Broadcom Earnings Preview: All Eyes on the Next AI Test
Global AI ASIC giant $Broadcom(AVGO)$
FY26Q1 Core Financial Indicators
– Revenue: Consensus estimates stand at $19.17 billion, representing a 29% year-over-year increase and a 6% quarter-over-quarter rise. This is slightly above the previous guidance of $19.1 billion.
– GAAP Gross Margin: Consensus is 67.3%, implying a decline of 0.7 percentage points both year-over-year and quarter-over-quarter.
– Operating Profit: GAAP operating profit consensus is $8.3 billion, up 79% YoY and 11% QoQ. Non-GAAP operating profit consensus sits at $12.61 billion, up 28% YoY and 6% QoQ.
– Net Income: GAAP net income consensus is $7.05 billion, up 28% YoY but down 17% QoQ. Non-GAAP net income consensus is $10.05 billion, up 28% YoY and 3% QoQ.
Three Things to Watch
Will the AI Backlog See an Upward Revision?
The market expects semiconductor revenue to hit $12.3 billion this quarter, up 50% YoY. Within this, AI revenue is projected at $8.2 billion, doubling year-over-year, while non-AI revenue is expected to be $4.1 billion, showing a slight decline.
Last quarter, $Broadcom (AVGO.US)$ revealed that its AI-related backlog (XPUs, switches, DSPs, optical components, etc.) exceeded $73 billion. This represents nearly half of the company's total backlog of $162 billion and is scheduled for delivery within the next 18 months. Breaking it down, XPU orders accounted for roughly $53 billion, AI networking for about $10 billion (with record bookings for the Tomahawk 6 102T switch), and other AI businesses for around $10 billion. The non-AI semiconductor backlog stood at $16 billion.
Crucially, management previously framed that $73 billion as the minimum revenue floor for the AI business over the next six quarters. However, the market was left wanting more last time, so all eyes are on whether this figure gets hiked in this report.
Will Margins Face Further Pressure as ASICs Ramp Up?
Management admitted last quarter that as the AI revenue mix increases, future gross margins will inevitably decline, and operating margins might follow suit. This admission contributed to the stock's post-earnings dip last time as the market worries about margin erosion, especially with rack-scale shipments acting as a further drag.
It is worth noting that although gross margins are trending down, operating margins are trending up, mainly due to the ASIC business model. ASIC gross margins are lower because the memory component requires external sourcing and is uncontrollable, while the logic component's margin remains normal. However, since R&D and Opex are shared with customers, the comprehensive operating margin is actually quite decent.
Software Profit Pillar: Short-Term Weakness and Long-Term AI Threats
$Broadcom (AVGO.US)$ 's infrastructure software business (represented by VMware, Symantec, CA, and Brocade) generated $6.9 billion in revenue last quarter, up 19% YoY and 2% QoQ, accounting for 39% of total revenue.
Investors should note that the software business boasts a massive 93% gross margin and 78% operating margin. Compare that to the semiconductor unit's 68% gross and 59% operating margin. The recent Wall Street narrative of "AI cannibalizing software" poses a risk here, which is terrifying considering software contributes nearly half of Broadcom's total profits.
Management previously guided for low double-digit growth in software for FY26. Since Q1 is typically a slow season for renewals, investors will be closely monitoring management's long-term outlook for this segment.
Option Market Signals
Ahead of Broadcom's quarterly earnings release after Wednesday's closing bell, the options market is presenting a mixed but increasingly bullish picture with a put/call ratio of 1.06 across 2.01 million total open interest contracts, though the March 6 weekly expiration tells a decidedly more optimistic story. Implied volatility remains elevated at 63.52% compared to 39.80% historical volatility, sitting at the 92nd percentile and reflecting heightened expectations for a significant post-earnings swing in the AI infrastructure bellwether.
On the weekly options chain, call volume dominates with 26.15K contracts versus just 8.05K puts, with a striking concentration of call activity exceeding 10,400 contracts clustered around the $360 strike, suggesting aggressive bullish bets targeting a potential breakout above that psychological level.
Open interest data reinforces this optimistic positioning as call contracts total 57.45K against 33.75K puts, with a towering call open interest position surpassing 22,000 contracts near the $317.5 strike indicating institutional accumulation, as traders appear to be wagering that Hock Tan will deliver upbeat commentary on AI networking demand and custom accelerator momentum that could propel shares sharply higher in the sessions ahead.
Summary
As the world's second-largest AI chip player, $Broadcom (AVGO.US)$ still has massive runway for growth across both ASICs and GPUs amidst a severe shortage of AI compute.
However, $NVIDIA (NVDA.US)$ 's sharp sell-off last week despite a comprehensive earnings beat has cooled sentiment across the sector, leaving zero margin for error in this report. The stakes are particularly high given that Broadcom is currently trading at nearly double Nvidia's valuation while delivering significantly slower growth.
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