Broadcom FY2026 Q3 Highlights: Revenue +86% to a Record High, AI Semiconductors +221% to $16.7B, Multi-Year AI Path Raised to $230B in FY2028

Core Thesis

Broadcom (NASDAQ: AVGO) reported fiscal Q3 2026 results (quarter ended August 2, 2026) after the close on September 2, 2026. Revenue was $29.591 billion, up 86% year over year, slightly above consensus of roughly $29.4–$29.45 billion and another quarterly record. Non-GAAP diluted EPS was $3.32, up 96% year over year and above estimates of about $3.21–$3.24. Growth was driven by custom AI accelerators (XPUs) and AI networking: AI semiconductor revenue reached $16.7 billion, up 221% year over year and 54% quarter over quarter, or about 56% of total revenue. Non-GAAP operating income was $20.095 billion, up 92%, with an operating margin of about 67.9%. Free cash flow was $13.665 billion, up 95% and equal to 46% of revenue.

Q4 revenue guidance of about $34.8 billion (+93% year over year) came in modestly below most Street estimates of roughly $35.0–$35.05 billion and was treated as the “blemish.” AI semiconductor guidance of $21.7 billion (+236% year over year) was slightly above the ~$21.33 billion estimate. Management raised FY2026 AI semiconductor revenue guidance to $58 billion from $56 billion and laid out a path to $115 billion in FY2027 and $230 billion in FY2028, with FY2028 EPS expected to exceed $30. Shares fell about 0.7% in regular trading and dropped more than 5%–6% after hours before recovering during the call.

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Detailed Breakdown

1. Consolidated Revenue and Profitability

• Revenue: $29.591 billion, +86% year over year (from $15.952 billion), and up from $22.187 billion in Q2, a slight beat versus consensus.
• GAAP diluted EPS: $2.68 (versus $0.85 a year ago, about +215%). Non-GAAP diluted EPS: $3.32 (+96% year over year), above ~$3.21–$3.24.
• GAAP operating income: $15.955 billion, +171% year over year. Non-GAAP operating income: $20.095 billion, +92%, operating margin ~67.9% (up about 240 bps year over year).
• GAAP net income: $13.088 billion, +216%. Non-GAAP net income: $16.372 billion, +95%.
• Operating cash flow: $14.197 billion, +98%. Capex: $532 million. Free cash flow: $13.665 billion, +95%, or 46% of revenue.
• Cash and cash equivalents: $23.975 billion at quarter-end, versus $19.628 billion last quarter. Cash dividends paid: about $3.1 billion. Quarterly dividend held at $0.65 per share, payable September 30, 2026.
• Gross margin: about 75%, down ~210 bps sequentially on a richer AI mix, but better than the prior ~74% guide.

1. AI Semiconductors / Custom ASICs and Networking

• AI semiconductor revenue: $16.7 billion, +221% year over year and +54% quarter over quarter, above the ~$15.93 billion estimate; about 56% of company revenue and ~80% of Semiconductor Solutions.
• Semiconductor Solutions: $20.839 billion, +127% year over year, 70% of total revenue. Non-AI semiconductors were about $4.1 billion, roughly flat with ~$4.2 billion last quarter after stripping out AI.
• XPU shipments rose more than 3.5x year over year and accounted for about 73% of AI revenue. AI networking revenue rose more than 2.5x year over year. Management expects both XPU and AI networking revenue to roughly triple year over year in Q4.
• Product cadence: high-volume shipments of Ironwood TPU v7 to Anthropic and Google; production shipments of Google’s inference-oriented TPU v8i underway; first-generation OpenAI custom accelerator Jalapeño already shipping; Meta’s custom MTIA expected to enter production this quarter. On the networking side, Tomahawk 6 is deployed across all AI hyperscalers; Tomahawk Ultra is being used for low-latency Ethernet scale-up.
• CEO Hock Tan: “Demand for our custom AI accelerators and networking continues to be very strong.” He also said AI networking should grow as fast as the XPU business over the next several years.

