Broadcom Inc. Q2 2026 earnings call

Thank you, operator. Good afternoon, everyone. Joining me on today's call are Hock Tan, President and CEO, Charlie Kawwas, President, Semiconductor Solutions Group, and Ram Velaga, President, Infrastructure Software Group. Also joining is Kirsten Spears, Chief Financial Officer. As we announced, Kirsten will be retiring June 12th, and today we have joining us our incoming Chief Financial Officer, Amie Thuener. Thank you, Kirsten, for your leadership over the past 12 years. Broadcom distributed a press release and financial tables after the market closed, describing our financial performance for the second quarter fiscal year 2026. If you did not receive a copy, you may obtain the information from the investor section of Broadcom's website at broadcom.com. This conference call is being webcast live, and an audio replay of the call can be accessed for one year through the investor section of Broadcom's website.

During the prepared comments, Hock and Kirsten will be providing details of our second quarter fiscal year 2026 results, guidance for our third quarter fiscal year 2026, as well as commentary regarding the business environment. We'll take questions after the end of our prepared comments. Please refer to our press release today and our recent filings with the SEC for information on risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. In addition to US GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures, to the extent possible, is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. I will now turn the call over to Hock.

Thank you, Ji. Thank you, everyone, for joining today. In our fiscal Q2 2026, total revenue reached a record $22.2 billion, up 48% year-on-year, above our guidance on strength in AI semiconductors. Q2 operating margin was a record 67%, and adjusted EBITDA was a record 69% of revenue, which was above our guidance. Even as our revenue scales up massively, driven by AI, our operating and EBITDA margins remain strong and stable. Turning to semiconductors, Q2 revenue was a record $15 billion, as I said before, as we grew 79% year-on-year.

Driving this growth was AI semiconductor revenue at a record $10.8 billion, up 143% year-on-year and above our outlook. Networking represented almost 40% of our Q2 AI revenue. Demand for XPUs and networking is simply insatiable. During the quarter, bookings for AI semiconductors were over $30 billion against the $10.8 billion we shipped. In the second half of 2026, we expect AI semiconductor revenue to double from the first half we shipped this year. Consistent with this trend, in Q3, we expect AI semiconductor revenue to accelerate to $16 billion, up over 200% year-on-year. For the full year 2026, we expect to achieve AI semiconductor revenue of $56 billion, up approximately 180% from fiscal 2025. We expect this momentum to continue into fiscal year 2027 and reiterate our AI semiconductor revenue guidance to be in excess of $100 billion.

We expect AI semiconductor revenue growth to continue in fiscal 2028, based on the following initiatives with our six core customers. As you are aware, with Google, we announced in April that we entered into a long-term agreement to develop and supply multiple generations of TPUs and AI networking. Our relationship continues to be strategic and very substantial as we continue to deliver vastly superior technology and execution compared to other alternatives. This ability to provide differentiated value to Google ensures that our business will sustain and grow for the foreseeable future. For Anthropic, as you know, for 2026, we are providing access to Broadcom TPU-based compute of over one gigawatts. In April, we entered into an agreement to enable Anthropic to access another five gigawatts of next-generation TPU-based compute beginning in 2027. For OpenAI, we have delivered silicon, and we are on track for production late 2026.

We have a contractual commitment to deploy 1.3 GW in 2027 as part of the larger 10 GW that by 2029 agreement we announced last year. For Meta, in April, we announced a partnership to deliver multiple generations of MTIA XPUs. Under this agreement, we expect to deploy 3 GW through the end of 2028. The initial order for 1 GW, which includes XPUs and our networking, has been received and will start delivery in the second half of 2027. For our other two customers, we expect shipments to begin late 2026 and accelerate into 2027. To date, we have received purchase orders totaling $6 billion. While we have significant IP and execution leadership in XPUs, networking is key to building scalable XPU and GPU clusters. Here in networking, we have at least one generation of technology and product leadership.

For scale up within racks, we enable direct attached copper based on our industry-leading 200G and 400G SerDes, driving co-packaged copper with Ethernet and PCI Express switches. For scale out between racks, we have been shipping the industry's only 100 terabit Ethernet switch, the Tomahawk 6, for over a year. We will now be taping out our next generation 200 terabit switch this quarter. In CPOs, which is co-packaged optics, 1.6 Tb DSPs, CW and EML lasers, we are the de facto standard in the industry. To extend AI clusters across data centers, we remain the industry leader with our Jericho 3 and Jericho 4 fabric solutions, enabling the world's largest deployments at multiple hyperscalers.

Our strategic vision is to bring together Broadcom's leading technology and investor partners with the strongest balance sheets to deliver at scale sufficient compute capacity at the lowest cost and power for the leading AI frontier labs, including Anthropic and OpenAI. To deliver this vision, we are creating the AI XPU platform with Apollo and Blackstone and other leading investors to deploy more than 20 GW of compute capacity through 2028. The first tranche of this platform, valued at $35 billion, is in fact currently being launched by Apollo. Turning to non-AI semiconductors. Q2 revenue of $4.2 billion was up 6% year-on-year. Bookings during the same period exceeded $6 billion, which is a clear indication we're on a path towards a full cyclical recovery. Broadband, server storage and enterprise networking together were up, partially offset by a seasonal decline in wireless.

