Broadcom Q4 FY2025 Earnings: $73B AI Backlog Meets Margin Compression Reality

Broadcom Inc. (NASDAQ: AVGO) has executed one of the most audacious pivots in tech history. In just 18 months since acquiring VMware for $69 billion, the company has transformed from a diversified semiconductor player into an AI infrastructure juggernaut with a $73 billion backlog.

The Business Today:

The Strategic Bet: Broadcom is betting that custom AI accelerators (XPUs) will capture significant share from merchant GPUs by offering better price-performance through hardware-optimized designs. They're also selling complete rack systems, not just chips - a margin-dilutive but strategically critical move.

The $73B Question: Broadcom now has $73 billion in AI-related backlog (XPUs, switches, DSPs, optics) scheduled for delivery over 18 months. That's roughly $48B+ in AI revenue potential for FY26 - if they can execute. Add $73B infrastructure software backlog, and total backlog hits $162 billion.

Q4 vs Estimates:

Quarterly Revenue Trend (Last 4 Quarters):

AI Revenue Acceleration (Last 4 Quarters):

AI vs Non-AI Semiconductor Breakdown:

Annual Revenue Trends (5-Year):

The AI Growth Story: AI semiconductor revenue has grown 10x over 11 quarters (Q2 FY23 to Q4 FY25), from ~$650M quarterly to $6.5B. Management projects doubling again in Q1 FY26 to $8.2B, implying ~$30-35B AI semiconductor revenue run rate for FY26.

The Non-AI Problem: Everything outside AI is stagnant. Non-AI semiconductors flat YoY at $4.6B, and Q1 guidance calls for $4.1B (flat YoY, down sequentially). Enterprise IT spending remains sluggish as "AI is sucking the oxygen" from other capex budgets.

🚨 CRITICAL ONE-TIME ITEM: Broadcom recorded a $2.1 billion discrete non-cash tax benefit in Q4 FY25 from "impact of lapses of statutes of limitations." This one-time benefit significantly boosted Non-GAAP EPS from what would have been ~$1.53 to $1.95 reported. Without this gift, EPS would have grown only ~8% YoY vs 37% reported.

Margin Trends by Segment:

The Margin Compression Problem: Q1 FY26 guidance calls for gross margin down 100 basis points sequentially to ~77%. CFO Kirsten Spears explicitly cited "higher mix of AI revenue" as the driver. Here's why:

Management expects operating leverage to maintain operating margin dollars growth despite gross margin compression. Translation: Revenue growing so fast that absolute profit dollars still increase even as percentages decline.

Cash Flow Performance (Stellar):

Capital Allocation (Shareholder Friendly):

Inventory Management (Disciplined): Days inventory on hand declined to 58 days (from 66 in Q3), showing tight supply chain control despite massive demand surge.

Q1 FY26 Guidance vs Q4 Actual:

✓ ACCELERATING: AI semiconductor revenue doubling YoY, total revenue +28% YoY beating consensus

⚠️ CONCERNS: Gross margin compression continuing (-100bps), tax rate jump (+250bps), infrastructure software weak (+2% YoY)

Full Year FY26 Expectations (Not Formal Guidance):

$73B AI Backlog Delivery Schedule:

Why Margins Are Compressing: CFO Kirsten Spears: "Consolidated gross margins will be impacted by the revenue mix of Infrastructure Software and Semiconductors and also product mix within Semiconductors." Translation: Rack sales with pass-through components permanently lower gross margins. Management expects operating leverage to preserve operating margin dollars despite percentage declines.

Hock Tan (CEO) on Custom Accelerators vs GPUs:

"To make an investment in custom accelerator is a multiyear journey. It's a strategic directional thing. It's not a very transactional or short-term move... Don't follow what you hear out there as gospel. Moving from GPU to TPU is a transactional move, going into AI accelerator of your own is a long-term strategic move."

→ Translation: Pushback against narrative that hyperscalers will reduce custom silicon investments. Tan argues custom XPUs offer fundamental performance advantages that justify multi-year commitments.

Hock Tan on Tomahawk 6 Demand:

"We have never seen bookings of the nature that what we have seen over the past 3 months, particularly with respect to Tomahawk 6 switches. This is one of the fastest-growing products in terms of deployment that we've ever seen... It is the only one of its kind out there at 102 terabits per second."

→ Translation: AI networking demand outpacing compute demand as hyperscalers build infrastructure ahead of accelerator deployment. $10B+ Tomahawk 6 backlog is a leading indicator.

Kirsten Spears (CFO) on System Sales:

"We'll be passing through more components that are not ours within the rack. Those gross margins will be lower. However, gross margin dollars will go up, margins will go down, operating margins will come down a bit."

→ Translation: Broadcom willing to sacrifice margin percentages to capture more of the AI infrastructure stack through full rack sales. Betting on volume over margin.

Hock Tan on Non-AI Business:

"AI is sucking the oxygen a lot out of enterprise spending elsewhere and hyperscaler spending elsewhere. We don't see getting any worse. We don't see it recovering very quickly."

→ Translation: Enterprise IT budgets being diverted to AI, leaving traditional semiconductor markets stagnant. Don't expect recovery in non-AI business for "a couple more quarters."

On OpenAI (5th Customer):

"The journey with them on the custom [accelerators] progresses at a very advanced stage and will happen very quickly. And it will have a committed element to this whole thing... The 10 gigawatt announcement is an agreement to be aligned on developing 10 gigawatts for OpenAI over '27 to '29 time frame."

→ Translation: OpenAI is customer #5 with $1B initial order. Separate 10GW agreement is longer-term infrastructure alignment, not near-term revenue.

What They DIDN'T Say (Red Flags):

The Good:

The Bad:

The Verdict:

I think the market's -6% reaction is warranted but potentially overdone. Yes, the margin compression is real and structural - selling racks instead of chips permanently lowers gross margins, and the $2.1B tax gift masked core EPS growth of only 8%. But here's what matters: Broadcom has $73 billion in secured AI backlog delivering over 18 months, bookings accelerating at "record rates" on Tomahawk 6, and they're generating $26.9B in free cash flow annually. If AI infrastructure spending continues through 2026-2027 as I expect, they're building an $80B+ revenue company returning $20B+ annually to shareholders. The customer concentration risk (likely 70%+ Google/Meta) is real, but for investors with conviction in the AI buildout, this offers leveraged exposure to the two highest-conviction areas: custom silicon and networking. I'd wait for Q1 results to confirm margins stabilize before adding, but the sell-off creates opportunity if you believe in the thesis.

What to Watch:

Disclaimer: This is analysis, not investment advice. Data sourced from SEC filings and earnings transcripts. One-time tax benefit of $2.1B identified in 8-K GAAP to Non-GAAP reconciliation.