NVIDIA and AMD lackluster? Broadcom boldly takes over as the AI flag bearer

Broadcom (AVGO.O) released its financial report for the third quarter of fiscal year 2025 (ending July 2025) after the U.S. stock market closed on September 5, Beijing time:

1. Overall Performance: Broadcom (AVGO.O) achieved $15.95 billion this quarter, a year-on-year increase of 22%, meeting market expectations ($15.86 billion). The year-on-year growth was mainly driven by AI business and VMware integration price adjustments. The company's gross margin this quarter was 67.1%, and after excluding the impact of acquisition amortization and restructuring costs, the actual operating gross margin for this quarter was 76.8%, showing a sequential decline, mainly due to the relatively low gross margin of the custom ASIC business, which brought structural impact as its proportion increased.

2. Semiconductor Business: This quarter achieved $9.17 billion, a sequential increase of $760 million, with the AI business contributing the main increment. Specifically:

① AI Business: $5.2 billion, a sequential increase of $800 million, market expectation ($5.1 billion). $Broadcom(AVGO.US) Current AI revenue still comes from three major customers (Google, Meta, and ByteDance), with quarterly growth mainly driven by the increase in mass production of Google's TPUv6.

With the impact of increased capital expenditure by major companies like Google and Meta, AI business growth will continue to accelerate. The company expects next quarter's AI business revenue to be $6.2 billion, with a sequential increase of $1 billion.

② Non-AI Business: $4 billion, a sequential decline of 1%. Looking at various downstream sectors, wireless and industrial businesses remained flat sequentially this quarter, while enterprise storage continued to decline, and the overall performance of non-AI business remained relatively sluggish.

3. Infrastructure Software: This quarter achieved $6.79 billion, a sequential increase of $190 million, mainly driven by VMware's acquisition integration and fee model adjustments (from a perpetual license model to a subscription model). The software business will continue to benefit from the intrinsic growth of VMware's subscription model, but the high-growth phase has ended.

4. Operating Expenses: This quarter's core operating expenses (R&D expenses + sales and administrative expenses) were $4.12 billion, a sequential increase of $346 million, with the core operating expense ratio around 30%. After acquiring VMware, the company is committed to compressing and integrating operating expenses, and this quarter's increase was mainly due to the company's increased spending on stock-based compensation and related expenses. Excluding the impact of stock-based compensation, the company's core operating expenses for this quarter were $2.05 billion, a sequential decrease of $150 million.

5. VMware Integration Progress: Dolphin Research introduced a debt repayment indicator (Total Debt/LTM Adjusted EBITDA), and it was calculated that this indicator further decreased to 2.3 this quarter. As this indicator continues to decline, the impact of the VMware acquisition on the company's debt side has been gradually digested.

6. Broadcom Performance Guidance: The fourth quarter of fiscal year 2025 is expected to have revenue of approximately $17.4 billion, market expectation ($17 billion), and the company expects the adjusted EBITDA margin for the fourth quarter of fiscal year 2025 to be 67%. Among them, AI business is expected to continue growing to $6.2 billion.

Dolphin Research Overall View: The fourth customer on board, guidance revives ASIC confidence

Broadcom AVGO's performance this quarter basically met expectations. Revenue growth mainly came from the contribution of the AI business; in terms of gross margin, after excluding the impact of acquisition amortization and restructuring costs, the actual operating gross margin for this quarter was 76.8%, a sequential decline of 1.2 percentage points, due to the structural impact brought by the increased proportion of the low-margin ASIC business.

Although core operating expenses increased, they mainly came from stock-based compensation and related expenses. Excluding this expenditure, the company's core operating expenses for this quarter decreased by $150 million sequentially, maintaining the pace of integration and cost control.

The company's debt repayment indicator (Total Debt/LTM Adjusted EBITDA) for this quarter fell to 2.3, and the impact of the VMware acquisition has been gradually digested. Historically, the company's acquisitions and integrations have always occurred when this indicator fell to around 2, and the current indicator is already close to the pre-acquisition value.

After VMware is integrated and digested, the company's current main focus is on the AI business, especially the progress of custom ASICs:

a) Core Cloud Vendor Capital Expenditure: Compared to GPUs, Broadcom's custom ASIC business is more dependent on the procurement of core cloud vendors, and the current related revenue mainly comes from Google and Meta.