1. Other Segments (Infrastructure Software / VMware)

• Infrastructure software revenue: $8.752 billion, +29% year over year, 30% of total revenue (versus about 43% a year ago, diluted by faster semiconductor growth).
• Software ARR grew about 15% year over year. Non-GAAP software gross margin was about 94% and operating margin about 84% (up ~650 bps year over year), remaining the profit and cash-flow ballast.
• Growth continues to come from the VMware install base after integration. The company announced VMware Private AI Cloud for running enterprise AI alongside existing applications, and highlighted workload repatriation from public to private cloud.
• Q4 software guide: about $8.7 billion, +25% year over year, roughly flat sequentially.

1. Capacity, Capex, and Customer Visibility

• Demand still exceeds supply. Bottlenecks remain in substrates, HBM, wafers, and factory capacity. Q4 capex is guided to about $1.4 billion for a Singapore substrate plant (contribution starting in FY2027), indium phosphide optical capacity, and laser expansion.
• Management said supply is secured to support the FY2027 and FY2028 AI revenue targets. Broadcom previously signed a multi-year manufacturing agreement with Samsung to diversify foundry.
• Customer concentration: the bulk of AI compute demand sits with about six frontier-model XPU customers.
  • Anthropic: ~1 GW of Ironwood in 2026; another ~5 GW of TPU v8i in 2027, on track to become the largest XPU customer that year; incremental ~10 GW visibility in 2028.
  • OpenAI: ~1.3 GW of Jalapeño in 2027; more than 5 GW of Jalapeño plus the next generation in 2028, which would make OpenAI the second-largest XPU customer.
  • Meta: multiple MTIA generations, with ~3 GW of visibility through 2028.
  • Google: multi-year TPU and networking agreements, with TPU-related volume described as tens of billions of dollars annually over the next several years.
• Management framed 2027 deployments at ~10 GW and 2028 at ~20 GW, with content value per GW of about $20–$30 billion.
• Broadcom is building a compute financing platform with Apollo and Blackstone targeting more than 20 GW by the end of 2028. A first $35 billion tranche closed in June for Anthropic’s ~1 GW deployment; modest residual-value guarantees may sit as contingent liabilities.

1. Next-Quarter and Medium-Term Guidance

• Q4 FY2026 (ending November 1, 2026) revenue: about $34.8 billion, +93% year over year and ~+18% quarter over quarter; modestly below most estimates of ~$35.0–$35.05 billion.
• Q4 semiconductors: about $26.1 billion (+136% year over year). Within that, AI semiconductors: $21.7 billion (+236% year over year), slightly above ~$21.33 billion, or about 62% of quarterly revenue.
• Q4 non-GAAP operating margin: about 66% (flat year over year, below this quarter’s ~67.9%). Gross margin guide: about 73% as XPU and memory content keep rising.
• FY2026 AI semiconductor revenue raised to $58 billion from $56 billion, or about +186% year over year.
• FY2027 AI semiconductor revenue: $115 billion (roughly double FY2026). FY2028: $230 billion (about 4x FY2026). FY2028 EPS expected to exceed $30, versus then-consensus of about $26.42.

1. Market Backdrop and Investor Concerns

• The core tension is “excellent, but not excellent enough.” Q3 revenue, EPS, and AI sales all beat, yet Q4 total revenue missed an elevated consensus, triggering the after-hours selloff. Analysts noted that with an AI-heavy valuation, a modest beat-and-raise is no longer enough.
• Gross margin is structurally drifting lower as AI—especially XPUs plus HBM—takes share. Q4 gross margin is guided to ~73%. Management argues this is mix, not a collapse in product profitability, and wants investors to focus on operating margin and operating leverage.
• Customer and competitive risk: revenue is concentrated in a handful of frontier labs, and hyperscalers are dual-sourcing custom silicon. Power, land, and data-center readiness could also slip GW deployments.
• The call was the sentiment pivot: the 580 / 1,150 / 2,300 three-year AI path and Anthropic / OpenAI visibility partly answered the “too dependent on Google” concern and helped trim after-hours losses.
• Software’s falling revenue mix does not mean software is weakening; AI semiconductors are simply growing faster. Software still supplies high-margin cash flow for dividends and reinvestment.

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Disclaimer

This material is for informational purposes only and is not investment advice.