound in late 2023 for our premium members with executive commentary on how AI PCs will accelerate the PC market’s growth rate. Industry research organizations similarly see strong growth in AI PCs, with some forecasting annual AI PC shipments to more than triple by 2028. In other words, AI-capable PCs are projected to rise from ~19% of total PC shipments this year to more than 70%, even up to 80% by 2028. The rapid adoption curve will be driven “with a strong inclination towards commercial adoption.” There is indication the early majority will adopt AI PCs in 2025, and the late majority in 2026. This leaves time for consumers to participate, which thus far has been a challenge for AI, as it's been predominately driven forward by Big Tech.

Refresher on AI PCs

With the rapid ascent of generative AI over the past year and a half, the term ‘AI PC’ may be self-explanatory but there are nuances to each release. Microsoft has adopted a new definition for AI PCs that underpins the launch of its Copilot+ PCs on the market, which launched in mid-June.

According to Microsoft’s definition, an AI PC will contain a CPU, a GPU, and an NPU (neural processing unit), as well as its Copilot key and Copilot software onboard. NPUs are highly efficient at parallel processing for AI and ML workloads by running matrix multiples. Essentially, NPUs offer a very power-efficient way of running localized AI on devices such as PCs and smartphones without draining battery life by operating in the background. Per Microsoft, AI PCs must be capable of 40 TOPS or greater performance on the NPU.

Meeting Microsoft’s Copilot+ requirement calls for at least 16GB RAM and 256GB storage alongside the 40+ TOPS NPU performance. This is currently only met by Qualcomm’s Snapdragon X Elite chips, but will soon be met with Intel’s Lunar Lake chips, AMD’s Strix Point chips, and others.

AMD and Intel define the AI PC more broadly – AMD defines an AI PC as “a PC designed to optimally execute local AI workloads across a range of hardware, including the CPU, GPU, and NPU.” Intel’s definition says an AI PC “has a CPU, a GPU and an NPU, each with specific AI acceleration capabilities.”

Intel believes the AI PC “promises to be a huge improvement for everyday PC usages,” as it “represents a fundamental shift in how our computers operate.” AI PCs meeting the TOPS and memory requirements set forth by Microsoft will allow AI models and workloads to be built and deployed directly at the edge, without transferring data to and from the cloud, offering an extra layer of security and privacy.

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Strong Growth Forecasts

Shipments of AI-capable PCs are forecast to grow at a rapid rate over the next four years, while also boosting broader PC market growth. HP believes that as AI PC commercialization accelerates, the “overall PC category growth rate can double over the next three years.”

Canalys is projecting AI PC shipments to rise at a 44% CAGR from 2024 to 2028, from an estimated 48 million PCs this year, before doubling to more than 100 million in 2025 and rising to over 205 million by 2028. Cumulative shipments of AI PCs are projected to surpass 600 million over the next four years.

Gartner is slightly more optimistic on the near-term growth of AI PC shipments, forecasting shipments to more than double from 24 million in 2023 to 54.5 million in 2024, nearly 14% higher than Canalys’ estimate. Gartner’s 2025 forecast calls for shipments more than doubling once more to 116 million units, or 43% of total PC shipments, up from just 10% in 2023 and 22% this year.

IDC is projecting 50 million shipments in 2024, with 3-year growth of 234%, reaching 167 million annual shipments in 2027. Here’s what the three projections look like:

AI Capable PC, Forecasted Annual Shipments

Source: I/O Fund

While there are some nuances in the growth projections, especially in the next twelve to eighteen months, the longer-term growth trends remain intact, with shipments projected to increase more than 200% by 2027.

Much of the growth through 2025 is expected to be in the premium (or high-end) laptop segment, with ASPs rising due to the NPU. For example, the first Copilot+ PCs equipped with Qualcomm’s Snapdragon X Plus chips start at $999, and the Snapdragon X Elite PCs at $1,249.

In addition, while the growth in AI PC shipments is expected to be felt across both the consumer and commercial end markets, commercial adoption is forecast to be higher, at approximately 60% by 2028 versus 40% for consumer. This is due to the productivity gains that AI PCs can enable via powerful on-device AI as well as benefits to software developers and related roles. For example, Dell’s XPS and Latitude 7455, equipped with the Snapdragon X Elite, “can support 13 billion-plus parameter models which means customers can run popular models like Llama 3 directly on their PCs.”

We’re closely tracking a semiconductor name that has tie-ins to the AI PC industry and growth forecast, and may soon add this name to our portfolio. Our premium members will receive real-time trade alerts and an updated buy plan on this stock. Learn more here.here.

PC Market Growth

A look at the broader PC market shows that the industry finally inflected back to growth after a challenging two-year stretch of declines; however, this came against an easy comp of a nearly (29%) YoY decline in Q1 2023, per IDC.

Counterpoint Research and Canalys both reported 3% YoY growth for the PC market in Q1, with Lenovo leading the way with nearly 8% YoY growth. In addition, IDC noted that “global PC shipments finally returned to pre-pandemic levels as 1Q24 volumes rivaled those seen in 1Q19 when 60.5 million units were shipped.”

For the full year, the market is expected to see approximately 2% to 3% growth, with annual shipments in the 265 million and 270 million range. This is still a far cry from the ~340 million shipments seen in 2021, due to the challenging landscape the industry navigated through 2023.

An Ultra-Competitive Landscape

Competition in AI PCs is quickly heating up, with Intel forecasting a surge in its PC chip shipments, while Nvidia, AMD and others line up powerful Arm-based CPUs to take on Qualcomm’s Snapdragon X chips once its exclusivity deal with Arm expires at the end of 2024. Apple is rumored to be planning an M4-powered Mac refresh either by the end of this year or early 2025.

The four are competing on NPU performance, alongside efficiency:

  • Qualcomm’s Snapdragon X NPU offers 45 TOPS of AI performance, while CEO Cristiano Amon “claiming a performance-per-watt 2.6 times better than AMD and 5.4 better than Intel's Core Ultra 7 chips.”
  • Intel’s upcoming Lunar Lake chip offers up to 48 TOPS on the NPU, and Intel is claiming “1.4x AI performance over the Snapdragon X Elite running the Stable Diffusion tool in a GIMP plugin; faster overall core performance versus Ryzen and Qualcomm competition; and a 1.5x improvement over its previous generation in the performance of the integrated GPU.”
  • AMD’s upcoming Ryzen AI 300 series chips (Strix Point and Strix Halo) offer up to 50 TOPS performance from the NPU, the highest on the market so far.
  • Apple’s M4 chip offers up to 38 TOPS performance on the NPU, with the chip originally deploying on the iPad lineup with the Mac refresh rumored for this year or next.

Nvidia does not have an NPU competitor yet, as it believes its GeForce RTX GPUs offer significantly higher TOPS and more AI performance: “Performing 40 TOPS is sufficient for some light AI-assisted tasks, like asking a local chatbot where yesterday’s notes are. But many generative AI tasks are more demanding. NVIDIA RTX and GeForce RTX GPUs deliver unprecedented performance across all generative tasks — the GeForce RTX 4090 GPU offers more than 1,300 TOPS. This is the kind of horsepower needed to handle AI-assisted digital content creation, AI super resolution in PC gaming, generating images from text or video, querying local large language models (LLMs) and more.” However, Nvidia and MediaTek are reportedly working on an Arm-based AI PC chip for a 2025 launch following the expiration of Qualcomm’s exclusivity deal.

The I/O Fund recently shared its buy plan on NVDA for its free readers, and premium members receive real-time trade alerts when we buy as well as frequent detailed research reports. Learn more about our premium services here.free readers, and premium members receive real-time trade alerts when we buy as well as frequent detailed research reports. Learn more about our premium services here.

Industry Commentary on PCs, AI PCs

Industry commentary on the AI PC outlook is optimistic over the longer-term, with vendors and chipmakers alike seeing growth through 2026. Management teams are broadly bullish on the upcoming refresh cycle and the potential for AI PCs to not only boost growth but also to improve ASPs.

Let’s break down some recent industry commentary:

Hewlett-Packard:

HPQ’s management is expecting to see stronger AI PC demand as 2024 closes with larger impacts in 2025 and 2026. Management said that “in the second half, we expect to see the introduction of AI PCs accelerate demand, over-and-above the anticipated PC refresh cycle and Windows 11 roll out.”

CEO Enrique Lores said that HP believes the “penetration of AI PCs is going to be growing over time,” with its first AI PCs representing “around 10% of the shipments for the second half. That's how we are quantifying that. But really, the impact will be more relevant in 2025 and in 2026. In fact, we expect that AI PCs, and at that point will be our new generation, will be between 40% and 60% of our sales three years after launch. … And as we have discussed before, we continue to believe that they will drive an improvement in average selling price of between 5% and 10%”

He further clarified that of the new AI PC products, HP expects “a stronger traction in consumer because commercial requires some evaluation done by customers. That takes some time. But over time, we expect the penetration in commercial to grow and to be more relevant in 2025 and in 2026.”

Dell:

Despite have one of the largest AI PC lineups in the industry, Dell’s management has been a bit more opaque about the opportunity, though they remain bullish on AI PCs.

Management said in Q1’s earnings call that the “commercial PC demand has also stabilized and we saw an improving demand environment as we move through the quarter. … We expect commercial PCs to continue to improve as the year progresses. We remain optimistic about the coming PC refresh cycle, driven by multiple factors. The PC installed base continues to age, Windows 10 will reach end of life later next year and the industry is making significant advancements in AI-enabled architectures and applications.”

This return to growth in commercial PCs and stabilization in demand is a positive sign, and also echoes HP’s view that the commercial space may need more than a quarter or two to fully embrace AI PCs and for shipment growth to accelerate.

Qualcomm:

Qualcomm sees AI redefining the PC, and its understandable management would be outwardly very optimistic about the opportunity given the Arm exclusivity this year and partnership with Microsoft.

CEO Cristiano Amon said at Computex that “the PC is truly reborn. It's a new era for the PC and that is happening with the combination of Snapdragon X Elite and Copilot Plus,… it's one of the most significant transitions in Windows. Personally, I believe is as significant as Windows 95. It is changing the experience, delivering groundbreaking AI capabilities, fundamentally changing how we interact with our PCs.” Amon added that the AI PC “will become indispensable for both personal and business applications. One thing is going to be different about this new PC. Unlike the past, your Windows PC will get better over time.”

Despite the optimism, Qualcomm said that “in our June quarter guidance, there isn't material PC volume forecasted in our numbers,” with more of the impacts coming from the back-to-school season and into 2025.

AMD:

AMD is arguably one of the more bullish companies in the industry regarding the impact that AI PCs will have on the upcoming refresh cycle.

CFO Jean Hu mentioned that AMD’s “PC client business are performing really well. We're gaining share. And primarily, they are driven by our most recent generation of processors, Ryzen 8000.” She added that the company believes the “AI PC is a very significant inflection point. It will potentially help the refresh the PC market. … [And] we think generation over generation technology and product leadership will help us both on the commercial side and the consumer side to continue to gain share.”

This echoes statements from CEO Lisa Su in AMD’s Q1 earnings call: “We see clear opportunities to gain additional commercial PC share based on the performance and efficiency advantages of our Ryzen Pro portfolio and an expanded set of AMD-powered commercial PCs from our OEM partners. Looking forward, we believe the market is on track to return to annual growth in 2024, driven by the start of an enterprise refresh cycle and AI PC adoption. We see AI as the biggest inflection point in PC since the Internet with the ability to deliver unprecedented productivity and usability gains.”

