Broadcom Inc (AVGO) — Q3 2024 Earnings Call Transcript

Thank you, operator, and good afternoon, everyone. Joining me on today's call are Hock Tan, President and CEO; Kirsten Spears, Chief Financial Officer; and Charlie Kawwas, President of Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the third quarter of fiscal year 2024. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom's website at broadcom.com. This conference call is being webcast live and an audio replay of the call can be accessed for one year through the Investors section of Broadcom's website. During the prepared comments, Hock and Kirsten will be providing details of our third quarter fiscal year 2024 results, guidance for our fourth quarter fiscal year 2024, as well as commentary regarding the business environment. We'll take questions after the end of our prepared comments. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. In addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. I will now turn the call over to Hock.

Thank you, Ji, and thank you, everyone for joining us today. In our fiscal Q3 2024, consolidated net revenue of $13.1 billion was up 47% year-on-year, and operating profit was up 44% year-on-year. These strong results reflected three key factors: one, AI revenue continues to grow and grow strongly; two, VMware bookings continue to accelerate; and three, non-AI semiconductor revenue has stabilized. Before I give you more color on our two reporting segments, let me give you a quick update on guidance. Now we started the year providing annual guidance with quarterly updates as we run the process of integrating VMware. Things are now much more stable and we're in the final quarter of 2024. So instead of giving you annual guidance, we now revert to providing the quarterly guidance for Q4. Starting with software. In Q3, infrastructure software segment revenue of $5.8 billion was up 200% year-on-year driven by $3.8 billion in revenue contribution from VMware. The transformation of the business model of VMware continues to progress very well. In fact, last week, we held a well-attended VMware Explore Conference in Las Vegas, our first as a combined company. This event was all about promoting VMware Cloud Foundation, or VCF, which is the full software stack that virtualizes an entire data center and creates a private cloud environment on-prem for enterprises. The success of this strategy is reflected in our performance in fiscal Q3. We booked more than 15 million CPU costs of VCF, representing over 80% of the total VMware products we booked during the quarter. And this translates into an annualized booking value, or ABV, as I had described before, of $2.5 billion during Q3, up 32% from the preceding quarter. Meanwhile, we continue to drive down costs in VMware. We brought VMware spending down to $1.3 million in Q3 from $1.6 million in Q2. And when we acquired VMware, our target was to deliver adjusted EBITDA of $8.5 billion within three years of the acquisition. We are well on the path to achieving or even exceeding this EBITDA goal in the next fiscal '25. Now turning to semiconductors. In networking, Q3 revenue of $4 billion grew 43% year-on-year, representing 55% of semiconductor revenue. This was again driven by strong demand from hyperscalers for both AI networking and on custom AI accelerators. As you know, our hyperscale customers continue to scale up and scale out their AI clusters. Custom AI accelerators grew 3.5 times year-on-year. In the fabric, Ethernet switching, driven by Tomahawk 5 and Jericho3-AI grew over 4 times year-on-year, while our optical lasers and PIN diodes used in optical interconnects grew three-fold. Meanwhile, PCI Express switches more than doubled, and we're shipping in volume our industry-leading 5 nanometer, 400 gigabit per second NICs and 800 gigabit per second DSPs. So now let me give you more color on our networking products, which are not used in AI. As we had indicated last quarter, we believe we did bottom in Q2. And in Q3, non-AI networking was up actually 17% sequentially, even as it was down 41% year-on-year. We expect this level of revenue to sustain in Q4 and the year-on-year decline to moderate to 30%. So in adding the strength, we continue to see in AI, we expect total networking revenue to grow over 40% year-on-year in Q4. Across enterprise infrastructure, we see the same trend of recovery in server storage. Our Q3 server storage connectivity revenue was $861 million, up 5% sequentially and down 25% year-on-year. In Q4, we expect server storage revenue to grow mid to high-single digit percent sequentially, even as revenue is expected to be down high-single digit percent year-on-year. Moving on to wireless. Q3 wireless revenue of $1.7 billion grew 1% year-on-year, representing 23% of semiconductor revenue. And in Q4, reflecting the launch of next-generation devices and our North American customers, we expect wireless revenue to actually grow over 20% sequentially even as it will be relatively flat year-on-year. On to broadband, Q3 revenue declined 49% year-on-year to $557 million, representing 8% of semiconductor revenue. Broadband remains weak on a continued pause in telco and service provider spending. And in Q4, we expect broadband to continue to be down over 40% year-on-year, but we do expect that recovery to begin in '25. Finally, Q3 industrial resales of $164 million declined 31% year-on-year. We believe we are approaching bottom in Q3 as Q4 resales are expected to recover sequentially. Year-on-year, Q4 industrial resales will still be down approximately 20%. In summary, here are the trends we are seeing in semiconductors. In aggregate, we have reached the bottom in our non-AI markets, and we're expecting a recovery in Q4. AI demand remains strong and we expect, in Q4, AI revenue to grow sequentially 10% to over $3.5 billion. This will translate to AI revenue of $12 billion for fiscal '24, up from our prior guidance of over $11 billion. Putting it all together with software, here's our forecast for Q4. We expect Q4 semiconductor revenue of approximately $8 billion, up 9% year-on-year. For infrastructure software, we expect revenue to be about $6 billion. So we are guiding Q4 consolidated revenue to be approximately $14 billion, which is up 51% year-on-year. We also expect this will drive Q4 consolidated adjusted EBITDA to approximate 64% of revenue. This Q4 guidance would imply we are raising the outlook for our fiscal 2024 revenue to $51.5 billion and adjusted EBITDA for the year to 61.5%. And with that, let me turn the call over to Kirsten.

