By most measures, Broadcom offered a solid report with record revenue of $22.2 billion, up 48% YoY driven by AI semiconductor revenue of $10.8 billion, up 143% YoY. The Q3 outlook topped estimates on total revenue with management guiding for $29.4 billion, yet the Q3 AI guide came in below expectations for $17.2 billion. In addition, management did not offer a raise to previous commentary that they foresee $100 billion in FY27 AI revenue. The softer AI guide is due to a slight pivot in how they plan to supply Anthropic, which will be with XPU chips instead of AI systems, with the latter offering higher revenue yet weaker margins (more on this below).
Overall, Broadcom is well positioned, based on a combination of being the strongest XPU player and a formidable networking giant. In fact, networking comprised 40% of AI revenue this quarter, and even though it's expected to be lower in the near future, that is only because XPUs are expected to eclipse networking from 60/40 to 70/30.
Perhaps somewhat buried by the AI number miss is that Broadcom is entering the circular investing arena by standing up an external financing vehicle with Apollo, Blackstone and other investors to deploy 20GW of compute through 2028, with the first tranche valued at $35 billion. The announcement is a reminder that demand is being heavily funded for companies that are deep in the red and would otherwise see bad credit terms (such as Anthropic and OpenAI).
Below, we look at what caused the softer AI guide and why a softer AI guide is not a concern, whereas circular investing raises questions.
"Only Chips” is What Caused the Softer AI Guide
The softer AI guide traces back to the fiscal Q3 and fiscal Q4 call awhile back when Broadcom management stated they would be delivering Ironwood racks: “Last quarter, one of these prospects released production orders to Broadcom, and we have accordingly characterized them as a qualified customer for XPUs and, in fact, have secured over $10 billion of orders of AI racks based on our XPUs.”
However, management was quite evasive when analysts had asked for clarification between chips and racks two quarters ago. There was more than one attempt for clarification, yet the one below stands out. Here is what was stated in the FYQ4 call:
“Vivek Arya: BofA Securities, Research Division:
And on the clarification, Hock, Anthropic racks versus chips.
Hock Tan: President, CEO & Executive Director:
I'd rather not answer that, but we're okay. As Kirsten said, we're good on our dollars and margin.”
However, on the earnings call this evening, the CEO had a change of heart and decided to stop dodging the question and rather inform investors they are only supplying the chips.
Ross Seymore
Deutsche Bank AG, Research Division
And the rack versus chip side of things, is that all clarified now?
Hock Tan
President, CEO & Executive Director
No racks it's all chip…
Kirsten Spears
CFO & Chief Accounting Officer
We are on a chip business only.
Hock Tan
President, CEO & Executive Director
We are only chips.
Kirsten Spears
CFO & Chief Accounting Officer
Only chips.”
This shift in deal structure has puts and takes for how analysts model Broadcom’s AI revenue this year, as booking the full revenue for the full AI system inflates revenue (because the components would become a passthrough) yet would have diluted Broadcom’s margins. That’s why directly preceding the “only chips” exchange; the analyst was pressing Broadcom on how their margins would be affected by selling systems. Personally, I’m not a fan when there are repeated attempts by analysts to clarify guidance assumptions; those questions are not answered directly, and then a miss occurs after walking back the original framing.
However, that opinion aside, the miss is inconsequential to the bigger picture. Broadcom emphasized they booked $30 billion in AI orders compared to the $10.8 billion shipped. Management also stated they have visibility into 2028, although that might not be a good thing if the visibility stems from sourcing chips well in advance while having to secure power and other supply constrained components.
For additional color on the growing backlog and visibility, this was stated on the call: “See a lot of large — this few six customers now, they realize that lead time to get compute, you need lead time. You need to be thoughtful. And that's not just asking for wafers to get the chips or memory to ensure that HBMs are available or DRAM is available. They're also talking about, hey, I got to have the power, the power shell. So all this is planning ahead.
And what we are seeing the bookings that are coming is not for immediate delivery. Some are hope to have, but the reality, they all accept is they need to align quite a few other things in place before they can deliver. But they are placing their orders early and they're placing their orders now, and they are placing orders in fairly huge demand, which basically gives us a lot more visibility than we normally otherwise would have in semiconductors.”
On the earnings call, an analyst pointed out that if you look at the 10 gigawatts that Broadcom expects to help deploy next year, priced at $15 billion to $20 billion, the $100B medium-term forecast seems low.
Furthermore, there aresix customers driving the AI orders, whereas in the past Broadcom has been highly concentrated with Google as the primary customer. These customers include Anthropic, OpenAI, Meta, and two more unnamed customers.