Q1 had already seen rather strong demand for AMD’s latest Ryzen series, as “Ryzen desktop CPU sales grew by a strong double-digit percentage year-over-year and Ryzen mobile CPU sales nearly doubled year-over-year as new Ryzen 8040 notebook designs from Acer, Asus, HP, Lenovo and others ramped.” If anything, this could be seen as a strong indicator of demand for the upcoming Ryzen AI 300 series.

Intel:

Intel has had the most to say about AI PCs, given that their positioning in the x86 versus Arm-based processor competition is most at risk if Arm-based PCs really start to see strong adoption over the next few quarters to years. We previously discussed the outlook for Arm-based PCs for our premium readers, saying that “if Arm-based PCs stick this time, it will mark a massive shift in edge devices. X86 dominates PCs as it stands today, yet AI leaders have their roadmaps loaded with Arm-based releases over the next year.” For more on Arm-based PCs, reference our analysis “Arm-Based PCs and AI Edge Devices”.

However, Intel has made it crystal clear that they don’t see Arm as much of a threat. Management explained that “Arm and Windows PC is not a new dynamic. This is something that was a big concern of the investment community as far back as 2011. And so there's been 14, 15 years of trying to break Arm into the Windows PC market with very little success in large part because we had a very strong road-map in large part because we had a strong ecosystem and in large part x86 PCs not only make us a profitable, it makes the OEMs profitable as well.

And so we kind of feel like the dynamic really hasn't changed all that much from the 2011 time period. Clearly, Microsoft is throwing more weight behind this. They've done an exclusivity with a single vendor in Qualcomm and that is up at the end of the year. And we fully expect to see other potential Arm suppliers come into the market when that exclusivity is up. But in general, there's been one successful Arm PC vendor in the market, and that's been Apple. And they've had 25 plus years in the market and they've got about a 10% market share.”

Turning to AI PCs, Intel is one of the most bullish on the long-term potential, seeing up to 80% of annual PC shipments being AI PCs by 2028.

Intel also believes revenue in Q1 was the “bottom and we expect sequential revenue growth to strengthen throughout the year and into 2025, underpinned by, one, the beginnings of an enterprise refresh cycle and growing momentum for AI PCs.” Management also hinted that the weaker Q2 revenue guide in part boiled down to supply constraints for its Core Ultra chips: “Q2 client revenue is constrained by wafer-level assembly supply, which is impacting our ability to meet demand for our Core Ultra-based AI PCs.”

Management further explained that the ramp of Core Ultra (Meteor Lake) “continues to accelerate beyond our original expectation with units expected to double sequentially in Q2, limited only by our supply of wafer level assembly. Improving second half Meteor Lake supply and the addition of Lunar Lake and Arrow Lake later this year will allow us to ship in excess of our original 40 million AI PC CPU target in 2024.” As a reminder, Intel is aiming to ship more than 100 million AI PC chips by the end of 2025, with a target of 40 million or more in 2025, and 50% growth to 60 million or more in 2025. Supply constraints will certainly pressure this target if wafer supply takes longer to improve, but at the moment, the demand is present, aided by the enterprise refresh.

As a whole, management teams from both chipmakers and PC vendors alike are projecting strong growth for AI PCs. Qualcomm is leading the push for the Arm-based PC, while Intel is targeting a huge growth in shipments for its x86-based Core Ultra lineup over the next six quarters.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.Learn more here.

Conclusion

We see AI PCs as the next wave of growth in the budding AI industry, following GPU hardware and memory as professionals and consumers alike both stand to benefit from the ability to run on-device AI efficiently. AI PCs are projected to spearhead growth in the broader PC industry over the next few years, while adoption rates of AI PCs are estimated to soar, from less than one-fifth of total shipments this year to nearly four-fifths of annual shipments by 2028.

In terms of unit growth, AI PCs are expected to more than triple from approximately 50 million units this year to north of 200 million units by 2027, a rapid growth curve for the industry. We’re keeping a close eye on the major players and in the space as we work to identify the top beneficiaries of this trend, recently sharing a downstream beneficiary with our premium members.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Micron Q3: “Multiple Billions” In HBM Revenue Next Year

Posted on by io-fund

Micron beat and raised in Q3 as strong high-bandwidth memory (HBM) demand and price increases drove revenue growth of 81.5% in the quarter. Management reiterated their forecast for several hundred million in HBM revenue in fiscal 2024, with Q3 generating north of $100 million in HBM revenue in the quarter. Micron also offered its first look at fiscal 2025 for HBM, seeing “multiple billions” of HBM revenue next fiscal year, implying growth may come in more than ten-fold next year for this portion of its DRAM business.

CEO Sanjay Mehrotra said that Micron is “gaining share in high-margin products like High Bandwidth Memory, and our data center SSD revenue hit a record high.” He added that Micron is “excited about the expanding AI-driven opportunities ahead, and are well positioned to deliver a substantial revenue record in fiscal 2025.”

Micron also mentioned that HBM is sold out for calendar 2025 with pricing already contracted for. There are some drawbacks to this as the market may interpret it as a lack of potential for upside. That is being too hasty as the exact pricing is not disclosed, only that HBM is sold out. This will probably be the situation into the foreseeable future due to low yields from HBM.

Revenue and EPS

Micron’s revenue growth accelerated sharply in Q3, with the company reporting revenue growth of 81.5% YoY, a 2380 bp acceleration from 57.7% YoY growth last quarter. Micron’s Q4 guide was barely above the consensus estimate although revenue growth is still accelerating, with the midpoint of the guided range pointing to 89.5% YoY growth next quarter.

  • Q3 revenue was $6.81 billion, an increase of 81.5% YoY and 16.9% QoQ.
  • Fiscal Q4 revenue was guided at $7.6 billion, +/- $200 million, for YoY growth of 89.5% and QoQ growth of 11.6%. This marginally beat the consensus estimate of $7.58 billion, but fell short of Citi’s expectation for an $8 billion revenue guide.
  • Q3 GAAP EPS was $0.30, in line with estimates. This was a strong increase from ($1.73) in the year ago quarter, but a sequential decline from $0.71 last quarter. The sequential decline was due to a ($377 million) income tax provision in Q3, whereas Q2 benefitted from a $622 million income tax benefit.
  • Q3 adjusted EPS was $0.62, beating estimates for $0.53. This compares to adjusted EPS of ($1.43) in the year ago quarter and $0.42 last quarter.
  • For Q4, Micron guided GAAP EPS to be $0.61, +/- $0.08 for QoQ growth of 103%, at the midpoint. Adjusted EPS was guided at $1.08, +/- $0.08, for QoQ growth of 74% at midpoint.

Margins

Micron’s Q3 report was a standout on margins, as increased prices drove significant expansion in Q3’s margins down the line and pointed to margin expansion continuing next quarter. Q4’s gross margin guide and implied operating margin levels were very strong.

Management stated the following in terms of how to model a higher product mix of HBM: “Keep in mind that higher mix of HBM will offset non-HBM DRAM cost reductions, but HBM will be at accretive gross margins.” In the long run, “portfolio mix will be an important contributor over time as HBM, high-capacity DIMMs, data center SSDs and other high-value products increase as a portion of our mix.”

Q3’s margins were strong across the board, coming in ahead of management’s guided ranges and reflecting strong QoQ and YoY expansion.

  • GAAP gross margin was 26.9% in Q3, an 840 bp QoQ and 4470 bp YoY expansion up from from (-17.8%). This came ahead of management’s guide for 25.5%.
  • Adjusted gross margin was 28.1%, an 810 bp QoQ and 4420 bp YoY expansion.
  • GAAP operating margin was 10.6%, a 730 bp QoQ and 5750 bp YoY expansion up from (-46.90). This also was ahead of management’s implied guide for 8.7%.
  • Adjusted operating margin was 13.8%, a 1030 bp QoQ and 5300 bp YoY expansion.
  • GAAP net margin was 4.9%, down from 13.6% last quarter but up substantially from (50.5%) in the year ago quarter. The QoQ decline was due to the income tax provision.
  • Adjusted net margin was 10.3%, up from 8.2% last quarter and (41.7%) in the year ago quarter.

Q4’s guided margins point to continued expansion, with the impacts of this margin strength increasingly evident when viewed in dollar terms.

  • For Q4, management guided GAAP gross margin at 33.5%, +/- 1.0%, representing a 660 bp QoQ and 4430 bp YoY expansion (on pace with Q3’s YoY expansion). Last year, GAAP gross margin was (-10.80%).
  • Q4’s adjusted gross margin was guided at 34.5%, up 640 bp QoQ and 4360 bp YoY.
  • For Q4, based on management’s operating expenditure guides, GAAP operating margin is expected to be 17.8%, up 720 bp QoQ and 5450 bp YoY. Last year, GAAP operating margin was (-36.70%).
  • Adjusted operating margin is expected to be 20.6%, up 680 bp QoQ and 5070 bp YoY, and reaching the highest level since Q4 2022.

Here’s what the expansion in margins looks like in dollar terms:

  • Gross profits of $1.8 billion reported in Q3 will increase to $2.5 billion in Q4. This is following a loss of $668 million last year.
  • Operating income of $700 million in Q3 will grow to $1.3 billion in Q4. This is following a loss of $1.7 billion in Q3 of last year.

Cash and Debt

Cash flows were particularly strong as well, with operating cash flow more than doubling QoQ and free cash flow returning to positive territory.

  • Operating cash flow was $2.48 billion in Q4, more than double the $1.22 billion generated last quarter and a significant improvement from $24 million in the year ago quarter. OCF margin was 36.4%, compared to 20.9% last quarter and 0.6% in the year ago quarter.
  • Adjusted free cash flow was $425 million, compared to ($29 million) last quarter and ($1.36 billion) in the year ago quarter. Adjusted FCF margin was 6.2%, versus (0.5%) last quarter and (36.1%) in the year ago quarter.
  • Cash, investments and restricted cash totaled $9.22 billion, and debt totaled $13.26 billion.

Key Segments

  • DRAM revenue increased 13% QoQ to $4.7 billion, with the sequential growth decelerating from 21% in Q2 and 24% in Q1. DRAM ASPs increased approx. 20% QoQ, accelerating from the high-teens last quarter.
  • NAND revenue increased 32% QoQ to $2.1 billion, accelerating from 27% QoQ growth in Q2. NAND ASPs increased approx. 20% QoQ.

The following guidance was provided: “We expect DRAM bit shipments to be flattish and NAND shipments to be up slightly in fiscal Q4. We forecast shipment growth to strengthen modestly in the November quarter.” The market may have wanted more in terms of sequential growth given the strong QoQ growth seen in the prior two quarters. 

  • Compute and Networking (CNBU) revenue increased 18% QoQ and 85% YoY to $2.57 billion.
  • Mobile (MBU) revenue decreased (1%) QoQ but increased 94% YoY to $1.59 billion.
  • Embedded (EBU) revenue increased 16% QoQ and 42% YoY to $1.29 billion.
  • Storage (SBU) revenue increased 50% QoQ and 116% YoY to $1.35 billion.

Management said that in the data center, “rapidly growing AI demand enabled us to grow our revenue by over 50% on a sequential basis, and we grew share in high margin AI-related product categories such as HBM, high-capacity DIMMs and data center SSDs.”

