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The demand for AI continued to flourish in Q3 (Jul), supporting Broadcom's (AVGO -10%) increased FY24 (Oct) AI revenue outlook. However, non-AI semiconductor revenue remained a drag, dampening the company's overall sales forecast for Q4 and causing it to fall shy of analyst estimates. As a result, shares of the semiconductor and software giant are enduring hefty selling pressure today.

AVGO's softer-than-expected Q4 revenue guide of approximately $14.0 bln, which still represented an over +50% improvement yr/yr, is clouding an otherwise solid quarterly report. Alongside accelerating AI demand, which lifted AVGO's FY24 AI revenue guidance by $1.0 bln to $12.0 bln, VMware continues producing tremendous benefits. Meanwhile, and perhaps most importantly, CEO Hock Tan commented that non-AI product revs have stabilized, with recoveries across some businesses already underway while others are expected to recover in 2025.

• AVGO's earnings and revenue figures in Q3 remained sound, expanding its bottom line by nearly 18% yr/yr to $1.24 per share (AVGO implemented a 10-for-1 stock split during the quarter) on a 47% jump in revenue to $13.07 bln, an acceleration from the +43% posted in Q2 (Apr) and +34% in Q1 (Jan).
• VMware continued to shine brightly, contributing $3.8 bln to AVGO's $5.8 bln software revs in the quarter, a 200% pop yr/yr. Bookings accelerated, translating to a 32% improvement in annualized booking value compared to the previous quarter. Meanwhile, AVGO is driving down costs in VMware, putting it on track to achieve or exceed its initial adjusted EBITDA target of $8.5 bln by next year.
• AI demand held firm, illuminated by a 43% increase in networking revs to over $7.0 bln. AVGO remarked that hyperscalers (Amazon, Microsoft, Google, etc.) continued to pour capital into the technology, purchasing AI networking and custom AI accelerator products, which grew by 3.5x yr/yr. Furthermore, Ethernet switching products saw an over 4.0x increase while PCI Express Switches more than doubled.
• However, non-AI products within AVGO's networking division languished, tumbling by 41% yr/yr. However, non-AI networking revs climbed by 17% sequentially, underscoring strong recovery dynamics. AVGO anticipates further sequential growth in Q4, keeping the yr/yr decline to a more moderate 30%.
• Similar characteristics were displayed across AVGO's other businesses. In server storage, revenue fell by 25% yr/yr but inched 5% higher from Q2 and is expected to sustain this momentum in Q4. In wireless, where Apple (AAPL) comprises most of the revenue, sales crawled only 1% higher yr/yr but increased by 6% sequentially. With new iPhones prepared to launch during Q4, AVGO anticipates a 20% leap in revs sequentially next quarter. Finally, broadband remained weak, plunging by 49% yr/yr. However, AVGO sees a recovery unfolding in 2025.

AVGO's downbeat Q4 revenue projection is taking center stage today, igniting a meaningful pullback. However, items taking a backseat to the Q4 guidance were encouraging. Non-AI revenue is already recovering, and at the same time, AI revenue is snowballing, pointing to outsized strength over a longer timeframe.