After the second quarter financial report, companies like Google and Meta have successively raised their capital expenditure expectations, and Broadcom's stock price has risen from $280 to $300. Considering the situation of each company, Dolphin Research expects the combined capital expenditure of the four major core cloud vendors in 2025 to reach approximately $400 billion, a year-on-year increase of nearly 60%.

Since the main customers of the custom ASIC business are large cloud service companies, as long as the capital expenditure of these large companies continues to show good growth performance, the high-growth logic of the company's AI business will continue.

b) AI Business Revenue and Guidance: After several major companies raised their capital expenditure expectations, the company's stock price has risen. For this financial report, the market is concerned about whether the company's AI revenue and guidance growth can accelerate as expected, which can directly reflect the company's performance and competitiveness.

This quarter, the company achieved $5.2 billion in AI revenue, which is in line with expectations. For next quarter's AI revenue, the company provided guidance of $6.2 billion, a sequential increase of $1 billion, slightly better than the buy-side expectation ($6 billion).

In the case of increased capital expenditure by major companies in the second half of the year, if the company provides a non-increasing quarterly guidance (like Marvell), it will definitely disappoint the market. The company's accelerated growth guidance, in line with the increase in capital expenditure by major companies, also proves Broadcom's capability in the custom ASIC market.

c) Custom ASIC Customer and Product Progress: Currently, AI ASIC chips have been mass-produced by three companies (Google, Meta, ByteDance), which are the main sources of the company's AI revenue.

After this financial report, the company disclosed the progress of the fourth customer: more than $10 billion in AI-related orders have been placed, with delivery starting in the third quarter of fiscal year 2026. Based on this, AI revenue in 2026 will be significantly higher than the guidance implied in the previous quarter.

In the case where revenue and next quarter's guidance are only slightly better, the 2026 guidance becomes the absolute protagonist and the biggest positive stimulus, adding assurance to the growth of the AI business in the next fiscal year, and also reflecting the company's production and research capabilities.

Pay attention to the progress of the other three "potential customers" converting to "formal customers" (referring to mass production and revenue realization). If the progress exceeds expectations or new customers are added, it is expected to further enhance the market's confidence in the company's AI business.

Overall (a+b+c), Broadcom AVGO's AI revenue benefits from the increase in capital expenditure by core cloud vendors, and the company's customer diversity, customer stickiness, and business resilience in the custom ASIC market are significantly stronger than Marvell.

Considering the current market value ($1.4 trillion), the company's post-tax core operating profit for fiscal year 2026 corresponds to approximately 36 times PE (assuming revenue +24%, gross margin of 68.2%, tax rate of 7.5%). Compared to NVIDIA's current approximately 29 times PE for fiscal year 2027 (similar to 2026), Broadcom AVGO's higher valuation reflects the market's expectation for the company's higher growth in the custom ASIC business and Broadcom's efforts to capture market share in the AI chip market.

From the current core players in the data center market for AI chips, NVIDIA maintains an absolute position with the mass production of the GB series, while Broadcom AVGO has surpassed AMD in market share (9.6% vs 6.0%) due to the increased demand for custom ASICs from server giants, bringing more imagination to the custom ASIC market.

Overall, Broadcom's performance this quarter was quite good, with AI revenue achieving a sequential increase of $800 million and providing guidance for AI revenue to continue increasing by $1 billion sequentially next quarter.

With the increase in capital expenditure by major companies, Broadcom AVGO's stock price once rose above $300. Under the influence of Marvell's weak guidance on ASIC confidence, the stock price fell back below $300. However, the company's guidance for accelerated AI revenue growth and the disclosure of the fourth customer's order situation will once again boost market confidence in the company, and the stock price will stabilize above $300.

The current high valuation of Broadcom includes the market's expectation for the company's high growth in the ASIC business and its efforts to capture market share in the AI chip market. In this financial report, the company disclosed information about the fourth customer, and the market will begin to imagine whether more potential customers will convert into direct ordering customers like the fourth customer.

If this is the case, then the market's previous skepticism and hesitation about the company's guidance of $60-90 billion SAM (Serviceable Available Market) will directly change to certainty and belief, and even start to think that the $60-90 billion SAM might be underestimated. Under this emotional drive, Broadcom still has hope to continue to rise.

Dolphin Research's detailed analysis of Broadcom (AVGO.O)'s financial report is as follows:

I. Broadcom's Main Business Situation

Broadcom's previous performance growth mainly came from the AI business and the acquisition and consolidation of VMware, so the custom ASIC chips in the AI business and VMware's pricing adjustment strategy are the main focus of the market. Specifically, the business includes:

1) Semiconductor Solutions: Mainly benefiting from the growth of AI revenue, mainly benefiting from the demand for custom ASICs from customers like Google, Meta, and ByteDance. Other non-AI businesses are greatly affected by downstream demand and perform relatively sluggishly.