HBM Growth Strong, 2025 Outlook Sees Multiple Billions in Revenue

We had noted in our pre-earnings write-up that Micron’s updates on HBM3e were to be closely watched, and management finally unveiled its FY25 HBM revenue targets as well as HBM3e revenue for Q3.

Management had said last quarter that Micron was “on track to generate several hundred million dollars of revenue from HBM in fiscal 2024,” and left that target unchanged. However, management clarified that the “HBM shipment ramp began in FQ3, and we generated over $100M in HBM3E revenue in the quarter, at margins accretive to DRAM and overall company margins.” Micron has also “sampled our 12-high HBM3E product and expect to ramp it into high volume production in CY25, and increase in mix throughout 2025.”

In addition, management now sees “multiple billions in revenue from HBM in FY25,” this will be up from several hundred million in FY24.

Notably, demand on HBM will outstrip supply for some time due to HBM consuming 3X more wafers than D5. The trade ratio will increase from HBM3 to HBM4, as increasing the die stack from 8 to 12 will exacerbate the issue of low HBM yields. The yields will be far less than the previous generation of DRAM, creating more supply pressure.

We’ve mentioned before, but doesn’t hurt repeating, that Micron expects to have a similar market share in HBM by 2025 as it has in overall DRAM – which translates to 38% market share.

HBM Sold Out; Pricing Already Contracted

The blemish in the report is the commentary that HBM is sold out for calendar 2024 and 2025, with “pricing already contracted for the overwhelming majority of our 2025 supply.”

While contracts on pricing protect Micron in the event that prices fall, we’ve seen prices rise so far through 2024 on a tight-supply environment, suggesting that Micron may be expecting the supply side to ease and pricing increases to fade through 2025. Should prices continue to rise through 2025, having a majority of supply contracted already may limit some incremental revenue and margin growth. This could imply there is no further upward surprises due to tight supply and higher ASPs.

There was a question about this issue from the call.

Christopher Danely (Analyst)

“So I think you mentioned you're signing up some customers to long-term contracts. Given your belief that the pricing is going to keep going up, why sign people up to long-term contracts and potentially miss out on some of the increased pricing? Or is there some potential for wiggle room on pricing with the contracts and it's more of a unit basis? Just curious there.”

Sanjay Mehrotra (Executives)

“The long-term contracts really help us and customers get closer, not only with respect to, let's say, supply or pricing discussions as may be relevant to our various customer contracts, but also with respect to the technology road map, the product road map, the timing of the supply. And they are very helpful factors in building a close relationship with the customers. And you can see that we are pointing to a substantial revenue record in 2025, of course, leveraging some of these contracts that we have put in place, and we have also pointed to a significant improvement in profitability. So I think we are well positioned in these contracts with respect to not only the supply and demand fundamentals, but also with respect to the financial aspects.”

What’s important to note is that even if management knows what fiscal year 2025 will see from HBM pricing, they have not guided yet for FY2025. In addition to this, although data center is the main story for now, Micron’s revenue is also determined by the timing of AI PCs and Mobile.

Capex To Rise Meaningfully in FY25

Amidst the strong growth forecast for HBM next year, Micron also unveiled its FY25 capex plan, which calls for meaningful YoY growth in capex from its $8 billion target in FY24.

Management is planning for FY25’s capex to be in the “mid-30s % range of revenue” to support HBM assembly and test equipment, fab and back -end facility construction as well as technology transition investment to support demand growth.”

Management add that FY25’s “record revenue and significantly improved profitability in FY25 will help support average quarterly capex in FY25 to be meaningfully above the FQ4 2024 level of $3B.”

Given that current analyst estimates call for ~$37 billion in revenue in FY25, management is implying FY25 capex to increase by more than 50% YoY to over $12 billion, with the $14 billion range (a ~75% YoY increase) more likely given the quarterly average comment. This supports stronger price action in companies like Lam Research, which supplies Micron.

The CHIPS Act helps to offset this increase in capex. During the past quarter, Micron signed a preliminary memorandum to receive $6.1 billion in grants.

Here is what the CFO stated on the call and how it’s expected that revenue growth outpaces capex spending growth.

“Toshiya Hari (Analyst)

Okay. Got it. That's helpful. And then as my follow-up, maybe one for Mark on CapEx. So you're guiding fiscal year '25 up materially. Given some of the hints that you've provided, maybe you're looking at a mid-teens $1 billion number for fiscal '25. I know more than half of that or half of that is coming from the greenfield investments in the U.S. But how should we be thinking about your bit supply growth in fiscal '25 or calendar '25? Should we expect you guys to grow more or less in line with the demand CAGR you have for DRAM and NAND, mid-teens and high teens respectively? Or do you expect to undership relative to those ranges in fiscal '25?

Answer
Mark Murphy (Executives)

Yes, we — good questions, Toshiya. And your view on CapEx, we've given enough that — we don't want to guide revenue for '25 because we'll do that at a future date by quarter. But we do expect a material increase year-over-year. For the quarter sequentially, we'll see a meaningful step up. And we were — we're at $3 billion — we increased from $2.1 billion to $3 billion third quarter to fourth quarter guide. I would characterize that both on a dollar and percent basis is more than meaningful. So it would be less than that sequentially. But we are spending more.

To your question on, we are very constrained on bits. — bit production. And so we will — as I mentioned in my earlier comments, we will certainly see inventory levels come down. In fact, we expect to be approaching target inventory levels by the end of 2025.

Note on HBM and NAND CAGRs

HBM’s CAGR is expected to remain strong and be above 50% for the next few years.

“Well, as we have said before, that we see the CAGR for HBM growth — in terms of bit growth CAGR to be well above 50% over the next few years. So certainly, HBM is a strong growth driver. And again, as we increase our mix of HBM going forward, it will, of course, be continuing to be accretive to our financial performance, including margins. And we are pleased that with the strong performance that we have we are sold out for '25 as well with overwhelming part of our output already committed in terms of pricing.”

During the Q&A, it was pointed out that the forecast for NAND CAGR growth was lowered from “the low 20s” to a new forecast of “growth in the high teens.” Management’s response was the following:

“And I'll also tell you that we basically revise the base here for the CAGR that we used. So this time, the CAGR that we used, we use the base year of 2023. And in 2023, as you know, we had bit demand growth in NAND that was higher, meaningfully higher than the CAGR. So that, of course, the larger base of 2023, just somewhat changed our outlook on the overall CAGR.”

This is important to note should we see headlines tomorrow that NAND growth will be lower than expected, that it’s instead a different baseline year.

Comments on AI PCs & Mobile

Per management, AI PCs are expected to accelerate in Q4 and throughout 2025 due to the Windows 12 replacement cycle. Micron will benefit as management explained: “we expect these devices will have 40% to 80% more DRAM content than today’s average PC.”

Micron’s management sees smartphones growing in the “low-to-mid single-digit percentage range.” Micron’s DRAM is seeing a 50% to 100% increase in Tier 1 Android phones from the mid-range Android phone having 6GB or 8GB to AI-enabled smartphones requiring 12GB and 16GB. Per the opening remarks: “In calendar Q1, we received recognition for being #1 in quality by five of the world’s leading smartphone OEMs.”

Conclusion:

There was a quote from management in the opening remarks that checks a lot of boxes.

 “As we look ahead to 2025, demand for AI PCs and AI smartphones and continued growth of AI in the data center create a favorable setup that gives us confidence that we can deliver a substantial revenue record in fiscal 2025, with significantly improved profitability underpinned by our ongoing portfolio shift to higher-margin products.”

You can’t complain about “a substantial revenue record” on the horizon plus improved profitability and a mix of higher-margin products. It would be hasty to assume the 2025 contracted pricing can’t deliver a beat or upward surprise, which grew 20% QoQ, and rather, we will want to watch DRAM QoQ growth more closely as it’s decelerated from the 20% QoQ range, down to 13% and now down to flat QoQ growth expected for next quarter.

With Micron at 73% YTD compared to QQQ at 20% YTD, the stock certainly has performed well. There are many paths for Micron to continue to perform well that we will be monitoring closely.

Damien Robbins and Beth Kindig contributed to this analysis

Recommended Reading:

Micron Q3 FY2024 Earnings Preview: Strong rebound led by AI

Posted on by io-fund

Micron will release its results on June 26th. The company reported a 42% acceleration to 57.7% revenue growth in the last quarter. Management expects revenue to accelerate 18.2% to 75.9% growth in Q3 FY2024.

The strength of the bottom line was the outlier in the report. The company achieved its goal of a positive adjusted operating margin a quarter ahead of expectation, primarily helped by the recovery in the DRAM and NAND pricing. Management is confident this trend will continue and expects positive free cash flow in the second half of the year and record revenue in FY2025.

The company is riding the Artificial Intelligence wave. Its HBM (High-Bandwidth Memory) is sold out for the calendar year 2024 and most of 2025 supply is being allocated. As a result of strong AI demand, the prices of HBM are expected to increase, which should help to drive higher revenues and profitability.

Revenue

The analysts expect revenue to grow 77.8% YoY to $6.67 billion and accelerate to 88.4% in Q4 FY2024. It is slightly higher than the management guide of 75.9% for Q3 FY2024. The company’s Q2 FY2024 revenue grew by 57.7% YoY to $5.82 billion, a 42% acceleration from Q1.

  • Q2 DRAM revenue grew by 21% sequentially to $4.2 billion, primarily helped by the increase in bit shipments in the low-single-digit percentage and price increasing by high teens. DRAM accounted for 71% of Q2 revenue.
  • Q2 NAND revenue grew by 27% sequentially to $1.6 billion, primarily helped by the increase in price of over 30% and offset by the decrease in bit shipments. NAND accounted for 27% of Q2 revenue.

The company provided an update during the J.P. Morgan conference on the company’s efficient handling of the disruption caused by the Taiwan earthquake. “We did have — and we put out the statement that up to about mid-single-digit percent of 1 quarter's DRAM output loss through a combination of some wafers that had to be scrapped, some lost production as we were restarting equipment, and then some slightly lower yields on product that was already in process. But all in all, I think the Micron teams responded extremely well. And as you note, we haven't had to make any further comments since then. And as Mark noted, no further comments relative to our guidance either.”

Margins

Margins have experienced a steep cyclical low and now appear to have bottomed out. The company achieved its goal of positive adjusted operating margin a quarter ahead of expectation, primarily helped by the recovery in the DRAM and NAND pricing.

Other factors include lower utilization charges, which management expects to be lower in the future. CFO Mark Murphy replied to an analyst question on the margins in the earnings call, “On the underutilization charges, Chris, they went from, I think it was $165 million in the first quarter down to under $50 million in the second quarter. We believe they'll stay at low levels well below 50 for the foreseeable future. So we'll no longer comment on those.”

