VMware revenue plunges $600 million, but Broadcom assures investors growth plan is on track
- Reference: 1718252902
- News link: https://www.theregister.co.uk/2024/06/13/broadcom_q2_2024/
- Source link:
Speaking on Broadcom's Q2 2024 earnings call, CEO Hock Tan announced VMware revenue for the quarter came in at $2.7 billion. Broadcom's quarter ended on May 5 – as did pre-acquisition VMware's Q1 2024 when, in June 2023, it [1]reported [PDF] $3.28 billion revenue for the period.
Hock Tan did not compare the results, but suggested Broadcom is "Making good progress transitioning all VMware products to a subscription licensing model" and that 3,000 of the 10,000 largest VMware customers have signed for multi-year deals. The CEO enthused about VMware's increasing annualized booking values – a metric of commitment to long-term contracts – which rose from $1.2 billion last quarter to $1.9 billion this time around. He added that Broadcom sees "a lot of interest" from customers looking to VMware's portfolio as a means to build on-prem private clouds "as a nice complement, maybe even alternative or hybrid, to public clouds."
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Costs are also well down at VMware – from $2.3 billion a quarter to $1.6 billion. Tan told investors Broadcom targeted quarterly costs of $1.4 billion, but is on track to exit 2024 with costs at $1.3 billion – and can reduce them further to $1.2 billion. Rumors of further layoffs are already circulating.
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"We are making very strong progress integrating VMware and accelerating its growth," Tan declared, noting that $2 billion has already been spent on restructuring and integration costs before predicting revenue from the business unit "will accelerate towards $4 billion per quarter run rate."
With VMware predicted to have lower costs and higher revenue, Tan also forecast higher margins across Broadcom's software business.
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And that business appears to be in good shape, with quarterly revenue of $5.3 billion from the combined VMware, CA, and Symantec. In the same quarter of 2023 the division, then without VMware, won $1.9 billion of revenue. That means the CA and Symantec businesses have added $700 million of revenue year over year – an endorsement of Broadcom's approach to running software businesses.
On the silicon side
Broadcom's silicon business also fared well. Revenue of $7.2 billion represented a six percent year-over-year improvement.
Tan told investors that revenue from AI-related products "stepped up 280 percent year on year to $3.1 billion, more than offsetting continued cyclical weakness in semiconductor revenue from enterprises and telcos."
Networking revenue grew 44 percent year on year to reach $3.8 billion, thanks to "strong demand from hyperscalers for both AI networking and custom accelerators."
"It's interesting to note that as AI datacenter clusters continue to deploy, our revenue mix has been shifting toward an increasing proportion of networking," Tan observed, noting that networking silicon accounted for 53 percent of semiconductor revenue in the quarter.
[6]Broadcom ends easy elasticity for VMware Cloud on AWS
[7]Broadcom CEO pay award jumps 164% to $160.8 million
[8]In pursuit of artificial general intelligence, Meta adds Broadcom boss Hock Tan to its board
[9]AI PC vendors gotta have their TOPS – but is this just the GHz wars all over again?
Part of that growth is due to hyperscalers using Ethernet to connect their GPUs – a trend Tan predicted will mean "Next year, we expect all mega-scaled GPU deployments to be on Ethernet." That's a big endorsement of the venerable protocol, even as Nvidia proclaims its NVlink networking tech does a better job of allowing accelerator fleets to work in parallel.
Tan asserted that Broadcom definitely sees itself as an Nvidia competitor in the network, but won't go head-to-head with it for GPUs. ASICs are a different matter: Tan said Broadcom is more than happy to help hyperscalers build custom chips for AI accelerators.
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Growing demand for AI-related silicon and anticipated growth at VMware saw Broadcom increase its guidance for FY 2024 to $51 billion – a billion more than forecast in its [11]Q1 result , which itself was an upgrade.
