Drill Down Earnings, Ep. 476: Broadcom Q3 earnings – ($AVGO) – A Deep Dive with Cory Johnson

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Cory Johnson (0:30)

Welcome to Drill Down Earnings. We have quarterly results out from Broadcom, a really important company, one of the 50 most important companies of technology, of course, because that's what we talk about here in the Drill Down Earnings podcast. I'm Cory Johnson, Chief Market Strategist for Epistrophy Capital Research. Broadcom, Stockticker, AVGO is a great reminder. This is a company, it's just a pile of technology assets that CEO Hock Tan has put together here. And in a really important place in the world of AI, I made the mistake of watching some people on TV talking about this stock. They have no idea what they're talking about. It's kind of unbelievable. And I'm upset because all they look at is a miss or a beat, and it was a beat. OK, so what? It was $29.7 billion of revenue instead of $29.4.

So it was about 1% of revenues more than their expectations. $3.32 of adjusted earnings per share. But the underlying story here is so important. It's a real story.

Revenue growth has exploded at this company. It's up 86% on a year-over-year basis off the biggest quarter they'd ever have, which is bigger than the last quarter, which is the biggest they ever had, which is bigger than the long quarter before that, bigger than anything they ever had. The acquisitions have worked well, and they've also been able to use the technologies that they've acquired over the years to build some products for today. What they're building are these TPUs for Google XPUs, which is what we want, which is to say they are competitors to the products coming out of NVIDIA, the GPUs coming out of NVIDIA. They are semiconductors, complicated semiconductors being used in data centers to make AI happen, and it has resulted in this $29.6 billion quarter with 86% growth in a year over your basis. However, you want to look at it, gross margins of 69%, surging operating margins, 54% profit margins for this company.

It's 1700 basis points better than a year ago.

Just really impressive, making a lot of money, whether it's revenues or gross margins or operating margins or actual god-honest profits. Yeah, this company has got all that. My goodness, free cash flow. I mean, I saw someone on TV said free cash flow wasn't very good. Free cash flow was amazing. It was $13.7 billion in the quarter. CapEx was quite low compared to operating cash flows. 46% of revenues flowed all the way down to free cash flow. That is amazing by any standpoint for any company ever. This was a great quarter for Broadcom. It's not investment advice. I just want to talk about how the business is performing. What is the business? Well, a third of it's really simple this quarter. A third of its infrastructure software, 70% is semiconductors. The AI semiconductor business within the semiconductor business was so good, growing at 221% a year. They got love from the hyperscalers, meaning the overall semiconductor segment was just great. 127% growth on a year-over-year basis. Semiconductor solutions of $20.8 billion.

Really focused on six customers for what we call XPUs. It's not a GPU, it's not a CPU, it's a whatever. It's an XPU. And big volume being sold to Anthropic and being sold to Google.

Shipping the Google jalapeno chip, sorry, the OpenAI jalapeno chip. OpenAI is a new chip for first-generation custom accelerator specifically for OpenAI. XPU shipments rose to more than three and a half times what they wore a year ago, and it's now 73% of their AI revenue.

A really impressive performance, they say, better than VeriRubin GPOs coming from NVIDIA. And they say that their jalapeno chip, we heard the same thing from OpenAI, outperforming the Grace Blackwell in terms of inference, which is we're hearing a bigger market now than just understanding AI, but actually using AI in inference, inference versus training, of course. AI networking, also growing to two and a half times a year. Broadcom's Tomahawk 7, which is the industry's first 200 terabit per second Ethernet switch being used to move information in data centers and indeed to scale out connecting one data center to another using those chips, that business, using their Tomahawk 7 and their Tomahawk Ultra to scale up inside the rack using Ethernet for the first time. Ethernet continues to win. And that's important because there's always some new technology. It's not going to be Ethernet. And it seems like for decades now, Ethernet always ends up being the winner.