 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. When you think of AI leadership, which companies come to mind? Nvidia, OpenAI, the hyperscalers, meta, hugging face, Anthropic, and names like that, right? You don't typically think of Broadcom, do you? Well, you should. In our view, Broadcom, along with Nvidia, has become one of the top two AI plays in the public markets. Despite the fact that it doesn't make GPUs or LLM software, rather the company has made a big bet that the CPU, along with alternative processors like the GPU, NPU, LPU, et cetera, let's call them XPUs, will need high-speed, low-cost connections between them based on open technologies that scale and can deliver low-power solutions over a roadmap that will last a decade or more. Broadcom is perhaps the most unique company in the technology business. It doesn't chase markets that are steep growth curves and can deliver fast ROI in two, three years. Rather, it goes after established markets with durable franchises, what it calls sustainable franchises. Broadcom focuses its R&D on serving customers in these markets with major engineering investments to achieve a dominant position in each of its sectors. And sometimes the company lucks out with this strategy and catches a wave accidentally by design. Hello and welcome to this week's The Cube Research Insights powered by ETR. In this breaking analysis, we extract Key Nuggets from our sit-down at MWC this week with Broadcom president Charlie Cowis and we unpack the contrarian business technology model of Broadcom. Let's start by looking at AIs everywhere. So let's review the impact that AIs having on enterprise tech spending overall. And we showed this ETR survey data last month but it's worth reviewing here. The data is from more than 1,700 IT decision makers, we call them ITDMs, and it shows net score or spending momentum on the vertical axis. The horizontal plane shows sector pervasion or penetration into those 1,700 accounts. That red dotted line, you see that red dotted line at 40%. That indicates a highly elevated spending momentum on the vertical axis. And the data shows how prior to chat GPT's announcement that the AI sector was decelerating and that flipped almost overnight to where it is now the number one sector in terms of customer spend momentum. And moreover, AI is stealing from other sectors. We've talked about this extensively. This data from a different ETR survey of 415 ITDMs, this past quarter, this quarter, it was done in January, shows that 40% of customers tell us that AI is being funded by taking budget from other areas. As well, we've seen evidence that organizations are squirreling away AI budgets as they experiment and figure out what they're actually gonna do in AI. Kind of holding back. Specifically, ITDMs report caution with how and where they're spending their AI money. The point is, if you're not well positioned for AI and you got to pivot, it can be really disruptive and really difficult to find talent. It's no coincidence that last June, we saw both Databricks and Snowflake acquire AI startups just ahead of their big conferences, their big user conferences. Snowflake, in fact, just appointed the CEO of its AI acquisition as the new CEO of the company. Now, NVIDIA didn't have to pivot to gen AI. It showed up and turns out NVIDIA is perfectly positioned to capitalize. So is Broadcom. Listen to how Charlie Cowis explains how elephant AI workloads are much different from those that are traditional in general purpose and nature. Please play the clip. This is actually something that's very dear to my heart, personally, especially with my background and my career. I actually believe, depending on the workload, there are data centers, infrastructure worlds that the CPU and the processor is the center and the heart of that system. When you talk AI, everything has changed because with AI, you have these elephant workloads that cannot run on a single processor where it's a GPU, TPU, NPU, the flavor of the day. Let's call them for the next 15 minutes, XPUs. So if you take these XPUs and you take some of these elephant workloads, you can't run them on a single XPU. You can't even run them on eight CPUs or XPUs or GPUs. You have to now scale into the thousands today, thousands of these. In order to do that, you've transcended now a single system where you've scaled up. Now you have to scale out to many, many of these systems and racks and you have to interconnect them. And guess what? If you don't have the right network strategy and connectivity strategy, this will not work. This will not scale up. I want to. Okay, this is really nuanced, but Broadcom is one of the only companies other than Nvidia, which makes chips for both internal connectivity for high performance AI workloads and silicon for high speed switching at distances. Now, the history of this business shows that Open is going to win the innovation game. The power of Open models almost always wins in the long run because you've got millions of engineers can work on a problem versus the staff inside of a single company. IBM Power was moderated by the de facto standard of Wintel. Microsoft, that was kind of considered open back then. Microsoft's dominance was challenged by Linux. Open web standards like internet protocol won the day with the internet and disrupted the proprietary networks. Now, this chart from ETR is from the emerging technology survey that surveys about 1500 ITDMs about which private companies technologies they're deploying. And