  • Gross margin improved by 51.2 percentage points YoY and by 19.2 points sequentially to 18.5%. It was primarily helped by higher prices, selling the remainder of written-down inventories, and lower utilization charges. The management guide for the next quarter is 25.5%. Similarly, the adjusted gross margin improved 51.4 points YoY to 20%. The management guide for the next quarter is 26.5% and sequential improvement is helped by “robust price increases across both DRAM and NAND.”
  • Operating margin improved 65.7 percentage points YoY and up 27.2 points sequentially to 3.3%. The management guide for the next quarter is 8.7%. The adjusted operating margin improved 59.7 percentage points YoY and up 23.7 points sequentially to 3.5%, primarily helped by the factors discussed above and partly offset by higher variable compensation expense due to the improved 2024 outlook. Management adjusted operating margin guide for the next quarter is 11.5% after accounting for a $30 million sequential increase in operating expenses due to increased R&D expenses.
  • Net income was $793 million or 13.6% of revenue compared to a net loss of (-$2.3 billion) or (-62.6%) of revenue. The adjusted net income was $476 million or 8.2% of revenue compared to a net loss of (-$2.081 billion) or (-56.3%) of revenue. GAAP EPS came at $0.71 and beat estimates by 285.4% and adjusted EPS came at $0.42 and beat estimates by 273.7%.
  • The management GAAP EPS guide is $0.17 +/- $0.07 and adjusted EPS guide is $0.45 +/- $0.07 for Q3. The analysts expect the company to report adjusted EPS of $0.52.

Management made it crystal clear that HBM is accretive to margins and the strength in margin is due to pricing power. “So with respect to the accretive nature of HBM, look, HBM carries a higher cost, but it also carries a significantly higher pricing because it brings such great value in the applications in terms of its performance and power. And we are executing well. Our yield ramp is going well as well according to plan.”accretive nature of HBM, look, HBM carries a higher cost, but it also carries a significantly higher pricing because it brings such great value in the applications in terms of its performance and power. And we are executing well. Our yield ramp is going well as well according to plan.”

“And therefore, we are pleased that in this quarter, when we have begun our production shipments, we will be having it accretive to our gross margins in the quarter. And of course, this momentum will continue to build in the quarters ahead.”we will be having it accretive to our gross margins in the quarter. And of course, this momentum will continue to build in the quarters ahead.”

Cash and Balance Sheet

Q2 FY2024 operating cash flow was $1.22 billion or 20.9% of revenue compared to $343 million or 9.3% of revenue in the same period last year. Adjusted free cash outflow was (-$29 million) or (-0.50%) of revenue compared to adjusted free cash outflow of (-$1.81 billion) in the same period last year.

Due to the increase in investments in AI chips, the company slightly raised the capex last month by removing the lower range of the capex outlook for FY2024 of $7.5 billion to $8 billion to the current $8 billion. Management has reiterated positive free cash flow in the next two quarters.

The company had cash and investments of $9.7 billion and debt of $13.7 billion compared to $9.8 billion and $13.5 billion in the November quarter. In FQ2, the company refinanced $1 billion in debt, thereby extending the maturity and lowering the near-term borrowing costs. The company paid $127 million in dividends.

Key Metrics from Business Units

Compute and Networking Business Unit (CNBU) revenue showed a solid acceleration to 59% YoY and 26% QoQ growth to $2.185 billion from a decline of (-1%) YoY in the previous quarter. It was led by strong growth in data center revenue and cloud doubled sequentially.

Mobile Business Unit (MBU) revenue grew by 69% YoY and 24% sequentially to $1.598 billion. It was primarily helped by the increase in price and offset by the decrease in volume.

Embedded Business Unit (EBU) revenue grew by 28% YoY and 7% sequentially to $1.11 billion, it was led by strong demand for leading-edge products in the industrial market.

Storage Business Unit (SBU) revenue grew by 79% YoY and up 39% sequentially to $905 million. The company reported a strong acceleration from a (-4%) decline in the previous quarter. The company witnessed strong growth in all the end markets and Datacenter SSD revenue doubled on a YoY basis, driven by share gains for the company’s products.

Other noteworthy points to watch

HBM3e

Management updates on the HBM3e are to be closely watched. In December, Micron’s HBM3e was a core part of our multi-faceted AI-driven growth thesis. The company provided positive updates on HBM3e development and revenue generation in the last earnings call.

CEO Sanjay Mehrotra said “We commenced volume production and recognized our first revenue from HBM3E in fiscal Q2 and now have begun high-volume shipments of our HBM3E product.” The company is “on track to generate several hundred million dollars of revenue from HBM in fiscal 2024.”

Micron expects these HBM revenues “to be accretive to our DRAM and overall gross margins starting in the fiscal third quarter.” This is an important quote – Micron has already driven tremendous improvement in gross and operating margins in Q2, and the HBM pricing power will further provide a tailwind to margins going forward. Moving beyond fiscal Q3 and Q4 and into fiscal 2025, margins are expected to continue to expand at a fairly strong rate as HBM revenues ramp up significantly.

Micron shed light on customers and capacity, noting that while its HBM3e will be a part of Nvidia’s H200 Tensor Core GPU, it is “making progress on additional platform qualifications with multiple customers.”

Recently, Samsung failed Nvidia’s tests due to the heat and power consumption issues. Wells Fargo said that the Micron is likely to benefit from the Samsung HBM issues.

Micron’s upcoming 12-high HBM3e has been sampling to customers, and Micron said it will begin ramping the cube in high volume production throughout 2025: “Earlier this month, we sampled our 12-high HBM3E product, which provides 50% increased capacity of DRAM per cube to 36 gigabytes. This increase in capacity allows our customers to pack more memory per GPU, enabling more powerful AI training and inference solutions. We expect 12-high HBM3E will start ramping in high-volume production and increase in mix throughout 2025.”We expect 12-high HBM3E will start ramping in high-volume production and increase in mix throughout 2025.”

Nvidia’s H200 win is a major win for Micron, as competition in the HBM landscape remains stiff. Per management: “NVIDIA announced its next-generation Blackwell GPU architecture-based AI systems, which provides a 33% increase in HBM3E content, continuing a trend of steadily increasing HBM content per GPU. Micron's industry-leading high-bandwidth memory HBM3E solution provides more than 20x the memory bandwidth compared to standard D5-based DIMM-server module.”which provides a 33% increase in HBM3E content, continuing a trend of steadily increasing HBM content per GPU. Micron's industry-leading high-bandwidth memory HBM3E solution provides more than 20x the memory bandwidth compared to standard D5-based DIMM-server module.”

Edge AI – Smartphone and PCs

Smartphone recovery is another tailwind for the company. Also, AI smartphones have a substantial increase in DRAM content compared to non-AI phones. The company’s DRAM and NAND solutions are already included in leading smartphones like Samsung Galaxy S24 and Honor Magic 6 Pro.

“Smartphone unit volumes in calendar 2024 remain on track to grow low to mid-single digits. Smartphones offer tremendous potential for personalized AI capabilities that offer greater security and responsiveness when executed on device. Enabling these on-device AI capabilities is driving increased memory and storage capacity needs and increasing demand for new value-add solutions. For example, we expect AI phones to carry 50% to 100% greater DRAM content compared to non-AI flagship phones today.we expect AI phones to carry 50% to 100% greater DRAM content compared to non-AI flagship phones today.

Micron's leading mobile solutions provide the critical high performance and power efficiency needed to unlock an unprecedented level of AI capability. In DRAM, we are now sampling our second-generation, 1-beta LPDRAM LP5X product, which delivers the industry's highest performance at improved power for flagship smartphones.”which delivers the industry's highest performance at improved power for flagship smartphones.”

PCs are expected to be another growth market for Micron. Management expects PCs to return to growth in CY2024 in the “low single-digit range.” The neural processing units (NPU) chipsets that AI PCs require will see 40% to 80% more DRAM content than non-AI PCs.

Valuation

The company trades at a P/S ratio of 8.4 and a forward P/S ratio of 6.2. The stock is trading significantly higher than the 5-year P/S ratio of 3.4 as the company is one of the key beneficiaries of the AI trend.

Conclusion

We entered a position with Micron in December last year for a thesis we have carefully built on a memory rebound. Micron’s HBM3e was a core part of our multifaceted AI-driven growth. We further believe we should have a long run away with Edge AI to be the next growth driver, potentially in 2025.

Recommended Readings:

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Broadcom Q2 Post-Earnings: “We are not Standing Still”

Posted on by io-fund

Broadcom beat across the board with highlights including “just over” $11B in AI revenue expected and networking growth raised to 40% YoY growth, up from “over 35% growth” previously guided. The VMWare acquisition is one of the more intriguing points with management stating: “VMware revenue in Q1 was $2.1 billion, grew to $2.7 billion in Q2 and will accelerate towards a $4 billion per quarter run rate.”

As of now, Broadcom is expected to report over $11 billion in AI revenue this year, up from $10 billion. Additionally, the company beat on the top line and bottom line, and raised full year guidance.

Revenue and EPS:

Note: Broadcom completed the acquisition of VMware on Nov 22, 2023 and 11 months contribution from VMware is expected to be $12B for FY24

Revenue growth of 42.99% beat estimates for growth of 37.5% for revenue of $12.5 billion. Next quarter, Broadcom is expected to report revenue of $12.7 billion for growth of 43%.

For the fiscal year, the company is expected to report $51 billion in revenue for growth of 42.4%, up from a guide for $50 billion last quarter.

Adjusted EPS of $10.96 beat estimates of $10.84, which was flat QoQ yet was up $10.32 in the year ago quarter. Next quarter’s adjusted EPS is expected to be $11.90, for growth of 13%. GAAP EPS is lower than usual for Broadcom at $4.42 due to costs associated with the VMW acquisition. Per the CFO: “For modeling purposes, please keep in mind that GAAP net income and cash flows in fiscal year 2024 are impacted by restructuring and integration-related cash costs due to the VMware acquisition.”

Adjusted EBITDA was $7.4 billion, up from $7.15 billion last quarter. Adjusted EBITDA margin is 59.5% with management raising the guide for FY2024 to 61%, up from 60% previously guided. This is down from FY2023, which was 65% without VMWare.

Margins:

Margins expanded across the board with operating margin expanded 633 basis points QoQ. Per our pre-earnings writeup: “The merger integration process is expected to take a year and will initially have a drag on profit margins due to transition costs and VMware's lower margin profile. However, cost-cutting measures and merger synergies are anticipated to improve margins in the long term.”

  • Gross Margin of 62.27% increased QoQ from 61.66% although high 60% is more typical. This led to gross profit of $7.78 billion.
  • Adjusted gross margin of 76.2% expanded 84 basis points for adjusted gross profit of $9.51 billion.
  • GAAP operating margin of 23.74% expanded from 17.41% for operating income of $2.12 billion. This is typically in the mid-40% with the lower OPM being from costs associated with the VMW acquisition.
  • Adjusted operating margin of 57.3% was up 20 bps QoQ from 57.1% for adjusted operating profits of $7.14 billion. This is typically in the low 60-percent range.
  • Net margin of 16.99% is up 591 basis points for $2.12 billion in net income. This is typically in the high 30% range.
  • Adjusted net margin was 43.20% down 73 basis points for adjusted net income of $5.4 billion.

Cash:

Broadcom reported operating cash flow of $4.58 billion for OCF margin of 36.7%. Free cash flow of $4.45 billion represents a margin of 35.6%. The company has $9.8 billion in cash on the balance sheet and $74 billion in debt. This is up from $39 billion in debt two quarters ago due to the VMWare acquisition.

The company paid $2.4B in cash dividends based on a quarterly dividend of $5.25 per share. The company repaid $2B in debt in the quarter. Last quarter, the company stated they intend to continue paying $2 billion on the floating rate debt every quarter this year. Even though Broadcom has a high cash flow margin, the high debt is not ideal. You can find more details about the floating rate in our pre-earnings writeup.

