Hyperscale spending on generative artificial intelligence is driving significant growth in the technology industry. Companies like Broadcom Inc. (AVGO, Financial) are experiencing a surge in revenue as they supply custom AI compute engines and networking technologies to hyperscale customers.
Hock Tan, the CEO of Broadcom, highlighted the importance of generative AI investments in driving the continued strength in hyperscale spending. Generative AI refers to the use of artificial intelligence algorithms to generate new content, such as images, videos or text. This technology requires large clusters of AI engines, including GPUs or other customized AI silicon compute engines, which are interconnected through a fabric of networking connectivity.
According to Tan, the demand for generative AI products is driving the growth of hyperscale spending. Hyperscalers, which are companies that operate massive data centers and provide cloud services, require advanced networking technologies to scale out their AI clusters. Broadcom is at the forefront of providing these technologies, including switches, routers and custom silicon AI engines.
Ethernet networking protocol plays a crucial role in scaling out AI clusters. Broadcom believes that ethernet offers low latency attributes that are essential for machine learning and AI applications. The company is actively developing cutting-edge technology, such as the next-generation Tomahawk 5 switch and Jericho3-AI routers, to meet the increasing demand for high-speed and high-bandwidth networking solutions.
The growth in hyperscale spending on generative AI is reflected in Broadcom's financial performance. In the fiscal Q3 of 2023, the company achieved $8.9 billion in consolidated net revenue, a 5% increase compared to the previous year. Semiconductor solutions revenue, which includes generative AI-related products, grew by 5% year-on-year to $6.9 billion. Networking revenue, driven by generative AI deployments, reached $2.8 billion, representing a 20% increase year-on-year.
To cater to the growing demand for AI-driven networking solutions, Broadcom has developed a range of next-generation products. The company has already received substantial orders for its Tomahawk 5 switch and Jericho3-AI routers, which will replace existing 400-gigabit networks with 800-gigabit connectivity. Additionally, Broadcom is working on the development of the Tomahawk 6 switch, which will offer 1.6-terabit connectivity and breakthrough throughput capacity of over 100 terabits per second.
Broadcom's commitment to meeting the evolving needs of hyperscale customers is evident in its investments in fundamental technologies. The company has developed industry-leading 200G SerDes, enabling high-speed chip-to-chip connectivity and integration of multiple AI compute engines. Broadcom's investment in complex packaging technologies, such as 3D integration, allows for the seamless integration of large memory with AI compute engines and accelerators. These advancements in silicon technology are driving the development of cutting-edge networking solutions that are crucial for scaling generative AI.
Looking ahead, Broadcom expects the growth in hyperscale spending on generative AI to continue. In Q4 of 2023, the company anticipates networking revenue to accelerate by more than 20% year-on-year. The demand for generative AI products is forecasted to grow by approximately 50% sequentially and almost two times year-on-year.
Software expansion
During the quarter, Broadcom's infrastructure software revenue reached $1.9 billion, representing a 5% year-over-year increase and accounting for 22% of the company's total revenue. This growth demonstrates the success of Broadcom's strategic focus on software solutions.
One key factor contributing to the expansion of Broadcom's software business is the strong demand for their core software products. The company reported consolidated renewal rates averaging 117% over expiring contracts, with strategic accounts averaging 127%. This indicates high customer satisfaction and loyalty, as well as the successful cross-selling of other portfolio products to core customers.
Broadcom's software business has also benefited from recurring subscription and maintenance revenue, with over 90% of the renewal value coming from these sources. This provides a stable and predictable revenue stream for the company.
Looking ahead, Broadcom expects its infrastructure software segment to continue growing at a mid-single-digit rate in Q4. This positive outlook reflects the company's confidence in the market demand for their software solutions.
The expansion of Broadcom's software business aligns with the company's broader strategy to diversify its revenue streams and reduce reliance on its semiconductor business. By leveraging their expertise in software development and their strong customer relationships, Broadcom is well-positioned to capitalize on the growing demand for software solutions in various industries.
In addition to their software business, Broadcom has also been actively pursuing acquisitions to further strengthen their software portfolio. One notable pending acquisition is VMware, for which Broadcom has received legal merger clearance in multiple jurisdictions. This acquisition is expected to enhance competition in the cloud and provide more choices for enterprise customers.
Conclusion
Overall, Broadcom's expansion into the software business is a strategic move that has proven successful in driving revenue growth and diversification. With a strong focus on customer satisfaction, cross-selling opportunities, and recurring revenue, Broadcom is well-equipped to sustain the growth of its software segment in the coming quarters.
Hyperscale spending on generative AI is driving significant growth in the technology industry. Companies like Broadcom are capitalizing on this trend by supplying custom AI compute engines and networking technologies to hyperscale customers. The demand for advanced networking solutions, particularly Ethernet, is crucial for scaling out AI clusters. As the adoption of generative AI continues to grow, companies in the supporting technology sectors can expect to see continued growth in revenue and opportunities for innovation.
Looking ahead, Broadcom expects its networking revenue to continue its upward trajectory, with a projected growth of over 20% year-on-year in the fourth quarter of fiscal 2023. The company anticipates that the demand for networking solutions will be primarily driven by the rapid expansion of generative AI deployments. As AI networks become increasingly prevalent, Ethernet is poised to play a pivotal role in scaling AI clusters, further solidifying Broadcom's position as a leading provider of networking infrastructure.
