Broadcom's Q3AI product revenue fell short of expectations, with Q4 revenue guidance disappointing, causing a drop of over 7% in after-hours trading | Financial Report News

In the past quarter, Broadcom, a popular artificial intelligence (AI) concept stock, saw slower growth in its AI-related product business than Wall Street expected. The performance guidance also indicated that due to the drag from non-AI product business, the total revenue growth for this quarter fell short of market expectations. Despite Broadcom raising its sales forecast for AI products for the current fiscal year, it still failed to reverse the downward trend in stock prices.

After the US market closed on Thursday, September 5th, Broadcom announced its financial data for the third quarter of the 2024 fiscal year ending on August 4, 2024, and provided guidance for the fourth quarter.

1) Key Financial Data:

Revenue: In the third quarter, net revenue was $13.072 billion, a year-on-year increase of 47%, with analysts expecting $12.97 billion. Semiconductor solutions revenue for the quarter was $7.274 billion, a 5% increase year-on-year, with analysts expecting $7.41 billion. Infrastructure software revenue was $5.798 billion, a 200% increase year-on-year.

EPS: On a non-GAAP basis, adjusted diluted earnings per share (EPS) for the third quarter was $1.24, an 18% increase year-on-year, with analysts expecting $1.20.

Net Profit: On a non-GAAP basis, net profit for the third quarter was $6.12 billion, an increase of approximately 33% year-on-year. On a GAAP basis, there was a net loss of $1.875 billion, compared to a net profit of $3.303 billion a year ago.

EBITDA: Earnings before interest, taxes, depreciation, and amortization (EBITDA) for the third quarter was $8.223 billion, a 42% increase year-on-year.

2) Performance Guidance:

Revenue: Including the revenue contribution from the acquisition of enterprise software company VMware at the end of last year, the fourth-quarter revenue is expected to be approximately $14 billion, with analysts expecting $14.1 billion.

After the financial report was released, Broadcom's US stock fell more than 0.8% in after-hours trading on Thursday, initially rising over 3% before quickly turning downwards, dropping by over 7% at one point.

Stock analysts commented that Broadcom's post-market decline was somewhat exaggerated. The total sales and profits for the third quarter were stronger than expected, and the guidance for the fourth quarter was only slightly below expectations. Moreover, Broadcom has raised its sales forecast for AI products, which is the main reason for holding Broadcom shares.

Unexpected Slowdown in 5% Revenue Growth for Semiconductor Solutions in the Third Quarter, Non-AI Demand Weakness Drags Down Fourth Quarter Guidance

The financial report shows that in the third quarter, Broadcom's semiconductor solutions business, including AI custom chips, unexpectedly slowed down in revenue growth, with a year-on-year increase slowing from 6% in the previous quarter to 5%, while analysts expected a faster growth rate of around 6.8%.

Broadcom CEO Tan Hock Eng stated that the performance in the third quarter reflects the company's strong performance in AI semiconductor solutions and VMware.

Based on guidance calculations, Broadcom expects revenue to continue to accelerate in the fourth quarter, with a growth rate of 51%, still slightly below analysts' expectations. Commentators believe that the fourth-quarter guidance indicates that Broadcom's non-AI business growth rate is lower than expected, a sign of weak demand in the non-AI sector. Some of Broadcom's businesses are not closely related to the AI trend and have not benefited from the surge in AI spending by enterprise customers.

Data center suppliers rely on Broadcom's custom chip designs and network semiconductors to build their AI systems. Broadcom also sells components for cars, smartphones, and Internet-connected devices, and is expanding into software areas related to large computers, network security, and data center optimization.

Furthermore, Broadcom stated that the GAAP net loss in the third quarter includes a $4.5 billion tax provision, which comes from Broadcom transferring intellectual property from one business unit to a company unit in the United States, an act related to supply chain management.

2024 Fiscal Year AI Product Sales Expectations Raised Again to a Record $12 Billion

When announcing the financial report, Broadcom CEO Tan Hock Eng stated that for the entire 2024 fiscal year, the sales of AI components and custom chips are expected to reach $12 billion. This not only sets a new annual sales record for such products but also marks Broadcom's second upward revision of its annual sales expectations for AI products. After the second-quarter financial report, Broadcom raised this sales guidance by 10% to $11 billion, with this latest increase representing approximately 9.1%.

An article by Wall Street News previously indicated that as a popular AI concept target, Broadcom has been more favored by Wall Street institutions in recent months due to news about custom chips.

In July of this year, there were reports that OpenAI might collaborate with Broadcom to develop self-designed AI chips. At that time, the media reported that OpenAI was trying to develop its own chips, recruiting former Google AI chip business employees, seeking to develop an AI server chip, and has been in talks with chip design companies including Broadcom to develop new AI chips.

Subsequently, a Citigroup analyst report stated that following Google, Meta, and ByteDance, OpenAI will become Broadcom's fourth largest ASIC (custom chip) customer, with Broadcom expected to deliver new chips to OpenAI after the second half of next year.

Also in July, Bank of America listed Broadcom as a top AI target on par with NVIDIA in a conference call, mentioning that one of the key factors attracting investors to Broadcom is its rapid growth in the AI business Broadcom's management expects that in the next three to five years, the potential market for the company's AI business will reach between $30 billion and $50 billion annually. Even with the upward revision of revenue expectations for AI chips announced in the third quarter financial report, the company's full-year target for the 2024 fiscal year is less than $15 billion.

During the conference call, it was mentioned that Broadcom's revenue will mainly come from large internet companies, focusing on large consumer AI platform customers. Their business model favors Broadcom's ASIC, a high-efficiency and low-power custom AI chip. Over the next three to five years, these customers will not slow down their investment in xPU clusters, with the scale increasing from 100,000 clusters this year to 1 million clusters. Most importantly, there are no signs of demand slowing down before reaching this scale