Broadcom's Q2 revenue exceeded expectations, soaring by 20%, but AI revenue guidance was not impressive enough, leading to a drop of over 5% in after-hours trading | Earnings Report Insights

Last year, Broadcom, which became the "new favorite" in the field of artificial intelligence (AI) chips, reported revenue in the last fiscal quarter that was strong compared to Wall Street expectations, but the guidance for AI product revenue in the current fiscal quarter was not as impressive as some optimistic investors had anticipated.

After the earnings report was released, Broadcom stated that major customers are increasing spending on AI inference. Non-AI chip sales are nearing a bottom but will slowly recover. Due to custom AI chips, profit margins are narrowing. The deployment of custom AI chips in fiscal year 2026, the next fiscal year, will exceed expectations.

Commentators believe that Broadcom's guidance for this quarter appears relatively bland, indicating that the surge in AI spending is not as strong as some investors had expected.

After Broadcom's earnings report, the stock price, which had already fallen over 0.4%, failed to reverse its decline in after-hours trading, and the drop even expanded, at one point falling over 5%.

On June 5th, Eastern Time Thursday, Broadcom announced its financial performance for the second fiscal quarter (referred to as "Q2") ending May 4th of the calendar year and provided financial guidance for the third fiscal quarter ("Q3").

1) Key Financial Data:

Revenue: Q2 operating revenue was $15 billion, a year-on-year increase of 20%, compared to analyst expectations of $14.96 billion, and a year-on-year increase of 25% in the previous quarter.

Net Profit: Adjusted net profit for Q2 under non-GAAP standards was $7.787 billion, a year-on-year increase of 44%, compared to a year-on-year increase of 48.9% in the previous quarter.

EBITDA: Adjusted EBITDA for Q2 was $10.001 billion, a year-on-year increase of 34.6%, accounting for approximately 66.7% of total revenue, compared to a year-on-year increase of 40.9% and accounting for 68% of revenue in the previous quarter.

EPS: Adjusted earnings per share (EPS) for Q2 was $1.58, a year-on-year increase of 43.6%, compared to analyst expectations of $1.56, and a year-on-year increase of 45.5% in the previous quarter.

2) Performance Guidance:

Revenue: Q3 revenue is expected to be approximately $15.8 billion, a year-on-year increase of 21%, compared to analyst expectations of $15.72 billion.

EBITDA: Q3 EBITDA is expected to account for at least approximately 66% of revenue.

Q2 AI Chip Revenue Growth of 46% Shows Significant Slowdown Compared to Previous Quarter

The earnings report shows that Broadcom's total revenue and EPS growth in Q2 slightly slowed compared to the previous fiscal quarter, but still exceeded Wall Street expectations, maintaining a strong double-digit growth momentum. Revenue growth in Q2 slowed from 25% in the previous quarter to 20%, and EPS growth slowed from 45.5% to 43.6%.

In Q2, Broadcom's semiconductor solutions business providing products for data centers and networks generated revenue of $8.41 billion, a year-on-year increase of 16.7%, which was also stronger than the analyst expectation of $8.39 billion Broadcom CEO Hock Tan commented on the second-quarter performance, noting that the company's revenue reached a record high for a single quarter, attributing this to the growth of its semiconductor solutions business and the cloud computing business of VMware, which was acquired by Broadcom in 2023. He also mentioned that revenue from AI chip-related businesses grew by 46%. This is a significant slowdown compared to the 77% growth rate for AI chip revenue he disclosed for the previous fiscal quarter.

Hock Tan said:

"Thanks to the continued growth of AI semiconductor solutions and VMware's business, Broadcom's second-quarter revenue reached an all-time high. Driven by strong demand for AI networks, second-quarter AI revenue grew by 46% year-on-year, exceeding $4.4 billion."

Third-quarter AI chip revenue expected to accelerate growth, still below some analysts' expectations

In terms of guidance, Broadcom expects total revenue to grow by 21% in the third quarter, slightly accelerating from the second quarter and stronger than analysts' expectations. Hock Tan stated that AI revenue will also accelerate in the third quarter.

"We expect that with the continued investment from our hyperscale partners, third-quarter AI semiconductor revenue will accelerate to $5.1 billion, achieving growth for ten consecutive quarters."

Analysts generally expect Broadcom's AI chip revenue in the third quarter to be $4.79 billion, with some analysts predicting revenue as high as $5.29 billion, exceeding the guidance mentioned by Hock Tan by more than 3.7%.

Investors in Broadcom have recently focused on its custom design business, which benefits from the demand for customers running AI workload components. Broadcom also produces switching chips used to transmit traffic between expensive graphics processing units (GPUs), which are used to train and run AI models.

On Tuesday, Broadcom released the Tomahawk 6 series chips for high-performance data center switches and announced that the switches in this series have begun shipping, calling it the world's first 102.4Tbps switch.

Broadcom stated that the Ethernet switching capacity provided by Tomahawk 6 reaches 102.4 terabits per second, which is twice the bandwidth of any Ethernet switch currently on the market. This chip is designed to meet the needs of data centers running AI processor clusters.

On the day of the official announcement of the "breakthrough" data center switch chip, Broadcom's stock price rose over 3%, reaching an all-time high, and then increased by more than 1.6% on Wednesday, continuing to set new highs