this is the data for Gen AI. The chart shows net sentiment or intent to engage on the Y axis with mind share on the X axis. Notice Open AI, it's highlighted and read so far out to the right. You know, some call it closed AI. It is literally off the charts in terms of its lead from the standpoint of mind share and intent to engage. Well ahead of the pack, which comprises both proprietary and open source LLMs. And what we've done here is we've superimposed Meta's Lama inferring from other surveys. So it's not part of the ETS survey because Meta is a public company and ETS is just private companies but we have data from other surveys that allows us to infer how Lama is positioned relative to Anthropic and the others. The point is in the fullness of time it's likely that open source software is gonna close the gap despite the substantial lead currently enjoyed by Open AI. Now the relevance to Broadcom is this open philosophy is ingrained in the company's DNA. A prominent example is the Ultra Ethernet consortium and OpenStand and OpenStandard which will challenge Nvidia's lead with Infiniband. Let's listen to Charlie Cowis explain his view of open versus proprietary. I think innovation as it sparks initially starts with a proprietary approach because it'll be innovated let's say by maybe a handful of companies in many cases it's a single company. So as that spark happens traditionally it is proprietary. The challenge is if it becomes such a disruptive force just like we're discussing. I think bringing a million or two million or five million engineers across the ecosystem over a span of 10 years remember the sustainable franchise will out innovate any single company in the world. It takes time it's not a six months or a year it's many many years and that's what we're committed to this is why you see us invest heavily actually with our peers in the industry and our partners and customers where we say we found it we were the founding member for Ultra Ethernet consortium. You know what that's going to help us innovate. Of course if we take the power that we have in Ethernet and do it on our own we will create for the next three years something so cool that nobody else has. But long term is that the right thing to do for all of us no. Okay let's talk about sustainable franchises this novel business model mindset. In that clip you heard Charlie Cowis talk about sustainable franchises. Here's where Broadcom is misunderstood but sharp investors have picked up on this differentiator. Specifically Broadcom starts by looking at markets not hockey stick markets rather durable sustainable businesses with install bases where technology and engineering roadmap can be applied for a decade plus where engineering can lead to good outcomes and continued outcomes. Listen to Charlie Cowis explain this concept and how it applies to Broadcom's 26 distinct franchises. Please play the clip. So we term and coin this capability and strategy and model sustainable franchise. So in Broadcom today and it by the way it's applicable to hardware systems and software. And by hardware I mean semiconductor silicon. And that's where the genesis of this this is where it started. So what does that mean to have a sustainable franchise? We have 26 of them today. Nine on the software side and 17 on the hardware side. It comes down to first believe it or not many people don't think of it this way the market. So for us we spend time making sure that when we want to invest in a market we invest for at least a decade. Many people don't know this about Broadcom actually. So when we say we are in a certain business we commit to 10 years plus. That is extremely important for us. Now most people say I want to invest in a space that has a hockey stick. Many people do that. That's not what we do. Sometimes it happens to be like AI and generative AI. Which is great. But you know what that's not what we're looking for. Even if a market in 10 years is declining low single digits that is actually exciting for us. For many people it's boring it's legacy. Big, big, big mistake. So first the market 10 years plus. Two most importantly technology leadership. That is the most important thing that we do at Broadcom. In the 26 categories and specifically the 17 on the hardware side we have to be the technology leader over that span of 10 years. So if you look at a span of 10 years sometimes a company A might be the leader. The next gen another company. So just to clarify, so your philosophy on the market is it's got to be big but doesn't have to be growing. It's got to be established. Established, big enough to do some things in but you're not chasing growth curves. No. There might be growth curves you'll hit like AI. Correct. Because it just happens to be what you're focused on. But the franchise is a durable business model. Sustainable, okay got it. Now you heard Charlie say this philosophy applies to software too. It's going to be interesting to see how VMware plays here and CA you certainly don't consider those open standards. Although VMware is a de facto standard and we'll talk about that in a moment. Many people have questioned Broadcom's acquisitions of CA, Symantec and of course now VMware. Further many are critical of Broadcom citing its propensity to cut staff of the firms that it acquires. Some have likened it to a private equity firm but this couldn't be further from the truth. I mean there are similarities in that Broadcom acquires mature businesses that can throw off cash and it does cut