Lastly, content per gigawatt was touched on, with the CEO stating Broadcom’s revenue will increase from one generation to the next: “Our revenue — our content per gigawatt will increase. Put it simply, our content from the fact that our compute chip will — XPU will go up in price very dramatically, particularly when you not only put SRAMs into it, as far as it cost, you start putting a lot — you start putting embedding CPU costs into the same XPUs and making those chips basically multi-die with lots of HBM.”
Broadcom to Backstop Anthropic; Deploy 20GW through 2028 with Blackstone, Apollo
Broadcom is helping to arrange a $35-$36 billion private-credit facility arranged by Apollo and Blackstone to help fund and purchase the deployment of custom TPUs. According to Bloomberg, Broadcom has agreed to backstop part of the debt (about $25 billion) with its top-tier investment-grade credit rating around 5.75% compared to the portion without a backer at 8% to 9% yield. In other words, Broadcom’s strong balance sheet is the reason lenders are extending tens of billions to a customer that is not yet profitable.
Oddly enough, when asked on the call if Anthropic’s deal was backstopped, the CEO pushed back and said the company is strictly supplying chips. Here is what was stated on the call: “As the deal we did with Anthropic is we use our TPU chips that we developed to provide the compute capacity to Anthropic. We want that it wasn't backstop in that sense. We were the ones providing the chips to Anthropic. We were the ones providing the compute capacity Anthropic.”
Although Broadcom is not taking equity, and the capital is private credit, according to Bloomberg, the company is lending its credit rating to manufacture demand from a buyer that cannot yet fund the purchase on its own. Therefore, it does closely resemble a backstop.
Noteworthy Discussions: Incremental Supply and 2027-2028 Commentary
There was an exchange on the call that points toward 2027-2028 being strong years for Broadcom, with management stating: “Well, good question. Yes, for '27, we indicated about 10 gigawatts shipment in '27. That's still very much intact. That will be shipping — and we are planning to ship 10 gigawatts in '27. And that nothing has changed. Back half loaded, to that extend? Yes, and which really provides an interesting trajectory into '28 with this back half trajectory. So '28, we expect a lot more gigawatts.”
Also, in another exchange, an analyst asked if Broadcom can secure incremental supply, which would point toward a ceiling to growth. There wasn’t much revealed in the exchange, yet an analyst having this concern in a very supply constrained market (CPUs, HBM, NAND, CoWoS capacity, etc) is noteworthy:
Timothy Arcuri
UBS Investment Bank, Research Division
Right. But if a customer comes to you and wants incremental supply, are you able to go to your suppliers and get it the way that it seems like some of your competitors are?
Hock Tan
President, CEO & Executive Director
Customers have been coming to us incrementally over the last few months. We expect that to continue. And by and large, yes.
Q2 Revenue Beats by 0.3%; Q3 Guide Implies Acceleration to 84% YoY
Broadcom reported Q2 revenue of $22.19 billion, beating consensus of $22.12 billion by a marginal 0.3%, growing 47.9% YoY and 14.9% QoQ. While the headline beat was modest — Broadcom’s smallest in five quarters — YoY growth accelerated for the fifth consecutive quarter, picking up another 18 points from 29.5% in Q1 and marking Broadcom’s fastest YoY growth since the immediate post-VMware-close quarters.
For Q3 FY2026, Broadcom guided to revenue of approximately $29.4 billion, ahead of consensus for $28.47 billion. At the midpoint, the guide implies sharp acceleration to 84.3% YoY and 32.5% QoQ — a sequential dollar increase of more than $7.2 billion, which is itself larger than the company’s entire quarterly revenue base just three years ago. The QoQ dollar step-up of $7.2 billion exceeds the $2.9 billion QoQ step-up between Q1 and Q2, underscoring that Broadcom’s AI ramp is materially compounding.
Fiscal 2026 consensus revenue estimates have inched slightly higher over the last three months, moving up 5.4% from $97.7 billion to $103.1 billion; the nearly $1 billion beat on Q3’s guide implies FY26 estimates have a bit more upside ahead. Fiscal 2027 consensus have jumped even more sharply to $161.0 billion (+56.2% YoY) from $135.9 billion in March, representing a +$25 billion revision driven by management’s commentary into >$100 billion in chip revenue alongside multiple multi-GW commitments from OpenAI, Anthropic and key customers Meta and Google.
