Broadcom shares fall 10% as its non-AI businesses struggle: Earnings report in depth

Actions of Broadcom (AVGO -10.36%) fell 10.4% on Friday, following the semiconductor and infrastructure software maker’s release earlier in the afternoon of its third-quarter fiscal 2024 (ended Aug. 4) report.

The decline was likely largely driven by fourth-quarter earnings guidance coming in slightly lower than Wall Street had expected. In the current environment of artificial intelligence (AI) stocks that have risen sharply, simply hitting or slightly beating Wall Street estimates is often not enough to protect against a decline after earnings releases. These companies often have to post results and issue guidance far higher than Wall Street forecasts to satisfy investors.

Some investors may also have been unhappy with Broadcom’s third-quarter results. Both the top and bottom lines beat analysts’ consensus estimates — but only by a bit.

Additionally, broader market dynamics likely played a smaller role in Broadcom’s stock decline. Major indexes were hurt on Friday by a weaker-than-expected jobs report for August.

Broadcom’s key numbers

Data source: Broadcom. YOY = year over year. GAAP = generally accepted accounting principles. Q3 fiscal 2024 ended on August 4.

Broadcom’s revenue growth was driven almost entirely by its acquisition of VMware in November 2023. Excluding the contribution from that acquisition, revenue rose just 4% year-over-year.

In general, investors should focus primarily on the adjusted operating and net income numbers, which exclude one-time items. That said, the GAAP numbers should also draw attention.

The GAAP net loss “included a one-time non-cash tax provision of $4.5 billion from the impact of an intra-group transfer of certain intellectual property (IP) rights to the United States as a result of the realignment of the supply chain.” the company said.

Wall Street was looking for adjusted EPS of $1.22 on revenue of $12.98 billion, so Broadcom slightly beat both expectations.

In the quarter, Broadcom generated $4.96 billion in cash from its operations, up 5% from the year-ago period. It generated free cash flow (FCF) of $4.79 billion, or 37% of revenue, up 4% year over year. FCF excluding VMware restructuring and integration was 5.3 billion dollarsup 14% year-on-year.

The company ended the quarter with cash and cash equivalents of 10 billion dollarsup 1% from the previous quarter and long-term debt of $66.8 billion.

How much revenue has been generated from AI-related products?

Broadcom did not explicitly state how much total revenue it generated from AI-related products.

On the earnings call, CEO Hock Tan said that “in Q4, we expect AI revenue to grow 10% sequentially to over $3.5 billion.” So we can deduce that Q3 AI revenue was around $3.1 billion to $3.2 billion. This is about 24% of total revenue.

Segment performance — and other breakdowns

Data source: Broadcom. YOY = year over year.

Growth in the Infrastructure Software segment was driven entirely or almost entirely by the acquisition of VMware, according to the metric management provided on the earnings call. VMware focused on virtualization and cloud services.

On the earnings call, Tan provided the following data about the semiconductor segment:

• Networks revenue grew 43% year-over-year to $4 billion, representing 55% of segment revenue. Growth was driven by strong demand from hyperscale customers for AI networks and custom AI accelerators.
• Revenue from non-AI networks fell 41% year-over-year, but rose 17% sequentially, suggesting a bottom has been reached.
• Custom AI accelerator revenue grew three and a half times year over year. The company makes custom AI chips — or application-specific integrated circuits (ASICs) — for three big customers, the first and largest of which is parent Facebook Meta platforms. Google parent Alphabet is another customer, while Broadcom has not identified its newest large technology customer.
• Server storage connectivity market revenue was $861 million, down 25% year-over-year but up 5% sequentially, suggesting a trough has been reached.
• Wireless market revenue was $1.7 billion, up 1% year over year.
• Broadband market revenue was $557 million, down 49% year over year.
• Industrial market revenue was $164 million, down 31% year over year.

Guidance

For the fiscal fourth quarter (ending November 3), management expects:

• Revenue of $14 billion, which equates to 51% year-over-year growth.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of 64% of estimated revenues. For context, in the recently reported third quarter, this measure was 63%.

Going into the report, Wall Street had been modeling for revenue of $14.11 billion in Q4, so the company’s revenue outlook was slightly below expectations.

For this year, Broadcom now expects AI product revenue to be $12 billion, up from its previous outlook of more than $11 billion.

A mixed bag

In short, Broadcom’s revenue growth is driven entirely by demand for its AI products, namely its Ethernet networking products and custom chips that accelerate AI workload processing. Its non-AI business continues to struggle, although some parts of that business seem to have bottomed out and are starting to come back.

Moreover, Broadcom’s revenue growth was driven almost entirely by the contribution of its VMware acquisition. Organic growth was only 4% year-over-year.