Artificial intelligence: Broadcom plays its cards with software and microchips

On the one hand, through the integration of VMware, the boost to the Infrastructure Software business. On the other hand, the acceleration, concretised with the shopping spree of WMware itself, on Artificial Intelligence. This is how one can broadly describe the core of the current business development strategy Broadcom.

Yes, the business. The chip giant, which according to companiesmarketcap.com is the eighth largest hi-tech company in the world in terms of capitalisation ($674 billion), divides its business object into two large areas: Semiconductor solutions and Infrastructure Software. The first division, on closer inspection, comprises the design and production of microchips for various activities: from data flow management in data centres to wireless connectivity to set-top boxes and storage systems. The latter, on the other hand, includes software for, among other things, managing apps in differentiated environments (from edge platforms to the cloud) or automating IT processes. Not forgetting, moreover, solutions to manage the networks, in fibre optics, that specifically connect servers and data storage devices. These are, evidently, areas that are synergetic with each other. Two segments that reflect the desire to combine hardware and software offerings, in order to present itself to customers as a single supplier on different technologies.

Well: at the end of the last quarter (the group publishes the new figures on 5 September), Semiconductor solutions turnover was USD 7.2 billion (+6% compared to the same period in 2023), while Infrastructure software generated revenues of USD 5.3 billion. The latter figure implies an increase of 175%. The leap forward is mainly due to the contribution of WMware. The acquisition of the Paolo Alto-based company, completed in November 2023, enabled Broadcom to push the software division forward. At the end of the last quarter (5 May), the area in question was worth 42% of the entire turnover (58% for semiconductors) compared to 21.3% for the whole of 2023. It will be said: a single quarter is too short a period to draw definitive conclusions. The objection does not hold water. Expanding the analysis to the two quarters of 2024 so far, the percentage of Infrastructure software stands at 40% compared to 21% twelve months earlier. In short: the numbers tell the story of the acceleration on this front.

The dynamic - as said - is intentional, but for what reasons? Firstly because, from an accounting and industrial point of view, the marginality of this sector is higher than that of microchips. Software solutions, at the end of the two quarters of 2024, had an operating profit to revenue ratio of 59.6%. The Ebit margin of semiconductors, for its part, stood at 55.5%. It is therefore clear that the expansion of the software world, thanks to M&A itself, has its rationale in the search for greater profitability. Not only that. Another reason - equally relevant - of a strategic nature and that pertains to VMware's operating sector is the increased control of the cloud computing sector. Broadcom, in the wake of the same extraordinary transaction, is now in a position to offer more integrated and sophisticated solutions for cloud computing, especially as a function of the development of artificial intelligence.

All as easy as drinking a glass of water, then? The reality is more complicated. It must be emphasised that the integration of a new entity (as important as WMware whose M&A was worth $69 billion) is not simple. There is always the risk execution, as well as the possible dilution of margins. In this sense - according to some experts - the Ebit margin of Infrastructure software, excluding the integration costs of the newly acquired company, would have been - in the second quarter - 64%. That is to say, higher than the figure reported by Broadcom. The company for its part, with respect to the subject under discussion, does not express concern. The hi-tech giant first recalls that 'since the beginning of the year, restructuring and integration costs have been around EUR 2 billion (...)'. Then, it indicates that its 'spending rate at MVware in the second quarter dropped to 1.6 billion (from 2.3 billion in the pre-acquisition quarter)'. Not only that: on the one hand, 'spending,' it is explained, 'will continue to decline, coming in around 1.3 billion coming out of the fourth quarter'; on the other hand, 'revenues will accelerate towards 4 billion per quarter'. A combination that - according to Broadcom - should allow VMware's operating margins to align with those of its software division in the fiscal year 2025.