Broadcom forecasts $17.4B Q4 revenue as AI semiconductor momentum accelerates with new customer
Sep. 04, 2025 8:22 PM ET
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Earnings Call Insights: Broadcom Inc. (AVGO) Q3 2025
Management View- Hock Tan, President and CEO, announced "total revenue was a record $16 billion, up 22% year-on-year," citing AI semiconductors and VMware growth as key drivers. "Bookings were extremely strong. And our current consolidated backlog for the company hit a record of $110 billion."
- Tan stated that Q3 semiconductor revenue reached $9.2 billion, with AI semiconductor revenue of $5.2 billion, up 63% year-on-year, noting this marks "10 consecutive quarters" of robust AI growth.
- The CEO highlighted the addition of a fourth qualified XPU customer, with over $10 billion in AI rack orders secured. This leads to "the outlook for our fiscal 2026 AI revenue to improve significantly from what we had indicated last quarter."
- New networking products were introduced, including Tomahawk 5 and Tomahawk 6 switches, and Jericho4 Ethernet fabric router, supporting larger-scale AI clusters. Tan emphasized, "The biggest challenge to deploying larger clusters of compute for generative AI will be in networking."
- Tan forecasted Q4 AI semiconductor revenue to be approximately $6.2 billion, up 66% year-on-year, and non-AI semiconductor revenue to grow low double digits sequentially to about $4.6 billion.
- On the software side, Tan revealed the release of VMware Cloud Foundation version 9.0 and noted Q3 infrastructure software revenue of $6.8 billion, with total contract value booked over $8.4 billion.
- Tan summarized, "continued strength in AI and VMware will drive our guidance for Q4 consolidated revenue to approximately $17.4 billion, up 24% year-on-year."
- Kirsten Spears, CFO, stated, "Gross margin was 78.4% of revenue in the quarter, better than we originally guided on higher software revenues and product mix within semiconductors."
- Spears provided further detail: "Q3 operating income was a record $10.5 billion, up 32% from a year ago. Adjusted EBITDA of $10.7 billion or 67% of revenue was above our guidance of 66%."
- Tan announced an agreement with the Board to continue as CEO through 2030, calling this an "exciting time" for Broadcom.
Outlook- Management guided Q4 consolidated revenue to $17.4 billion, with semiconductor revenue of about $10.7 billion and AI semiconductor revenue of $6.2 billion.
- Infrastructure software revenue is expected to be about $6.7 billion, up 15% year-on-year.
- Spears indicated, "we expect Q4 consolidated gross margin to be down approximately 70 basis points sequentially, primarily reflecting a higher mix of XPUs and also wireless revenue."
- The non-GAAP tax rate for Q4 and fiscal year 2025 is expected to remain at 14%.
Financial Results- Q3 consolidated revenue reached $16 billion, gross margin was 78.4%, and operating expenses totaled $2 billion.
- Q3 operating income came in at $10.5 billion, with adjusted EBITDA of $10.7 billion.
- Semiconductor Solutions revenue was $9.2 billion, with gross margin at approximately 67%. Infrastructure software revenue was $6.8 billion, with gross margin at 93% and operating margin at 77%.
- Free cash flow was $7 billion, representing 44% of revenue. Inventory rose to $2.2 billion in anticipation of future growth.
- The company held $10.7 billion in cash and $66.3 billion in gross principal debt at quarter end.
- Q3 dividends paid totaled $2.8 billion.
Q&A- Ross Seymore, Deutsche Bank: Asked about the acceleration of AI/XPU business. Tan responded, "it's the fourth customer that we now add on to our roster...really changes our thinking of what '26 would be."
- Harlan Sur, JPMorgan: Inquired about non-AI semi cyclical recovery. Tan explained, "non-AI semiconductor is kind of slow to recover...Q4 year-on-year is up maybe low single digits."
- Vivek Arya, BofA: Sought quantification on 2026 AI growth. Tan replied, "we're seeing the growth rate accelerate as opposed to just remain steady...for 2026."
- Stacy Rasgon, Bernstein: Asked about the $110 billion backlog. Tan clarified it's "largely driven by AI in terms of growth."
- Ben Reitzes, Melius: Questioned future prospects beyond current customers. Tan declined to give specifics, stating, "these prospects are real prospects and continue to be very closely engaged."
- Karl Ackerman, BNP Paribas: Asked about VMware Cloud Foundation adoption. Tan confirmed, "way over 90% has bought VCF," but deployment is ongoing.
- Christopher Muse, Cantor Fitzgerald: Requested gross margin clarity. Spears said, "TPUs will be going up along with wireless...and our software revenue will be coming up just a bit as well."
- Joe Moore, Morgan Stanley: Asked about the fourth customer and $10 billion in orders. Tan estimated delivery will be "around...Q3 of our fiscal '26."
- Harsh Kumar, Piper Sandler: Probed on XPU share. Tan responded, "As they gain confidence...they will have the confidence to keep using a higher and higher percentage of their compute footprint in their own XPUs."
Sentiment Analysis- Analysts expressed positive sentiment, congratulating management on results and seeking clarity on growth acceleration, backlog, and new customer momentum.
- Management maintained a confident tone in prepared remarks, highlighting records and future growth: "we continue to make steady progress in growing our AI revenue."
- During Q&A, management responded with cautious optimism regarding new prospects and acknowledged challenges in non-AI recovery, often avoiding direct forecasts for 2027 and beyond.
- Compared to the previous quarter, both analysts and management showed increased optimism around AI and customer expansion, with more direct references to backlog and bookings.
Quarter-over-Quarter Comparison- Q3 saw record revenue and EBITDA, higher than Q2.
- AI semiconductor revenue growth accelerated from previous quarter, with the addition of a fourth major customer and improved 2026 outlook.
- Non-AI segments remain slow to recover, but broadband shows strong momentum.
- Management tone was more overtly bullish on AI opportunity and customer wins than in Q2, while analysts focused more on AI backlog and future acceleration than in the prior call.
- Gross margin declined compared to Q2 due to product mix, but operating leverage improved.
Risks and Concerns- Management noted "demand continues to be slow to recover" for non-AI semiconductors, with no V-shaped recovery expected in the near term.
- Tan cautioned, "as a whole, they are not getting worse...but they are not showing a V-shaped recovery."
- The CEO stressed the importance of continued innovation and investment to maintain competitive position, especially in the XPU and networking segments.
- Analysts highlighted the risk of cyclical uncertainty in non-AI business and sought clarity on long-term AI customer prospects.
Final Takeaway
Broadcom management emphasized that robust AI semiconductor and VMware momentum drove record Q3 results and support guidance for a significant Q4 revenue increase to $17.4 billion. The addition of a fourth major XPU customer and record backlog signal an improved outlook for AI-related growth in 2026, while non-AI segments remain subdued but stable. Management's extended leadership continuity and continued investment in both AI and networking infrastructure are positioned as key strengths for sustaining long-term shareholder value.
Read the full Earnings Call Transcript |