Days sales outstanding is 40 days, down from 41 days last quarter. Inventory is at $1.8 billion compared to $1.9 billion last quarter.

Key Segments:

Semiconductor solutions grew 6% YoY to $7.2 billion and infrastructure software grew 175% YoY to $5.28 billion. As stated under the revenue section, 11 months contribution from VMWare is expected to be $12B or about $3.3 billion if we assume all things are equal, which means non-VMWare software revenue was flat. What’s important to monitor is the 15% QoQ growth as the restructuring VMWare is going through is expected to result in accelerating revenue. Last quarter, infrastructure software was $4.6 billion.

Networking revenue also grew 15% QoQ from $3.3 billion to $3.8 billion. This represents YoY growth of 44%. There were some strong statements about networking on the call, primarily this one: “Next year, we expect all mega-scale GPU deployments to be on Ethernet. 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.”Next year, we expect all mega-scale GPU deployments to be on Ethernet. 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.”

This quarter, Broadcom reported $3.1 billion in AI revenue with management stating they expect to end the year with “just over $11 billion in AI revenue.” Per discussions in the Q&A, this should be a minimum of $11.6 billion, with management being coy when asked why they weren’t guiding higher given H2 is supposed to be larger than H1: “So you may be right. You may estimate it better than I do, but the general trajectory is getting better. […] That's the best forecast I have at this point, Stacy.”

Server storage connectivity declined (27%) YoY to $824 million, which is a nominal improvement from last quarter when the segment declined (29%) YoY to $887 million. Per management, Q2 is expected to be a bottom in server storage and “we expected a modest recovery in the second half of the year.”

Broadband declined (39%) YoY to $730 million, which is steeper than last quarter when this segment declined (-23%) to $940 million. Broadband is “expected to bottom in H2 with a recovery in 2025.”

Wireless grew 2% YoY to $1.6 billion but was down QoQ due to seasonality. The company expects FY2024 to be flat this year.

Per a Bloomberg report, Apple is expected to replace some of its Broadcom chips with custom chips in 2025. This will reduce the customer concentration of Apple from 20% to 12%-15%.

Note on Valuation:

Broadcom is trading above historic averages with PS ratio prior to earnings of 16 compared to historic 5-year average of 8. The PE Ratio prior to earnings was 52 compared to a historic average of 40. AI semis have been seeing higher-than-usual valuations and where the market settles on this long-term is anyone’s guess, but over the past year or so, the market has given a premium valuation to AI-related semis.

Q&A:

Networking Update:

The statement that: “next year, we expect all mega-scale GPU deployments to be on Ethernet” is when Broadcom saw even stronger price action after hours. This is sooner than most expected. We covered the differences between InfiniBand and Ethernet in our Broadcom writeup here: “Broadcom: Networking/ASICs Giant and Second Largest By AI Revenue.”

That comment is interesting because InfiniBand accounts for over $10 billion in revenue for Nvidia. There were questions on how Broadcom plans to compete with Nvidia, with the CEO pointing out that they’ve been a leader in Ethernet for decades.

Per the opening remarks: “Networking these AI accelerators is very challenging but the technology does exist today. In Broadcom, we have the deepest and broadest understanding of what it takes for complex, large workloads to be scaled out in an AI fabric. Proof in point, 7 of the largest 8 AI clusters in deployment today use Broadcom Ethernet solutions.”

From my perspective, the impetus for the market moving toward Ethernet is to shake up Nvidia’s iron grip on the market, and thus, Broadcom should be a first-place contender. That’s speculative, but a reasonable and investable assumption. Per my previous write-up: “[Benefits of Ethernet]: Large pool of vendors whereas InfiniBand increases dependency on Nvidia. For this reason, AWS and Google Cloud have remained on Ethernet as they prioritize custom silicon.”

In other words, despite being an Nvidia bull, I do not think Spectrum X will take the Ethernet market. I think Broadcom will remain the leader.

Here is the Q&A portion on this topic. We are interested in the second part as it’s understood that ASICs and GPUs do not compete, rather they are going to coexist.

Question
Vivek Arya (Analyst):

Hock, I would appreciate your perspective on the emerging competition between Broadcom and NVIDIA across both accelerators and Ethernet switching. So on the accelerator side, they are going to launch their Blackwell product that many of the same customers that you have a very large position in the custom compute. So I'm curious how you think customers are going to do that allocation decision, just broadly what the visibility is.

And then I think part B of that is as they launch their Spectrum-X Ethernet switch, do you think that poses increasing competition for Broadcom and the Ethernet switching side in AI for next year?

Answer
Hock Tan (Executive):

Very interesting question, Vivek.

On AI accelerators, I think we are operating on a different — to start with scale, much a different model. It is — and on the GPUs, which are the AI accelerator of choice on merchant — in a merchant environment is something that is extremely powerful as a model and it's something that NVIDIA operates in, in a very, very effective manner. We don't even think about competing against them in that space, not in the least. That's where they're very good at and we know where we stand with respect to that.

Now what we do for very selected or selective hyperscalers is if there's a scale and the skills to try to create silicon solutions, which are AI accelerators, to do particular very complex AI workloads, we're happy to use our IP portfolio to create those custom ASIC AI accelerator. So I do not see them as truly competing against each other. And far for me to say I'm trying to position myself to be a competitor on basically GPUs in this market. We're not. We are not a competitor to them. We don't try to be either.

Now on networking, maybe that's different. But again, people may be approaching and they may be approaching it from a different angle. We are, as I indicated all along, very deep in Ethernet as we've been doing Ethernet for over 25 years, Ethernet networking. And we've gone through a lot of market transitions, and we have captured a lot of market transitions from cloud-scale networking to routing and now AI. So it's a natural extension for us to go into AI.

We also recognize that being the AI compute engine of choice in merchants in the ecosystem, which is GPUs, that they are trying to create a platform that is probably end to end very integrated. We take the approach that we don't do those GPUs, but we enable the GPUs to work very well. So if anything else, we supplement and hopefully complement those GPUs with customers who are building bigger and bigger GPU clusters.”

Tomahawk 6 Coming End of 2025:

On the topic of Broadcom’s leadership in Ethernet, this was a key Q&A moment as to how Broadcom intends to stay in the lead on networking:

“Question
Harlan Sur (Analyst)

[…] it's been 2 years since you've introduced Tomahawk 5 product introduction, right, which if I look back historically, means you have silicon and are getting ready to introduce your next-generation 3-nanometer Tomahawk 6 products, which would, I think, puts you 2 to 3 years ahead of your competitors. Can you just give us an update there?

Answer
Hock Tan (Executive)

Harlan, you're pretty insightful there. Yes, we launched Tomahawk 5 '23. So you're right, by late '25, the time we should be coming out with Tomahawk 6, which is the 100-terabit switch, yes.”

VMWare Update:

Management provided a key update on VWM this quarter: “VMware revenue in Q1 was $2.1 billion, grew to $2.7 billion in Q2 and will accelerate towards a $4 billion per quarter run rate. We therefore expect operating margins for VMware to begin to converge towards that of classic Broadcom software by fiscal 2025.”

The restructuring of VMWare has been controversial and bold. Broadcom’s management team terminated partner agreements, laid off thousands of employees and restructured its perpetual licensing terms to narrow its focus from 300,000 customers down to the 10,000 A-list customers that can drive the most revenue. From there, the company forced resellers to reapply and increased pricing for many customers.

To illustrate the overhaul, the CEO stated in the opening remarks: “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 4 core product offerings and simplified the go-to-market flow, eliminating a huge amount of channel conflicts.”we have modernized the product SKUs from over 8,000 disparate SKUs to 4 core product offerings and simplified the go-to-market flow, eliminating a huge amount of channel conflicts.”

This was also offered: “We are making good progress in transitioning all VMware products to a subscription licensing model. And since closing the deal, we have actually signed up close to 3,000 of our largest 10,000 customers to enable them to build a self-service virtual private cloud on-prem. Each of these customers typically sign up to a multiyear contract, which we normalize into an annual measure known as annualized booking value or ABV. This metric, ABV, for VMware products accelerated from $1.2 billion in Q1 to $1.9 billion in Q2. For a reference, for the consolidated Broadcom software portfolio, ABV grew from $1.9 billion in Q1 to $2.8 billion over the same period in Q2.”transitioning all VMware products to a subscription licensing model. And since closing the deal, we have actually signed up close to 3,000 of our largest 10,000 customers to enable them to build a self-service virtual private cloud on-prem. Each of these customers typically sign up to a multiyear contract, which we normalize into an annual measure known as annualized booking value or ABV. This metric, ABV, for VMware products accelerated from $1.2 billion in Q1 to $1.9 billion in Q2. For a reference, for the consolidated Broadcom software portfolio, ABV grew from $1.9 billion in Q1 to $2.8 billion over the same period in Q2.”

Custom Silicon Update:

Per Royston’s pre-earnings writeup:

“During its AI Infrastructure Investor meeting held in March, the company announced its third AI ASIC customer. Charlie Kawwas, Broadcom's President, Semiconductor Solutions Group, said, “Well, since you're all here today and you traveled here, we wanted to actually share with you that we actually have a third customer. I don't hear any excitement. Come on. So we're very, very honored and pleased and happy to tell you that third customer is also in the consumer AI space and we are in the ramp phase and we will be shipping products in the next few months to that customer. And this is something that we believe will continue as well over the next few years.”

This is certainly big since the CEO mentioned, “it takes years. It takes a lot of heavy lifting to create that custom silicon because you need to do more than just hardware of silicon to really have a solution for generative…” The company counts Google and Meta as the first two customers and JP Morgan believes that the third could be ByteDance. They also believe that the company has recently won follow-on orders from Google and Meta.

"Overall, we estimate that Google and Meta combined will drive $9B+ in AI ASIC chip revenues for Broadcom this year (Google ~$8B+ and Meta around $500M-$1B), up almost 2.5x over CY23," wrote the analyst. "More importantly, as we said back in 2022, we believe that Meta remains on track to become Broadcom's next multi-billion dollar per year AI ASIC customer potentially starting in CY25." JP Morgan estimates that the AI revenue to be $10 billion to $12 billion for FY2024, driven by the third customer, strong demand for Tomahawk 5 and Jericho 3 switching/routing chipsets and PCIe Gen5/Gen6 switches.

Conclusion:

We are also seeing early shoots on AI software and AI custom silicon. Pick a direction in AI, and if you look closely enough, you’ll see Broadcom is not “standing still.” That’s the CEO’s words, not mine, but I think it perfectly describes an old school networking giant that has managed to innovate and hang with some of the cooler, hipper AI design companies.

Although I have become known for the Nvidia call, the team is working overtime to bring you other AI opportunities. Broadcom is a strong contender and we are pleased to be positioned here ahead of ethernet taking more market share on GPU networking (where InfiniBand is the leader today).

GPU clusters are only going to grow (this was covered last week on the free side). Nvidia will push Spectrum X for its benefits of a tight integration, yet Big Tech may want to resist handing the keys to the kingdom to Nvidia. We will see, but that’s my hunch. Broadcom is number one today on ethernet networking and I don’t think this is going to change.