2) Infrastructure Software: VMware consolidation, with software revenue accounting for more than 40%. The company has adjusted the pricing strategy for VMware's customers, and the price increase can drive revenue growth, but this impact has significantly weakened.

II. Overall Performance: Meeting Standards, Positive Guidance

2.1 Revenue Side

Broadcom BROADCOM (AVGO.O) achieved revenue of $15.95 billion in the third quarter of fiscal year 2025, a year-on-year increase of 22%, market expectation ($15.87 billion). The year-on-year growth was mainly driven by AI business and VMware integration price adjustments.

On a sequential basis, the company's revenue increased by $950 million this quarter, with the AI business contributing $800 million of the increment, being the largest growth source; software business rebounded sequentially.

2.2 Gross Margin Side

Broadcom BROADCOM (AVGO.O) achieved a gross profit of $10.7 billion in the third quarter of fiscal year 2025, a year-on-year increase of 28%.

Among them, Broadcom's gross margin for this quarter was 67.1%, a sequential decline.

After excluding the impact of acquisition amortization and restructuring costs, the actual operating gross margin for this quarter was 76.8%, a sequential decline of 1.2 percentage points, mainly due to the relatively low gross margin of the custom ASIC business, which brought structural impact as its proportion increased.

2.3 Operating Expenses

Broadcom BROADCOM (AVGO.O) had operating expenses of $4.82 billion in the third quarter of fiscal year 2025, a sequential increase of $450 million, mainly due to the company's increased stock-based compensation this quarter.

Excluding the impact of stock-based compensation, the company's core operating expenses (R&D expenses + sales and administrative expenses) for this quarter were $2.05 billion, a sequential decrease of $150 million. After completing the consolidation of VMware, the company is committed to integrating and reducing operating expenses, mainly reducing sales and administrative related expenses.

2.4 Profit Side

Broadcom BROADCOM (AVGO.O) achieved a net profit of $4.14 billion in the third quarter of fiscal year 2025. Compared to net profit, Dolphin Research believes that core operating profit (= gross profit - R&D expenses - sales and administrative expenses) better reflects the company's true operating situation. Broadcom achieved a core operating profit of $8.13 billion this quarter, a sequential increase of $200 million, mainly driven by the growth of the ASIC business.

2.5 Broadcom's EBITDA

Since Broadcom is good at external acquisitions, the company usually uses adjusted EBITDA% as one of the company's operating indicators. Dolphin Research estimates that the company's adjusted EBITDA% for the third quarter of fiscal year 2025 rose to 67.1%, better than the company's previous guidance (66%).

Further observing the company's debt repayment ability, the company's total debt/LTM Adjusted EBITDA ratio for this quarter continued to fall to 2.3. As performance grows, this ratio continues to decline, which also means that the impact of the VMware acquisition has been basically digested. As this ratio approaches the position around 2, the company may start looking for new acquisition opportunities again.

III. Specific Business Situation: AI Accelerates, Confidence Remains Strong

Broadcom BROADCOM (AVGO.O)'s main businesses are semiconductor solutions and infrastructure software. With the completion of the company's acquisition and consolidation of VMware, the proportion of the company's infrastructure software business has significantly increased, and the current software business revenue accounts for more than 40%.

In the two major categories of business, it specifically includes, 1) Semiconductor Solutions: Networking, wireless, storage connectivity, broadband, industrial, and others; 2) Infrastructure Software: VMware, CA, Symantec, Brocade, etc.

3.1 Semiconductor Solutions

Broadcom BROADCOM (AVGO.O) achieved revenue of $9.17 billion in semiconductor solutions in the third quarter of fiscal year 2025, a year-on-year increase of 26%. The growth of the company's semiconductor business this quarter mainly came from the drive of the AI business, while non-AI business remained sluggish.

1) AI Business

The current AI business is the focus of the company's performance, with AI revenue of $5.2 billion this quarter, a sequential increase of only $800 million, with sequential growth accelerating again.

The current AI revenue comes from three major customers (Google, Meta, and ByteDance), and with the impact of increased capital expenditure by major companies like Google and Meta, the company's AI revenue growth will accelerate again. The company expects next quarter's AI revenue to be $6.2 billion, a sequential increase of $1 billion.

