Fabless chip and software maker Broadcom (NASDAQ: AVGO) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 28.2% year on year to $18.02 billion. On top of that, next quarter’s revenue guidance ($19.1 billion at the midpoint) was surprisingly good and 4.4% above what analysts were expecting. Its non-GAAP profit of $1.95 per share was 4.3% above analysts’ consensus estimates.

Is now the time to buy AVGO? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Broadcom’s third quarter results exceeded Wall Street’s expectations for both revenue and non-GAAP earnings, but the market reacted negatively to the print. Management attributed the quarter’s performance to accelerating demand for AI semiconductors and continued growth in its infrastructure software segment. CEO Hock Tan highlighted that AI semiconductor revenue rose sharply, supported by major orders for custom accelerators and AI data center components. He also noted, “We have never seen bookings of the nature that we have seen over the past three months.” Meanwhile, infrastructure software benefited from strong VMware Cloud Foundation adoption, driving robust contract bookings and expanding the company’s software backlog.

Looking forward, management expects AI-related demand to remain the primary growth engine, with a significant backlog fueling expectations for accelerating revenue in upcoming quarters. CEO Hock Tan emphasized, “We expect our AI revenue to double year on year to $8.2 billion,” and outlined ongoing investments in advanced packaging and supply chain resilience to support delivery. While infrastructure software is set to grow at a lower rate, Broadcom’s focus will remain on leveraging its backlog and capacity expansions. CFO Kirsten Spears cautioned that gross margins may come under pressure as product mix shifts further toward system-level AI sales, but she stressed that operating leverage is expected to keep operating margin dollars growing.

Key Insights from Management’s Remarks

Management pointed to surging AI semiconductor demand, robust infrastructure software bookings, and evolving product mix as key drivers for the quarter and near-term outlook.

• AI semiconductor orders surge: Broadcom saw a 74% year-on-year jump in AI semiconductor revenue, fueled by large-scale orders for custom accelerators (XPUs) from major hyperscaler customers. The company secured a fifth major XPU customer and a follow-on order from an existing customer, illustrating rising industry adoption of custom AI hardware.
• AI networking and components strength: Record demand for AI data center infrastructure components, such as high-speed switches (Tomahawk 6), digital signal processors (DSPs), and optical components, contributed significantly to the quarter. Management noted the order backlog for AI switches alone now exceeds $10 billion, reflecting customers’ urgent need to scale data center capabilities.
• System-level sales ramp up: Broadcom is transitioning from selling individual chips to full system solutions for AI data centers. CEO Hock Tan described these as “system sales,” where Broadcom provides integrated racks containing multiple proprietary and third-party components. This approach aims to capture a larger share of customer spend but is expected to dilute gross margins due to higher pass-through costs.
• Infrastructure software momentum: The VMware Cloud Foundation offering drove infrastructure software revenue up 19% year-over-year, with contract bookings and backlog showing notable increases. Management credited the integration of VMware and improved operating leverage for the expansion in software margins.
• Inventory and supply chain management: Inventory days outstanding improved as Broadcom focused on disciplined inventory management across its ecosystem. The company is investing in advanced packaging capacity—especially in Singapore—to mitigate supply chain risks and support future AI hardware demand.

Drivers of Future Performance

Broadcom’s guidance is shaped by surging AI hardware demand, further system-level sales, and margin dynamics driven by product mix.

• AI revenue trajectory accelerates: Management forecasts AI semiconductor revenue to double year-on-year in the next quarter, supported by a growing order backlog across custom accelerators and data center infrastructure. CEO Hock Tan noted that the $73 billion AI backlog is expected to grow further as new orders materialize.
• Shift to system sales impacts margins: As Broadcom delivers more system-level solutions, gross margins are expected to decline due to increased pass-through of third-party components, like memory and packaging. However, management expects operating leverage—spreading fixed costs over greater revenue—to keep operating margin dollars rising, even if margins as a percentage of revenue decrease.
• Non-AI segments stabilize: While AI-related offerings drive most of the growth, non-AI semiconductor revenue is forecasted to remain stable, with broadband showing recovery but other end markets, such as enterprise, continuing to lag. Infrastructure software is projected to grow at a low double-digit rate, anchored by VMware adoption.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be monitoring (1) the pace at which Broadcom converts its expanding AI order backlog into revenue, (2) the impact of system-level sales on both gross and operating margins, and (3) the continued adoption and integration of VMware Cloud Foundation within the infrastructure software segment. Progress in advanced packaging capacity and supply chain resilience will also be critical for meeting delivery commitments.

Broadcom currently trades at $388.23, down from $406.60 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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