Broadcom shares fall 10% as its non-AI business struggles: In-depth look at earnings report

Shares Broadcom (AVGO -10.36%) fell 10.4% on Friday after the semiconductor and infrastructure software maker released its fiscal 2024 third-quarter report (ended Aug. 4) in the afternoon.

The decline was likely largely due to fourth-quarter revenue guidance that was slightly below Wall Street’s expectations. In the current environment of artificial intelligence (AI) stocks that have surged, simply meeting or slightly beating Wall Street estimates is often not enough to protect against a post-earnings decline. These companies often have to release earnings and issue guidance that is significantly higher than Wall Street’s forecasts to please investors.

Some investors may also have been unhappy with Broadcom’s Q3 results. Both the top and bottom lines beat analyst estimates — but only slightly.

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

Broadcom Key Numbers

Data Source: Broadcom. YOY = Year-over-Year. GAAP = Generally Accepted Accounting Principles. Fiscal Q3 2024 ended August 4.

Broadcom’s revenue growth was driven almost entirely by its November 2023 acquisition of VMware. Excluding the impact of that acquisition, revenue grew just 4% year over year.

Overall, investors should focus primarily on the adjusted operating and net income numbers, which exclude non-recurring items. That said, the GAAP numbers should also draw attention.

The GAAP net loss “included a one-time, separate tax provision of $4.5 billion resulting from the effects of the intra-company transfer of certain intellectual property rights to the United States as a result of a supply chain restructuring,” the company said.

Wall Street had been expecting adjusted earnings per share (EPS) of $1.22 on revenue of $12.98 billion, so Broadcom slightly beat both expectations.

Broadcom generated $4.96 billion in cash from operations during the quarter, up 5% year over year. Free cash flow (FCF) was $4.79 billion, or 37% of revenue, up 4% year over year. FCF excluding restructuring and VMware integration was $5.3 billionan increase of 14% year-on-year.

The company closed the quarter with cash and cash equivalents of 10 billion dollarswhich is an increase of 1% compared to the previous quarter, and long-term debt amounted to $66.8 billion.

How much revenue did AI-related products generate?

Broadcom did not explicitly say how much total revenue is generated by AI-related products.

During the earnings conference call, CEO Hock Tan said that “we expect AI revenue to grow 10% sequentially in Q4 to over $3.5 billion.” So we can conclude that AI revenue in Q3 was around $3.1 billion to $3.2 billion. That’s around 24% of total revenue.

Segment Results and Further Analysis

Data source: Broadcom. YOY = year-over-year.

According to metrics management data provided during the earnings conference call, the infrastructure software segment’s growth was all or almost all driven by the acquisition of VMware. VMware focused on virtualization and cloud services.

During the earnings conference call, Tan provided the following data for the semiconductor segment:

• Network 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.
• Non-AI networking revenue fell 41% year-over-year but was up 17% sequentially, suggesting it has bottomed out.
• Custom AI accelerator revenue grew three-and-a-half times year over year. The company makes custom AI chips — or ASICs (application-specific integrated circuits) — for three major customers, the first and largest of which is Facebook’s parent company Meta Platforms. Google Parent Alphabet is another customer, while Broadcom did not disclose the name of its latest major technology client.
• 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 revenues totaled $1.7 billion, up 1% year-over-year.
• Broadband revenue was $557 million, down 49% year over year.
• Industrial revenue was $164 million, down 31% year over year.

Conductivity

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

• Revenue was $14 billion, up 51% year over year.
• Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) 64% of forecasted revenue. For context, in Q3, which was just reported, the figure was 63%.

Before the report, Wall Street had forecast fourth-quarter revenue of $14.11 billion, so the company’s revenue forecast was slightly below expectations.

Broadcom expects AI revenue to reach $12 billion this year, up from a previous forecast of more than $11 billion.

Blend

In short, Broadcom’s revenue growth is being driven entirely by demand for AI products, namely Ethernet networking products and custom chips that accelerate AI workloads. Its non-AI business continues to struggle, although parts of that business appear to be bottoming out and starting to rebound.

What’s more, Broadcom’s revenue growth was almost entirely driven by the VMware acquisition, with organic growth coming in at just 4% year over year.

Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former Facebook chief market development officer and spokeswoman and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.