Consistent with this trend in Q3, we forecast non-AI semiconductor revenue to be approximately $4.5 billion, up 12% from a year ago. In summary, we expect Q3 semiconductor revenue to be $20.5 billion, up 124% year-over-year. Let me turn to Infrastructure software segment. Q2 software revenue of $7.2 billion was up 9% year-over-year, in line with our guidance. Bookings continue to be strong as we sustain ARR growth of 17% year-over-year. For Q3, we forecast software revenue to be approximately $8.9 billion, up 31% year-over-year. We just released VMware Cloud Foundation 9.1, focused on improving infrastructure efficiency, security, and support for enterprise AI inferencing workloads. With strong server demand globally, the deployment of VCF 9.1 for on-prem cloud computing is extremely strong, driving robust revenue growth.

This release adds heterogeneous compute support across GPUs and CPU architectures, including AMD, Intel, and NVIDIA platforms, enabling enterprise cloud customers to run AI, Kubernetes, and traditional virtualized workloads on a common private cloud environment. To sum it up, for Q3 2026, we expect our consolidated revenue to grow to $29.4 billion, up 84% year-on-year. We expect operating margin to be stable at approximately 67% of revenue, and adjusted EBITDA to be at approximately 68% of revenue. With that, let me turn the call over to Kirsten.

Thank you, Hock. Let me now provide additional detail on our Q2 financial performance. Consolidated revenue was a record $22.2 billion for the quarter, up 48% from a year ago. Gross margin was 77.1% of revenue in the quarter, down 230 basis points year-on-year, as semiconductor became a larger proportion of our product mix. Consolidated operating expenses were $2.2 billion, of which $1.6 billion was R&D. Q2 operating income was a record $14.9 billion, up 52% from a year ago. Note that even with the decline in gross margin, operating margin increased 200 basis points year-over-year to 67.3% as operating expenses remained relatively flat. Adjusted EBITDA of $15.2 billion or 69% of revenue was above our guidance of 68%. A review of the P&L for our two segments. Starting with semiconductors.

Revenue for our Semiconductor Solutions segment was a record $15 billion with growth accelerating to 79% year-on-year driven by AI. Semiconductor revenue represented 68% of total revenue in the quarter, and AI semiconductor revenue represented 49% of total revenue. Gross margin for our Semiconductor Solutions segment was approximately 70%. Operating expenses of $1.2 billion reflected increased investment in R&D for leading-edge AI semiconductors and represented 8% of revenue. Semiconductor operating margin of 62% was up 460 basis points year-on-year, reflecting our strong operating leverage. Now moving on to Infrastructure Software. Revenue for Infrastructure Software of $7.2 billion was up 9% year-on-year and represented 32% of revenue. Gross margin for Infrastructure Software was 93% in the quarter, and operating expenses were $1 billion in the quarter. Q2 software operating margin was up 310 basis points year-on-year to approximately 79%.

Moving on to cash flow. Free cash flow in the quarter was a record $10.3 billion and represented 46% of revenue. We spent $231 million on capital expenditures. We ended the second quarter with $19.6 billion of cash compared to $14.2 billion in the prior quarter. We ended the second quarter with inventory of $4.33 billion as we continued to secure supply to support strong AI demand. Our days of inventory on hand were 86 days in Q2 compared to 68 days in Q1 in anticipation of accelerating AI semiconductor growth in the second half of the year. Turning to capital allocation. In Q2, we paid stockholders $3.1 billion of cash dividends based on a quarterly common stock cash dividend of $0.65 per share. Now moving to guidance. Our guidance for Q3 is for consolidated revenue of $29.4 billion, up 84% year-over-year.

We forecast semiconductor revenue of approximately $20.5 billion, up 124% year-on-year. Within this, we expect Q3 AI semiconductor revenue of $16 billion, up over 200% year-on-year. We expect Q3 infrastructure software revenue of approximately $8.9 billion, up 31% year-on-year. Moving on to margins.

As the proportion of AI revenue significantly grows in Q3, we expect Q3 consolidated gross margin to be down to approximately 74%. This decline in gross margin does not represent a structural change in semiconductor margin. Rather, it reflects product mix between semiconductors and infrastructure software. Regardless of the impact to gross margin, we expect Q3 operating margin to be 67%, which is flat quarter-over-quarter, demonstrating our strong operating leverage. We highly recommend that investors model semiconductor and infrastructure software margins separately to properly reflect the impact of changes in total revenue mix going forward. We expect the non-GAAP tax rate for Q3 in fiscal year 2026 to be approximately 16% due to the impact of the global minimum tax and the geographic mix of income compared to that of fiscal year 2025.

In Q3, we expect the non-GAAP diluted share count to be approximately 4.94 billion shares, excluding the impact of potential share repurchases. That concludes my prepared remarks. Operator, please open up the call for questions.