Thank you, Hock. Let me now provide additional detail on our Q3 financial performance. Consolidated revenue was $13.1 billion for the quarter, up 47% from a year ago. Excluding the contribution from VMware, Q3 revenue increased 4% year-on-year. Gross margins were 77.4% of revenue in the quarter. R&D was $1.5 billion, and consolidated operating expenses were $2.2 billion, up year-on-year primarily due to the consolidation of VMware. Q3 operating income was $7.9 billion and was up 44% from a year ago, with an operating margin at 61% of revenue. Excluding transition costs, operating profit of $8 billion was up 45% from a year ago with an operating margin of 62% of revenue. Adjusted EBITDA was $8.2 billion or 63% of revenue. This figure excludes $149 million of depreciation. Now a review of the P&L for our two segments, starting with semiconductors. Revenue for our semiconductor solutions segment was $7.3 billion and represented 56% of total revenue in the quarter; this was up 5% year-on-year. Gross margins for our semiconductor solutions segment were approximately 68%, down 270 basis points year-on-year, driven primarily by a higher mix of custom AI accelerators. Operating expenses increased 11% year-on-year to $881 million on increased investment in R&D, resulting in semiconductor operating margins of 56%. Now moving on to infrastructure software. Revenue for infrastructure software was $5.8 billion, up 200% year-on-year, primarily due to the contribution of VMware and represented 44% of revenue. Gross margins for infrastructure software were 90% in the quarter, and operating expenses were $1.3 billion in the quarter, resulting in infrastructure software operating margin of 67%. Excluding transition costs, operating margin was 69%. Moving on to cash flow. Free cash flow in the quarter was $4.8 billion and represented 37% of revenues. Excluding cash used for restructuring and integration of $529 million, free cash flows of $5.3 billion were up 14% year-on-year and represented 41% of revenue. Free cash flow as a percentage of revenue has declined from the same quarter a year ago due to higher cash interest expense from debt related to the VMware acquisition and higher cash taxes due to a higher mix of U.S. income and the continued delay in the reenactment of Section 174. We spent $172 million on capital expenditures. Days sales outstanding were 32 days in the quarter, in line with the year ago. We ended the third quarter with inventory of $1.9 billion, up 3% sequentially. Note that we continue to remain disciplined on how we manage inventory across the ecosystem. We ended the third quarter with $10 billion of cash and $72.3 billion of gross principal debt. During the quarter, we replaced $5 billion of floating rate notes with new fixed senior notes. We used the proceeds from the completed sale of VMware's End-User Computing business to KKR, and cash on hand to reduce floating rate debt by an additional $4.2 billion. Following these actions, the weighted average coupon rate and years to maturity of our $53 billion in fixed rate debt is 3.6% and 7.7 years, respectively. The weighted average coupon rate and years to maturity of our $19 billion in floating rate debt is 6.7% and 3.1 years, respectively. We expect to repay approximately $1.9 billion of fixed rate senior notes due in Q4. Turning to capital allocation. In Q3, we paid stockholders $2.5 billion of cash dividends, which based on a split adjusted quarterly common stock count, represented a cash dividend of $0.525 per share. For Q4, we are rounding up the quarterly cash dividend to $0.53 per share. In Q3, the split adjusted non-GAAP diluted share count was 4.92 billion, in line with expectations. We paid $1.4 billion of withholding taxes due on vesting of employee equity, resulting in the elimination of 8.4 million AVGO shares. In Q4, we expect the non-GAAP diluted share count to be approximately 4.91 billion shares. Now on to guidance. Our guidance for Q4 is for consolidated revenue of $14 billion and adjusted EBITDA of approximately 64%. For modeling purposes, we expect consolidated gross margins to be down approximately 100 basis points sequentially on the higher revenue mix of semiconductors and product mix within semiconductors. GAAP net income and cash flows in Q4 are impacted by higher taxes, restructuring, and integration-related cash costs due to the VMware acquisition. As Hock just discussed, we are resuming quarterly revenue and adjusted EBITDA guidance for fiscal 2025 as fiscal year '24 has been a transition and integration year following the VMware deal close. That concludes my prepared remarks. Operator, please open up the call for questions.

