Broadcom (AVGO.O) released its Q4 fiscal year 2024 financial report (ending October 2024) after U.S. stock market hours on December 13, Beijing time:

1. Overall performance: Record high performance, continuous improvement in profit margin before depreciation and amortization. Broadcom (AVGO.O) achieved revenue of $14.05 billion in Q4 fiscal year 2024, a year-on-year increase of 51.2%, in line with market expectations ($14.1 billion). The quarterly revenue growth was mainly driven by high growth in AI and the consolidation of VMware.

$Broadcom(AVGO.US) achieved a net profit of $4.324 billion in Q4 fiscal year 2024, a significant increase. The growth in profit was mainly due to the increase in revenue and the decrease in expense ratio, with business integration accelerating the release of final profits. With the improvement in earnings before interest, taxes, depreciation, and amortization (EBITDA%) margin, Broadcom's total debt relative to the adjusted EBITDA over the past 12 months

(this profit data can be roughly equated to "cash-like" profit, reflecting the true profit creation ability without the impact of mergers and acquisitions and debt interest payments) decreased to 3.1 this quarter, indicating continued improvement in debt repayment ability.

2. Business Segmentation: Dual drive from AI and VMware. From the company's segmented business situation, driven by the growth of AI business and the consolidation of VMware, the revenue shares of the company's networking business and VMware reached 32% and 27%, respectively.

2.1 Semiconductor Solutions Business: Revenue of $8.23 billion this quarter, a year-on-year increase of 12.3%, better than market expectations ($8.05 billion).

1) Networking Business: The company's networking business maintained a growth rate of over 40% this quarter, mainly benefiting from the AI business. The AI business revenue reached $3.7 billion this quarter, with a year-on-year growth of 150%, mainly driven by shipments from clients such as Google;

2) Other Semiconductor Businesses: Excluding the AI business, other semiconductor businesses remained sluggish, with another double-digit decline this quarter. From a structural perspective, storage and wireless businesses showed some recovery, while broadband, industrial, and other businesses still experienced significant declines.

2.2 Infrastructure Software: Revenue of $5.82 billion this quarter, a year-on-year increase of 196%, below market expectations ($6.03 billion). The growth mainly came from VMware, while the existing software business did not show significant growth.

1) VMware Business: The company's VMware revenue reached $3.7-3.8 billion this quarter, showing significant year-on-year growth, mainly due to changes in pricing strategies. However, there was no quarter-on-quarter growth this quarter, mainly due to some revenue being deferred to the first quarter. With the increasing proportion of subscription SaaS customers, VMware is expected to continue to grow; 2) Other Software Business: Apart from VMware, the company's original software business remains at around $2 billion, maintaining steady single-digit growth.

3. Broadcom Performance Guidance: Expected revenue for the first quarter of fiscal year 2025 is around $14.6 billion, in line with market expectations ($14.64 billion). The company expects the adjusted EBITDA margin for the first quarter of fiscal year 2025 to continue to improve to 66%. The growth of AI and the acceleration of VMware integration further drive the improvement in the company's performance.

Overall View of Dolphin: The company's financial report is quite good, but the confidence of the management is more effective.

Broadcom's financial report this quarter is decent. Driven by AI revenue and VMware integration, the company's revenue and gross margin continue to improve. The increase in gross margin has slowed down, mainly due to the higher proportion of revenue from the semiconductor business, which has a lower gross margin.

On the operating expense side, the company continues to manage costs. The company's R&D expense ratio and selling and administrative expense ratio have decreased to 15.9% and 7.2%, respectively. The management also mentioned in previous communications that they are currently focusing on integrating R&D and related departments in the VMware integration to reduce operating expenses and improve operational efficiency. Through the integration of operations, the company's core profits continue to rebound this quarter, with the adjusted EBITDA% returning to 64.7%.

In terms of business, the market is most concerned about the company's AI business, VMware business, and wireless business: 1) The company's AI business achieved $3.7 billion this quarter, better than the previous guidance of $3.5 billion, with the shipment of AI XPUs to large-scale customers doubling and AI connection revenue growing rapidly; 2) VMware's revenue this quarter was $3.74 billion, slightly down quarter-on-quarter, mainly due to some revenue being delayed to the first quarter; 3) In the wireless business, regarding rumors of Apple's self-developed technology, the company will continue to collaborate with customers on multiple technologies.

