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Welcome to Big Picture Earnings Analysis. The news out of Broadcom AVGO. Yeah, it uh it demands an immediate look. Absolutely. Their Q4 fiscal 2025 results. They didn't just meet expectations. They, you know, they completely crushed them. But the real story here, I think, is the forward guidance. It's signaling this massive acceleration in AI.
That's it. We've been pouring over the financials from December 11th, the guidance and uh all the commentary from the CEO, Hawkan. And the takeaway the takeaway for you is this. Broadcom is not just a component supplier anymore. They are one of the two sort of foundational engines for the entire global AI buildout.
Okay, let's unpack the numbers first. What did Q4 actually look like? Because the beat was significant. It was um total reported revenue came in at $8.02 billion. The street was looking for something closer to 17.49 billion. So a very strong beat. And that's what 28% year-over-year growth. Exactly. and the profitability followed.
Non-GAP EPS hit $1.95 and when consensus was around $186. The number that really jumped out at me though was the gap net income. It climbed 97% year-over-year. Almost double. Right. When you see net income almost doubling on a 28% revenue increase. Yeah. That tells you the operational leverage is just huge.
It is. But if we want to know why it looks so good, we have to look at what the CEO said. Hawkan was really explicit. What were the drivers? He said the whole beat was driven uh primarily by one thing, a stunning 74% year-over-year jump in AI semiconductor revenue. Wow. That one category was $ 8.2 billion of the revenue just in Q4.
So AI isn't just contributing. It's I mean it's the entire growth engine right now. It really is. And yet they're suggesting it's going to get even faster. What does the Q1 guidance tell us? It tells us they see no slowdown at all. For Q1, they're forecasting total revenue of about $19.1 billion, which is again way above what analysts were thinking.
They were at what, $18.3 billion? Yeah, significantly higher. So, they're expecting that 28% year-over-year growth rate to just continue. And the most compelling figure buried in that Q1 guidance. Ah, that's the headline. That's what should jump out at everyone. The AI chip sales forecast. Broadcom expects AI chip sales and that includes their custom chips, their XPUs, and all the networking silicon to double year-over-year in Q1.
Double. To be clear, they are forecasting another $ 8.2 billion in AI chip sales just for the first quarter. Doubling year-over-year is an extraordinary rate of acceleration for a company of this scale. What makes them so critical here? It's the strategic focus. The commentary from Hawkan really emphasizes that their biggest customers, the hyperscalers, the big AI developers are going allin on custom chips,
their XPUs, right? They're using them for two critical things. First is training the large language models. That's the super complex compute heavy part. That's the big capital expense. Exactly. But second, and just as important, is inferencing, which is the day-to-day use when you ask a chatbot a question.
That's it. That's where the platforms are actually monetized. And by supplying the custom silicon for both, Broadcom is letting these customers, you know, control their own destiny optimized for their specific needs. And speaking of controlling destiny, yeah, this brings us to the scale of the commitment, the backlog.
We have to talk about that number. The figure is just it's staggering. Broadcom now has a total order backlog for AI related components of 73 billion. 73 billion. And they expect to deliver that over the next 18 months. And for context, what's their total company backlog? Their total consolidated backlog is $162 billion.
So AI is now almost half of their entire order book. It's the clearest validation of the strategy you could ask for. I think a lot of people see that $73 billion and just assume it's all processors, all XPUs. But the mix is really insightful, isn't it? It is. It really highlights the whole ecosystem.
About$20 billion dollars of that AI backlog is for networking components, plumbing essentially, the critical plumbing, high-speed switches, DSPs, optical components, PCIe switches, all the stuff that lets thousands of these ships talk to each other at incredible speeds. Without it, the processors are just expensive paper weights.
Exactly. So $20 billion is for connectivity and the rest, you know, north of $50 billion. That's the custom processing power, the XPUs themselves. And that networking demand is on fire. It's exceptionally strong. The CEO specifically called out their latest Tomahawk 6 switch. He said, and I'm quoting here, "We have never seen bookings of the nature that what we've seen over the past 3 months."
That demand is obviously feeding right into the XPU business. We knew about the big Anthropic order from Q3. What's new? Okay, so first, Anthropic seems to have doubled down. Broadcom confirmed an additional 11 billion order for their newest TPU, which is cenamed Ironwood Rex. So that brings Anthropic's total commitment for just that one chip to what?
$21 billion. $21 billion. It just shows how deeply this custom silicon is embedded in their multi-year plans. And it's not just the existing customers. No. And this is strategically very important. They announced they've signed a fifth XPU customer. A new one. A new one with an initial $1 billion order for delivery in late 2026.
This diversification is key. It reduces their reliance on any single client. Let's talk about another strategic shift, the system sale. They confirmed for customer number four, they're not just selling chips, they're selling the whole rack. What does that mean? This is a huge pivot. I mean, it's one of the most powerful moves Hawkan has made.