Thanks for taking my question. Just a clarification, Hock, and then the question. So I think AI revenue roughly $3.1 billion in Q3, flattish sequentially. What was the mix in terms of compute versus networking? And the $3.5 billion for Q4, what do you see of that mix? And then as we get into fiscal '25, I realize you're not guiding overall AI, but just how is your general kind of confidence and visibility? Do you think that Broadcom can kind of grow in line or better than the overall AI silicon industry in fiscal '25?

Yeah. Well, as we indicated in the last earnings call, for this past quarter, I think we're talking about two-thirds in compute and one-third in networking. And we kind of expect Q4 to run the similar trend. And as far to answer your second part, no, we don't guide – yet for fiscal ‘25, but we do expect fiscal ‘25 to continue to be strong, to show strong growth on our AI revenue.

Great. Thanks for taking my question. Hock, one of the things that we've picked up from both suppliers and the broader ecosystem in AI, I think we heard this from NVIDIA as well, that there was a shift in their revenue in the quarter, somewhat away from cloud service providers towards enterprise. And I wondered if that might potentially have a slowing effect on your revenue outlook in this end market because your participation is really pretty focused on the cloud customers. I wonder if you're seeing that, if you view it as a challenge or maybe you have a contrary view? Thank you.

Okay. Well, it's an interesting question in terms of the shift. But see, we do not focus very much on the enterprise AI market as you know well. Our products in AI are largely, very much largely focused, especially on the AI accelerator or XPU side, but also just as much on the networking side, on hyperscalers, on cloud, those three large platforms and some digital natives, what you call big guys. We don’t deal very much on AI with enterprise. So we obviously don’t see that trend.

Hi. Thanks for letting me ask a question. I wanted to pivot over to the software side of things. Hock, it seems like, obviously, the VMware business had a great fiscal third quarter. It seems like the classic Broadcom software fell off. So I guess the two-part question is, what happened in the classic Broadcom side of things to create that volatility? And are we now kind of reaching that $4 billion base in the fourth quarter that you talked about with VMware? And kind of, if so, what are the puts and takes in the growth rate as we look into the future on that business?

Well, as far as we indicated, the VMware business continues to book very well, as we convert our customers very much in two ways, one, from perpetual to a subscription license, but also those subscription licenses for the full stack of VCF. And that has been very successful, as I indicated, given the high ratio of VCF subscribers, new subscribers that we have achieved. And we see this trend continuing in Q4 very much so and also very likely through into '25. So in terms of directional trend, other than the indication I’m giving you – than the guidance I’m giving you in Q4 ‘24, directionally, we continue to see accelerated bookings and by extension, accelerated growth.

Hi, everyone. I appreciate you taking my questions. I have two quick ones, one regarding each segment. In semiconductors, the non-AI networking is down over 50% compared to its previous performance. Additionally, other areas are also significantly below their peaks. Is there a particular reason for this, or is it simply a cyclical issue? Will these areas return to their prior levels once recovery occurs? Moving on to the software side, the non-VMware components appear to have returned to approximately $2 billion per quarter, similar to previous figures. Is this decline primarily due to Brocade? Furthermore, is this $2 billion per quarter the bottom line, and should we consider this as the growth benchmark for the non-VMware software business moving forward?