Looking at the business situation and the company's guidance for the next quarter, it can be seen that the company's AI progress is slightly better than expected, but overall it is just a decent performance. However, the company's small increase in stock price after the financial report rising to double-digit gains is mainly due to the confidence conveyed by the management during the communication meeting.

Dolphin believes the highlights behind this financial report are:

1) EBITDA%: The company's current business integration is progressing smoothly, with gross margins rebounding and expense ratios declining, driving the adjusted EBITDA% back to 64.7%, with expectations to increase to 66% next quarter. With the recovery in performance, the company's core debt repayment capacity ratio (Total Debt/LTM Adjusted EBITDA) has already decreased to 3.1 this quarter. Historically, at this pace, the company is expected to reduce the ratio to around 2 in the next two years, allowing for consideration of new acquisition targets; 2) Outlook for AI Business: Although the company has low expectations for AI revenue in the next quarter, around $3.8 billion, Dolphin believes this is mainly due to the transitional situation of the company's clients moving from TPU V6e to V6p products. After the mass production of V6p, the company's AI growth will continue to accelerate.

In addition, the company expects that in the fiscal year 2027, the serviceable market size for its ultra-large-scale customers' XPU and network business will reach $60-90 billion. Combined with the company's belief that the serviceable market size for fiscal year 2024 will be $15-20 billion, the compound growth rate will exceed 50%, injecting a "strong stimulant" into this market confidence.

Overall, Broadcom's current business growth mainly comes from AI business and VMware. As VMware's customers gradually shift from licenses to subscription-based SaaS fees, the corresponding growth rate will slow down. However, under the company's high growth expectations for AI business, it will become the main driving force for the company's growth. Although it will be difficult for cloud vendors to maintain a compound growth rate of over 50% in capital expenditures over the next three years, Broadcom can achieve excess growth performance through market share gains and category expansion.

Based on the company's outlook, assuming the company's AI revenue maintains a compound growth rate of 40% over the next three years, the core operating profit for the fiscal year 2026 is expected to reach $43 billion, a year-on-year increase of 23%. The current market value ($843.8 billion) corresponds to about 21 times PE for the core operating profit after tax for the fiscal year 2026. The company's operational situation can support its current stock price, while the market's buying is more about anticipating the company's brighter performance in the future.

Dolphin's specific analysis of Broadcom (AVGO.O) earnings report is detailed below:

1. Overall Performance: Record High Earnings, Continuous Improvement in EBITDA%

1.1 Revenue Side

Broadcom (AVGO.O) achieved revenue of $14.05 billion in the fourth quarter of fiscal year 2024, a year-on-year increase of 51.2%, in line with market expectations ($14.1 billion). The company's growth this quarter mainly came from the increase in AI revenue and the consolidation of VMware . The consolidation of VMware contributed approximately $4 billion to the company's revenue this quarter. Additionally, AI revenue also doubled year-on-year this quarter.

1.2 Gross Profit Side

Broadcom (AVGO.O) achieved a gross profit of $9.002 billion in the fourth quarter of fiscal year 2024, an increase of 40.5% year-on-year. The gross margin for Broadcom this quarter was 64.05%, which slightly declined year-on-year but showed a slight recovery quarter-on-quarter. This was mainly due to the acquisition and consolidation of VMware, which included part of the acquisition cost in the cost of sales. The recent recovery in gross margin is mainly due to the progress in the integration of VMware, leading to improvements in both software and overall gross margins From a medium to long-term perspective, the addition of software business will drive an overall increase in the company's gross profit margin.

1.3 Operating Expenses

Broadcom (AVGO.O) reported operating expenses of $4.568 billion in the fourth quarter of fiscal year 2024, significantly increasing year-on-year due to the acquisition of VMware. However, under the company's continuous cost control measures, operating expenses have decreased quarter-on-quarter.

