Marvell collapses, NVIDIA lies low? Broadcom comes to be the stabilizing force

Broadcom (AVGO.O) released its Q1 FY2025 financial report (for the period ending January 2025) after U.S. stock market hours on March 7, Beijing time:

1. Overall Performance: New highs, improving debt repayment ability. Broadcom (AVGO.O) achieved revenue of $14.9 billion in Q1 FY2025, a year-on-year increase of 24.7%, exceeding market expectations ($14.6 billion). The quarterly revenue growth was primarily driven by AI and VMware businesses.

Broadcom reported a net profit of $5.5 billion in Q1 FY2025, continuing to improve. The profit growth was mainly due to revenue growth and a decrease in expense ratios, with business integration accelerating the release of final profits. With the increase in EBITDA margin, the ratio of total debt to adjusted EBITDA over the past 12 months

(this profit data can be roughly equated to "cash-like" profits, reflecting the true profit-generating ability without the impact of mergers and acquisitions and debt interest payments) continued to decline to 2.7 this quarter, indicating an ongoing improvement in debt repayment ability.

2. Business Segments: AI achieves better-than-expected growth. From the breakdown of $Broadcom(AVGO.US), driven by the growth of AI and VMware businesses, the combined revenue from these two segments has approached 60%.

2.1 Semiconductor Solutions Business: Revenue for this quarter was $8.2 billion, a year-on-year increase of 11.1%, exceeding market expectations ($8.15 billion).

1) Networking Business: The company's networking business maintained a growth rate of over 30% this quarter, primarily benefiting from the AI business. The AI business revenue reached $4.1 billion this quarter, a year-on-year increase of 77%, mainly driven by increased shipments of products like Google TPU;

2) Other Semiconductor Businesses: Aside from the AI business, other semiconductor businesses performed moderately, with non-AI business still experiencing a double-digit decline year-on-year this quarter. From a structural perspective, broadband business showed some recovery quarter-on-quarter, while other businesses remained relatively sluggish.

2.2 Infrastructure Software: Revenue for this quarter was $6.7 billion, a year-on-year increase of 46.7%, exceeding market expectations ($6.48 billion). The growth was mainly driven by VMware, while the existing software business remained relatively stable.

1) VMware Business: The impact of VMware's consolidation this quarter has weakened, mainly due to growth from adjustments in the "charging strategy." Currently, the proportion of transitioning from perpetual licenses to SaaS subscription fees has reached 60%, and with the increase in the share of subscription SaaS, it is expected to continue bringing incremental growth to VMware and the software business; 2) Other Software Business: Excluding VMware, Dolphin Research estimates that the company's original software business remains stable at around $2.1 billion.

3. Broadcom Performance Guidance: For the second quarter of fiscal year 2025, expected revenue is around $14.9 billion, market expectation is $14.6 billion, and the company expects an adjusted EBITDA margin of 66% for the second quarter of fiscal year 2025. Among them, AI business is expected to continue to grow to $4.4 billion.

Dolphin Research Overall View: The financial report is overall good, and the guidance is even more reassuring.

Broadcom's financial report this quarter is good, with revenue and profit meeting market expectations, mainly driven by growth in AI and VMware businesses. The company's operating expenses are relatively stable, and the impact of acquisition amortization is gradually weakening, indicating an overall improvement in the company's operating situation.

With the growth in performance, the company's Adjusted EBITDA% this quarter reached 67.6%. Considering the company's total debt, the Total Debt/LTM Adjusted EBITDA has decreased from 4.4 times a year ago to 2.7 times, gradually approaching the pre-acquisition level of around 2 times. This indicates that the impact of the VMware acquisition has basically been absorbed by the company. The main focus going forward will be on the company's AI business and the organic growth performance of VMware:

① AI Business: The company achieved $4.1 billion this quarter and provided guidance of $4.4 billion for the next quarter, both of which are better than market expectations (no growth quarter-on-quarter). This is mainly because 60-70% of AI revenue comes from custom ASICs, with the largest customer being Google's TPU. Due to Google's current transition from 5nm TPU to 3nm TPU, the market's revenue expectations for the company's AI and AISC in the near half year are relatively low, while the company has provided expectations for continued growth;

② VMware: This quarter contributed the main incremental revenue to the software business, and Dolphin Research estimates that the company's VMware revenue this quarter is around $4.5 billion. The growth of VMware this quarter is mainly due to the company's shift in pricing strategy from "perpetual licenses to subscription SaaS model," resulting in a price increase effect. Before the price adjustment and acquisition consolidation, VMware's related revenue was only around $2 billion, which has now doubled. Currently, among the existing perpetual license customers, the proportion that has converted to subscription SaaS has reached 60%. With the increase in penetration rate, VMware is expected to continue to grow.

