Broadcom (NASDAQ: AVGO) is set to report its fiscal third-quarter results after the close on Wednesday, September 2, with investors watching a striking financial divergence closely.
The chip and software giant’s trailing-12-month revenue climbed 32% to $75.5 billion, a remarkable figure given the company’s enormous scale in the semiconductor industry.
Yet the bottom line is moving far faster, with net income over the same period surging 127% to $29.3 billion, nearly four times the pace of revenue growth.
About 39 cents of every revenue dollar now lands as profit, compared to roughly 23 cents a year earlier, a spread that reflects dramatic operating leverage across the business.
Part of the 127% gain is tied to an inherited comparison, as Broadcom reported a rare $1.9 billion net loss in the fiscal third quarter of 2024 due to a one-time $4.5 billion noncash tax charge linked to an intellectual property transfer to the United States.
Strip that charge out entirely, and profit still grew about twice as fast as revenue, meaning the underlying trend remains genuinely strong regardless of the flattering comparison.
The fiscal second quarter, which ended May 3, offered perhaps the cleaner picture, with revenue rising 48% year over year to $22.2 billion while net income climbed 88% to $9.3 billion.
Broadcom’s GAAP operating margin expanded from roughly 39% of revenue in the year-ago quarter to nearly 49% in fiscal Q2, a gain of almost 10 percentage points in a single year.
The cost structure explains the spread, with total operating expenses rising only about 6% year over year in fiscal Q2 to $4.6 billion even as revenue jumped 48%.
Research and development spending grew 11%, selling and administrative costs actually fell, and noncash amortization from past acquisitions held steady at around $2 billion per quarter rather than scaling with revenue.
Both of Broadcom’s major business segments contributed meaningfully, with semiconductor operating income nearly doubling year over year and lifting its operating margin from 57% to about 62% on 79% revenue growth.
Infrastructure software, built around VMware, converted 9% revenue growth into 13% profit growth as its costs declined, pushing its operating margin to nearly 79% from about 76% a year earlier.
Custom artificial intelligence accelerators and networking brought in $10.8 billion in fiscal Q2, CEO Hock Tan said, representing a 143% year-over-year increase and nearly three-quarters of the chip segment’s revenue.
Then-chief financial officer Kirsten Spears noted on the June 3 earnings call that consolidated gross margin should decline in fiscal Q3 as AI grows as a share of sales, describing it as a product-mix effect rather than a structural change in chip margins.
“In Q3 we expect consolidated revenue growth to increase 84% year-over-year to $29.4 billion, with non-GAAP operating margin stable at 67% reflecting our strong operating leverage,” Spears said in the company’s June 3 earnings release.
Tan expects $16 billion of the quarter’s revenue to come from AI, up more than 200% year over year, underscoring how central the AI buildout has become to Broadcom’s growth story.
Trading at around $369 as of the time of writing, down about 25% from its 52-week high of $495, the stock carries a price-to-earnings ratio of roughly 60 times earnings.
Trailing earnings per share more than doubled in a year, meaning the valuation compresses quickly if the gap between profit growth and revenue growth continues to hold through coming quarters.
The central question Wednesday will begin to answer is whether cost discipline holds as quarterly revenue steps up by roughly $7 billion from the most recent period.
If operating expenses start climbing alongside revenue at a faster rate, profit growth would fall back toward revenue growth and make the current earnings multiple increasingly difficult to justify.
