Shares of Broadcom (AVGO +5.58%) dropped 10.4% on Friday, following the semiconductor and infrastructure software maker's release on the prior afternoon of its report for the third quarter of fiscal 2024 (ended Aug. 4).
The decline was likely largely driven by guidance for fourth-quarter revenue being a bit lower than Wall Street had expected. In the current environment for artificial intelligence (AI) stocks that have run up considerably, simply meeting or slightly beating Wall Street's estimates is often not enough to protect against a post-earnings release decline. These companies must often post results and issue guidance notably higher than Wall Street projections to satisfy investors.
Some investors might have also been dissatisfied with Broadcom's Q3 results. Both the top and bottom lines beat the analyst consensus estimates -- but only by a little.
In addition, broader market dynamics likely played a smaller role in Broadcom stock's decline. Major indexes got clobbered on Friday due to a weaker-than-expected jobs report for August.
Broadcom's key numbers
| Metric | Fiscal Q3 2023 | Fiscal Q3 2024 | Change YOY |
|---|---|---|---|
| Revenue | $8.88 billion | $13.07 billion | 47% |
| GAAP operating income | $3.86 billion | $3.79 billion | (2%) |
| Adjusted operating income | $5.54 billion | $7.95 billion | 44% |
| GAAP net income | $3.30 billion | ($1.88 billion) | Flipped to negative from positive |
| Adjusted net income | $4.60 billion | $6.12 billion | 33% |
| GAAP earnings per share (EPS) | $0.77 | ($0.40) | Flipped to negative from positive |
| Adjusted EPS | $1.05 | $1.24 | 18% |
Data source: Broadcom. YOY = year over year. GAAP = generally accepted accounting principles. Fiscal Q3 2024 ended Aug. 4.
Broadcom's revenue growth was driven nearly entirely by its acquisition of VMware in November 2023. Excluding the contribution from this acquisition, revenue grew just 4% year over year.
In general, investors should focus mainly on the adjusted numbers for operating and net income, which exclude one-time items. That said, GAAP numbers should also get attention.
The GAAP net loss "included a one-time discrete non-cash tax provision of $4.5 billion from the impact of an intra-group transfer of certain IP [intellectual property] rights to the United States as a result of supply chain realignment," the company said.
Wall Street was looking for adjusted EPS of $1.22 on revenue of $12.98 billion, so Broadcom slightly surpassed both expectations.
In the quarter, Broadcom generated cash of $4.96 billion running 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 restructuring and the integration of VMware was $5.3 billion, up 14% year over year.
The company ended the quarter with cash and cash equivalents of $10 billion, up 1% from the prior quarter, and long-term debt of $66.8 billion.
How much revenue was 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 "we expect, in Q4, AI revenue to grow sequentially 10% to over $3.5 billion." So, we can deduce that Q3 AI revenue was roughly $3.1 billion to $3.2 billion. That equates to about 24% of total revenue.
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Key Data Points
Segment performance -- and further breakdowns
| Segment | Fiscal Q3 2024 Revenue | Change YOY |
|---|---|---|
| Semiconductor solutions | $7.27 billion | 5% |
| Infrastructure software | $5.80 billion | 200% |
| Total | $13.07 billion | 47% |
Data source: Broadcom. YOY = year over year.
The infrastructure software segment's growth was entirely or nearly entirely driven by the VMware acquisition, according to metrics management provided on the earnings call. VMware's focus was on virtualization and cloud services.
On the earnings call, Tan provided the following data on the semiconductor segment:
- Networking revenue grew 43% year over year to $4 billion, representing 55% of the segment's revenue. Growth was driven by strong demand from hyperscale customers for AI networking and custom AI accelerators.
- Non-AI networking revenue was down 41% year over year, but grew 17% sequentially, suggesting the 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, of which its first and largest is Facebook parent Meta Platforms. Google parent Alphabet is another customer, while Broadcom has not identified its newest big tech customer.
- Server storage connectivity market revenue was $861 million, down 25% year over year, but up 5% sequentially, suggesting the bottom 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 (which ends Nov. 3), management expects:
- Revenue of $14 billion, which equates to growth of 51% year over year.
- Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of 64% of projected revenue. For context, in the just-reported Q3, this metric was 63%.
Going into the report, Wall Street had been modeling for Q4 revenue of $14.11 billion, so the company's revenue outlook fell a bit short of the expectation.
For the year, Broadcom now expects revenue from AI products to be $12 billion, up from its prior outlook of more than $11 billion.
A mixed bag
In short, Broadcom's revenue growth is being entirely driven 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, though some parts of this business seem to have bottomed out and begun rebounding.
Moreover, Broadcom's revenue growth was nearly entirely driven by the contribution from its VMware acquisition. Organic growth was only 4% year over year.