From these two core focus points, the company has provided good "answers" this quarter.

In addition, considering the company's business and industry situation, Dolphin Research believes that the continued growth of the company's AI business will be more certain: 1) The company has acquired its fifth ASIC business client: Dolphin Research speculates that the company's current five clients are Google, Meta, ByteDance, OpenAI, and SoftBank/ARM;

2) The company's AI business is expected to see strong growth starting in the second half of the year: ① After completing the product transition, Google's 3nm TPU will achieve large-scale shipments in the second half of the year; ② Meta's 3nm custom ASIC products are also expected to enter mass production in the second half of the year or next year; ③ The company is expected to start mass production of ASIC chips for OpenAI and SoftBank/ARM in 2026.

Overall, Broadcom's AI business has provided better-than-expected data and forecasts, which will enhance market confidence in the company in the short term. From a medium to long-term perspective, the five major clients the company has will ensure its future growth. Combined with the capital expenditure situation of major cloud vendors, a "low first, high later" trend is expected in 2025, and with the large-scale shipment of Google's new TPU in the second half of the year, Broadcom's AI business will clearly benefit.

Compared to the uncertainties faced by Marvell, Broadcom's client structure and future product planning are more robust and clear. Previously, Broadcom's market space expectation for three clients reached USD 60-90 billion. Now, with the addition of two more clients, this will further open up the company's future growth space. As multiple clients advance the mass production of custom AISC products in 2026, the company's performance is expected to continue to maintain high growth. Marvell mainly faces competition and other influencing factors, while Broadcom's latest financial report has once again boosted confidence in the ASIC market and further clarified the company's position as the "industry leader." After experiencing a product transition period in the first half of the year, the company's AI business is expected to bring significant incremental growth again.

Currently, what the market is most concerned about regarding Broadcom is the progress of its AI business and the integration of VMware. Dolphin Research will subsequently release the minutes of the conference call on the Changqiao app, and it is recommended to pay close attention.

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

1. Broadcom's Main Business Situation

Broadcom's recent performance growth mainly comes from its networking business and the acquisition and consolidation of VMware, which currently accounts for more than half of its total business. The price increase strategies for ASIC and VMware in the networking business are also the main focus of the market. In terms of specific business:

1) Semiconductor Solutions: Although the proportion has declined, it still accounts for 60%. Apart from the networking business, other businesses are significantly affected by downstream demand and are relatively sluggish. The networking business mainly benefits from the growth of AI revenue, primarily driven by the demand for ASICs from Google and Meta;

2) Infrastructure Software: With VMware's consolidation, the proportion of software revenue has increased to 40%. Recently, the company has adjusted its pricing strategy for VMware's clients, and the price increase can boost revenue, but it may also affect the retention of some clients.

II. Key Financial Data of Broadcom

2.1 Revenue

Broadcom (AVGO.O) achieved revenue of $14.9 billion in the first quarter of fiscal year 2025, a year-on-year increase of 24.7%, exceeding market expectations ($14.6 billion).

The company's revenue growth has slowed, primarily due to the consolidation of VMware starting from the first quarter of the previous fiscal year. This quarter's growth mainly comes from AI business and VMware's organic growth, which is also the main focus of the current market.

2.2 Gross Profit

Broadcom (AVGO.O) achieved a gross profit of $10.145 billion in the first quarter of fiscal year 2025, a year-on-year increase of 37.6%. The gross margin for Broadcom this quarter was 68%, showing improvements both year-on-year and quarter-on-quarter.

The increase in the company's gross margin is mainly due to the ongoing integration of VMware, which has led to a rebound in the company's software business and overall gross margin. From a medium to long-term perspective, the increasing proportion of the software business will benefit the overall gross margin of the company.

2.3 Operating Expenses

Broadcom (AVGO.O) reported operating expenses of $3.885 billion in the first quarter of fiscal year 2025, a year-on-year decrease of 26.6%. With the company's continued cost control and internal integration, the impact of acquisition amortization on operating expenses has gradually weakened.