Broadcom's ASIC business currently has 7 partners, of which 3 (Google, Meta, ByteDance) have achieved mass production and revenue realization. This quarter, the company disclosed the progress of the fourth customer: more than $10 billion in AI-related orders have been placed, with delivery starting in the third quarter of fiscal year 2026. This adds assurance to the growth of the AI business in the next fiscal year and also reflects the company's production and research capabilities.

For the short-term performance of the AI business, attention is still focused on the product performance of the current three customers, especially the situation of Google's TPUv6 and v7 products. The increase in v6 mass production will be the main source of growth for the company's AI business next quarter. The v7 orders will be the basic growth point for the AI business in the next fiscal year.

From a medium to long-term perspective, with a rich customer base, Broadcom's AI business is more resistant to risks. The company currently has 7 ASIC partners (Google, Meta, ByteDance, OpenAI, SoftBank/ARM, and two other new customers), focusing on the progress of "potential customers" converting to "mass production customers" and the situation of new customers, which will bring more growth opportunities for the AI business.

2) Non-AI Business

The company's non-AI semiconductor business revenue for this quarter was $3.97 billion, a sequential decline of 1%, and the overall performance is still quite sluggish.

The company's non-AI business mainly includes: enterprise storage, broadband business, wireless business, and industrial and others. Specifically: enterprise network business declined sequentially this quarter, while wireless communication business, industrial, and others remained flat sequentially.

3.2 Infrastructure Software

Broadcom BROADCOM (AVGO.O) achieved revenue of $6.79 billion in infrastructure software in the third quarter of fiscal year 2025, a sequential increase of $190 million. The growth of the software business over the past year mainly came from the acquisition and integration of VMware. The growth this quarter mainly came from the intrinsic growth brought by VMware's pricing strategy adjustments.

Broadcom's software business is mainly divided into two parts: VMware and the original software business of CA & Symantec & Brocade. Since the company's original software business of CA & Symantec & Brocade basically maintains a quarterly revenue of around $2 billion, the main focus of the company's software business is the acquired VMware.

The impact of VMware on the company's performance, Dolphin Research believes, is mainly in two aspects: "the external part of the acquisition and consolidation" and "the comprehensive shift from perpetual licenses to subscription models". Combined with the performance of the software business this quarter, Dolphin Research expects that the VMware part achieved revenue of approximately $4.7 billion this quarter. The current proportion of license users switching to subscription models has exceeded 60%. As the penetration rate of the subscription model increases, VMware and software business revenue are still expected to grow.

Currently, over 90% of top customers have purchased VCF, but "deployment and implementation" requires 2 years. Due to related restrictions, the adoption speed of small and medium-sized customers (non-top 10,000) is slower. Therefore, VMware is unlikely to have high growth performance again.

Combined with the current debt repayment indicator falling to 2.3, the acquisition of VMware has been basically digested by the company, and the company no longer discloses detailed data on VMware separately. The AI business is the "focus" that the market is most concerned about.

Dolphin Research Broadcom (AVGO.O) related articles review:

Financial Report:

June 6, 2025, Conference Call "Broadcom (Minutes): AI Revenue Will Continue to Grow at 60% in 2026"

June 6, 2025, Financial Report Commentary "Broadcom: ASIC Growth "Malfunction", Trillion ASIC Story Meets "Pit" or Welcomes "Opportunity"?"

March 7, 2025, Conference Call "Broadcom (Minutes): ASIC Customers Add 2 to Become "3+4", No Consideration for Acquisitions for Now"

March 7, 2025, Financial Report Commentary "Marvell Collapse, NVIDIA Dormant? Broadcom Becomes the Stabilizing Force"

December 13, 2024, Conference Call "Broadcom: The Serviceable Market Size for AI in Fiscal Year 2027 Will Reach $60-90 Billion (FY24Q4 Minutes)"

December 13, 2024, Financial Report Commentary "ASIC to Surpass GPU? Broadcom's Good Days Are Ahead"

September 6, 2024, Conference Call "Broadcom: ASIC Demand Will Be More in 2025 (FY24Q3 Conference Call)"

September 6, 2024, Financial Report Commentary "Broadcom "Surge"? AI Can't Support the Collapse of Traditional Semiconductors"

In-depth:

December 4, 2024, Company In-depth "Broadcom (AVGO.O): A Winner in the AI Computing Power Era with Both Software and Hardware"