Image source: The Motley Fool. DATEThursday, June 5, 2025 at 5 p.
ETCALL PARTICIPANTSPresident and Chief Executive Officer — Hock TanChief Financial Officer — Kirsten SpearsHead of Investor Relations — Ji YooNeed a quote from one of our analysts.
[ tected] TAKEAWAYSTotal Revenue: $15 billion for Q2 FY2025, up 20% year over year, as the prior-year quarter was the first full period with VMware, making the 20% year-over-year growth organic relative to a VMware-included base.
Adjusted EBITDA: Adjusted EBITDA was $10 billion for Q2 FY2025, a 35% increase year over year, representing 67% of revenue and above the Q2 FY2025 guidance of 66%. Semiconductor Revenue: $8.
4 billion for Q2 FY2025, up 17% year over year, with growth accelerating from Q1 FY2025's 11% rate. AI Semiconductor Revenue: Over $4.
4 billion in AI semiconductor revenue for Q2 FY2025, up 46% year over year and marking nine consecutive quarters of growth; AI networking represented 40% of AI revenue in Q2 FY2025 and grew over 70% year over year.
Non-AI Semiconductor Revenue: $4 billion for non-AI semiconductor revenue in Q2 FY2025, down 5% year over year; broadband, enterprise networking, and service storage were sequentially higher, but industrial and wireless declined.
Infrastructure Software Revenue: $6. 6 billion infrastructure software revenue for Q2 FY2025, up 25% year over year and above the $6.
5 billion outlook for Q2 FY2025, reflecting successful enterprise conversion from perpetual vSphere to the VCF subscription model. Gross Margin: 79.
4% of revenue for Q2 FY2025, exceeding prior guidance, with Semiconductor Solutions gross margin was apximately 69% (up 140 basis points year over year), and Infrastructure Software gross margin was 93% (up from 88% year over year).
Operating Income: Q2 FY2025 operating income was $9. 8 billion, up 37% year over year, with a 65% operating margin for Q2 FY2025. Operating Expenses: $2.
1 billion consolidated operating expenses for Q2 FY2025, including $1.
5 billion for R&D in Q2 FY2025, and Semiconductor Solutions operating expenses increased 12% year over year to $971 million on AI investment. Free Cash Flow: $6.
4 billion free cash flow for Q2 FY2025, Free cash flow represented 43% of revenue, impacted by increased interest on VMware acquisition debt and higher cash taxes. Capital Return: $2.
8 billion paid as cash dividends ($0. 59 per ) in Q2 FY2025, and $4. 2 billion spent on repurchases (apximately 25 million s). Balance Sheet: Q2 FY2025 with $9. 5 billion cash and $69.
4 billion gross principal debt; repaid $1. 6 billion after quarter end, reducing gross principal debt to $67. 8 billion subsequently. Q3 Guidance — Consolidated Revenue: Forecasting $15.
8 billion consolidated revenue for Q3 FY2025, up 21% year over year. Q3 Guidance — AI Semiconductor Revenue: $5.
1 billion expected AI semiconductor revenue for Q3 FY2025, representing 60% year-over-year growth and tenth consecutive quarter of growth.
Q3 Guidance — Segment Revenue: Semiconductor revenue forecast at apximately $9. 1 billion (up 25% year on year) for Q3 FY2025; Infrastructure Software revenue expected at apximately $6.
7 billion (up 16% year over year).
Q3 Guidance — Margins: Consolidated gross margin expected to decline by 130 basis points sequentially in Q3 FY2025, primarily due to a higher mix of XPUs in AI revenue.
Customer Adoption Milestone: Over 87% of the 10,000 largest customers have adopted VCF as of Q2 FY2025, with software ARR growth reported as double digits in core infrastructure.
Inventory: Inventory of $2 billion for Q2 FY2025, up 6% sequentially, and 69 days of inventory on handDays Sales Outstanding: 34 days in the second quarter, imved from 40 days a year ago.
Duct Innovation: Announced Tomahawk 6 switch, dering 102. 4 terabits per second capacity and enabling scale for clusters exceeding 100,000 AI accelerators in two switching tiers.
AI Revenue Growth Outlook: Management stated, "we do anticipate now our fiscal 2025 growth rate of AI semiconductor revenue to sustain into fiscal 2026.
"Non-GAAP Tax Rate: Q3 and full-year 2025 expected at 14%.
SUMMARYManagement highlighted that executives vided multi-year roadmap clarity for AI revenue, signaling the current high growth rates could continue into FY2026, based on strong customer visibility and demand for both training and inference workloads.
New duct cycles, including Tomahawk 6, are supported by what management described as "tremendous demand.