Historically, they sold components. Now, they're taking full responsibility for the whole integrated system. So, they're building the whole thing, the XPUs, the switches, power, cooling, everything, and they're guaranteeing it works together. For the hyperscaler, this just it massively reduces complexity and risk.
It makes Broadcom a strategic partner, not just a vendor. It's selling a solution, not just a product. Precisely. Before we move on, what about the OpenAI partnership they announced? Any more clarity there? Yes, and the timeline is important. They confirmed the partnership is moving forward, but Hawk clarified that significant revenue from that uh 10 gawatt alignment is not really expected in 2026.
So, that's a longer term story, right? Think more like 2027 to 2029. For the near term, it's the current customers and anthropic that are doing all the heavy lifting. That's a very clear picture. [snorts] Okay, let's pivot away from the AI halo for a moment. Broadcom still has huge non-AII businesses.
Absolutely. The main semiconductor solutions group did 11.07 07 billion in Q4. But if you strip out AI, the nonAI semi outlook for Q1 is about $4.1 billion, just flat year-over-year. Flat year-over-year and down a bit from Q4 because of the usual wireless seasonality. So stable, but not booming. What's holding it up?
It's mainly a solid recovery in their broadband segment. You know, Wi-Fi, 7 routers, consumer stuff, that's doing well. But other areas like general enterprise spending on serveries and storage, that's still pretty subdued. And what about the other huge piece of the puzzle? Infrastructure software, especially with VMware now integrated
performing extremely well. It brought in $6.94 billion in Q4, up 19% year-over-year. That growth is all about VMware and really strong adoption of the VMware Cloud Foundation or VCF. That's their private cloud suite. Yes. And the business is incredibly sticky. They ended the year with a software backlog of 73 billion.
Wait, 73 billion? Yep. Up from $49 billion a year ago. That software backlog is the exact same size as the entire AI component backlog. That is the story right there. A dual 73 billion backlog. One in hyperrowth custom silicon and one in super sticky software. It provides this deep layer of high margin stability.
It's an incredible financial fortress. So when you sum up the full fiscal year, the cash generation must have been off the charts. It was phenomenal. FY25 non-Jap free cash flow grew 39% to a stunning 26.9 billion and that kind of cash flow goes right back to shareholders immediately they announced a 10% dividend increase that's their 15th consecutive annual increase and they extended the share buyback program
right now we have to address what might seem counterintuitive to investors margins management guided the consolidated gross margin is actually going to decrease a bit in Q1 why this is a classic high growth trade-off the AI high business especially these huge custom deals just inherently has lower gross margins than their legacy business
and there are two main reasons for that two main reasons the first is the pass through cost of components they don't make primarily high bandwidth memory or HBM the memory that's essential for AI chips right they have to buy it and they basically pass that cost straight through to the customer so it adds revenue but with very little margin which pulls the overall percentage down
and the second reason is that strategic shift we're talked about the system sale. Exactly. When they sell a whole rack, they're bundling in a lot of non Broadcom parts. They're acting as an integrator. So again, more revenue, but the gross margin percentage on the total sale shrinks even though the total profit in dollars is way, way higher.
So the message is don't focus on the percentage, focus on the dollars. That's the executive message. The operating leverage from this insane growth means the operating margin dollars will continue to grow very strongly. It's a volume in dollars play and that volume leads to the final question the supply chain.
How do you guarantee delivery on a 73 billion backlog? We know things like advanced packaging co are huge bottlenecks. They recognize that and they're taking a pretty dramatic step to derisk it. They are setting up a substantial facility in Singapore to partially insource these complex advanced packaging processes.
Is that about saving money? No, it's overwhelmingly about strategic control and supply chain security. When you have an 18-month delivery window on that kind of backlog, you cannot risk being held up by a third party supplier. So, they're ensuring they can deliver for their biggest customers no matter what.
It guarantees those revenues will materialize. Okay, so to sum up what you need to know, we have a company with record financials guiding to accelerated AI growth and sitting on this incredible twin 73 billion backlog in custom silicon and software. And they are cementing themselves as the key strategic partner for hyperscalers who want to build hardware that is perfectly tailored to their own specific needs.
So what's the big picture here? What should you be watching in fiscal year 2026? The fundamental battle is now crystal clear. It is the battle between these high margin purpose-built custom XPUs which Broadcom is enabling and the generalized merchant GPUs that have you know dominated the market until now.
So the big question for the market is the question is this does Broadcom's success with custom silicon mean the general purpose GPU market is starting to plateau at the very high end or is the pride just growing so fast that there's room for both custom Destiny and merchant silicon to keep growing exponentially. That's the dynamic you have to
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