costs to make the franchise more profitable. The difference from a classic PE model is it invests aggressively in engineering. It spends like $5 billion a year on R&D. VMware is just going to add to that spend. And it's strategies to drive technology leadership within that franchise and dominate. This is key because essentially by investing in R&D even if it raises prices on customers the business case for those customers to stay is usually better than leaving because they get ongoing access to engineering roadmaps and they don't have to incur migration costs. So let's look at Broadcom's software assets from the standpoint of ETR survey data. This is one of those similar like the first ETR chart we showed you a similar XYG graph with net score on the vertical axis remember that's spending momentum overlap or penetration into those 1700 respondent accounts is on the horizontal axis. Now look at the red line in the vertical axis at 40% that highly elevated spend velocity mark that would be where the steep growth curves are. That's not what Broadcom chases obviously look at the table insert in the bottom right showing net score and end. That's how the dots are plotted that informs where the dots are plotted. So the net scores they're all in the red because they're so far below the 40% mark some are even deeper than negative. Remember this data is percent of customers it's not how much they're spending. Now we heard from Charlie Cowis that Broadcom doesn't chase those short-term hockey sticks rather it goes after sustainable businesses not as in climate that's important but in this context we mean install bases that can pay back that are durable over a decade or more. So in the table insert the ends are what matters most and look at VMware's end 862 out of around 1700 so VMware is represented in 50% of these accounts. Symantec's got 236 VMware cloud which you would add to VMware that's mostly VMware cloud foundation adds to that core VMware. You can see carbon black which we predicted a couple of years ago actually a year when Broadcom did the acquisition of VMware we predicted that carbon black would be delevered spun off and pay down some of Broadcom's debt but look at the ends it's 185 rumor has it that Broadcom is no longer selling carbon black. I'm not sure why perhaps it couldn't get its price or maybe Broadcom decided that it was a sustainable franchise. So we'll research that a little bit more and try to find out for you. And you can see the other software franchises on the chart including CA. Now while we're not showing it here when we run the ETR data on infrastructure software only the only firm that has a bigger install base than VMware in the dataset is Microsoft and Microsoft from an account penetration standpoint is everywhere. So VMware is kind of right behind if you will. So that speaks to that sustainable durable large install base that Charlie Cowis was talking about. So hopefully this starts to bring it to focus Broadcom strategy a little bit more which generally we think is misunderstood. Now let's talk about silicon that is network centric. But Charlie Cowis explained this sort of OSP model open scalable and power low meaning low power. The Broadcom is in the middle of this AI CapEx build out as the hyperscalers are a major part of its business. Though the world as John Furrier put it has quote just spun in Broadcom's direction people change their data center to a cloud operating model now they're extending their cloud to hybrid and on-premise and to the edge deployments including device mobility. So it's a perfect storm where all of these AI enable capabilities all of these platforms are AI enabled whether it's on-prem whether it's hybrid whether it's in the cloud you're going to be training LLM models in the cloud you're going to be doing stuff on-prem these very domain specific across that power law that we often talk about they all involve AI enablement and they involve Broadcom IP. In fact Broadcom claims that 95% of carrier traffic goes through some type of Broadcom chip. Increasingly that chip will support some type of AI either training or inferencing and of course Broadcom plays in both. The company creates merchant silicon but it's also evolved its business to partner for custom silicon assuming that the volume is sufficient. So while Broadcom has 26 business units and their philosophy is that they no crutch they call it they all stand on their own but they do have a shared engineering resource that sort of mainspring for foundational technologies and Broadcom applies this capability for both merchant markets and also these custom opportunities. Here's how Charlie Cowis explains the model please roll the clip. This is the awesome part actually you're right we're going through a big inflection point that happens actually sometimes once a decade or sometimes once every two decades. So with AI the model that we have with this structure that I described before. First on the semiconductor side we build merchant silicon and that's important and the merchant silicon is about the connect centric or network centric capability and it is about okay let me see if you remember open scale of all and lower power. And I tell you so those abilities that we drive today can be applied to hyperscalers who are absolutely investing each tens of billions of dollars but it can be taken all the way down to an enterprise level that want to do their own inference on prem or build their own platform on prem. We can do that with the merchant