Broadcom Inc. (AVGO) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call indicates strong financial performance, with record revenue and EBITDA growth driven by AI semiconductors. The backlog and future commitments are robust, and guidance remains optimistic despite minor margin declines. The Q&A reveals increased AI demand and strategic customer growth, although some specifics were withheld. Overall, the positive financial metrics, optimistic outlook, and record backlog suggest a likely positive stock reaction, despite the lack of share repurchases and some margin pressure.
Key Financial Performance
Total Revenue $16 billion, up 22% year-on-year. Growth driven by strength in AI semiconductors and continued growth in VMware.
Consolidated Adjusted EBITDA $10.7 billion, up 30% year-on-year. Reflects robust demand from AI and strong bookings.
Consolidated Backlog $110 billion, a record high. Indicates strong demand and future commitments.
Semiconductor Revenue $9.2 billion, up 26% year-on-year. Growth driven by AI semiconductor revenue of $5.2 billion, which was up 63% year-on-year.
Infrastructure Software Revenue $6.8 billion, up 17% year-on-year. Growth attributed to strong bookings and the release of VMware Cloud Foundation version 9.0.
Gross Margin 78.4% of revenue, better than guided due to higher software revenues and favorable product mix within semiconductors.
Operating Income $10.5 billion, up 32% year-on-year. Sequential operating margin increased 20 basis points to 65.5%.
Free Cash Flow $7 billion, representing 44% of revenue. Capital expenditures were $142 million.
Inventory $2.2 billion, up 8% sequentially in anticipation of revenue growth next quarter. Days of inventory on hand were 66 days compared to 69 days in Q2.
Cash and Debt $10.7 billion in cash and $66.3 billion in gross principal debt. Weighted average coupon rate for fixed-rate debt is 3.9%.
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Operating Highlights
AI Semiconductor Revenue: Achieved $5.2 billion in Q3, up 63% year-on-year, marking 10 consecutive quarters of growth. Forecasted to reach $6.2 billion in Q4, up 66% year-on-year.
VMware Cloud Foundation 9.0: Launched a fully integrated cloud platform enabling enterprises to run AI workloads on virtual machines and modern containers, providing an alternative to public cloud.
Tomahawk 5 and 6: Introduced advanced Ethernet switches to scale AI compute clusters, improving bandwidth and reducing latency.
Jericho4 Ethernet Router: Launched to handle clusters beyond 200,000 compute nodes across multiple data centers.
AI Market Expansion: Secured over $10 billion in orders for AI racks based on XPUs from a new qualified customer. Strong demand for AI networking and custom AI accelerators from three major customers.
Infrastructure Software Growth: Q3 revenue reached $6.8 billion, up 17% year-on-year, driven by VMware integration and strong bookings.
Revenue Growth: Achieved record Q3 revenue of $16 billion, up 22% year-on-year, driven by AI semiconductors and VMware.
Gross Margin: Maintained strong gross margin of 78.4% in Q3, supported by higher software revenues and favorable product mix.
Free Cash Flow: Generated $7 billion in Q3, representing 44% of revenue.
Leadership Continuity: CEO Hock Tan to remain in position through 2030, ensuring stability and continued strategic direction.
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Risk or Challenges
Networking Challenges for AI Clusters: Customers face difficulties scaling compute clusters beyond 100,000 nodes due to bandwidth and latency issues. Current architectures require multiple tiers of networking switches, which increase complexity and power consumption.
Non-AI Semiconductor Demand: Demand for non-AI semiconductors remains slow to recover, with enterprise networking showing continued weakness. This could impact revenue diversification and growth.
Revenue Mix Impact on Margins: Higher mix of XPUs and wireless revenue is expected to lower consolidated gross margins in Q4, reflecting potential profitability challenges.
Inventory Management: Inventory levels increased by 8% sequentially, which could pose risks if demand does not materialize as anticipated.
Debt Levels: The company holds $66.3 billion in gross principal debt, which could limit financial flexibility and increase vulnerability to interest rate changes.
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Guidance & Outlook
AI Semiconductor Revenue: For Q4 2025, AI semiconductor revenue is forecasted to be approximately $6.2 billion, up 66% year-on-year. The outlook for fiscal 2026 AI revenue is expected to improve significantly due to secured orders of over $10 billion for AI racks based on XPUs.
Non-AI Semiconductor Revenue: In Q4 2025, non-AI semiconductor revenue is expected to grow low double digits sequentially to approximately $4.6 billion, driven by seasonality. Broadband, server storage, and wireless are expected to improve, while enterprise networking remains down quarter-on-quarter.
Infrastructure Software Revenue: Q4 2025 infrastructure software revenue is expected to be approximately $6.7 billion, up 15% year-on-year.
Consolidated Revenue: Q4 2025 consolidated revenue is forecasted to be approximately $17.4 billion, up 24% year-on-year.
Adjusted EBITDA: Q4 2025 adjusted EBITDA is expected to be 67% of revenue.
Gross Margin: Q4 2025 consolidated gross margin is expected to be down approximately 70 basis points sequentially, primarily reflecting a higher mix of XPUs and wireless revenue.
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Shareholder Return Plan
Cash Dividends Paid: $2.8 billion of cash dividends were paid in Q3 based on a quarterly common stock cash dividend of $0.59 per share.
Share Repurchases: No specific mention of share repurchase activities in the transcript.
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Key Q&A
Q:What has changed in the AI business and XPU growth projections?
A:The growth projections have increased significantly due to the addition of a fourth customer with substantial demand starting in 2026, along with increasing volumes from the existing three customers.
Q:What is the outlook for the non-AI semiconductor business?
A:The non-AI semiconductor business is showing a slow recovery, with Q4 year-on-year growth up slightly by 1-2%. Broadband is recovering strongly, but other segments are not showing a V-shaped recovery. A U-shaped recovery is expected by mid-to-late 2026.
Q:What is the updated fiscal 2026 AI growth guidance?
A:The growth rate for fiscal 2026 is expected to accelerate beyond the 50-60% year-on-year growth seen in 2025. However, no specific number was provided.
Q:What is the composition of the $110 billion backlog?
A:The backlog is largely driven by AI growth, with at least 50% being semiconductors. The semiconductor portion is predominantly AI-related.
Q:What is the status of the additional AI customers and prospects?
A:There are now four significant customers in production, with three additional prospects being closely engaged. The goal of reaching 1 million units for the four customers remains intact.
Q:What is the significance of Jericho4 in AI networking?
A:Jericho4, with 51 terabit per second capacity, supports scale-across networking for large AI clusters. It builds on proven technology used in Jericho3 and is designed for hyperscalers creating multi-site data centers.
Q:What is the progress in converting top accounts to vSphere Cloud Foundation (VCF)?
A:Over 90% of the top 10,000 accounts have adopted VCF, but full deployment and operation are ongoing. Expansion to mid-sized companies is being explored.
Q:What are the gross margin dynamics for the next quarter?
A:Gross margins are guided to decline by 70 basis points due to higher contributions from wireless and XPUs, which have lower margins, while software revenue will increase slightly.
Q:What is the timeline for the $10 billion in orders from the fourth AI customer?
A:The $10 billion in orders is expected to be delivered in Q3 of fiscal 2026.
Q:What is the outlook for Ethernet in AI networking?
A:Ethernet is expected to remain the dominant networking protocol due to its proven reliability and open-source nature. It is being optimized for AI workloads, including scale-up and scale-out scenarios.
Q:What is the competitive landscape for XPUs and networking?
A:Broadcom faces competition in both XPUs and networking. The company focuses on out-investing and out-innovating competitors, leveraging its leadership in Ethernet and XPU development.
Q:What is the long-term outlook for XPU adoption among AI customers?
A:XPU adoption is expected to increase progressively as customers gain confidence in the technology and deploy it more extensively across their compute footprint.
Q:Review of Unclear Management Responses
A:Management avoided providing specific growth numbers for fiscal 2026 AI guidance, stating only that growth would accelerate. They also declined to give detailed breakdowns of the $110 billion backlog or specific timelines for additional AI prospects beyond the four current customers.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI networking
AI rack
AI semiconductor
Demand
Jericho
Kirsten
Semiconductor margin
Tomahawk
VMware
XPUs rack
basis point
cash
center
challenge cluster
cloud
cluster compute
compute node
day inventory
debt
enterprise
infrastructure software
margin basis
product mix
rack Today
rate
record
router
segment
share
terabit
year
AVGO Transcript
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The earnings call reveals strong financial performance with significant AI revenue growth and a solid $73 billion AI backlog. Despite lower gross margins, operating margins are expected to grow in dollar terms. The management's optimistic outlook for fiscal '26 AI revenue and strategic investments in custom accelerators are positive indicators. The Q&A session confirmed backlog growth and supply chain readiness, despite some vague responses. The overall sentiment is positive, with a likely stock price increase of 2% to 8%.
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Broadcom Inc. (AVGO) Q3 2025 Earnings Call Transcript
Positive9-4
The earnings call indicates strong financial performance, with record revenue and EBITDA growth driven by AI semiconductors. The backlog and future commitments are robust, and guidance remains optimistic despite minor margin declines. The Q&A reveals increased AI demand and strategic customer growth, although some specifics were withheld. Overall, the positive financial metrics, optimistic outlook, and record backlog suggest a likely positive stock reaction, despite the lack of share repurchases and some margin pressure.
Broadcom Inc. (AVGO) Q2 2025 Earnings Call Transcript
Positive6-5
The earnings call reflects strong financial performance with a 20% revenue increase, robust growth in AI semiconductors, and substantial share repurchases. Despite potential risks like economic uncertainties, supply chain challenges, and increased debt, the optimistic guidance and strategic investments in AI and infrastructure software are positive indicators. The Q&A section reveals confidence in sustaining growth, though some concerns remain. Overall, the positive financial results and shareholder returns suggest a positive stock price movement, potentially in the 2% to 8% range.
AVGO Report
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