Breaking down the specific expenses:

1) R&D Expenses: The company's R&D expenses for this quarter were $2.234 billion, a year-on-year increase of 61%. The significant year-on-year increase in R&D expenses is mainly due to the consolidation of VMware. With the ongoing internal integration, the company's R&D expenses have decreased continuously quarter-on-quarter. The R&D expense ratio has currently fallen to 15.9%, approaching the previous range of 13-14%;

2) Sales and Management Expenses: The company's sales and management expenses for this quarter were $1.01 billion, a year-on-year increase of 142%. The rapid growth in sales expenses is also mainly influenced by the acquisition consolidation. With the progress of the VMware integration, the current sales and management expense ratio has declined to 7.19%, continuing to approach the previous range of 4-5%;

3) Acquisition and Related Other Expenses: The company's amortization expenses for intangible assets this quarter were $813 million, and restructuring, impairment, and disposal expenses were $318 million, both related to the acquisition, remaining basically unchanged quarter-on-quarter.

1.4 Net Profit

Broadcom (AVGO.O) achieved a net profit of $4.324 billion in the fourth quarter of fiscal year 2024, continuing to rebound. The loss in the previous quarter was mainly due to the supply chain restructuring, which resulted in the transfer of certain intellectual properties to the United States, leading to a one-time non-cash tax provision of $4.5 billion.

Excluding related impacts, the company's operating profit still showed significant growth, mainly due to revenue growth and a decrease in expense ratios. Driven by AI growth and the consolidation of VMware, the company's quarterly revenue reached a new high. After strengthening integration and internal control, the company's operating expense ratio has significantly declined.

From the perspective of core operating profit (= gross profit - R&D expenses - sales and management expenses), Broadcom achieved a core operating profit of $7.4 billion this quarter, a year-on-year increase of 47%.

1.5 Broadcom's EBITDA

Due to Broadcom's expertise in mergers and acquisitions, the company typically uses adjusted EBITDA% as one of its operational indicators. According to Dolphin's calculations, the company's adjusted EBITDA% for the fourth quarter of fiscal year 2024 is expected to rebound to 64.7%, essentially returning to the pre-acquisition range.

Further observing the company's debt repayment ability, the current total debt/LTM Adjusted EBITDA ratio continues to decline to 3.1. With the growth in performance, this ratio is expected to fall below 3 in the next fiscal year and may return to pre-acquisition levels in the following year, after which the company may start looking for new acquisition opportunities.

II. Business Segmentation: AI and VMware, Dual Drivers

Broadcom (AVGO.O) has two main business segments: semiconductor solutions and infrastructure software. With the completion of the acquisition and consolidation of VMware, the proportion of the company's infrastructure software business has significantly increased, currently accounting for 40% of software business revenue.

The two main business categories include, 1) Semiconductor Solutions: networking, wireless, storage connectivity, broadband, industrial, and others; 2) Infrastructure Software: VMware, CA, Symantec, Brocade, etc.

From the company's revenue structure, it can be seen that the networking business within the semiconductor segment and VMware within the software segment currently have the highest revenue shares, reaching 32% and 27% respectively, and these two segments are the most closely watched by the market.

2.1 Semiconductor Solutions

Broadcom (AVGO.O) achieved revenue of $8.23 billion in semiconductor solutions for the fourth quarter of fiscal year 2024, a year-on-year increase of 12.34%. The growth in the company's semiconductor business this quarter was primarily driven by AI, while non-AI business saw a double-digit decline year-on-year.

1) Networking Business

Since the company's AI revenue is within the networking business, the networking segment also achieved over 40% growth this quarter due to AI. Excluding the impact of AI, the company's non-AI networking business still experienced a double-digit decline

The market's focus is on the company's AI business, which includes revenue from AI ASIC chips and related network accessories. The company's AI business revenue for this quarter reached $3.7 billion, with a year-on-year growth rate of over 150%, better than the company's previous revenue guidance of $3.5 billion. With the increase in AI revenue, its proportion in the company's total revenue has reached 26.3%.

From the company and the industry chain, it is known that 60-70% of the company's AI revenue comes from ASIC shipments. Currently, the company's ASIC customers that have achieved mass production are Google and Meta, with the largest portion coming from Google. Therefore, the company's AI revenue has a strong correlation with Google's capital expenditure.