Breaking down the specific expenses:

1) R&D Expenses: The company's R&D expenses for this quarter were $2.253 billion, a year-on-year decrease of 2.4%. After the consolidation of VMware, the company's R&D expenses have remained stable. With the growth in revenue, the R&D expense ratio has decreased to 15.1%;

2) Selling and Administrative Expenses: The company's selling and administrative expenses for this quarter were $949 million, a year-on-year decrease of 39.6%. The company continues to integrate its business and control costs, with the impact of acquisitions gradually weakening. Currently, the selling and administrative expense ratio has decreased to 6.36%, continuing to approach the previous level of around 4%;

3) Acquisition and Related Other Expenses: The company's amortization expenses for intangible assets this quarter were $511 million, and restructuring, impairment, and disposal expenses were $172 million, both related to acquisitions, continuing to decrease quarter-on-quarter.

2.4 Net Profit Broadcom (AVGO.O) achieved a net profit of $5.5 billion in the first quarter of fiscal year 2025, continuing to rebound. The quarterly loss previously experienced by the company was mainly due to the impact of a one-time non-cash tax provision of $4.5 billion resulting from the transfer of certain intellectual property to the United States during the supply chain restructuring.

Excluding the related impact, the company's net profit has shown a "continuous upward trend" since the first quarter of fiscal year 2024. Driven by AI growth and the consolidation of VMware, the company's quarterly revenue reached a new high. After strengthening integration and internal controls, the company's operating expense ratio significantly declined, leading to an increase in the net profit margin to 36.9%.

To better understand the company's operational situation, Dolphin Research looks at core operating profit (= gross profit - R&D expenses - selling and administrative expenses), where Broadcom achieved a core operating profit of $8.441 billion this quarter, a year-on-year increase of 70%.

2.5 Broadcom's EBITDA

Due to Broadcom's expertise in mergers and acquisitions, the company typically uses adjusted EBITDA% as one of its operational indicators. Dolphin Research estimates that the adjusted EBITDA% for the first quarter of fiscal year 2025 has rebounded to 67.6%, essentially returning to the range prior to acquisitions.

Further observing the company's debt repayment ability, the current ratio of total liabilities to LTM Adjusted EBITDA continues to decline to 2.7. With the growth in performance, this ratio is expected to continue to decrease, gradually approaching the level of around 2 before acquisitions, after which the company may begin to seek new acquisition opportunities.

III. Specific Situations of Broadcom's Various Businesses: AI Achieves Exceeding Expectations Growth

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 45% of software business revenue.

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

Since the company did not explicitly disclose the revenue changes for networking and VMware this quarter, Dolphin Research speculates that within the current revenue structure, the networking business in semiconductor solutions and VMware in software business remain the two highest revenue items, collectively accounting for 60% of total revenue.

3.1 Semiconductor Solutions

Broadcom (AVGO.O) achieved revenue of $8.212 billion in semiconductor solutions in the first quarter of fiscal year 2025, a year-on-year increase of 11.12%. The growth of the company's semiconductor business this quarter was mainly driven by AI, while non-AI business still experienced a double-digit decline year-on-year.

1) Networking Business

Since the company's AI revenue is included in the networking business, driven by AI, Dolphin Research estimates that the company's networking business reached approximately $4.5 billion this quarter, with a growth rate still exceeding 30%. Excluding the impact of AI, the non-AI portion of the company's networking business still saw a significant decline.

The market's focus is on the company's AI business, which includes revenue from AI ASIC chips and related networking accessories. The company's AI business revenue reached $4.1 billion this quarter, with a year-on-year growth rate of 77%, better than market expectations ($3.73 billion). With rapid growth, the AI business accounted for 27.5% of the company's total revenue.

From the company and the industry chain, it is known that the company's AI revenue mainly includes custom ASIC chips and network connections, with ASICs accounting for approximately 60-70% of AI revenue. 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 expenditures.

Due to the different reporting periods of the two companies, Dolphin Research approximates them to be within the same period, showing a clear correlation. When Google significantly increases its capital expenditures, the company's AI revenue also experiences rapid growth. With Google's expected capital expenditure for 2025 reaching $75 billion, a year-on-year growth of over 40%, the company's AI revenue will continue to benefit.

However, as Google is currently in a product transition period, moving from 5nm TPU inference chips to 3nm TPU v6 training chips. The market is relatively cautious about the company's AI revenue over the past six months (no quarter-on-quarter growth this quarter), but the company delivered an unexpected performance of $4.1 billion this quarter and provided an excellent guidance of $4.4 billion for the next quarter, which will inject confidence back into the market. With the completion of the product transition, Broadcom's AI revenue is expected to see stronger growth starting in the second half of the year: ① Google's 3nm TPU has achieved full-scale production; ② Meta's 3nm TPU is also expected to achieve mass production in the second half of 2025 or 2026; ③ The company has gained its fifth customer and is expected to start mass production ASIC chips for OpenAI and SoftBank/ARM in 2026.