On the semiconductor side, the situation is straightforward. As you know, we've experienced the typical downturn in the semiconductor market, particularly in the non-AI segment, which we've discussed multiple times. We've been through this downturn, and as our customers and the broader ecosystem adjust their inventory levels throughout the supply chain, we haven't been completely insulated from it. However, we believe we have passed the lowest point. The best indicator of recovery is the bookings we're seeing. In the third quarter, our non-AI semiconductor bookings are up 20%, indicating that we are on the path to recovery. The timing and level of recovery can vary by end market, but we have passed the lowest point in enterprise sectors, including enterprise data center and IT spending. The third quarter saw a sequential recovery from what we believe was the bottom in the second or first quarter of this fiscal year, and we expect this recovery to continue into the fourth quarter and into 2025. Although we haven't yet seen the same recovery in broadband, we believe it is nearing the bottom, with bookings improving from previous levels. Overall, we are confident that the non-AI semiconductor market has moved past its downturn and is on an upswing. Historically, we’ve always bounced back to previous levels, and considering the current rate of bookings, there’s no reason to think we won't do so again. Additionally, as AI technology integrates into enterprises and among digital natives, there will be an increased need for server, storage, and networking upgrades across the entire ecosystem. This could set the stage for an upcycle, though the timing is uncertain. I believe 2024 will mark the lowest point before an uptick. Regarding the software segment, we’ve achieved a level of stability, particularly with our non-VMware revenue, which has stabilized despite the volatility of Brocade. We are focusing on how VMware will grow over the next year and a half.

Got it. That’s helpful. Thank you, Hock.

Hey. Thanks a lot for the question. Hock, I wanted to ask you about semiconductors, your AI revenue. If you could just clarify some of your comments. Was the third quarter $3.1 billion in line with your expectations and was anything weaker than expected? And then with the sequential growth, the 3.5, where are you expecting that to come from? And then, if you don't mind, you said next year AI revenue should grow quite a bit. I was just wondering if that was due to any additional customers within your hyperscaler and consumer Internet portfolio? Thanks.

Our number in the third quarter aligns closely with our expectations for AI revenue. The forecast for Q4 is largely what allows us to raise our guidance for AI revenue for the full year to over $12 billion. This suggests to us that we anticipate a strong trend continuing into next year, driven mainly by hyperscalers, cloud services, and digital natives, along with a combination of AI accelerators and networking. This outlook is also supported by our existing backlog. Beyond that, we are not providing guidance beyond the current backlog, which indirectly answers your question about whether we have more customers; we will have to wait and see.

Yes. Thank you. Curious, I was hoping you could speak to the relocation of IP back to the U.S. that is causing a $4.5 billion tax liability. Historically, Broadcom has redomiciled ahead of a pending transaction, and I'm getting questions from investors, if this action may relate to any asset sales as the company seeks to pay down debt. So if you could clarify that, that would be helpful? Thank you.

Yeah. No, it was just the timing of when we chose to do it this time. And no, it doesn't have anything to do with that. It's just we relocated the IP and that caused the $4 billion charge. The offset to that is a deferred tax liability, so think of that as non-cash, very little cash impact to that.

Thanks a lot. Hock, I wanted to ask about the growth rate in your AI revenue versus what we're seeing on the GPU side. Your AI revenue grew in the same zip code this year as what the GPU compute is growing. And you did say that it would be up next year, but your main customer's ramping a new version of their custom ASIC next year. And there's some thought that they might shift some of their purchasing back to GPUs next year. So do you think that the growth of your AI revenue should still approximately track how much GPU compute is going to grow next year? If you can give us any qualitative or quantitative thoughts there, that would be great. Thank you.

Tim, I think we had some communication gaps here. Could you repeat the question?

Yeah. So the question, Hock, really is around the growth rate of your AI revenue versus what we're seeing on the GPU side because this year, you grew about the same as what GPU compute's growing. And the question is, is there anything happening next year that would change that equation so that your growth rate of your AI revenue would be materially different than what GPU compute is growing next year?

That's a difficult question for me to answer because it has two parts. For GPU growth, you should talk to the companies involved in merchant GPUs like NVIDIA and ASD. I don't operate in the enterprise market, so I don't have visibility there. However, both of those companies are somewhat involved with hyperscalers, which is where my focus lies. There’s really no direct connection between those markets. Long term, the large hyperscalers, with their substantial consumer subscriber bases, are set to run extensive large language models and AI workloads. Over time, this will likely lead them to develop their own compute silicon and custom accelerators. We are currently witnessing this transition, which may take several years. My path is centered on enabling custom accelerators, not on helping enterprises with AI on their workloads, which is more aligned with the merchant companies. While some merchant firms are currently involved with hyperscalers, there’s an ongoing transition where those areas do not connect directly. However, I do believe that as this transition unfolds, our business model of providing accelerators and networking to the AI data centers of large hyperscalers will benefit significantly.

