The demand for AI surged in Q3 (Jul), boosting Broadcom's (AVGO, Financial) FY24 (Oct) AI revenue outlook. However, non-AI semiconductor revenue remained a drag, impacting the company's overall sales forecast for Q4 and causing shares to fall sharply.
AVGO's softer-than-expected Q4 revenue guide of approximately $14.0 billion, which still represented over a +50% improvement year-over-year, overshadowed an otherwise strong quarterly report. AI demand lifted AVGO's FY24 AI revenue guidance by $1.0 billion to $12.0 billion. VMware continues to deliver significant benefits. CEO Hock Tan noted that non-AI product revenues have stabilized, with some businesses already recovering and others expected to recover in 2025.
- Q3 earnings and revenue were solid, with a nearly 18% year-over-year increase in net income to $1.24 per share (AVGO implemented a 10-for-1 stock split) and a 47% jump in revenue to $13.07 billion, accelerating from +43% in Q2 and +34% in Q1.
- VMware contributed $3.8 billion to AVGO's $5.8 billion software revenues in the quarter, a 200% increase year-over-year. Bookings accelerated, leading to a 32% improvement in annualized booking value compared to the previous quarter. AVGO is reducing costs in VMware, aiming to meet or exceed its adjusted EBITDA target of $8.5 billion by next year.
- AI demand remained strong, with a 43% increase in networking revenues to over $7.0 billion. Hyperscalers like Amazon, Microsoft, and Google continued investing in AI technology, purchasing AI networking and custom AI accelerator products, which grew by 3.5x year-over-year. Ethernet switching products saw a 4.0x increase, and PCI Express Switches more than doubled.
- Non-AI products in AVGO's networking division fell by 41% year-over-year but climbed by 17% sequentially, indicating strong recovery dynamics. AVGO expects further sequential growth in Q4, reducing the year-over-year decline to around 30%.
- Other businesses showed similar trends. Server storage revenue fell by 25% year-over-year but rose 5% from Q2 and is expected to maintain this momentum in Q4. Wireless revenue, mainly from Apple (AAPL, Financial), grew by 1% year-over-year and 6% sequentially. With new iPhones launching in Q4, AVGO anticipates a 20% sequential revenue increase. Broadband remained weak, plunging by 49% year-over-year, but AVGO expects a recovery in 2025.
AVGO's downbeat Q4 revenue projection is causing a significant pullback. However, positive factors such as recovering non-AI revenue and growing AI revenue suggest strong long-term potential.
