Broadcom CFO sees Q4 gross margin falling to ~73% from 78% YoY
- Broadcom CFO expects Q4 consolidated gross margin of ~73%
- Margin down from 78% in the same period last year
- Capital expenditures expected to be $1.4 billion in Q4
- Investment aimed at expanding semiconductor capacity
*this image is generated using AI for illustrative purposes only.
Broadcom (NASDAQ: AVGO) CFO expects fourth-quarter consolidated gross margin to be approximately 73%, a decline from the 78% recorded in the same period last year.
The margin contraction reflects increased capital expenditures as the company invests in semiconductor manufacturing capacity. Management anticipates capital expenditures of $1.4 billion for the quarter.
Updated Guidance and Long-Term Outlook
The revision to the FY26 guidance reflects continued strong demand for custom AI accelerators and networking solutions. While the Q4 revenue guidance of approximately $34.8 billion missed analyst estimates of $35.03 billion, the long-term AI trajectory remains robust.
Management expects AI semiconductor revenue to accelerate to $21.7 billion in the fourth quarter, up 236% year-over-year. This quarterly figure contributes significantly to the revised annual total.
| Metric | Previous Guidance | New Guidance / Update | YoY Growth |
|---|---|---|---|
| FY26 AI Revenue | $56 billion | $58 billion | +186% |
| Q4 AI Revenue | N/A | $21.7 billion | +236% |
| 2028 Capacity | N/A | Incremental 10 gigawatts | N/A |
Third-Quarter Results Recap
The guidance update came alongside third-quarter results where adjusted earnings per share (EPS) reached $3.32, beating estimates of $3.24. Revenue hit $29.591 billion, surpassing the $29.362 billion consensus. Despite the beats, shares fell 5.07% in after-hours trading on soft Q4 general guidance.
The adjusted EPS of $3.32 marks a 96.45% increase from the $1.69 per share reported in the same period last year. Total revenue expanded by 85.50% year-over-year from $15.952 billion.
AI Revenue Surge and Cash Flow
AI semiconductor revenue was a primary driver, reaching $16.7 billion in the quarter. This represents a 221% year-over-year increase and a 54% quarter-over-quarter growth. CEO Hock Tan noted that demand for custom AI accelerators and networking remains very strong.
Operationally, Broadcom generated approximately $14.2 billion in cash from operations and $13.7 billion in free cash flow during the quarter. The company exited the period with approximately $24 billion in cash and cash equivalents.
What the Numbers Show
The upward revision of FY26 AI revenue guidance to $58 billion, despite a miss in Q4 overall revenue estimates, underscores the disproportionate weight and growth velocity of the AI segment. With Q4 AI revenue projected at $21.7 billion against a total company revenue guidance of ~$34.8 billion, AI is expected to constitute over 62% of total sales in the fourth quarter. This deep concentration highlights that while non-AI segments may face headwinds (leading to the Q4 miss), the AI engine is accelerating faster than previously modeled, justifying the higher annual ceiling.
How will the 5% gross margin contraction in Q4 impact Broadcom's long-term profitability as capital expenditures for semiconductor capacity continue to scale?
With AI revenue projected to constitute over 62% of total sales in Q4, what specific risks does this deep concentration pose to Broadcom's overall business stability?
Given the $1.4 billion quarterly capex and plans for incremental 10 gigawatts of capacity by 2028, how might Broadcom's manufacturing strategy affect competitive dynamics with NVIDIA and AMD?
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