Yeah, Hock. I was curious about the profitability of VMware. Historically, your software businesses have had operating margins greater than 70%. VMware, I know is newer and you're doing things a little different. You're keeping more customers than you historically have kept. But I was curious, if you see a similar profile as the rest of your software businesses for VMware after you're done with all the cuts and everything?

Well, I’ll let you draw your own conclusion, Harsh, but I was at pains to lay out as you probably heard. In Q3, our revenue from VMware was $3.8 billion and our operating expenses is $1.3 billion. And you can pretty quickly figure out where we’re headed in terms of operating margin and, as I indicated, EBITDA margin. And Q4, we’ll continue the trajectory of revenue continuing to grow and expenses still dropping even as it starts to stabilize but continue to reduce.

Yeah. Good afternoon. Thank you for taking the question. I wanted to focus on software gross margin. So when you closed the acquisition of VMware, we ticked lower from low 90s to kind of high 80s. And we're now pushing a bit higher in July. And curious, as we kind of get to that $4 billion threshold and you've kind of indicated higher in fiscal '25, how should we think about the gross margin trajectory overall for software?

Well, it's, for us, software gross margin is actually direct, it's not that relevant. You know that, right? So unless I'm running SaaS big time, now a lot of our products on subscription but they're not SaaS. We have some products on SaaS cloud-based, but most of them are not. And our gross margin will be around 90% at least.

Yes. Thank you. Good evening. I wonder if you could speak to the custom AI revenue and perhaps the contribution from some of the other customers aside from that largest customer. How meaningful are the other customers in that segment and what do you expect into next year as some of those newer projects start to ramp?

We have three significant customers that we are currently working with, but we only consider them as customers once we start making substantial shipments of AI accelerators to them. Given that this is a new and emerging trend, deploying these products is not straightforward for any customer. Therefore, we do not view proof of concepts as equivalent to production volume. All three customers have production accelerators deployed in their AI data centers.

Hi. Thanks for the question. My question is actually on storage. And Hock, you bought Seagate's hard disk drive SoC assets earlier in the year. Can you talk about what you actually bought there, what it means in terms of economics for your company, and whether this accelerates your storage business over the next few years? Thanks.

This is more of a partnership than anything else. Essentially, our intention with that transaction was to emphasize our long-term belief in the sustainability of hard disk drive media as a viable storage alternative for hyperscalers. It’s logical to consider that while everything may eventually transition to flash, hard disk drive storage will still maintain its significance. The technology surrounding this is particularly fascinating to us and has great potential for development. Currently, hard disks range from 22 to 24 terabytes, and we're looking ahead to advancements that could bring us to 30, 40, and even 50 terabytes. A lot of innovation will take place along that journey, with much of it relying on silicon. Therefore, our initiative is more of a collaborative effort, albeit structured as a purchase of intellectual property. We’re integrating our engineers and designers with theirs, effectively supporting Seagate and ultimately the entire industry in pursuing a roadmap aimed at achieving 50 terabytes. This is our goal and vision, and we aim to realize this within five years or less. We firmly believe that hard disk drive storage will remain robust over the next five years, if not longer.

Yeah. Thanks for taking the question. Kind of thinking strategically as we look forward ahead to NVIDIA's Blackwell product cycle, there's been some indications that possibly Broadcom has an opportunity to participate more deeply in the optical side of that product platform for NVIDIA. I'm curious, do you see that as an opportunity relative to prior generations of NVIDIA just to deepen a participation or just to participate in general in kind of the areas of DSPs and maybe other things related to the Blackwell cycle from NVIDIA? Thank you.

That’s an interesting question and I’ve got a simple answer. I’m not really participating in NVIDIA’s roadmap. I’m really not directly in that kind of market, in that kind of product roadmap. That’s NVIDIA product roadmap in terms of Blackwell. Impressive product on the way to coming out. Now in terms of base technology we developed, of course, it could be used, it could be applied, and we are very happy to share that with – as it may be useful to get – to enable Blackwell to be part of that, whether it’s on the optical component side, which is what you’re referring to, or even on the DSP side in terms of providing the interconnects to enable clusters of Blackwell to be built. That is fine on our engagement in that. We’re happy to be part of that ecosystem as I said. But directly, we’re not in that market as you know.