Pro premium members receive deep-dive research on all the stocks in the portfolio and quarterly earnings kickoff webinars. In addition, the Advanced Market Signals Members receive regular technical and broad market analysis and weekly webinars from our Portfolio Manager, Knox Ridley. We closed Super Micro in early May for an average gain of 275% across all entries and exits. Also, we booked sizable gains in two cybersecurity stocks in April.  Learn more here.We closed Super Micro in early May for an average gain of 275% across all entries and exits. Also, we booked sizable gains in two cybersecurity stocks in April.  Learn more here.

Recommended Reading:

Broadcom Q2 Post-Earnings: “We are not Standing Still”

Posted on by io-fund

Broadcom beat across the board with highlights including “just over” $11B in AI revenue expected and networking growth raised to 40% YoY growth, up from “over 35% growth” previously guided. The VMWare acquisition is one of the more intriguing points with management stating: “VMware revenue in Q1 was $2.1 billion, grew to $2.7 billion in Q2 and will accelerate towards a $4 billion per quarter run rate.”

As of now, Broadcom is expected to report over $11 billion in AI revenue this year, up from $10 billion. Additionally, the company beat on the top line and bottom line, and raised full year guidance.

Revenue and EPS:

Note: Broadcom completed the acquisition of VMware on Nov 22, 2023 and 11 months contribution from VMware is expected to be $12B for FY24

Revenue growth of 42.99% beat estimates for growth of 37.5% for revenue of $12.5 billion. Next quarter, Broadcom is expected to report revenue of $12.7 billion for growth of 43%.

For the fiscal year, the company is expected to report $51 billion in revenue for growth of 42.4%, up from a guide for $50 billion last quarter.

Adjusted EPS of $10.96 beat estimates of $10.84, which was flat QoQ yet was up $10.32 in the year ago quarter. Next quarter’s adjusted EPS is expected to be $11.90, for growth of 13%. GAAP EPS is lower than usual for Broadcom at $4.42 due to costs associated with the VMW acquisition. Per the CFO: “For modeling purposes, please keep in mind that GAAP net income and cash flows in fiscal year 2024 are impacted by restructuring and integration-related cash costs due to the VMware acquisition.”

Adjusted EBITDA was $7.4 billion, up from $7.15 billion last quarter. Adjusted EBITDA margin is 59.5% with management raising the guide for FY2024 to 61%, up from 60% previously guided. This is down from FY2023, which was 65% without VMWare.

Margins:

Margins expanded across the board with operating margin expanded 633 basis points QoQ. Per our pre-earnings writeup: “The merger integration process is expected to take a year and will initially have a drag on profit margins due to transition costs and VMware's lower margin profile. However, cost-cutting measures and merger synergies are anticipated to improve margins in the long term.”

  • Gross Margin of 62.27% increased QoQ from 61.66% although high 60% is more typical. This led to gross profit of $7.78 billion.
  • Adjusted gross margin of 76.2% expanded 84 basis points for adjusted gross profit of $9.51 billion.
  • GAAP operating margin of 23.74% expanded from 17.41% for operating income of $2.12 billion. This is typically in the mid-40% with the lower OPM being from costs associated with the VMW acquisition.
  • Adjusted operating margin of 57.3% was up 20 bps QoQ from 57.1% for adjusted operating profits of $7.14 billion. This is typically in the low 60-percent range.
  • Net margin of 16.99% is up 591 basis points for $2.12 billion in net income. This is typically in the high 30% range.
  • Adjusted net margin was 43.20% down 73 basis points for adjusted net income of $5.4 billion.

Cash:

Broadcom reported operating cash flow of $4.58 billion for OCF margin of 36.7%. Free cash flow of $4.45 billion represents a margin of 35.6%. The company has $9.8 billion in cash on the balance sheet and $74 billion in debt. This is up from $39 billion in debt two quarters ago due to the VMWare acquisition.

The company paid $2.4B in cash dividends based on a quarterly dividend of $5.25 per share. The company repaid $2B in debt in the quarter. Last quarter, the company stated they intend to continue paying $2 billion on the floating rate debt every quarter this year. Even though Broadcom has a high cash flow margin, the high debt is not ideal. You can find more details about the floating rate in our pre-earnings writeup.

Days sales outstanding is 40 days, down from 41 days last quarter. Inventory is at $1.8 billion compared to $1.9 billion last quarter.

Key Segments:

Semiconductor solutions grew 6% YoY to $7.2 billion and infrastructure software grew 175% YoY to $5.28 billion. As stated under the revenue section, 11 months contribution from VMWare is expected to be $12B or about $3.3 billion if we assume all things are equal, which means non-VMWare software revenue was flat. What’s important to monitor is the 15% QoQ growth as the restructuring VMWare is going through is expected to result in accelerating revenue. Last quarter, infrastructure software was $4.6 billion.

Networking revenue also grew 15% QoQ from $3.3 billion to $3.8 billion. This represents YoY growth of 44%. There were some strong statements about networking on the call, primarily this one: “Next year, we expect all mega-scale GPU deployments to be on Ethernet. 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.”Next year, we expect all mega-scale GPU deployments to be on Ethernet. 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.”

This quarter, Broadcom reported $3.1 billion in AI revenue with management stating they expect to end the year with “just over $11 billion in AI revenue.” Per discussions in the Q&A, this should be a minimum of $11.6 billion, with management being coy when asked why they weren’t guiding higher given H2 is supposed to be larger than H1: “So you may be right. You may estimate it better than I do, but the general trajectory is getting better. […] That's the best forecast I have at this point, Stacy.”

Server storage connectivity declined (27%) YoY to $824 million, which is a nominal improvement from last quarter when the segment declined (29%) YoY to $887 million. Per management, Q2 is expected to be a bottom in server storage and “we expected a modest recovery in the second half of the year.”

Broadband declined (39%) YoY to $730 million, which is steeper than last quarter when this segment declined (-23%) to $940 million. Broadband is “expected to bottom in H2 with a recovery in 2025.”

Wireless grew 2% YoY to $1.6 billion but was down QoQ due to seasonality. The company expects FY2024 to be flat this year.

Per a Bloomberg report, Apple is expected to replace some of its Broadcom chips with custom chips in 2025. This will reduce the customer concentration of Apple from 20% to 12%-15%.

Note on Valuation:

Broadcom is trading above historic averages with PS ratio prior to earnings of 16 compared to historic 5-year average of 8. The PE Ratio prior to earnings was 52 compared to a historic average of 40. AI semis have been seeing higher-than-usual valuations and where the market settles on this long-term is anyone’s guess, but over the past year or so, the market has given a premium valuation to AI-related semis.

Q&A:

Networking Update:

The statement that: “next year, we expect all mega-scale GPU deployments to be on Ethernet” is when Broadcom saw even stronger price action after hours. This is sooner than most expected. We covered the differences between InfiniBand and Ethernet in our Broadcom writeup here: “Broadcom: Networking/ASICs Giant and Second Largest By AI Revenue.”

That comment is interesting because InfiniBand accounts for over $10 billion in revenue for Nvidia. There were questions on how Broadcom plans to compete with Nvidia, with the CEO pointing out that they’ve been a leader in Ethernet for decades.

Per the opening remarks: “Networking these AI accelerators is very challenging but the technology does exist today. In Broadcom, we have the deepest and broadest understanding of what it takes for complex, large workloads to be scaled out in an AI fabric. Proof in point, 7 of the largest 8 AI clusters in deployment today use Broadcom Ethernet solutions.”

From my perspective, the impetus for the market moving toward Ethernet is to shake up Nvidia’s iron grip on the market, and thus, Broadcom should be a first-place contender. That’s speculative, but a reasonable and investable assumption. Per my previous write-up: “[Benefits of Ethernet]: Large pool of vendors whereas InfiniBand increases dependency on Nvidia. For this reason, AWS and Google Cloud have remained on Ethernet as they prioritize custom silicon.”

In other words, despite being an Nvidia bull, I do not think Spectrum X will take the Ethernet market. I think Broadcom will remain the leader.

Here is the Q&A portion on this topic. We are interested in the second part as it’s understood that ASICs and GPUs do not compete, rather they are going to coexist.

Question
Vivek Arya (Analyst):

Hock, I would appreciate your perspective on the emerging competition between Broadcom and NVIDIA across both accelerators and Ethernet switching. So on the accelerator side, they are going to launch their Blackwell product that many of the same customers that you have a very large position in the custom compute. So I'm curious how you think customers are going to do that allocation decision, just broadly what the visibility is.

And then I think part B of that is as they launch their Spectrum-X Ethernet switch, do you think that poses increasing competition for Broadcom and the Ethernet switching side in AI for next year?

Answer
Hock Tan (Executive):

Very interesting question, Vivek.

On AI accelerators, I think we are operating on a different — to start with scale, much a different model. It is — and on the GPUs, which are the AI accelerator of choice on merchant — in a merchant environment is something that is extremely powerful as a model and it's something that NVIDIA operates in, in a very, very effective manner. We don't even think about competing against them in that space, not in the least. That's where they're very good at and we know where we stand with respect to that.

Now what we do for very selected or selective hyperscalers is if there's a scale and the skills to try to create silicon solutions, which are AI accelerators, to do particular very complex AI workloads, we're happy to use our IP portfolio to create those custom ASIC AI accelerator. So I do not see them as truly competing against each other. And far for me to say I'm trying to position myself to be a competitor on basically GPUs in this market. We're not. We are not a competitor to them. We don't try to be either.

Now on networking, maybe that's different. But again, people may be approaching and they may be approaching it from a different angle. We are, as I indicated all along, very deep in Ethernet as we've been doing Ethernet for over 25 years, Ethernet networking. And we've gone through a lot of market transitions, and we have captured a lot of market transitions from cloud-scale networking to routing and now AI. So it's a natural extension for us to go into AI.

We also recognize that being the AI compute engine of choice in merchants in the ecosystem, which is GPUs, that they are trying to create a platform that is probably end to end very integrated. We take the approach that we don't do those GPUs, but we enable the GPUs to work very well. So if anything else, we supplement and hopefully complement those GPUs with customers who are building bigger and bigger GPU clusters.”

Tomahawk 6 Coming End of 2025:

On the topic of Broadcom’s leadership in Ethernet, this was a key Q&A moment as to how Broadcom intends to stay in the lead on networking:

“Question
Harlan Sur (Analyst)

[…] it's been 2 years since you've introduced Tomahawk 5 product introduction, right, which if I look back historically, means you have silicon and are getting ready to introduce your next-generation 3-nanometer Tomahawk 6 products, which would, I think, puts you 2 to 3 years ahead of your competitors. Can you just give us an update there?

Answer
Hock Tan (Executive)

Harlan, you're pretty insightful there. Yes, we launched Tomahawk 5 '23. So you're right, by late '25, the time we should be coming out with Tomahawk 6, which is the 100-terabit switch, yes.”

VMWare Update:

Management provided a key update on VWM this quarter: “VMware revenue in Q1 was $2.1 billion, grew to $2.7 billion in Q2 and will accelerate towards a $4 billion per quarter run rate. We therefore expect operating margins for VMware to begin to converge towards that of classic Broadcom software by fiscal 2025.”

The restructuring of VMWare has been controversial and bold. Broadcom’s management team terminated partner agreements, laid off thousands of employees and restructured its perpetual licensing terms to narrow its focus from 300,000 customers down to the 10,000 A-list customers that can drive the most revenue. From there, the company forced resellers to reapply and increased pricing for many customers.