silicon piece and most of the products that we have play in that role so I would say more than 80, 90% of the products we have are merchant open enable the scale at a low power. But on the other end of the spectrum when somebody has massive volume of such platform sometimes they say I don't want the merchant play I want to have a custom play. And that's the engagement model that we've changed where we said okay well let me bring my foundational technologies you bring your foundational technologies and software and let's sit down and say okay if you're going to build a cluster that is call it 32,000 processors or 100,000 how do we do that from an open platform that is actually very scalable at a very low power because I tell you power is the number one issue that we're having right now. And bringing that foundational technology in a custom or hybrid play is another big differentiator that I think we have the ability to do. Now that we've shared the Broadcom philosophy and have been in the business model differentiation let's take a look at how Broadcom's business model translates into financial performance and why it is so well positioned in AI in our opinion. Here's a graphic that compares the financial model of Broadcom with NVIDIA, Microsoft, Oracle and Cisco. Here we show key metrics for each company including consensus annual revenue for the current fiscal year of these companies and the corresponding growth rates year over year growth rates. Then we compare the trailing 12 month gross margin, operating margin and free cash flow margin. And then the valuation and the revenue multiple. We also put in just for kicks, the balance sheet, the cash and equivalents. And then we sort each company by revenue multiple in descending order. And here are the key takeaways. Broadcom's margin model is comparable to those of NVIDIA and Microsoft with a very healthy 12.6 X revenue multiple. Pretty amazing, similar to that of Microsoft. Remember that we've estimated that of the trillion dollar valuation increase enjoyed my Microsoft last calendar year, roughly three quarters of that, we believe came from the AI froths related to its open AI strategy. In our view, Broadcom's AI play is still not widely appreciated because it doesn't make GPUs and it doesn't make LLM software. But without networks for AI, there really is no AI. And we're talking about internal network networks between those XPUs and chiplets, which we didn't go into here. We went into a couple of weeks ago and on Twitter recently. And we did in the Charlie Cowell's interview, we'll put that in the show notes. And so again, Broadcom plays both within those internal networks and scaled networks across switches. Remember, only NVIDIA and Broadcom really play extensively in both of these markets. So while NVIDIA is a big customer of Broadcom, they're also facing off for the future of AI. Not in the form of GPUs, but rather in the silicon that connects the components on which AI and those GPUs and NPUs, XPUs relies on to perform. And Broadcom's Cowell's explained over and over again that their approach is about OSP, open, scalable, and power efficient. Now we show Oracle in this chart because it's an extremely profitable software company with an infrastructure play from its cloud. And you can see the notes there. Oracle's historical operating margins are much higher, closer to 40%, but it's absorbing the server acquisition. And so that affects obviously the income statement and the balance sheet. We also include Cisco because it's a networking company and a bellwether and a very profitable business. But its financial model is not nearly as attractive as Broadcom's, of course the stock's off because of the lower guidance over the last couple of quarters. Still, you know, strong, you know, financial model, but look at Broadcom's much, much stronger from a framework standpoint. Maybe a few companies really are attractive as Broadcom as we enter this AI era. So as you can hopefully see, Broadcom extremely well positioned for this era not because it's chasing the Gen AI curve because it had a vision for a connect-centric world which happened to perfectly set it up for AI everywhere. As such, it's become, in our view, the number two way to play AI behind Nvidia without having to slog it out in GPUs. So maybe that's underappreciated potentially undervalued. And that's why we call it accidental by design. What do you think? Does Broadcom's business model resonate with you? How do you think its network-centric, network centricity and decade-plus sustainable markets philosophy are going to play out in the long run? How do you think this will apply to its software business, particularly with VMware? Let us know what you think. Okay, that's it for now. Thanks to Alex Meyerson and Ken Schiffman on our production. Alex also does our podcast. Tristan Martin and Cheryl Knight help get the word out on social media and in our newsletters and Rob Hoth is our EIC over at SiliconANGLE.com. Remember, all these episodes are available as podcasts wherever you listen, just search Breaking Analysis Podcasts. I publish each week on thecuberesearch.com and SiliconANGLE.com. You can email me at david.volante at SiliconANGLE.com or DM me at dvolante or comment on our LinkedIn posts. And please, by all means, do check out ETR.AI for the best survey data in the enterprise tech business. This is Dave Vellante for the CUBE Research Insights powered by ETR. Thanks for watching and we'll see you next time on Breaking Analysis.