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Broadcom's AI Bombshell Silences the 2027 Capex Doubters


$Broadcom(AVGO)$   the world's leading AI ASIC chipmaker and the second-largest AI chip giant overall, just reported its FY2026 Q1 earnings after the bell. Shares jumped over 5% in after-hours trading. Let's dig into what this report actually delivered.

FQ1 Key Financial Highlights

– Revenue came in at $19.31 billion, up 30% YoY and 7% QoQ, slightly beating the consensus estimate of $19.17 billion.

– GAAP gross margin hit 68.1%, up 0.1 percentage points both YoY and QoQ, comfortably above the Street's expectation of 67.3%.

– GAAP operating margin reached 44.3%, up 2.3 percentage points YoY and 2.6 percentage points QoQ, beating the consensus estimate of 43.3%. Non-GAAP operating margin came in at 66.4%, up 0.5 percentage points YoY and 0.2 percentage points QoQ, also ahead of the 65.8% consensus.

– GAAP net income was $7.35 billion, up 34% YoY but down 14% QoQ, topping the consensus estimate of $7.05 billion. Non-GAAP net income reached $10.19 billion, up 30% YoY and 5% QoQ, slightly above the consensus of $10.05 billion.


FQ1 Revenue Breakdown by Platform

– The Semiconductor Solutions segment, which includes networking, wireless, broadband, storage connectivity, industrial, and XPU chips, generated $12.52 billion in revenue, up 52% YoY and accounting for 65% of total revenue. The segment's gross margin was 68%, up 0.3 percentage points YoY, while operating margin hit 60%, up 2.6 percentage points YoY.

– Within the semiconductor segment, AI semiconductor revenue (primarily networking chips and XPUs) reached $8.4 billion, surging 105% YoY. Non-AI semiconductor revenue came in at $4.12 billion, roughly flat YoY, as growth in enterprise networking, broadband, and server storage was offset by seasonal weakness in the wireless business.

– The Infrastructure Software segment, which includes VMware, Symantec, CA, and Brocade, posted $6.8 billion in revenue, up just 1% YoY and missing market expectations. This segment accounted for 35% of total revenue. Software gross margin stood at 93%, with operating margin at 78%, up 1.9 percentage points YoY. It remains Broadcom's highest-margin business by far.


Three Things to Watch

Networking and XPU Ramp in Full Swing; Management Projects AI Chip Revenue to Break $100 Billion in 2027

AI revenue hit $8.4 billion this quarter, up 105% YoY. XPU revenue accounted for $5.6 billion of that, roughly doubling YoY, while networking chip revenue contributed $2.8 billion, up 60% YoY and representing one-third of total AI revenue. Management expects networking chip revenue to accelerate further in Q2, with its share of total AI revenue rising to 40%. This implies that Q2 networking revenue growth on a sequential basis will significantly outpace XPU growth.

Currently, among Broadcom's six major XPU customers, $Alphabet-C (GOOG.US)$ , $Meta Platforms (META.US)$ , Anthropic, and OpenAI have been publicly confirmed. ByteDance and $Apple (AAPL.US)$ are the other two widely rumored clients. The custom AI accelerator ramp across these customers is progressing very smoothly. Google's TPUv7 Ironwood is seeing robust demand and is expected to maintain its growth trajectory through 2026, with even stronger demand anticipated for the next-generation TPU in 2027 and beyond. Anthropic's demand stands at 1GW in 2026, scaling to over 3GW in 2027 and beyond. Meta's MTIA roadmap is progressing well, with shipments already underway and the next-generation MTIA expected to expand to several GW in 2027. As for the other two customers (widely speculated to be ByteDance and Apple), management indicated strong shipments this year, with volumes expected to more than double in 2027. OpenAI is projected to begin large-scale deployment of its first-generation XPU in 2027, corresponding to over 1GW of compute capacity.

All told, management expects AI chip revenue (including both XPUs and networking chips) to exceed $100 billion in 2027. The company noted that it has already locked in all critical component capacity needed from FY26 through FY28.


Gross Margin Concerns Temporarily Alleviated; Operating Leverage Clearly Kicking In

Last quarter, management signaled that long-term gross margins would face some pressure. This quarter provided meaningful relief on that front. Not only did overall gross margin tick up both YoY and QoQ, but the semiconductor segment's gross margin also improved YoY. Meanwhile, operating margin expansion was notable, highlighting the benefits of operating leverage.

Additionally, management's Q2 gross margin guidance calls for flat margins sequentially, rather than the sequential decline the market had feared.


Q2 AI Guidance Smashes Expectations; AI Quarterly Revenue to Surpass $10 Billion for the First Time; Software Guidance Falls Short

Management guided FQ2 total revenue to $22 billion, up 47% YoY and well above the consensus estimate of $20.53 billion, with gross margin flat QoQ and adjusted EBITDA margin at 68%.

Breaking it down by segment, FQ2 semiconductor revenue is expected to reach $14.8 billion, up 76% YoY and significantly above the consensus of $13.11 billion. Within that, AI revenue is guided to $10.7 billion, up 140% YoY and well ahead of the $9 billion consensus, marking the first time AI revenue will surpass $10 billion in a single quarter. Non-AI revenue is expected at $4.1 billion, up 2% YoY. Software revenue is guided to $7.2 billion, up 9% YoY, coming in just slightly below the consensus estimate of $7.22 billion.

Although VMware revenue grew 13% YoY this quarter, Total Contract Value (TCV) came in at $9.2 billion, down $1.2 billion sequentially. As for market concerns that AI could cannibalize the software business, management was emphatic: Broadcom's infrastructure software business is not being replaced or disrupted by AI. VCF cannot be bypassed, nor can it be substituted. The growth of generative AI and Agentic AI will actually stimulate greater VMware demand over time. 


Summary

Overall, this earnings report puts to rest the market's near-term concerns about declining gross margins. While the software business remains soft, management's powerful guidance on 2027 AI chip demand should help ease fears that a slowdown in hyperscaler capital expenditure growth could translate into weaker AI chip demand. Broadcom delivered exactly the kind of quarter the market needed to see.


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Broadcom Beats and Buyback! Chip Giant Back to $350?
Broadcom (AVGO) shocked the market with its fiscal 2026 Q1 earnings. AI-related semiconductor revenue surged 106% year over year to $8.4 billion, far exceeding market expectations. CEO Hock Tan noted that demand for custom AI accelerators remains extremely strong and raised Q2 AI revenue guidance to $10.7 billion. The company also announced a new share buyback program, while quarterly free cash flow reached $8 billion. Is Broadcom transforming from a “networking chip giant” into the second-largest AI hardware powerhouse after Nvidia?
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