Great. Thank you. I wonder, Hock, if you could talk about your thoughts on further M&A. Is that still on your radar down the road? And if you did, would it be still software-focused or any possibility of semiconductors becoming interesting to you again?

That's a great question, Joe. I'll be straightforward to avoid any disappointment. Currently, I'm fully engaged and really enjoying the process of transforming VMware's business model. It's a rewarding experience, and I'm pleased with how it's progressing, surpassing our expectations. My primary focus is on ensuring VMware continues to accelerate its deployment of private cloud solutions within the largest enterprises globally. It may take another year or two to fully complete that transformation.

Good afternoon. Thanks for taking my question. Hock, last quarter, you talked about an acceleration in R&D investments by your AI customers, and you talked about your follow-on wins for their next-generation XPU ASIC programs. It also looks like they're trying to accelerate their deployments of their GPUs, XPUs, and networking into their data centers here in the second half of the year. We know that on AI accelerators specifically, supply is quite tight, given the colos packaging and the HBM memory constraints. So has the team seen upside orders and demand for XPUs and networking here in the second half? Have you been able to meet that upside demand or is the team somewhat supply constrained? I guess in other words, is the AI demand greater than your supply here in the second half of the year?

We are still receiving orders and experiencing growth. You are correct about the trend, as our customers—hyperscalers—are striving to expand the capacity of their AI data centers. They are increasingly focused on power rather than how many XPUs or GPUs they can involve in their capacity, which shows their commitment to scaling up. As they make this transition, we are seeing positive results. I anticipate this will significantly increase by 2025. Although we're not incorporating that into any official guidance, your observation is accurate. We do expect to see continued growth, similar to what we've observed recently, over the next year, particularly with the deployment of XPUs and the rush to make the necessary infrastructure available. We are noticing quite a bit of that.

Have you been able to meet that upside or are you somewhat limited by supply constraints?

We can meet those upsides.

Okay. Thank you, Hock.

Thanks.

Thank you very much. Hock, that was a perfect segue into my question. You've said in the past calls that you thought that AI compute would move away from ASICs and go to merchant market. But it looks like the trend is kind of heading the other way. Are you still of the opinion that that's going to be the long-term trend of this? And secondly, as you just pointed out, power is becoming the defining factor for deployment with all the big guys at this point. Given the performance per watt of the ASICs over GPUs, which is superior to GPUs, why shouldn't we see more of these guys moving to custom ASIC? I know it takes a long time and it takes a lot of funding, etc. But especially as the enterprise starts getting more involved with this, there are going to be some applications that are kind of standard across some of the enterprises wouldn't even see some of the bigger, like AWS, move to custom silicon for a specific workload. So basically, the overall trend in ASICs in AI. Thanks.

Okay. Ed, did I hear you right to say at the beginning, maybe you meant that there is a trend towards ASIC or XPU from general-purpose GPU, right? You're right to point out that I used to believe general-purpose merchant silicon would ultimately prevail. Historically, general-purpose small merchant silicon has often been successful. However, I have changed my perspective on this, a shift I made around last quarter or maybe six months ago. It’s positive to keep up with these developments. I think there are two distinct markets for AI accelerators. First, we have the enterprises, which generally lack the capability, financial resources, or interest to develop their own custom silicon, large language models, or the necessary software to run AI workloads on custom silicon. The costs are too high and the returns too low for them. On the other hand, there are a few hyperscalers in the cloud space that have the scale and financial power to rationalize the creation of their own custom accelerators. Ultimately, it all centers around compute engines, especially for training large language models on their platforms. The emphasis is largely about GPUs—now seriously, GPUs have become more critical than the engineers to these hyperscalers in their planning. Those GPUs, or XPUs, are very significant. Thus, it makes sense for them to take control of their future by developing their own custom silicon accelerators, which is what I'm observing; they are all doing this, albeit at different speeds and starting points. It takes time, but these few hyperscalers are already creating their own systems to train on large language models. They are definitely moving in the direction of ASICs or XPUs, custom silicon. At the same time, there remains a market for merchant silicon in the enterprise space.

Thank you, operator. This quarter, Broadcom will be presenting at the Goldman Sachs Communacopia and Technology Conference on Wednesday, September 11 in San Francisco. Broadcom currently plans to report its earnings for the fourth quarter and fiscal year 2024 after the close of market on Thursday, December 12, 2024. A public webcast of Broadcom's earnings conference call will follow at 2:00 p.m. Pacific. That will conclude our earnings call today. Thank you, all, for joining. Operator, you may end the call.