Broadcom forecasts $5.1B AI semiconductor revenue for Q3 2025 as AI networking demand accelerates
Jun. 05, 2025 8:52 PM ET
AI-Generated Earnings Calls Insights
Earnings Call Insights: Broadcom Inc. (AVGO) Q2 2025
Management View- Hock E. Tan, President and CEO, opened the call by highlighting "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." Tan attributed the strong performance to "continued strength in AI semiconductors and the momentum we have achieved in VMware."
- Semiconductor revenue reached $8.4 billion with growth accelerating to 17% year-on-year, driven by AI semiconductor revenue of over $4.4 billion, which was up 46% year-on-year. Tan stated, "AI networking, which is based on Ethernet was robust and represented 40% of our AI revenue."
- The company announced the Tomahawk 6 switch, which Tan described as "the next-generation 102.4 terabits per second switch capacity" and noted its significance in enabling "clusters of more than 100,000 AI accelerators to be deployed in just 2 tiers instead of 3."
- Tan indicated that "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."
- For infrastructure software, Q2 revenue reached $6.6 billion, up 25% year-on-year, and Tan reported "over 87%" of the 10,000 largest customers have now adopted VCF.
- Kirsten M. Spears, CFO, stated, "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 product mix."
Outlook- The company guided Q3 consolidated revenue to be approximately $15.8 billion, up 21% year-on-year. Spears said, "We forecast semiconductor revenue of approximately $9.1 billion, up 25% year-on-year. Within this, we expect Q3 AI semiconductor revenue of $5.1 billion, up 60% year-on-year."
- Infrastructure software revenue is expected to be approximately $6.7 billion, up 16% year-on-year. Spears added, "We expect Q3 adjusted EBITDA to be at least 66%."
- Management indicated, "we anticipate now our fiscal 2025 growth rate of AI semiconductor revenue to sustain into fiscal 2026."
Financial Results- Q2 consolidated adjusted EBITDA reached $10 billion, up 35% year-on-year, representing 67% of revenue.
- Semiconductor solutions segment revenue was $8.4 billion, with gross margin approximately 69% and operating margin of 57%.
- Infrastructure software revenue was $6.6 billion, with gross margin 93% and operating margin approximately 76%.
- Free cash flow in the quarter was $6.4 billion and represented 43% of revenue.
- Inventory was $2 billion, up 6% sequentially, with days of inventory on hand at 69 days.
- The company paid $2.8 billion of cash dividends and repurchased $4.2 billion in common stock during Q2.
Q&A- Ross Clark Seymore, Deutsche Bank, asked about the drivers for 2026 growth. Hock E. Tan responded, "what we are seeing and what we have quite a bit of visibility increasingly is increased deployment of XPUs next year, much more than we originally thought and hand-in-hand with it, of course, more and more networking."
- Harlan L. Sur, JPMorgan, queried about sustaining 60% year-over-year AI growth. Tan replied, "over 6 months ago, we gave you guys a point, a year, 2027... we're providing you some level of guidance visibility what we are seeing, how the trajectory of '26 might look like."
- Benjamin Alexander Reitzes, Melius Research, pressed on AI networking strength and Tomahawk. Tan stated, "the increased density in scale up is 5 to 10x more than in scale out. And that's the part that kind of pleasantly surprised us and which is why this past quarter, Q2, the AI networking portion continues at about 40%."
- Stacy Aaron Rasgon, Bernstein, sought clarification on AI revenue trajectory. Tan answered, "the rate we are seeing now so far in fiscal '25 and will presumably continue, we don't see any reason why it doesn't given lead time visibility in '25."
- Joshua Louis Buchalter, TD Cowen, asked about gross margins. Spears explained, "the majority of it quarter-over-quarter, the 130 basis point decline is being driven by more XPUs."
Sentiment Analysis- Analysts frequently pressed for details on the sustainability of AI growth and product mix, showing a slightly positive yet probing tone, particularly on future AI revenue and networking trends.
- Management's tone was confident in prepared remarks, citing "excellent operating leverage" and "momentum," but became more cautious and factual during Q&A, especially when discussing long-term projections and export controls.
- Compared to the previous quarter, management's sentiment retained confidence but showed increased willingness to provide visibility into 2026 AI growth while maintaining caution on regulatory and market uncertainties.
Quarter-over-Quarter Comparison- Q2 guidance for AI semiconductor revenue increased from $4.4 billion in Q1 to $5.1 billion for Q3.
- Growth rates in AI revenue and networking outpaced initial expectations, while non-AI semiconductor revenue remained flat, consistent with prior commentary.
- Management increased transparency regarding 2026 AI revenue prospects, compared to Q1 where focus remained on 2025 and expanding customer engagements.
- Analysts’ questions in both quarters centered on AI trajectory, customer ramp-ups, and networking mix, but Q2 showed deeper probing into inference-driven demand and product transitions.
Risks and Concerns- Management noted that "non-AI semiconductor revenue is close to the bottom, has been relatively slow to recover."
- Spears highlighted that 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."
- Tan acknowledged uncertainty around export controls, stating, "rules are changing quite dramatically as trade -- bilateral trade agreements continue to be negotiated in a very, very dynamic environment."
Final Takeaway
Broadcom management emphasized organic revenue growth driven by AI semiconductor and infrastructure software momentum, highlighted by the launch of Tomahawk 6 and robust AI networking demand. The company projects continued strength in AI, forecasting $5.1 billion in Q3 AI semiconductor revenue and expects this growth rate to persist into 2026. Management remains focused on disciplined capital allocation, with ongoing debt reduction and share repurchases, while acknowledging headwinds in non-AI segments and regulatory uncertainties that may affect future performance.
Read the full Earnings Call Transcript |
