Broadcom reported a strong Q1, with revenue topping estimates by $330 million as management noted that AI revenue rose 77% YoY in the quarter. AI revenue reached $4.1 billion this quarter, beating previous guidance of $3.8 billion. The beat was driven by strength in networking with management mentioning last quarter that custom silicon would see stronger growth in H2. It was also stated networking was 40% of AI revenue while it’s typically 30% of AI revenue (confirming the higher product mix this quarter).
The stock was up double-digits after hours specifically when Broadcom stated next quarter AI revenue would be $4.4 billion and when management reiterated their serviceable addressable market forecast of $60 billion to $90 billion, stating “these R&D investments are very aligned with the roadmap of our three hyperscale customers as they each race towards 1 million XPU clusters by the end of 2027. And accordingly, we do reaffirm what we said last quarter, that we expect these three hyperscale customers will generate a Serviceable Addressable Market or SAM in the range of $60 billion to $90 billion in fiscal 2027.”
Managment also mentioned there are two more hyperscalers that plan “to tape out their XPUs” this year, referencing future expansion of the quoted SAM.
We’ve seen many AI stocks with similarly strong reports sell off this quarter, whereas the market loves Broadcom’s strong margins, its cash and the clarity management provides in terms of exact AI revenue per quarter.
Revenue
Broadcom’s revenue increased 24.7% YoY to $14.92 billion in its fiscal Q1, ahead of estimates for $14.59 billion due to strong AI momentum. Management guided for Q2 revenue to be flat sequentially at $14.9 billion, ahead of estimates for $14.73 billion.
Looking ahead, growth is expected to decelerate to 19.3% in Q2, a more than 5 point deceleration from 24.7% growth in Q1. Broadcom is lapping comps that include VMWare’s acquisition, hence why there is a large QoQ deceleration in Q1.
Most importantly, AI revenue rose 77% YoY and ~11% QoQ to $4.1 billion. For Q2, Broadcom said that it expects AI momentum to continue in Q2 “as hyperscale partners continue to invest in AI XPUs and connectivity solutions for AI data centers,” forecasting AI revenue to be $4.4 billion, up just over 7% QoQ and 44% YoY. This would put AI revenue at $8.5 billion for the first half of the fiscal year, up more than 57% from $5.3 billion in the same period last year.
Key Segments
Semiconductor Solutions revenue rose 11% YoY and was approximately flat QoQ at $8.22 billion, decelerating 1 point from 12% YoY growth in Q4.
- AI revenue was $4.1 billion, ahead of management’s guidance for $3.8 billion on “stronger shipments of networking solutions to hyperscalers on AI.” Management added that they “see a steady ramp in deployment of our XPUs and networking products,” supporting its AI revenue guide of $4.4 billion in Q2.
Non-AI semiconductor revenue was $4.1 billion, down 9% QoQ due to a seasonal decline in wireless revenue.
- Broadband “showed a double-digit sequential recovery in Q1 and is expected to be up similarly in Q2 as service providers and telcos step up spending.”
- Server storage “was down single-digits sequentially in Q1, but is expected to be up high-single digits sequentially in Q2.”
- Enterprise networking is expected to remain flattish in Q1 and Q2 as customers work through inventory.
- Wireless was flat in Q1 and expected to be flat YoY in Q2, and resales in industrial were “down double-digits in Q1 and are expected to be down in Q2.”
Infrastructure Solutions revenue rose 47% YoY and 15% QoQ to $6.70 billion. Management said the QoQ performance was “exaggerated though by deals which slipped” from Q4 to Q1, though the strong YoY performance was driven by two factors – converting largely perpetual licenses to one full subscription, and “upselling customers to a full stack VCF, which enables the entire data center to be virtualized.” At the end of Q1, approximately 70% of Broadcom’s 10,000 largest customers have adopted VCF.
- For Q2, Infrastructure Software revenue is expected to be $6.5 billion, up 23% YoY.
Margins
Margins expanded significantly across the board in Q1, with GAAP operating margin seeing the strongest expansion on a QoQ basis of 9.1 points.
- Gross margin was 68.0% in Q1, up from 64.1% in the prior quarter as gross profit topped $10 billion for the first time. Adjusted gross margin was 79.1%, expanding from 76.9% in the prior quarter.