Total revenue for the quarter came in at $12.5 billion, with net income of $2.1 billion. Broadcom also announced a ten-for-one stock split in July, which will make its scrip easier to acquire given that its share price finished the trading day at $1,495 and topped $1700 in after the bell trading. ®
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[1] https://www.vmware.com/content/dam/digitalmarketing/vmware/en/pdf/earnings/vmw-earnings-release-nongaap-q124.pdf
[2] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2ZmrDRcm1Pxh4-YSwxomTKQAAAE4&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0
[3] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44ZmrDRcm1Pxh4-YSwxomTKQAAAE4&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[4] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33ZmrDRcm1Pxh4-YSwxomTKQAAAE4&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[5] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44ZmrDRcm1Pxh4-YSwxomTKQAAAE4&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[6] https://www.theregister.com/2024/06/10/vmare_aws_elasticity_reduced/
[7] https://www.theregister.com/2024/02/28/broadcom_ceo_pay_award_jumps/
[8] https://www.theregister.com/2024/02/15/broadcom_ceo_joins_meta_board/
[9] https://www.theregister.com/2024/06/11/ai_pc_tops/
[10] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33ZmrDRcm1Pxh4-YSwxomTKQAAAE4&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[11] https://www.theregister.com/2024/03/08/broadcom_q1_2024/
[12] https://whitepapers.theregister.com/
Re: Strong growth, huge cost cuts
A sign that the sheepies, sorry, investor community, apparently couldn't see given the market reaction to the quarter's performance, which apparently exceeded the herd"s expectations.
I'm so hoping Broadcom become the poster boy for acquisition accounting hiding tanking underlying performance.
Re: Strong growth, huge cost cuts
I doubt it; more likely is that instead of booking a single sale of $1200 the customer switches to subscription and is paying $300 for the quarter, so instant quarterly revenues will appear to be down but, as the article quotes:
"annualized booking values – a metric of commitment to long-term contracts – which rose from $1.2 billion last quarter to $1.9 billion this time around."
Re: Strong growth, huge cost cuts
If the long term contracts are near enough guaranteed, then converting quarterly to recurring is a fabulous thing. If it's not so certain, then it means little. Such subscription figures can easily be manipulated by offering businesses a big discount to sign up for a long term contract that has a break clause - few downsides for the customer. In the longer term though, those discounts might not be so good the vendor, added to the dubious reliability of the revenues.
Forward sales commitments in software businesses are always a very movable feast, and the accounts can be made to say almost anything, often without breaking any laws and from the outside we can't really tell that much. Problem for Broadcom is the usual one of corporate acquisitions that they paid top dollar for VMware (more than 40% above the previous market valuation) and now need to extract that from users. There's other solutions for VMware's offer, and as Broadcom try and ream out customers to pay for their own largesse, customers will start looking to other providers.
Overall, how good was the combination of deal logic of "chipmaker buys market leading but single trick pony software company" and the underlying financials of the deal "we paid so much money we'll need to double revenues" ? My view is that most big deals are simply executive toys, conceived when a board can't see growth in their own core business, and this one will eventually go the way of most M&A between dissimilar companies. But with VMware reasonably entrenched in enterprise architecture, it'll take a good few years for any negative impacts to show; The advisors have already been paid their fees, and by the time any underperformance is clear those in Broadcom who dreamt this up will have trousered their bonuses and moved onto pastures new. The former shareholders of VMware have done very nicely, and the people who pay the price are the staff who are dumped to reduce costs, and the shareholders of Broadcom who sat and watched as the usual M&A fiasco plays out.
Re: Strong growth, huge cost cuts
Typical post-takeover accounting. He's talking about operating costs being lower, due to layoffs, but also Tan declared, noting that $2 billion has already been spent on restructuring and integration costs . "Restructuring" is the term usually used to cover things like compensation and legal costs associated with sacking people.
Whether we like it or not, Tan has a proven record in takeovers. If there is a number that will alarm investors, it will be that not even a third of the "whales" have signed long-term deals and this might suggest that that "forward revenue" is a little ambitious. But the real success story remains the silicon side of the business. So that even if things all go titsup with VM Ware, there's still plenty of cash coming in.
Our special military operation...
Is all going to plan and all objectives are being met.
Strong growth, huge cost cuts
And yet $600 million less revenue.
I'd say that's a sign . . .