Broadcom Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Total revenue in fiscal Q3 2025 was a record $16 billion, up 22% year on year, driven by AI semiconductors and VMware growth. Q3 consolidated adjusted EBITDA was a record $10.7 billion, up 30% year on year. Backlog hit a record $110 billion.
• Semiconductor revenue was $9.2 billion, up 26% year on year, with AI semiconductor revenue at $5.2 billion, up 63% year on year, accounting for 65% of AI revenue. XPU business accelerated, with a fourth customer adding over $10 billion of orders.
• AI networking demand remained strong, with launches of Tomahawk five, six, and Jericho four Ethernet switches. Infrastructure Software revenue was $6.8 billion, up 17% year on year, with VMware Cloud Foundation version 9.0 released.
• Free cash flow in the quarter was $7 billion, representing 44% of revenue. Ended Q3 with $10.7 billion of cash and $66.3 billion of gross principal debt.

Segment Performance

• Semiconductor Solutions: Revenue was $9.2 billion, up 26% year on year, representing 57% of total revenue. Gross margin was approximately 67%, down 30 basis points year on year. Operating expenses increased 9% year on year to $951 million. Semiconductor operating margin was 57%, up 130 basis points year on year and flat sequentially.
• Infrastructure Software: Revenue was $6.8 billion, up 17% year on year, representing 43% of revenue. Gross margin was 93% in the quarter, compared to 90% a year ago. Operating expenses were $1.1 billion, resulting in an operating margin of approximately 77%, up from 67% a year ago.

Guidance

• Q4 consolidated revenue forecast is $17.4 billion, up 24% year on year. Semiconductor revenue expected to be ~$10.7 billion, up 30% year on year, with AI semiconductor revenue at $6.2 billion, up 66% year on year. Infrastructure software revenue expected to be ~$6.7 billion, up 15% year on year.
• Q4 consolidated gross margin expected to be down approximately 70 basis points sequentially. Adjusted EBITDA expected to be 67%. Non-GAAP tax rate for Q4 and fiscal year 2025 expected to remain at 14%.

Risks

• No specific detailed risks discussed in the transcript beyond a general mention of risk factors causing actual results to differ materially from forward-looking statements made on the call.

Question and Answer

Q: Hi, guys. Thanks for asking question. Hock, thank you for sticking around for a few more years. So I just wanted to talk about the AI business and, specifically, the XPU. When you said you're gonna grow significantly faster than what you had thought, a quarter ago, what's changed? Is it just the impressive prospect moving to a customer definition, so that $10 billion backlog that you mentioned? Or is it, stronger demand across the existing three customers? Any detail on that will be helpful.

A: I think it's both, Ross. But to a large extent, it's the fourth quarter customer that we now add on to our roster. Which we will ship pretty strongly in 2026, I should say. So combination of increasing the volumes from existing three customers and we moved through that very progressively and steadily. And the addition of a fourth customer with immediate and fairly substantial demand. Really put our really, changes our thinking of what '26 would be starting to look like.

Q: Hi. Good afternoon. Congratulations on a well executed quarter and strong free cash flow. Know everybody's gonna ask a lot of questions on AI, Hock. I'm gonna ask about the non AI simulators If I look at your guidance for Q4, it looks like the non AI streaming business is gonna be down about 78% year over year on fiscal twenty five if you hit the midpoint of the Q4 guidance. Good news, is that the negative year over year trends have been improving to the year, in fact, think you guys are gonna be positive year over year in the fourth quarter. You've characterized it as relatively close to the cyclical bottom, relatively slow to recover. However, we have seen some green shoots of positivity. Right? Broadband server storage, enterprise networking. You're still driving the DOCSIS four upgrade in broadband, cable, You've got next gen PON upgrades in China and The US in front of you. Enterprise spending on network upgrades is accelerating. So near term, from the cyclical bottom, how should we think about the magnitude of the cyclical upturn? And given your thirty to forty week lead times, are you seeing continued order improvements in the non AI segment, which would point you to continued cyclical recovery into next fiscal year.

A: Well, you know, then if you take a look at that non AI segment, I mean, you're right. From a year on year Q4 guidance, we are actually up, as you say, slightly. Couple one or 2% from a year ago. And it's not much really to shout about at this point. And the and the big issue is the puts and takes. And the puts and takes and the bottom line to all this is other than seasonality that we perceive if you look at it short term, we've all looking year on year, but looking sequentially. We see in things like wireless and we even start to see some seasonality in server storage these days. We don't kind of all washes out so far. The only consistent trend we've seen over the last three quarters that is moving up strongly is broadband. And nothing else if you look at it from a cyclical point of view, seems to be able to sustain an uptrend so far. I don't think it's getting but as a whole, they are not getting worse as you pointed out, Harlan. But they are not showing a v shaped recovery as a whole. That we would like to see to see and expect to see in in cyclical semiconductor cycles. The only thing that gives us some hope is broadband at this point. And it is recovering very strongly. But then it was the business that was most impacted in the in the sharp downturn of '24 and early twenty five. So again, one takes that with a grain of salt. But best answer to you for you is non non AI semiconductor is kind of slow to recover as I said. And Q4 year on year is up maybe low single digits. Is the best way to to describe it at this point. So I'm expecting to see more of a u shaped recovery in non AI. And perhaps by late twenties mid twenty six, late twenty six, we'll start to see some meaningful recovery. But as of right now, not clear.