AI Revenue Up 143% YoY; Q3 Guide Implies >200% YoY but Short of $17.2B Estimate, Possible Q4 Decel
AI semiconductor revenue was once again the centerpiece of the report. Q2 AI revenue grew 143% YoY and 28.6% QoQ to $10.8 billion driven by increasing demand for custom silicon and networking, beating management’s own guide of $10.7 billion (+140% YoY). YoY growth accelerated another 37 points from 106% in Q1, marking the fourth consecutive quarter of acceleration.
For Q3, Broadcom guided AI semiconductor revenue to $16.0 billion, implying 200% YoY growth and a material acceleration to 48.1% QoQ. This sequential dollar step-up of $5.2 billion in AI revenue is more than double Q2’s $2.5 billion; however, it fell short of the $17.2 billion estimate.
For FY26, Broadcom guided for $56 billion in AI revenue, up 180% YoY, while reiterating its >$100 billion guidance for FY27.
This would plot out $20.8 billion in AI revenue in Q4, decelerating from the 48.1% QoQ guided in Q3 to 30% QoQ, and implying sequential dollar growth to moderate from $5.2 billion to $4.8 billion. JP Morgan’s Harlan Sur questioned about this deceleration dynamic, noting that 2X growth in 2H over 1H would put revenue closer to $60 billion, rather than the $56 billion guided. While the exchange with CEO Hock Tan suggests Broadcom may be taking quite a conservative stance in guiding through 2H while remaining positive on FY27’s prospects, the sequential deceleration on both a percent and dollar basis presents a risk to watch:
“Hock, on this fiscal year, AI sort of 2x growth second half over first half, that would put AI revenues over $60 billion with sequential growth in fiscal Q4, but you gave us this $56 billion number, which is only like 1.5x half-over-half growth with 4Q AI actually being down sequentially. So if you could just help us kind of square the numbers there.
Hock Tan
President, CEO & Executive Director
To begin with, let's start with '26. Doing a math basically 2x to 2x, the first half, we ship about in total AI revenue, something in the range of $19 billion, you're going to be precise. So — and if you do what I indicate and 2x that in the second half, you get pretty much in the range of what we're talking about, which is around $56 billion, Harlan.
So that number is still very, very — does tie up very well. Now your bigger question on the second half, which you're going to need a very detailed analysis of is, yes, we keep the momentum going as we expect to see in 2027. What we will see in 2027 is continued growth of the level we're talking about. And if you drive on that basis of what we're seeing here, almost 2x — in the range of 2x what 2026 will be.
I think you will easily see that 2027 will exceed very easily $100 billion in 2027, which is pretty much what we indicated last quarter, and we are continuing to say that it will be over $100 billion in 2027. So in that sense, if anything else, it might be based on what we're doing, very much on track, if not stronger.”
Semiconductors Up 79% YoY; Software In-Line at 9% YoY
Semiconductor Solutions revenue was $15.01 billion in Q2, up 78.5% YoY and 20.1% QoQ, beating the company’s own guide of $14.8 billion (76% YoY). YoY growth accelerated 26 points from 52% in Q1, with AI now contributing approximately 72% of Semiconductor segment revenue, up from 67% in Q1.
Infrastructure Software revenue was $7.18 billion, marginally below the company’s ~$7.2 billion guide and up 8.8% YoY and 5.4% QoQ. YoY growth rate decelerated from the elevated VMware-integration period a year ago. For Q3, Broadcom guided for Semiconductor revenue of $20.5 billion, up 124% YoY and 36.6% QoQ, and Infrastructure Software revenue of $8.9 billion, accelerating sharply to 31% YoY and 24% QoQ.
Margins: Operating Leverage Drives GAAP Expansion
Q2 margins highlighted the operating leverage thesis that has underpinned the Broadcom story since the VMware close, with GAAP profitability expanding as revenue scaled against a largely fixed cost base.
Q2 GAAP gross margin was 69.5%, expanding 150bps YoY and 140bps QoQ. Adjusted gross margin was 77.1%, in line with management’s 77% guide and expanding 10bps QoQ from 77.0% in Q1 — notable because it dispelled the prior concern that the rising XPU mix would pressure gross margins. Adjusted gross margin remains down 230bps YoY (from 79.4% in Q2 FY25) due to a higher custom-silicon mix, but the QoQ stability suggests the mix headwind has largely played through.
Q2 GAAP operating margin was 48.6%, expanding 980bps YoY and 430bps QoQ — a solid demonstration of operating leverage as semiconductor revenue scaled approximately $4.5 billion above Q2 FY25 levels while opex grew only ~6%. Adjusted operating margin was 67.3%, beating the 67% guide and expanding 200bps YoY and 90bps QoQ. For Q3, Broadcom guided adjusted operating margin to ~67% (flat sequentially).
