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Broadcom Earnings Review: $10B Deal Lifts FY26 AI Outlook

Shares of $Broadcom(AVGO)$   , a global leader in AI custom silicon (ASICs), jumped over 4% in after-hours trading following the release of its fiscal Q3 2025 earnings report. Let's break down the key highlights.

FQ3 Key Financial Highlights

~Revenue: $15.95 billion, up 22% year-over-year and 6% quarter-over-quarter, slightly beating the guidance of $15.8 billion.

~Gross Margin: 67.1%, an increase of 3.2 percentage points YoY but a decrease of 0.9 percentage points QoQ. This was slightly above the 67% guidance.

~GAAP Net Income: $4.14 billion, swinging to a profit from a loss a year ago but declining 17% sequentially and falling short of the consensus estimate of $5.15 billion.

~Non-GAAP Net Income: $8.4 billion, surging 56% YoY and 8% QoQ, narrowly exceeding the market expectation of $8.22 billion.

FQ3 Revenue Breakdown by Platform

1. Semiconductor Solutions: Revenue reached $9.2 billion, marking a 26% YoY and 9% QoQ increase. This segment, which includes networking, wireless, broadband, storage, industrial, and XPU chips, accounted for 57% of total revenue. The segment's gross margin was 67% (down 0.3 p.p. YoY) with an operating margin of 57%.

~Within semiconductors, AI-related revenue (networking, optical, XPU chips) was the star performer at $5.2 billion, a 63% year-over-year increase.

~Non-AI semiconductor revenue was $4.0 billion, posting a slight single-digit decline YoY.

2. Infrastructure Software: Revenue from this segment (including VMware, Symantec, CA, Brocade) was $6.8 billion, up 17% YoY and 3% QoQ, contributing 43% of total revenue. The software business posted an impressive 93% gross margin and a 77% operating margin.

Two Things to Watch

1. A $10 Billion Order from a New Customer Signals Accelerated AI Growth in FY26

This quarter, Broadcom's AI XPU chip revenue was approximately $3.4 billion, making up about 65% of its AI revenue and growing an impressive 28% sequentially. In contrast, AI networking and optical components revenue was about $1.8 billion, up only 3% sequentially, still showing a significant gap compared to $NVIDIA(NVDA)$   's Q2 networking performance.

The big news from the earnings call was the disclosure of a $10 billion order from a fourth major customer, reported by the Financial Times to be OpenAI. This is in addition to its three existing ASIC customers ( $Alphabet(GOOG)$   , $Meta Platforms, Inc.(META)$   , and ByteDance). Delivery is expected in FQ3'26, leading management to signal a significantly improved AI revenue outlook for fiscal 2026, with year-over-year growth now expected to exceed 60%.

For the first time, Broadcom also disclosed a total backlog of $110 billion. At least half of this is from the semiconductor business, where AI-related orders now outweigh non-AI. The company expects the growth trajectory in 2026 to surpass that of 2025. Differentiating its strategy from Nvidia's, Broadcom stated its XPU business will focus exclusively on the top-tier LLM market and will not address the broader enterprise segment.

2. Broadband Shines, but a Broader Non-AI Recovery Is Still on the Horizon

Broadcom's non-AI semiconductor business remained soft this quarter, with revenue of about $4.0 billion. The only segment demonstrating sustained strong growth was broadband. Meanwhile, enterprise networking and server storage declined sequentially, while wireless and industrial were flat.

Management noted that from a cyclical perspective, no other non-AI business is showing a sustained uptrend. The recovery is proving to be slow, with a meaningful rebound not expected until mid-to-late 2026 (the end of fiscal 2026).

FQ4 Guidance

~The company projects FQ4 revenue of $17.4 billion (+24% YoY).

~Gross margin is guided to 66.4% (+2.3 p.p. YoY, -0.7 p.p. QoQ), impacted by a higher revenue mix from XPU and wireless products.

~Adjusted EBITDA is expected to be $11.7 billion (+28% YoY).

~Semiconductor revenue is guided to $10.7 billion (+30% YoY), including $6.2 billion from AI (+66% YoY) and $4.5 billion from non-AI (slight YoY growth).

~Software revenue is projected at $6.7 billion (+15% YoY).

~Buoyed by the new $10 billion deal, the company anticipates its AI revenue growth rate in fiscal 2026 will be primarily driven by XPUs, leading to a smaller percentage contribution from the networking business over time.

Summary

In summary, the massive $10 billion deal, reportedly with OpenAI, has ignited strong market optimism for Broadcom's fiscal 2026 AI revenue. This bullish outlook is successfully overshadowing the persistent softness in its non-AI semiconductor and software segments. Amidst surging global AI capital expenditures, Nvidia and Broadcom are firmly positioned to lead the next wave of growth in AI semiconductors.

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