" The company affirmed a stable capital allocation apach, prioritizing dividends, debt repayment, and opportunistic repurchase, while maintaining significant free cash flow generation.
Despite a sequential uptick in AI networking content, management expects networking's of AI revenue to decrease to below 30% in FY2026 as custom accelerators ramp up.
Management noted, "Networking is hard. That doesn't mean XPU is any soft. It's very much along the trajectory we expect it to be. " addressing questions on duct mix dynamics within AI semiconductors.
On customer conversion for VMware, Hock Tan said, "We bably have at least another year plus, maybe a year and a half to go" in transitioning major accounts to the VCF subscription model.
AI semiconductor demand is increasingly driven by customer efforts to monetize platform investments through inference workloads, with current visibility supporting sustained elevated demand levels.
Kirsten Spears clarified, "XPU margins are slightly lower than the rest of the other than Wireless. " which informs guidance for near-term gross margin shifts.
Management stated that near-term growth forecasts do not include potential future contributions from new "spects" beyond active customers; will be vided only when revenue conversion is certain.
Hock Tan vided no on the 2027 AI revenue opportunity, emphasizing that forecasts rest solely on factors and customer activity currently visible to Broadcom Inc.
On regulatory risk, Hock Tan said, "Nobody can give anybody comfort in this environment," in response to questions spective impacts of changing export controls on AI duct shipments.
INDUSTRY GLOSSARYXPU: A custom accelerator chip, including but not limited to CPUs, GPUs, and AI-focused architectures, purpose-built for a specific hyperscale customer or application.
VCF: VMware Cloud Foundation, a software stack enabling private cloud deployment, including virtualization, storage, and networking for enterprise workloads. Tomahawk Switch: Broadcom Inc.
's high-performance Ethernet switching duct, with Tomahawk 6 as the generation capable of 102. 4 terabits per second throughput for AI data center clusters.
Co-packaged Optics: Integration of optical interconnect nology within switch silicon to lower power consumption and increase bandwidth for data center networks, especially as cluster sizes scale.
ARR (Annual Recurring Revenue): The value of subscription-based revenues regularized on an annual basis, indicating the stability and runway of software-related sales.
Full Conference Call TranscriptHock Tan: Thank you, Ji. And thank you, everyone, for joining us today. In our fiscal Q2 2025, total revenue was a record $15 billion, up 20% year on year.
This 20% year on year growth was all organic, as Q2 last year was the first full quarter with VMware.
Now revenue was driven by continued strength in AI semiconductors and the momentum we have achieved in VMware.
Now reflecting excellent operating leverage, Q2 consolidated adjusted EBITDA was $10 billion, up 35% year on year. Now let me vide more color. Q2 semiconductor revenue was $8.
4 billion, with growth accelerating to 17% year on year, up from 11% in Q1. And of course, driving this growth was AI semiconductor revenue of over $4.
4 billion, which was up 46% year on year and continues the trajectory of nine consecutive quarters of strong growth.
Within this, custom AI accelerators grew double digits year on year, while AI networking grew over 70% year on year.
AI networking, which is based on Ethernet, was robust and represented 40% of our AI revenue.
As a standards-based open tocol, Ethernet enables one single fabric for both scale-out and scale-up and remains the preferred choice by our hyperscale customers.
Our networking portfolio of Tomahawk switches, Jericho routers, and NICs is what's driving our success within AI clusters in hyperscale.
And the momentum continues with our breakthrough Tomahawk 6 switch just announced this week. This represents the next generation 102. 4 terabits per second switch capacity.
Tomahawk 6 enables clusters of more than 100,000 AI accelerators to be deployed in just two tiers instead of three.
This flattening of the AI cluster is huge because it enables much better performance in training next-generation frontier models through a lower latency, higher bandwidth, and lower power.
Turning to XPUs or customer accelerators, we continue to make excellent gress on the multiyear journey of enabling our three customers and four spects to deploy custom AI accelerators.
As we had articulated over six months ago, we eventually expect at least three customers to each deploy 1 million AI accelerated clusters in 2027, largely for training their frontier models.
And we forecast and continue to do so a significant percentage of these deployments to be custom XPUs.
These partners are still unwavering in their plan to invest despite the uncertain economic environment.
In fact, what we've seen recently is that they are doubling down on inference in order to monetize their platforms.
And reflecting this, we may actually see an acceleration of XPU demand into the back half of 2026 to meet urgent demand for inference on top of the demand we have indicated from training.
And accordingly, we do anticipate now our fiscal 2025 growth rate of AI semiconductor revenue to sustain into fiscal 2026.
