Broadcom's (AVGO) first-quarter adjusted earnings per share of $10.99 topped Wall Street estimates of $10.42. Net revenue of $11.96 billion beat the $11.76 billion expectation. However, the semiconductor solutions group posted revenue that fell short of analyst estimates.
CFRA Research Senior Equity Analyst Angelo Zino says that in 2023, when it came to AI chips, the only two companies out there were Broadcom and Nvidia (NVDA). In 2024, Zino expects "that same story that you saw in '23 from Broadcom continues to build here this year." Zino points to specifically two things driving the networking side of the business: the ethernet switcher business and the custom silicon business. Overall, "there's a lot of growth attached to that AI story for Broadcom," Zino says.
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Editor's note: This article was written by Stephanie Mikulich.
Video Transcript
JULIE HYMAN: Broadcom, the company's first quarter results hitting the wire and the shares down a quick 1.8% here. Let's run through the numbers here. First quarter adjusted earnings per share beating estimates, $10.99. First quarter adjusted net revenue at $11.96 billion. It looks like semiconductor solutions revenue is what the miss is here. That came in at 7.39 billion. Analysts were looking for $7.7 billion.
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So as far as I can tell, that's what's responsible here. I'm also seeing the company sees its full year revenue at about $50 billion. So that's something we'll be watching as well.
JOSH LIPTON: Yeah. Stock's down about 3 and 1/2% now. Again, like Marvell, Julie, Broadcom, this was just another monster. It was up about 120% over the last 12 months. Some comments here also from CEO Hock Tan, he's talking about drivers of revenue growth. He calls out VMware. Of course, they closed that big acquisition finally late last year.
Also, remember, part of the reason the stock has surged, investors seeing this as an AI play. And Hock Tan talks about that, their networking products and data centers, talks about custom AI accelerators from the hyperscalers to the big cloud giants. Again, though, at least initially here, stock down in the after hours.
JULIE HYMAN: You know, and just one more thing I wanted to mention as we talk about Marvell, as we talk about Broadcom, there has been an enormous surge in options activity around all the semiconductor makers. So when you see moves also post-earnings, you got to think that options plays are a part of that.
Let's talk more about these Broadcom numbers. Let's get to CFRA Research Senior Equity Analyst Angelo Zino. So Angelo, I know these numbers just came out, but just give us sort of your first blush take here.
ANGELO ZINO: Yeah. I mean, listen, overall, it came kind of in line with expectations. I mean, slightly ahead of expectations if you really think about it for the January quarter. But as far as the guidance that they provided, they essentially, last quarter, interestingly, kind of moved from a quarterly guidance to an annual guidance. And if you look at what they provided here for the full fiscal year 2024, again, it was pretty much matching what they said three months ago.
If you look at-- you guys pointed out some of the incredible moves that we've seen in some of these kind of semiconductor, AI-related names that both kind of Broadcom and Marvell kind of running into the numbers this quarter, it's not necessarily a surprise that you aren't getting much of a reaction or some downside here on the names, given the kind of inline expectations out there.
JOSH LIPTON: And, Angelo, interesting, of course, part of the reason the stock has surged the way it did. Investors see it as another smart AI play. And you've heard the company, they're obviously getting much more bullish about the opportunities they see in AI. Do you share that bullishness, Angelo?
ANGELO ZINO: No, we do. I mean, and if you look in calendar 2023, there were really two names out there on the semiconductor side of things that really did see some significant revenue on the AI side of things. That was, of course, Nvidia and the other name was Broadcom. And you saw the reaction or the move in the stock prices last year from those names, because you kind of go into 2024 here.
The same story that you saw in 23 for Broadcom continues to build here this year in terms of really on the networking side of things being driven by two factors. One kind of their ethernet switcher business out there, which is going to essentially nearly double this year. And then you kind of got that customer silicon business, which is largely Alphabet, if you think about it. And that's probably going to grow at least from a $3 to $4 billion type of run rate here this year. So there is a lot of growth attached to that AI story for Broadcom.
I think the other interesting thing, of course, is what's going on the software side of things. If you look at the multiple for Broadcom here over the last three, four months, you've absolutely seen a rerating here differently than what you've seen from the reasoning from Nvidia's move, which is really all kind of earnings beats on that side of things. For Broadcom, it's more along the lines of now being a 60/40 split in terms of semis and software. And kind of that visibility that you have over the next couple of years in greater kind of acceleration on the software side of things is kind of I think attributing to that the higher multiple for this name.
JULIE HYMAN: And Angelo, Hock Tan has said that AI, the general spending in AI, could account for about a quarter of the company's revenue this year. Anything in these results that make you think that number is too low or too high?
ANGELO ZINO: I mean, we're not going to have color until they actually have their fall and where they typically break down those numbers. But you look at the guidance that they did provide. Again, I would think it's pretty much everything's kind of running in line with what he previously commented on a couple of months ago.
If you look at the run rate just three months ago, it was-- AI was running at about 20% of their revenue. It was about 15% of their full fiscal year 2023 revenue. So that 25% number, I think, should at the very least match expectations with potential upside to that number.
JOSH LIPTON: And Angelo, we'll get you out of here on this, you know, this is Broadcom's first quarter, I think, with VMware in tow here. They close that acquisition late last year, Angelo. What is that acquisition going to mean for Broadcom's business going forward?
ANGELO ZINO: Yeah. I think it's a great acquisition for them know. Again, I think it boosts the margin trajectory of this company. I think a lot of investors are going to want to know exactly where the number is going to look like here over the next couple of quarters. I think there was hope that maybe that the cost-cutting was going to be maybe a little bit ahead of expectations, because Hock has just been absolutely exceptional in prior acquisitions with the cost-cutting moves. So we'll see what he has to say on that side of things.
But this is all about driving that margin expansion, the cost cuts, which we expect, will be about a 40% reduction from the end of last year to the end of this year. So there's going to be notable cost cuts. And then, again, it does accelerate the business in terms of the run rate. Even kind of exiting this calendar year as you go into next year, we do think high single digit, low double digit growth for the software business now is what to be expected, where over the last couple of years, it's been more of a low single digit growth driver for this company.
JOSH LIPTON: All right. Stock initially here down in the after hours. We'll see what CEO Hock Tan has to say on the call. Angelo, Thanks as always, for joining us. Appreciate it.