Currently, the company has five ASIC customers (Google, Meta, ByteDance, OpenAI, SoftBank/ARM). A rich customer base is expected to bring stability to the company's performance and growth. Compared to Marvell, which still faces the risk of losing a major customer (Amazon), Broadcom is expected to continue to hold its position as the leader in ASICs.

2) Other Semiconductor Businesses

Aside from networking, Broadcom's other semiconductor businesses remain relatively sluggish, with an overall decline. The broadband business has rebounded after hitting a bottom, while server storage and wireless businesses have seen a sequential decline.

Based on the company's statements, Dolphin Research estimates the approximate performance of non-AI semiconductor businesses as follows:

① Server Storage Business: The company achieved revenue of $940 million this quarter, with a single-digit sequential decline, and the overall business remains relatively sluggish;

② Wireless Business: The company achieved revenue of $1.98 billion this quarter, basically flat year-on-year, with a slight sequential decline. This business has significant seasonal characteristics, with Apple contributing most of the revenue, which is greatly affected by the release of new Apple devices;

③ Broadband Business: The company achieved revenue of $500-600 million this quarter, with a sequential rebound. After hitting a bottom, this business is expected to recover as service providers and telecom companies increase spending;

④ Industrial and Other Businesses: Relatively small proportion, only 1.3%. The company achieved revenue of nearly $200 million this quarter, still experiencing a double-digit decline;

Overall, while there are some signs of recovery in the company's traditional semiconductor business, the overall demand is not strong. Additionally, in the wireless business, Apple is the main customer. The progress of Apple's self-developed WiFi chips will have a certain impact on the company's performance and is a major focus in traditional businesses.

3.2 Infrastructure Software

Broadcom (AVGO.O) achieved revenue of $6.7 billion in infrastructure software in the first quarter of fiscal year 2025, a year-on-year increase of 46.7%. The rapid growth of the company's software business in the previous fiscal year was mainly due to the consolidation of VMware. Starting from this quarter, the growth of the software business mainly comes from the internal integration and improvement of VMware.

1) VMware

According to the company's financial report, since the growth of the company's software business this quarter is mainly contributed by VMware, Dolphin Research estimates that VMware's revenue this quarter is approximately $4.5 billion, accounting for about 30% of the overall revenue After acquiring VMware, Broadcom made adjustments to its business by divesting non-core operations such as end-user computing.

If we look at the total revenue from the "license + subscription SaaS business" before VMware went public, the combined quarterly revenue from these two businesses was approximately $2 billion. Now, after the acquisition, Broadcom has eliminated the license business and transitioned entirely to subscription SaaS fees. With the increase in the proportion of subscription customers, VMware's current quarterly revenue has exceeded $4 billion, achieving a doubling effect.

The quarter-over-quarter decline in VMware's revenue last quarter was mainly due to the company postponing some revenue to this quarter. The company is fully transitioning from a primarily perpetual license model to a subscription model. This change in charging model is essentially a "price increase" strategy. Currently, the proportion of existing license customers converting to subscription SaaS has exceeded 60%. With adjustments to the charging strategy for more customers, VMware-related revenue is expected to continue to grow.

2) Original software businesses such as CA, Symantec, and Brocade

Based on the company's financial reports and related information, Dolphin Research believes that the company's original software businesses (CA, Symantec, and Brocade) are relatively stable, maintaining around $2.1 billion, accounting for approximately 14% of total revenue.

Dolphin Research on Broadcom (AVGO.O) related articles:

In-depth:

On December 4, 2024, the company published an in-depth article titled "Broadcom (AVGO.O): A Dual Winner in Hardware and Software, An Alternative Winner in the AI Computing Era"

On September 13, 2024, the company published an in-depth article titled "Broadcom: 'Buy, Buy, Buy' Paving the Way for a 'Trillion' Path? Tencent and Alibaba Should Learn!"

Financial Reports:

On December 13, 2024, during a conference call, the company stated that "Broadcom: The AI Serviceable Market Size Will Reach $60-90 Billion by FY27 (FY24Q4 Minutes)"

On December 13, 2024, a financial report commentary titled "Will ASIC Surpass GPU? Broadcom's Good Days Are Ahead" September 6, 2024 Conference Call: Broadcom: Demand for ASICs Will Increase in 2025 (FY24Q3 Conference Call)

September 6, 2024 Financial Report Commentary: Broadcom "Surging"? AI Cannot Support the Collapse of Traditional Semiconductors

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure