Broadcom (Minutes): AI revenue will maintain a 60% growth rate in 2026

Broadcom (AVGO.O) released its Q2 2025 fiscal year earnings (as of April 2025) after the U.S. market closed on June 6, Beijing time:

Below is the earnings call transcript for Broadcom's Q2 2025 fiscal year. For earnings analysis, please refer to Broadcom: ASIC Growth "Stalls," Trillion-Dollar ASIC Story Faces "Pitfalls" or "Opportunities"?

1. $Broadcom(AVGO.US) Key Earnings Highlights

1. Segment Performance:

(1) Semiconductor Revenue ($8.4B, 56% of total): Up 17% YoY (driven by AI semiconductor revenue).

a) AI Semiconductor Revenue: $4.4B, up 46% YoY, marking the 9th consecutive quarter of growth.

Breakdown: I. Custom AI Accelerators: Double-digit YoY growth; II. AI Networking: Up >170% YoY, with Ethernet-based AI networking accounting for 40% of AI revenue.

b) Non-AI Semiconductor Revenue: $4.0B, down 5% YoY (bottomed out), with broadband, enterprise networking, and server/storage businesses growing sequentially.

(2) Infrastructure Software ($6.6B, 44% of total): (Q2 2024 was the first full quarter post-VMware acquisition).

a) Revenue up 25% YoY (exceeding guidance of $6.5B).

2. Balance Sheet & Capital Allocation:

(1) Cash & Debt: Ending cash of $9.5B, total debt of $69.4B. Repaid $1.6B post-quarter (current total debt: $67.8B).

Debt Structure: $59.8B fixed-rate debt (avg. rate 3.8%, avg. maturity 7 years); $8.0B floating-rate debt (avg. rate 5.3%, avg. maturity 2.6 years).

Inventory: $2.0B (up 6% QoQ; days inventory outstanding: 69 days).

(2) Dividends & Buybacks: Paid $2.8B in dividends ($0.59/share); repurchased $4.2B in shares (25M shares).

(3) Q3 Shares Outstanding: ~4.97B (non-GAAP diluted, excluding potential buybacks).

3. FY2025 Q3 Guidance:

(1) Revenue: $15.8B (up 21% YoY).

Semiconductor Solutions: $9.1B (up 25% YoY; AI revenue: $5.1B, up 60% YoY).

Non-AI Semiconductors: Maintained at $4.0B.

Infrastructure Software: $6.7B (up 16% YoY).

(2) Adjusted EBITDA%: At least 66%.

(3) Gross Margin: Down 130 bps QoQ (due to higher XPU mix in AI).

(4) Tax Rate: 14% (non-GAAP, unchanged for FY2025).

2. Broadcom Earnings Call Details

2.1 Key Management Commentary

1. Semiconductor Growth Drivers:

AI Accelerators & Networking:

(1) AI Networking (Ethernet-based) surged >170% YoY, supporting hyperscale AI clusters (Tomahawk switches, Jericho core routers, NIC drivers).

(2) Tomahawk 5 Switch: Launched 2.4Tbps version; simplified cluster architecture from 3-tier to 2-tier for >100K AI accelerators, reducing latency/power.

Custom XPU Strategy:

(1) Progressing with 3 existing and 4 potential customers; at least 3 plan to deploy 1M AI accelerator clusters by 2027 (mainly for frontier model training).

(2) Demand Shift: Hyperscalers accelerating inference deployment; orders may pull forward to late 2026.

(3) AI semiconductor momentum expected to continue through FY2026.

Non-AI Semiconductors: Revenue stable at $4.0B/quarter. Q3 Outlook: Enterprise networking/broadband up QoQ; server/storage/wireless/industrial flat.

2. Infrastructure Software (VMware) Progress:

(1) VCF Subscription Transition: 87% of top 10,000 customers shifted to VCF subscriptions (replacing perpetual licenses), driving double-digit annual growth in core software.

(2) Use Cases: Customers building modern private clouds, repatriating workloads from public clouds while running containerized/AI apps.

3. Operations & Strategic Focus:

(1) R&D: Increased spending for cutting-edge AI semiconductor development.

(2) VMware Integration: Strict cost controls drove software op margin up 1,600 bps YoY.

(3) Supply Chain: Inventory up 6% QoQ to support future growth.

2.2 Q&A

Q: Is next year's AI growth confidence driven by XPUs, connectivity, or both?

A: Primarily XPU deployment growth, with accompanying network demand—both contribute.

Q: Any specific inference progress?

A: Rapid inference demand growth observed.

Q: Can 60% AI growth sustain through year-end and FY2026? Is the 60% CAGR framework still valid?

A: Yes, based on visibility, FY2026 should maintain similar trajectory. Framework remains valid; no FY2027 update needed.

Q: Why did AI networking outperform? Implications for next year?

A: 1. AI networking syncs with accelerator cluster deployment. 2. Hyperscalers shifting from scale-out to scale-up architectures (5-10x higher switch density). This kept AI networking at 40% of AI revenue (vs. expected decline).

Q: When will Tomahawk switches accelerate growth?

A: Strong demand for 102Tb/s Tomahawk, but only in PoC stage—no mass shipments yet.

Q: Timing for Ethernet-based scale-up networks?

A: Scale-up rapidly adopting Ethernet, especially among hyperscalers.

Q: Will FY2026 AI grow 60% to $30B?

A: Current visibility supports 60% growth trajectory, but this is directional, not a target.

Q: Does inference expand SAM beyond $60-90B?

A: No SAM adjustment; reaffirming 2027 targets.

Q: Does networking strength imply XPU weakness?

A: XPU on track; networking heat doesn’t affect XPU trajectory.

Q: Milestones for new XPU customers?

A: No long-term updates; SAM framework (1T GPU clusters) remains. New customer timelines unclear until 2026.

Q: Best inference workloads for custom chips? Training vs. inference mix?

A: Custom chips excel in end-to-end optimization. No training/inference split disclosed, but customization is key for performance leaps.

Q: Is CPO critical for 5-10x scale-up? Tomahawk-driven?

A: Copper-to-optical shift (not CPO-specific) is key. Tomahawk enables flexible modules. Transition expected in 1-2 years.

Q: Other margin pressures beyond XPU?

A: 130bps QoQ GM drop due to XPU mix (structurally lower margins). No long-term GM guidance.

Q: Is AI surge due to XPU/ASIC outperforming GPUs?

A: Driven by hyperscalers monetizing LLMs (ROI focus), not tech shifts. Demand from existing cloud players.

Q: Will FY2026 60% growth include new customers (e.g., Meta)?

A: Visibility supports 60% trajectory; new customer contributions unquantified.

Q: Will NVLink scale-up shift to Ethernet?

A: No comment on competitors.

Q: Post-VMware capital allocation?

A: 1. 50% FCF to dividends. 2. Debt reduction (target ≤2x Debt/EBITDA). 3. Opportunistic buybacks. M&A: Only large-scale deals (e.g., VMware), no mid-sized distractions.

Q: Does FY2026 include new customer contributions?

A: No discussion of potential customers.

Q: Will AI networking stay at 40%?

A: XPU growth should lower networking to <30% by 2026.

Q: Is AI still immune to export controls?

A: No guarantees amid dynamic policy changes; impact unquantifiable.

Q: Subscription transition progress?

A: ~2/3 complete; full transition in 1-1.5 years (contract cycles).

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