AVGO Q2 Deep Dive: AI Semiconductor and Infrastructure Software Demand Drive Guidance Upside

Fabless chip and software maker Broadcom (NASDAQ:AVGO) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 22% year on year to $15.95 billion. The company expects next quarter’s revenue to be around $17.4 billion, coming in 2.1% above analysts’ estimates. Its non-GAAP profit of $1.69 per share was 1.6% above analysts’ consensus estimates.

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StockStory’s Take

Broadcom’s second quarter results were well received by the market, as management highlighted strong demand for AI-related semiconductors and ongoing momentum in its infrastructure software segment. CEO Hock Tan attributed the 22% year-over-year revenue growth primarily to accelerated adoption of custom AI accelerators and robust bookings in both AI semiconductors and VMware. Tan noted, “Demand for custom AI accelerators from our three customers continued to grow as each of them journeys at their own pace towards compute self-sufficiency.” The company also saw improvement in operating margins, supported by product mix and disciplined cost controls.

Looking ahead, Broadcom’s updated guidance is underpinned by expectations for continued growth in AI semiconductor shipments, the onboarding of a new large customer, and further integration of VMware Cloud Foundation. Management projects significant acceleration in AI-related revenue over the next year, with Tan stating, “We are expecting and seeing 2026 to accelerate more than the growth rate we see in ’25.” The company also anticipates improving trends in non-AI semiconductor products and steady demand for its infrastructure software offerings, even as it cautions that recovery in some segments may be gradual.

Key Insights from Management’s Remarks

Management credited the quarter’s performance to surging AI semiconductor demand, expanded XPU deployments, and steady growth in the infrastructure software segment, while noting that non-AI semiconductors are recovering at a slower pace.

• AI semiconductor momentum: The majority of revenue growth came from AI semiconductors, especially custom accelerators (XPUs). Management emphasized that demand from its three major customers remains strong, and the addition of a fourth significant customer contributed over $10 billion in new production orders.
• Networking technology advances: Broadcom introduced new networking switches such as Tomahawk Six and Jericho Four, designed to address scaling challenges for large AI training clusters. These products enable customers to expand compute clusters across multiple data centers with lower latency and improved power efficiency.
• VMware integration progress: The company launched VMware Cloud Foundation version 9.0, integrating cloud management tools for both on-premises and cloud environments. This is expected to help enterprise customers run a broader range of workloads, including AI applications, using a unified platform.
• Non-AI semiconductor trends: Non-AI semiconductor products showed mixed results, with broadband recovering more strongly than enterprise networking and storage. Management indicated that while broadband demand is rebounding, other segments are experiencing a slower, U-shaped recovery, lacking a sharp rebound typical of past cycles.
• Operating leverage and R&D investment: Operating expenses increased due to higher investment in research and development for leading-edge AI semiconductors, but margin improvements were attributed to operating leverage from higher revenue and favorable product mix.

Drivers of Future Performance

Broadcom’s outlook is shaped by ongoing AI demand, growing XPU adoption, and continued software traction, but management flagged mixed recovery in non-AI semiconductors as a headwind.

• AI accelerators and customer expansion: Management expects AI-related revenue to accelerate further, driven by increased orders from existing large customers and the onboarding of a substantial new customer, which is forecast to materially improve growth in the coming year.
• Software integration and services: The rollout of VMware Cloud Foundation is projected to support steady software growth, with management aiming to convert more of VMware’s top enterprise customers to the integrated platform and offer advanced services such as security and disaster recovery.
• Non-AI segment uncertainties: Despite early signs of improvement, management remains cautious on the pace of recovery in non-AI semiconductor categories, citing that only broadband has shown a sustainable upward trend while other areas may not see meaningful recovery until later next year.

Catalysts in Upcoming Quarters

For the next several quarters, our analysts will focus on (1) the pace of new AI XPU customer onboarding and expansion; (2) the adoption and rollout of VMware Cloud Foundation across Broadcom’s enterprise base; and (3) signs of sustained recovery in non-AI semiconductor segments, particularly broadband and storage. Developments in networking technology and service attach rates will also be closely monitored as indicators of future performance.

Broadcom currently trades at $320.11, up from $305.92 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free).

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