To illustrate the overhaul, the CEO stated in the opening remarks: “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 4 core product offerings and simplified the go-to-market flow, eliminating a huge amount of channel conflicts.”we have modernized the product SKUs from over 8,000 disparate SKUs to 4 core product offerings and simplified the go-to-market flow, eliminating a huge amount of channel conflicts.”

This was also offered: “We are making good progress in transitioning all VMware products to a subscription licensing model. And since closing the deal, we have actually signed up close to 3,000 of our largest 10,000 customers to enable them to build a self-service virtual private cloud on-prem. Each of these customers typically sign up to a multiyear contract, which we normalize into an annual measure known as annualized booking value or ABV. This metric, ABV, for VMware products accelerated from $1.2 billion in Q1 to $1.9 billion in Q2. For a reference, for the consolidated Broadcom software portfolio, ABV grew from $1.9 billion in Q1 to $2.8 billion over the same period in Q2.”transitioning all VMware products to a subscription licensing model. And since closing the deal, we have actually signed up close to 3,000 of our largest 10,000 customers to enable them to build a self-service virtual private cloud on-prem. Each of these customers typically sign up to a multiyear contract, which we normalize into an annual measure known as annualized booking value or ABV. This metric, ABV, for VMware products accelerated from $1.2 billion in Q1 to $1.9 billion in Q2. For a reference, for the consolidated Broadcom software portfolio, ABV grew from $1.9 billion in Q1 to $2.8 billion over the same period in Q2.”

Custom Silicon Update:

Per Royston’s pre-earnings writeup:

“During its AI Infrastructure Investor meeting held in March, the company announced its third AI ASIC customer. Charlie Kawwas, Broadcom's President, Semiconductor Solutions Group, said, “Well, since you're all here today and you traveled here, we wanted to actually share with you that we actually have a third customer. I don't hear any excitement. Come on. So we're very, very honored and pleased and happy to tell you that third customer is also in the consumer AI space and we are in the ramp phase and we will be shipping products in the next few months to that customer. And this is something that we believe will continue as well over the next few years.”

This is certainly big since the CEO mentioned, “it takes years. It takes a lot of heavy lifting to create that custom silicon because you need to do more than just hardware of silicon to really have a solution for generative…” The company counts Google and Meta as the first two customers and JP Morgan believes that the third could be ByteDance. They also believe that the company has recently won follow-on orders from Google and Meta.

"Overall, we estimate that Google and Meta combined will drive $9B+ in AI ASIC chip revenues for Broadcom this year (Google ~$8B+ and Meta around $500M-$1B), up almost 2.5x over CY23," wrote the analyst. "More importantly, as we said back in 2022, we believe that Meta remains on track to become Broadcom's next multi-billion dollar per year AI ASIC customer potentially starting in CY25." JP Morgan estimates that the AI revenue to be $10 billion to $12 billion for FY2024, driven by the third customer, strong demand for Tomahawk 5 and Jericho 3 switching/routing chipsets and PCIe Gen5/Gen6 switches.

Conclusion:

We are also seeing early shoots on AI software and AI custom silicon. Pick a direction in AI, and if you look closely enough, you’ll see Broadcom is not “standing still.” That’s the CEO’s words, not mine, but I think it perfectly describes an old school networking giant that has managed to innovate and hang with some of the cooler, hipper AI design companies.

Although I have become known for the Nvidia call, the team is working overtime to bring you other AI opportunities. Broadcom is a strong contender and we are pleased to be positioned here ahead of ethernet taking more market share on GPU networking (where InfiniBand is the leader today).

GPU clusters are only going to grow (this was covered last week on the free side). Nvidia will push Spectrum X for its benefits of a tight integration, yet Big Tech may want to resist handing the keys to the kingdom to Nvidia. We will see, but that’s my hunch. Broadcom is number one today on ethernet networking and I don’t think this is going to change.

Recommended Reading:

Broadcom Q2 FY2024 Earnings Preview: AI Networking and Early to AI Software

Posted on by io-fund

Broadcom will release its results today. Investors will be closely watching the AI revenue updates. During its last earnings call, the company raised the AI revenue guide to $10 billion for FY2024 from the earlier $7.5 billion. In Q1 earnings, the stronger-than-expected growth from AI offset the cyclical weakness in broadband and server storage.

During its AI Infrastructure Investor meeting held in March, the company announced its third AI ASIC customer. We are likely to get more updates in the earnings call. In addition to the AI revenue, the software segment is also to be watched as the company integrates VMware into its fold.

Revenue

The analysts expect Q2 FY2024 revenue to grow 37.5% YoY to $12.01 billion and accelerate to 42.8% and 48.1% in the next two quarters. The company’s Q1 revenue grew by 34.2% YoY to $11.96 billion. Excluding the 10.5 weeks of contribution from VMware, it grew 11% and a 7-point acceleration from the previous quarter. To recap, the company completed its acquisition of VMware in November 2023 and the management’s FY 2024 guide of $50 billion includes VMware’s 11-month contribution of $12 billion.

Margins

The merger integration process is expected to take a year and will initially have a drag on profit margins due to transition costs and VMware's lower margin profile. However, cost-cutting measures and merger synergies are anticipated to improve margins in the long term.

  • Q1 gross margin was 61.7% compared to 67.4% in the year-ago quarter. Amortization of acquisition-related intangible assets adversely impacted gross margin by 11.5% in the quarter compared to 6.0% in the year-ago quarter. Adjusted gross margin improved 160 bps YoY to 75.4%.
  • Q1 operating margin was 17.4% compared to 46% in the year ago quarter. The operating margin was mainly lower due to the increase of amortization of acquisition-related intangible assets, restructuring charges, and stock-based compensation. The adjusted operating margin was 57.1%, compared to 60.9% in the year ago quarter.
  • Q1 net margin was 11.1% compared to 42.3% in the year-ago quarter. The net margin was lower mainly due to points discussed in the above paragraphs. The adjusted net margin was 43.9%, compared to 50.3% in the year-ago quarter. The adjusted EPS grew by 6.4% YoY to $10.99 and beat estimates by 5.4%.
  • The analysts expect adjusted EPS to grow 5.1% YoY to $10.84 in Q2 FY2024 and accelerate to 13% and 21.9% growth in the next two quarters.

Q1 FY2024 adjusted EBITDA margin was 59.8% compared to 63.7% in the year-ago quarter.  The management reiterated its fiscal year revenue guide of $50 billion and full year adjusted EBITDA guidance of 60%. The margin drop is mainly due to VMware's lower margin. However, Broadcom aims to improve the margins through cost-cutting initiatives like job cuts and merger synergies.

Cash Flow and Balance Sheet

Q1 operating cash flows were $4.8 billion or 40.3% of revenue compared to $4.04 billion or 45.3% in the year-ago quarter. Free cash flows were $4.69 billion or 39.2% of revenue compared to $3.93 billion or 44.1%. Excluding the restructuring and integration spend of $658 million in the quarter, the free cash flow was 45% of revenue.

Cash was $11.9 billion and debt was $75.9 billion. The debt increased from the $39.2 billion in the previous quarter due to the additional debt taken to finance the VMware purchase and the company also assumed $8.3 billion VMware’s debt.

The average coupon rate and years to maturity of fixed rate debt of $48 billion is 3.5% and 8.4 years, respectively. The average coupon rate and years to maturity of floating rate debt of $30 billion is 6.6% and 3 years, respectively. The company repaid $934 million fixed rate debt during the quarter. The company also repaid $2 billion of floating rate debt during the first week of March (the week the Q1 results were announced) and intends to maintain the $2 billion quarterly repayment of debt throughout FY2024.

In Q1, Broadcom paid stockholders $2.4 billion of cash dividends based on a quarterly common dividend of $5.25 per share. The company repurchased $7.2 billion of common stock and eliminated $1.1 billion of common stock for taxes due on the vesting of employee equity, resulting in the repurchase and elimination of approximately 7.7 million shares.

Days sales outstanding were 41 days in the first quarter compared to 31 days in the fourth quarter on higher accounts receivable due to the VMware acquisition. This is due to the accounts receivable from VMware having payment terms of 60 days compared to Broadcom’s 30 days.

The company ended the first quarter with an inventory of $1.9 billion, up 1% sequentially.

Segments

Infrastructure Software

Infrastructure Software segment revenue grew by 153% YoY to $4.6 billion. If we exclude a $2.1 billion contribution from VMware the segment grew by 37% YoY and accelerated from 7% growth in the previous quarter. When asked about this, management said not to get too excited about this particular growth as it’s due to strong contract renewals. Instead, the CEO explicitly stated: “Yes, don't get too excited over that. So that has also accelerated, but that's not the star of this show, Stacy. Star this show is the accelerating bookings and backlog we are accumulating on VMware.” In fact, it was indicated that some of this could fall off in future quarters given the software guide was not raised. 

What the CEO is referring to as the star of the show is the consolidated bookings in software, which grew sequentially from less than $600 million to $1.8 billion in Q1 and is expected to grow to over $3 billion in Q2. Per management: “Revenue from VMware will grow double-digit percentage. Sequentially, quarter-over-quarter, through the rest of the fiscal year.” Management reiterated their software revenue guidance of $20 billion for this year.

Semiconductor solutions

Semiconductor solutions sales increased 4% YoY to $7.4 billion, up from 3% growth in the prior quarter. Stronger-than-expected growth from AI more than offsetting the cyclical weakness in broadband and server storage. AI revenue grew by 53% sequentially to $2.3 billion.

  • Q1 networking revenue of $3.3 billion grew 46% year-on-year, primarily helped by the strong demand for custom AI accelerators from the company’s two hyperscale customers. The networking revenue represented 45% of semiconductor revenue and accelerated from 23% growth in the previous quarter. Management stated, “For fiscal 2024, given continued strength of AI NAND working demand, we now expect networking revenue to grow over 35% year-on-year compared to our prior guidance for 30% annual growth.”
  • Q1 wireless revenue declined by (-4%) YoY to $2.0 billion. Wireless is expected to be flat YoY for FY2024.
  • Q1 server storage revenue declined by (-29%) YoY to $887 million. Management expects weaker demand in the first half of the year and recovery in the second half. Management revised its server storage revenue to decline in the mid-20 percentage range compared to prior guidance for a decline in the high teens.
  • Q1 broadband revenue declined by (-23%) YoY to $940 million. Management stated, “We are seeing a cyclical trough this year for broadband as telco spending continues to weaken and do not expect improvement until late in the year.” So, they revised the outlook for fiscal '24 broadband revenue to be down 30% year-on-year from prior guidance of down mid-teens year-on-year.
  • Q1 industrial resales of $215 million declined by (-6%) YoY. Management stated that industrial resales will be down by high single digits this year.

AI revenue

Management also reiterated the guidance for FY2024 for Semiconductor Solutions revenue to grow mid-to high single-digit percentage year-on-year. They also increased the AI revenue guide to $10 billion from the earlier $7.5 billion and now expects AI revenue to be 35% of the semiconductor revenue from the previous 25%.

During its AI Infrastructure Investor meeting held in March, the company announced its third AI ASIC customer. Charlie Kawwas, Broadcom's President, Semiconductor Solutions Group, said, “Well, since you're all here today and you traveled here, we wanted to actually share with you that we actually have a third customer. I don't hear any excitement. Come on. So we're very, very honored and pleased and happy to tell you that third customer is also in the consumer AI space and we are in the ramp phase and we will be shipping products in the next few months to that customer. And this is something that we believe will continue as well over the next few years.”

