In the past quarter, Broadcom, a popular artificial intelligence (AI) concept stock, saw its AI-related product business grow less than Wall Street expected. The performance guidance also indicated that due to the drag of non-AI product business, the total revenue growth for this quarter was also below market expectations. Despite Broadcom once again raising its AI product sales forecast for the current fiscal year, it has not been able to reverse the decline in stock prices.
On Thursday, September 5, Eastern Time, after the U.S. stock market closed, Broadcom announced the financial data for the third fiscal quarter (hereinafter referred to as Q3) of its fiscal year 2024, which ended on August 4, 2024, and provided performance guidance for the fourth fiscal quarter (hereinafter referred to as Q4).
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1) Main financial data:
- Total Revenue: Q3 net revenue was $13.072 billion, a year-over-year increase of 47%, exceeding analysts' expectations of $12.97 billion. The previous quarter saw a 43% increase. Among this, semiconductor solutions revenue was $7.274 billion, a year-over-year increase of 5%, below analysts' expectations of $7.41 billion, with a 6% increase in the previous quarter. Infrastructure software revenue was $5.798 billion, a year-over-year increase of 200%, with a 175% increase in the previous quarter.
- EPS: On a non-GAAP basis, the adjusted diluted earnings per share (EPS) for Q3 was $1.24, a year-over-year increase of 18%, exceeding analysts' expectations of $1.20, with a 6.2% increase in the previous quarter.
- Net Profit: On a non-GAAP basis, the net profit for Q3 was $6.12 billion, a year-over-year increase of approximately 33%, compared to $5.394 billion in the previous quarter, which saw a 20% year-over-year increase. On a GAAP basis, Q3 net loss was $1.875 billion, compared to a net profit of $3.303 billion a year ago, with a 39% decrease to $2.121 billion in the previous quarter.
- EBITDA: Earnings before interest, taxes, depreciation, and amortization (EBITDA) for Q3 was $8.223 billion, a year-over-year increase of 42%, with a 30.6% increase in the previous quarter.
2) Performance guidance:
- Revenue: Including the revenue contributed by the enterprise software company VMware, which was acquired at the end of last year, Q4 revenue is expected to be around $14 billion, below analysts' expectations of $14.1 billion.
After the financial report was released, Broadcom's U.S. stock, which closed down more than 0.8% on Thursday, initially rose by more than 3% after hours, then quickly dived into negative territory, falling more than 7% at one point after hours.Some stock analysts commented that the post-market decline of Broadcom was somewhat excessive. The total sales and profits for the third quarter were stronger than expected, and the guidance for the fourth quarter was only slightly below expectations. Moreover, Broadcom has raised its sales forecast for AI products, and the main reason for holding Broadcom is AI.
The revenue growth of semiconductor solutions in the third quarter unexpectedly slowed down to 5%, with weak non-AI demand dragging down the fourth-quarter guidance.
Financial reports show that Broadcom's total revenue and EPS earnings for the third quarter both exceeded expectations and accelerated growth. However, the revenue of the semiconductor solutions business department, including AI custom chips, unexpectedly slowed down, with year-over-year growth slowing from 6% in the previous quarter to 5%. Analysts expected an acceleration in growth, with an expected growth rate of about 6.8%.
Broadcom CEO Hock Tan said that the performance in the third quarter reflected the continued strong performance of the company's AI semiconductor solutions and VMware.
Based on the guidance, Broadcom expects its revenue to continue to accelerate growth in the fourth quarter, with a growth rate of 51%, still slightly below analysts' expectations. Comments suggest that the fourth-quarter guidance indicates that Broadcom's non-AI business growth rate is lower than expected, which is a sign of weak demand in the non-AI field. Some of Broadcom's businesses are not closely related to the AI boom and have not benefited from the surge in AI spending by enterprise customers.
Data center suppliers rely on Broadcom's custom chip designs and network semiconductors to build their AI systems. Broadcom also sells components for automobiles, smartphones, and internet-connected devices, and has entered the software field related to large computers, network security, and data center optimization.
In addition, Broadcom stated that the net loss under GAAP in the third quarter included a $4.5 billion provision for intellectual property transaction-related taxes. This provision arose from Broadcom transferring the intellectual property of a business unit to its U.S. company division, which is a supply chain management action.
The AI product sales forecast for the fiscal year 2024 has been raised again to a record $12 billion.
When announcing the financial report, Broadcom CEO Hock Tan said that for the entire fiscal year 2024, the company expects sales of AI components and custom chips to reach $12 billion. This will not only set an annual record for sales of such products but also marks Broadcom's second increase in its full-year sales forecast for Aides products. After announcing the second-quarter financial report, Broadcom raised this sales guidance by 10% to $11 billion, with this latest increase being approximately 9.1%.
Previous articles from Wall Street Journal have shown that, as a popular AI concept target, Broadcom has been more favored by Wall Street institutions in recent months due to news about custom chips.In July of this year, news circulated that OpenAI might collaborate with Broadcom to develop its own AI chips. At the time, media reported that OpenAI was attempting to create its own chips, recruiting former Google employees related to AI chip business, and seeking to develop an AI server chip. OpenAI has also been in discussions with chip design companies, including Broadcom, about the development of new AI chips.
Subsequently, a report from Citigroup analysts stated that following Google, Meta, and ByteDance, OpenAI would become Broadcom's fourth-largest ASIC (Application-Specific Integrated Circuit) customer. It is anticipated that Broadcom will deliver new chips to OpenAI sometime after the second half of next year.
Also in July, Bank of America listed Broadcom as a top-tier AI target on par with NVIDIA during a conference call, mentioning that a significant factor attracting investors to Broadcom is the rapid growth of its AI business. Broadcom's management estimates that the potential market for the company's AI business will reach between $30 billion and $50 billion annually over the next three to five years. Even after raising the revenue forecast for AI chips again during the announcement of the third-quarter financial report, the company's target for the full year of the 2024 fiscal year is less than $15 billion.
The conference call mentioned that Broadcom's revenue will primarily come from large internet companies, focusing mainly on large consumer AI platform customers whose business models prefer Broadcom's ASICs, which are high-performance, low-power, custom AI chips. Over the next three to five years, these customers will not slow down their investment in xPU clusters, with the scale expected to grow from 100,000 clusters this year to 1 million clusters. Most importantly, there are no signs of demand slowing down before reaching this scale.
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