Q2 GAAP net margin was 42.0%, expanding 890bps YoY and 390bps QoQ. Adjusted net margin was 54.4%, expanding 250bps YoY and 170bps QoQ.
EPS and Adjusted EBITDA
Adjusted EPS was $2.44 in Q2, beating estimates of $2.40 by 1.7%, marking Broadcom’s second consecutive quarter of sub-2% EPS beats. Adjusted EPS grew 54.4% YoY, accelerating from 28.1% in Q1. GAAP EPS was $1.91, growing 85.4% YoY.
While Broadcom did not guide directly for Q3 earnings, the $1 billion beat on revenue and margin maintenance suggests potential upside to current estimates for $3.18 in adjusted EPS, up 88.1% YoY. This is also likely to put upwards pressure on FY26 estimates, which sit at $11.33, up 66.1% YoY. Similar to revenue, FY27 EPS estimates have seen a strong upwards revision over the last three months, up 27% from $14.56 in March to $18.50, driven by the expected surge in AI revenue next year.
Adjusted EBITDA was $15.24 billion at a 68.7% margin, beating the 68% guide and growing 52.4% YoY and 16.1% QoQ. Adjusted EBITDA was guided to be ~68% of revenue in Q3, a marginal step-down versus Q2.
Cash Flows and Balance Sheet
Cash generation in Q2 was exceptional, with both OCF and FCF margins reaching post-VMware highs and dollar generation setting new records.
Operating cash flow was $10.49 billion in Q2 for a 47.3% margin, up 60.1% YoY in dollar terms and 27.0% QoQ. OCF margin expanded 360bps YoY and 450bps QoQ as higher-margin AI revenue mix flowed through to cash conversion.
Free cash flow was $10.26 billion for a 46.2% margin, up 60.1% YoY and 28.1% QoQ, with capex of just $231 million (1.0% of revenue, down slightly from $250 million in Q1). FCF margin expanded 350bps YoY and 470bps QoQ.
Cash and equivalents climbed to $19.63 billion at quarter-end, up from $14.17 billion in Q1. Debt declined modestly to $64.91 billion. The combination of moderating buybacks and accelerating FCF means Broadcom’s net debt position has improved by approximately $6.6 billion over the past two quarters, providing meaningful flexibility for either an acceleration of buybacks, M&A, or — given the AI ramp — potential incremental capacity investments.
Inventory rose sharply to $4.33 billion at quarter-end, up 46% QoQ from $2.96 billion in Q1, a meaningful supply-side signal that reinforces management’s confidence in the Q3 and Q4 AI ramp. Days sales outstanding extended to 44 days (from 40 days in Q1), reflecting the rising mix of larger hyperscaler customers with longer payment terms, though still well within historical norms. Both metrics — accelerating inventory build and modestly extending receivables — are consistent with a company gearing up for a sharp sequential ramp rather than one facing demand softness, mirroring similar supply-side signals seen at Nvidia and other AI infrastructure peers.
Conclusion:
Broadcom’s AI revenue growth on a YoY and QoQ basis is stunning on all accounts, especially given its growth at scale. Most importantly, Broadcom is diversifying its customer base to six customers with bookings running 3X shipments with visibility into 2028.
Management did not provide an updated guide for FY27, which may be partly due to the chip-only content that led to next quarter’s miss, but it could also be they are not sure when their customers will secure the other supply constrained components.
The more immediate reason the report is likely selling off after hours due to bringing up an important modeling question, which is how much revenue should be assigned to each gigawatt of XPU compute? Rack-level assumptions imply a much larger revenue opportunity than chip-only content, thus we are seeing an adjustment after hours. As you can tell from my write-up, I think this was an avoidable communication issue on management’s part, especially given the repeated attempts by analysts to clarify the rack-versus-chip economics in previous earnings calls.
However, a minor miss on surging AI revenue will soon be water under the bridge. The larger concern is around circular AI investments, which are likely here to stay. Broadcom is now tethered to AI customers that need enormous compute capacity but are not yet profitable at the scale required to fund it internally. The creation of financing vehicles with Apollo, Blackstone and other investors is one strategic solution, yet it’s not exactly ideal to lend your own credit rating to manufacture customer demand, especially given Anthropic is likely years away from profitability.
That’s a wrap! I/O Fund just had one of our best quarters ever, helped by strong positioning ahead of the Nasdaq’s historic April rally. Let’s see if we can do it again. Keep an eye out for upcoming analysis on new stocks we may add to the portfolio as we rotate out of weaker names, plus my Q3 Top 15 AI Stocks report, due next month.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in AVGO at the time of writing and may own stocks pictured in the charts.
Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
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