This is certainly big since the CEO mentioned, “it takes years. It takes a lot of heavy lifting to create that custom silicon because you need to do more than just hardware of silicon to really have a solution for generative…” The company counts Google and Meta as the first two customers and JP Morgan believes that the third could be ByteDance. They also believe that the company has recently won follow-on orders from Google and Meta.

"Overall, we estimate that Google and Meta combined will drive $9B+ in AI ASIC chip revenues for Broadcom this year (Google ~$8B+ and Meta around $500M-$1B), up almost 2.5x over CY23," wrote the analyst. "More importantly, as we said back in 2022, we believe that Meta remains on track to become Broadcom's next multi-billion dollar per year AI ASIC customer potentially starting in CY25." JP Morgan estimates that the AI revenue to be $10 billion to $12 billion for FY2024, driven by the third customer, strong demand for Tomahawk 5 and Jericho 3 switching/routing chipsets and PCIe Gen5/Gen6 switches.

Valuation

We understand the market expectations are high going into earnings. The company is trading at a P/E ratio of 52.1 and P/S ratio of 15.8, higher than the five-year average P/E ratio of 39.4 and P/S ratio of 8.1.

Conclusion

The continued strong AI revenue growth along with the addition of the recent AI ASIC customer is a bright spot offsetting the weakness in broadband and server storage. The synergies from the VMware acquisition are another key area to watch going forward. 

Pro premium members receive deep-dive research on all the stocks in the portfolio and quarterly earnings kickoff webinars. In addition, the Advanced Market Signals Members receive regular technical and broad market analysis and weekly webinars from our Portfolio Manager, Knox Ridley. We closed Super Micro in early May for an average gain of 275% across all entries and exits. Also, we booked sizable gains in two cybersecurity stocks in April.  Learn more here.We closed Super Micro in early May for an average gain of 275% across all entries and exits. Also, we booked sizable gains in two cybersecurity stocks in April.  Learn more here.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

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Broadcom Q2 FY2024 Earnings Preview: AI Networking and Early to AI Software

Posted on by io-fund

Broadcom will release its results today. Investors will be closely watching the AI revenue updates. During its last earnings call, the company raised the AI revenue guide to $10 billion for FY2024 from the earlier $7.5 billion. In Q1 earnings, the stronger-than-expected growth from AI offset the cyclical weakness in broadband and server storage.

During its AI Infrastructure Investor meeting held in March, the company announced its third AI ASIC customer. We are likely to get more updates in the earnings call. In addition to the AI revenue, the software segment is also to be watched as the company integrates VMware into its fold.

Revenue

The analysts expect Q2 FY2024 revenue to grow 37.5% YoY to $12.01 billion and accelerate to 42.8% and 48.1% in the next two quarters. The company’s Q1 revenue grew by 34.2% YoY to $11.96 billion. Excluding the 10.5 weeks of contribution from VMware, it grew 11% and a 7-point acceleration from the previous quarter. To recap, the company completed its acquisition of VMware in November 2023 and the management’s FY 2024 guide of $50 billion includes VMware’s 11-month contribution of $12 billion.

Margins

The merger integration process is expected to take a year and will initially have a drag on profit margins due to transition costs and VMware's lower margin profile. However, cost-cutting measures and merger synergies are anticipated to improve margins in the long term.

  • Q1 gross margin was 61.7% compared to 67.4% in the year-ago quarter. Amortization of acquisition-related intangible assets adversely impacted gross margin by 11.5% in the quarter compared to 6.0% in the year-ago quarter. Adjusted gross margin improved 160 bps YoY to 75.4%.
  • Q1 operating margin was 17.4% compared to 46% in the year ago quarter. The operating margin was mainly lower due to the increase of amortization of acquisition-related intangible assets, restructuring charges, and stock-based compensation. The adjusted operating margin was 57.1%, compared to 60.9% in the year ago quarter.
  • Q1 net margin was 11.1% compared to 42.3% in the year-ago quarter. The net margin was lower mainly due to points discussed in the above paragraphs. The adjusted net margin was 43.9%, compared to 50.3% in the year-ago quarter. The adjusted EPS grew by 6.4% YoY to $10.99 and beat estimates by 5.4%.
  • The analysts expect adjusted EPS to grow 5.1% YoY to $10.84 in Q2 FY2024 and accelerate to 13% and 21.9% growth in the next two quarters.

Q1 FY2024 adjusted EBITDA margin was 59.8% compared to 63.7% in the year-ago quarter.  The management reiterated its fiscal year revenue guide of $50 billion and full year adjusted EBITDA guidance of 60%. The margin drop is mainly due to VMware's lower margin. However, Broadcom aims to improve the margins through cost-cutting initiatives like job cuts and merger synergies.

Cash Flow and Balance Sheet

Q1 operating cash flows were $4.8 billion or 40.3% of revenue compared to $4.04 billion or 45.3% in the year-ago quarter. Free cash flows were $4.69 billion or 39.2% of revenue compared to $3.93 billion or 44.1%. Excluding the restructuring and integration spend of $658 million in the quarter, the free cash flow was 45% of revenue.

Cash was $11.9 billion and debt was $75.9 billion. The debt increased from the $39.2 billion in the previous quarter due to the additional debt taken to finance the VMware purchase and the company also assumed $8.3 billion VMware’s debt. We discussed this in our deep dive here.

The average coupon rate and years to maturity of fixed rate debt of $48 billion is 3.5% and 8.4 years, respectively. The average coupon rate and years to maturity of floating rate debt of $30 billion is 6.6% and 3 years, respectively. The company repaid $934 million fixed rate debt during the quarter. The company also repaid $2 billion of floating rate debt during the first week of March (the week the Q1 results were announced) and intends to maintain the $2 billion quarterly repayment of debt throughout FY2024.

In Q1, Broadcom paid stockholders $2.4 billion of cash dividends based on a quarterly common dividend of $5.25 per share. The company repurchased $7.2 billion of common stock and eliminated $1.1 billion of common stock for taxes due on the vesting of employee equity, resulting in the repurchase and elimination of approximately 7.7 million shares.

Days sales outstanding were 41 days in the first quarter compared to 31 days in the fourth quarter on higher accounts receivable due to the VMware acquisition. This is due to the accounts receivable from VMware having payment terms of 60 days compared to Broadcom’s 30 days.

The company ended the first quarter with an inventory of $1.9 billion, up 1% sequentially.

Segments

Infrastructure Software

Infrastructure Software segment revenue grew by 153% YoY to $4.6 billion. If we exclude a $2.1 billion contribution from VMware the segment grew by 37% YoY and accelerated from 7% growth in the previous quarter. When asked about this, management said not to get too excited about this particular growth as it’s due to strong contract renewals. Instead, the CEO explicitly stated: “Yes, don't get too excited over that. So that has also accelerated, but that's not the star of this show, Stacy. Star this show is the accelerating bookings and backlog we are accumulating on VMware.” In fact, it was indicated that some of this could fall off in future quarters given the software guide was not raised. 

What the CEO is referring to as the star of the show is the consolidated bookings in software, which grew sequentially from less than $600 million to $1.8 billion in Q1 and is expected to grow to over $3 billion in Q2. Per management: “Revenue from VMware will grow double-digit percentage. Sequentially, quarter-over-quarter, through the rest of the fiscal year.” Management reiterated their software revenue guidance of $20 billion for this year.

Semiconductor solutions

Semiconductor solutions sales increased 4% YoY to $7.4 billion, up from 3% growth in the prior quarter. Stronger-than-expected growth from AI more than offsetting the cyclical weakness in broadband and server storage. AI revenue grew by 53% sequentially to $2.3 billion.

  • Q1 networking revenue of $3.3 billion grew 46% year-on-year, primarily helped by the strong demand for custom AI accelerators from the company’s two hyperscale customers. The networking revenue represented 45% of semiconductor revenue and accelerated from 23% growth in the previous quarter. Management stated, “For fiscal 2024, given continued strength of AI NAND working demand, we now expect networking revenue to grow over 35% year-on-year compared to our prior guidance for 30% annual growth.”
  • Q1 wireless revenue declined by (-4%) YoY to $2.0 billion. Wireless is expected to be flat YoY for FY2024.
  • Q1 server storage revenue declined by (-29%) YoY to $887 million. Management expects weaker demand in the first half of the year and recovery in the second half. Management revised its server storage revenue to decline in the mid-20 percentage range compared to prior guidance for a decline in the high teens.
  • Q1 broadband revenue declined by (-23%) YoY to $940 million. Management stated, “We are seeing a cyclical trough this year for broadband as telco spending continues to weaken and do not expect improvement until late in the year.” So, they revised the outlook for fiscal '24 broadband revenue to be down 30% year-on-year from prior guidance of down mid-teens year-on-year.
  • Q1 industrial resales of $215 million declined by (-6%) YoY. Management stated that industrial resales will be down by high single digits this year.

AI revenue

Management also reiterated the guidance for FY2024 for Semiconductor Solutions revenue to grow mid-to high single-digit percentage year-on-year. They also increased the AI revenue guide to $10 billion from the earlier $7.5 billion and now expects AI revenue to be 35% of the semiconductor revenue from the previous 25%.

During its AI Infrastructure Investor meeting held in March, the company announced its third AI ASIC customer. Charlie Kawwas, Broadcom's President, Semiconductor Solutions Group, said, “Well, since you're all here today and you traveled here, we wanted to actually share with you that we actually have a third customer. I don't hear any excitement. Come on. So we're very, very honored and pleased and happy to tell you that third customer is also in the consumer AI space and we are in the ramp phase and we will be shipping products in the next few months to that customer. And this is something that we believe will continue as well over the next few years.”

This is certainly big since the CEO mentioned, “it takes years. It takes a lot of heavy lifting to create that custom silicon because you need to do more than just hardware of silicon to really have a solution for generative…” The company counts Google and Meta as the first two customers and JP Morgan believes that the third could be ByteDance. They also believe that the company has recently won follow-on orders from Google and Meta.

"Overall, we estimate that Google and Meta combined will drive $9B+ in AI ASIC chip revenues for Broadcom this year (Google ~$8B+ and Meta around $500M-$1B), up almost 2.5x over CY23," wrote the analyst. "More importantly, as we said back in 2022, we believe that Meta remains on track to become Broadcom's next multi-billion dollar per year AI ASIC customer potentially starting in CY25." JP Morgan estimates that the AI revenue to be $10 billion to $12 billion for FY2024, driven by the third customer, strong demand for Tomahawk 5 and Jericho 3 switching/routing chipsets and PCIe Gen5/Gen6 switches.

Valuation

We understand the market expectations are high going into earnings. The company is trading at a P/E ratio of 52.1 and P/S ratio of 15.8, higher than the five-year average P/E ratio of 39.4 and P/S ratio of 8.1.

Conclusion

The continued strong AI revenue growth along with the addition of the recent AI ASIC customer is a bright spot offsetting the weakness in broadband and server storage. The synergies from the VMware acquisition are another key area to watch going forward.

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Broadcom: $10B in AI Revenue This Year Plus Software is Rapidly AcceleratingBroadcom: $10B in AI Revenue This Year Plus Software is Rapidly Accelerating

Broadcom: Networking/ASICs Giant and The Second Largest by AI RevenueBroadcom: Networking/ASICs Giant and The Second Largest by AI Revenue

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.