Dolphin Jun presents the two sets of data together, clearly showing that when Google significantly increases its capital expenditure, the company's AI revenue also experiences rapid growth. However, affected by a slowdown in Google's capital expenditure in the fourth quarter, the company's AI revenue expectation for the next quarter is only slightly increased (company guidance around $3.8 billion).

Regarding the slowdown in Google's capital expenditure, Dolphin Jun believes this is mainly due to Google being in the product transition phase from TPU v6e to v6p after the release of TPU v6e, which has a phase impact on the company's ASIC revenue. As the v6p shipments are expected in fiscal year 2025, the company's AI revenue growth rate is likely to accelerate again.

From a medium to long-term perspective, Broadcom's management has also provided an outlook for the AI business, expecting that by fiscal year 2027, the company's addressable market size for hyperscale customers could reach $60-90 billion, which injects a "shot of confidence" into the market.

2) Other Semiconductor Businesses

Aside from the networking business, Broadcom's other semiconductor businesses remain relatively sluggish, experiencing a double-digit decline year-on-year. There are signs of recovery in the storage and wireless businesses, while the broadband and industrial and other businesses continue to show a significant decline.

Specifically:

① Server Storage Business: The company achieved revenue of $992 million this quarter, basically flat year-on-year. There has been a noticeable recovery since the bottom six months ago;

② Wireless Business: The company achieved revenue of $2.2 billion this quarter, with both year-on-year and quarter-on-quarter growth. The quarter-on-quarter growth of 30% is mainly driven by seasonal factors, as the company's major client Apple launches new products in the second half of the year;

③ Broadband Business: The company achieved revenue of $465 million this quarter, hitting a new low. This is mainly because operators have passed the large-scale investment period, resulting in relatively reduced product procurement, but the company expects a recovery in the next quarter; ④ Industrial and Other Businesses: The relative proportion is very small, only 1%. The company achieved revenue of $173 million this quarter, a year-on-year decline of 27%, and the company expects to recover in the second half of the 2025 fiscal year;

Overall, although there are some signs of recovery in the company's traditional semiconductor business, the overall demand is not strong. The recovery in broadband and industrial and other sectors still needs further observation. Among them, regarding the wireless business that the market is concerned about, management mentioned that the company continues to maintain close contact with Apple, covering various leading technologies (including RF, Wi-Fi, Bluetooth, sensing, and touch) in the long-term cooperation roadmap.

2.2 Infrastructure Software

Broadcom (AVGO.O) achieved revenue of $5.824 billion in the fourth quarter of the 2024 fiscal year for infrastructure software, a year-on-year increase of 196%. The rapid growth of the company's software business is mainly attributed to the consolidation of VMware.

1) VMware

According to the company's financial report, Dolphin estimated that VMware's revenue this quarter was approximately $3.74 billion, accounting for 27% of total revenue. After acquiring VMware, Broadcom made adjustments by divesting non-core businesses such as end-user computing.

If we look at the total revenue of the "license + subscription SaaS business" before VMware went public, the quarterly revenue of the two businesses combined was about $2 billion. Now, after the acquisition, Broadcom has canceled the license business and switched entirely to subscription SaaS fees. With the increase in the proportion of subscription customers, VMware's current quarterly revenue has reached $3.7-3.8 billion.

Although VMware's revenue has significantly increased, there was no growth quarter-on-quarter this quarter. The company's management stated that some software revenue was delayed to the first quarter, but it did not have a significant impact on the 2025 fiscal year.

Looking at VMware's orders, the company's annualized order value (ABV) this quarter is nearly $3 billion, with a quarter-on-quarter growth rate rebounding from 8% to 13%, further suggesting that VMware's revenue is expected to return to growth next quarter.

2) Original Software Businesses such as CA, Symantec, and Brocade

After excluding VMware's revenue, we can estimate the situation of the company's original software businesses (CA, Symantec, and Brocade). After calculation, Broadcom's original software business achieved revenue of $2.08 billion this quarter, a year-on-year increase of 5.8%. This shows that the current high growth of the software business mainly comes from VMware, while the growth of traditional software businesses remains relatively stable