- Operating margin witnessed the strongest QoQ expansion, with Broadcom reporting a 42.0% margin in Q1, up from 32.9% in Q4; this is marking a return to pre-VMWare acquisition levels. Adjusted operating margin was 65.9%, up from 62.7% in the prior quarter.
- Net margin was 36.9% in Q1, a strong 6.1 point expansion from 30.8% in the prior quarter. Adjusted net margin was 52.4%, up from 49.6% in the prior quarter.
Adjusted EBITDA margin also expanded nearly 3 points sequentially to 67.6%, with adjusted EBITDA surpassing $10 billion for the first time in Q1 at $10.08 billion. This also marked a strong, consistent expansion from the high-59% range at the start of FY24 when VMWare’s integration was impacting margins. Q2’s adjusted EBITDA margin was guided at 66%, a slight sequential contraction.
EPS
Given the strong margin expansion in Q1, Broadcom delivered a strong GAAP EPS beat of 35.7%, while its adjusted EPS beat was smaller in nature at ~6%.
- GAAP EPS of $1.14 beat estimates for $0.84.
- Adjusted EPS of $1.60 beat estimates for $1.51, for growth of 45.5% YoY. This is expected to be peak growth for adjusted EPS in fiscal 2025, with estimates pointing to 37% growth in Q2 below ending the fiscal year at almost 23% growth.
Cash and Balance Sheet
Operating and free cash flow were both strong in Q1 due to the margin strength and revenue outperformance, with both recording a margin of >40%.
- Operating cash flow was $6.11 billion, up 9% QoQ. OCF margin was 41%, improving from 39.9% last quarter.
- Free cash flow was $6.01 billion, up almost 10% QoQ. FCF margin was 40.3%, improving from 39.0% last quarter.
- Inventories were $1.91 billion, increasing more than 8% QoQ.
- Cash and equivalents totaled $9.31 billion, while debt decreased $1 billion QoQ to $66.58 billion.
Earnings Call:
Market Opportunity:
The market opportunity for Broadcom is quite large – represented by SAM of $75B at the midpoint by 2028, up from a $16B run rate right now. An analyst asked a similar question in terms of chips and management reiterated their current forecast is with only three customers right now whereas two more are likely to go into volume production in the coming years.
Timothy Arcuri:
Thanks a lot. Hock, in the past, you have mentioned XPU units growing from about 2 million last year to about 7 million you said in the 2027, 2028 timeframe. My question is, do these four new customers, do they add to that 7 million unit number? I know in the past, you've sort of talked about an ASP of 20 grand by then. So those — the first three customers are clearly a subset of that 7 million units. So do these new four engagements drive that 7 higher, or do they just fill in to get to that 7 million? Thanks.
Hock Tan:
And thanks, Tim for asking that. To clarify, as I made — I thought I made it clear in my comments. No, the market we are talking about, including — when you translate the unit is only among the three customers we have today. The other four, we talk about engagement partners. We don't consider that as customers yet and, therefore, are not in a served available market.
China Exposure:
Management was asked how many of the hyperscalers were from China, but they declined to comment. This is a notable question given any hyperscaler from that region has a low chance of being unscathed over the next four years. There were reports earlier this week that Broadcom may be losing major customer ByteDance, for example.
Management stated “no comment” yet it’s important to note the concern.
Conclusion:
Broadcom is quality and will help us hedge any anti-Nvidia narratives – which are bound to come up from time to time. As far as quality goes, you cannot find a better pair in AI (NVDA-AVGO). These are the juggernauts and we want exposure to AVGO as its empire slowly expands. Don’t forget AVGO’s AI software opportunity, which we’ve expanded on in the past.
That’s officially a wrap for the I/O Fund earnings season!
Regarding the AI trade falling out of favor this quarter, don’t let the market fool you for one minute – investors have never had it so good as to be able to track and verify there are hundreds of billionshundreds of billions pouring into one trend. It’ll be volatile, and it’ll be scary – and then ultimately thrilling, but this trend is bursting at the seams with demand. Supply is not merely bottlenecked; it’s dammed at the flood gates. The supply issues will work themselves out, and the I/O Fund and our Members will be well-positioned when those flood gates open.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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