Turning to our Q3 outlook, as we continue our current trajectory of growth, we forecast AI semiconductor revenue to be $5.
1 billion, up 60% year on year, which would be the tenth consecutive quarter of growth. Now turning to non-AI semiconductors in Q2, revenue of $4 billion was down 5% year on year.
Non-AI semiconductor revenue is close to the bottom and has been relatively slow to recover. But there are bright spots.
In Q2, broadband, enterprise networking, and service storage revenues were up sequentially. However, industrial was down, and as expected, wireless was also down due to seasonality.
We expect enterprise networking and broadband in Q3 to continue to grow sequentially, but server storage, wireless, and industrial are expected to be largely flat.
And overall, we forecast non-AI semiconductor revenue to stay around $4 billion. Now let me talk our infrastructure software segment. Q2 infrastructure software revenue of $6.
6 billion was up 25% year on year, above our outlook of $6.
As we have said before, this growth reflects our success in converting our enterprise customers from perpetual vSphere to the full VCF software stack subscription.
Customers are increasingly turning to VCF to create a modernized private cloud on-prem, which will enable them to repatriate workloads from public clouds while being able to run modern container-based applications and AI applications.
Of our 10,000 largest customers, over 87% have now adopted VCF.
The momentum from strong VCF sales over the past eighteen months since the acquisition of VMware has created annual recurring revenue, or otherwise known as ARR, growth of double digits in core infrastructure software.
In Q3, we expect infrastructure software revenue to be apximately $6. 7 billion, up 16% year on year. So in total, we are guiding Q3 consolidated revenue to be apximately $15.
8 billion, up 21% year on year. We expect Q3 adjusted EBITDA to be at least 66%. With that, let me turn the call over to Kirsten. Kirsten Spears: Thank you, Hock.
Let me now vide additional detail on our Q2 financial performance. Consolidated revenue was a record $15 billion for the quarter, up 20% from a year ago. Gross margin was 79.
4% of revenue in the quarter, better than we originally guided on duct mix. Consolidated operating expenses were $2. 1 billion, of which $1. 5 billion was related to R&D. Q2 operating income of $9.
8 billion was up 37% from a year ago, with operating margin at 65% of revenue. Adjusted EBITDA was $10 billion or 67% of revenue, above our guidance of 66%.
This figure excludes $142 million of depreciation. Now a review of the P&L for our two segments. Starting with semiconductors, revenue for our Semiconductor Solutions segment was $8.
4 billion, with growth accelerating to 17% year on year, driven by AI. Semiconductor revenue represented 56% of total revenue in the quarter.
Gross margin for our Semiconductor Solutions segment was apximately 69%, up 140 basis points year on year, driven by duct mix.
Operating expenses increased 12% year on year to $971 million on increased investment in R&D for leading-edge AI semiconductors.
Semiconductor operating margin of 57% was up 200 basis points year on year. Now moving on to Infrastructure Software. Revenue for Infrastructure Software of $6.
6 billion was up 25% year on year and represented 44% of total revenue. Gross margin for infrastructure software was 93% in the quarter, compared to 88% a year ago. Operating expenses were $1.
1 billion in the quarter, resulting in Infrastructure Software operating margin of apximately 76%. This compares to an operating margin of 60% a year ago.
This year-on-year imvement reflects our disciplined integration of VMware. Moving on to cash flow, free cash flow in the quarter was $6. 4 billion and represented 43% of revenue.
Free cash flow as a percentage of revenue continues to be impacted by increased interest expense from debt related to the VMware acquisition and increased cash taxes.
We spent $144 million on capital expenditures. Day sales outstanding were 34 days in the second quarter, compared to 40 days a year ago.
We the second quarter with inventory of $2 billion, up 6% sequentially in anticipation of revenue growth in future quarters.
Our days of inventory on hand were 69 days in Q2, as we continue to remain disciplined on how we manage inventory across the ecosystem. We the second quarter with $9. 5 billion of cash and $69.
4 billion of gross principal debt. Subsequent to quarter end, we repaid $1. 6 billion of debt, resulting in gross principal debt of $67.
The weighted average coupon rate and years to maturity of our $59. 8 billion in fixed-rate debt is 3. 8% and seven years, respectively.
The weighted average interest rate and years to maturity of our $8 billion in floating-rate debt is 5. 6 years, respectively. Turning to capital allocation, in Q2, we paid stockholders $2.
8 billion of cash dividends based on a quarterly common stock cash dividend of $0. In Q2, we repurchased $4. 2 billion or apximately 25 million s of common stock.
In Q3, we expect the non-GAAP diluted count to be 4. 97 billion s, excluding the potential impact of any.