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Is Broadcom's AI Story Too Good to Be True?
Broadcom's AI revenue is surging, and its VMware strategy is paying off. But can the company sustain this phenomenal growth trajectory into fiscal 2026?
By the numbers:
- Q2 FY2025 Revenue: $15.0 billion, +20% YoY¹
- Q2 FY2025 AI Semiconductor Revenue: $4.4 billion, +46% YoY²
- Q2 FY2025 Infrastructure Software Revenue: $6.6 billion, +25% YoY³
- Q3 FY2025 AI Semiconductor Revenue Guidance: $5.1 billion, +60% YoY⁴
Key Highlights
- Broadcom's AI semiconductor business is accelerating, with management now expecting the robust growth of fiscal 2025
to continue into fiscal 2026.⁵ - The integration of VMware is proving highly successful, rapidly converting customers to the VCF subscription model and
boosting software revenue and margins.⁶ - Strong demand for Ethernet-based AI networking solutions, including the new Tomahawk 6 switch, is a key driver of
the current AI revenue strength. - While AI and software are booming, the non-AI semiconductor business remains sluggish, showing the company is operating
on two different timelines.
The News
Broadcom reported record second-quarter revenue of $15.0 billion, a 20% year-over-year increase, driven by strong performance in its AI semiconductor and infrastructure software segments.⁷ The company provided a bullish forecast for its third quarter, projecting $15.8 billion in revenue, with AI revenue expected to jump 60% year-over-year. The standout news was management's increased confidence that the high growth rate in AI revenue will be sustained into fiscal 2026. Find out more on Broadcom's investor relations page.
Analyst Take
In my analysis of Broadcom’s latest earnings, I see a company firing on two critical cylinders: AI and infrastructure software. The results themselves are strong, but the real story is the increased visibility and confidence management has in its forward-looking pipeline, particularly in AI. CEO Hock Tan's assertion that the AI revenue growth rate seen in fiscal 2025 will sustain into 2026 is a significant statement, suggesting the current boom is more than a transitory bubble. This isn't just about training models anymore; the narrative is shifting to inference as hyperscalers look to monetize their massive AI investments.
The engine behind this confidence appears to be a combination of custom silicon (XPUs) and a surprisingly robust networking business. For a while, the market has focused on Broadcom's custom accelerator deals with major cloud players. However, the unsung hero this quarter was AI networking, which grew over 70% year-over-year and constituted 40% of AI revenue. This is a testament to Ethernet's staying power as the fabric of choice for AI data centers. As Hock Tan noted, Ethernet provides an open, standard-based approach for both scale-out and the increasingly important scale-up deployments within AI clusters.⁸
This networking strength seems to have caught even Broadcom a bit by surprise. Last quarter, management expected the networking mix to decline, but the density of switches required in scale-up architectures is proving to be much higher than anticipated. This trend works directly in Broadcom's favor.
What was Announced
Beyond the headline numbers, a key product announcement was the Tomahawk 6 switch. This next-generation switch is designed to deliver a massive 102.4 terabits per second of capacity.9 Its primary aim is to enable the deployment of enormous AI clusters—exceeding 100,000 accelerators—in just two switching tiers instead of three. Flattening the network architecture in this way is critical for reducing latency and power consumption while increasing bandwidth, all of which are essential for training the next generation of frontier AI models. While not shipping in volume yet, management pointed to "tremendous demand" for this new platform.
On the software front, the VMware acquisition continues to look like a strategic masterstroke. The transition of enterprise customers from perpetual licenses to the full-stack VMware Cloud Foundation (VCF) subscription is happening at a brisk pace. With over 87% of the top 10,000 customers now having adopted VCF, Broadcom is building a formidable annual recurring revenue (ARR) stream.10 This provides a stable, high-margin foundation that perfectly complements the more dynamic, hit-driven semiconductor business. Management estimates there's still a year to a year and a half left in this transition for major accounts, indicating a clear runway for software growth.
However, not all parts of the business are thriving. The non-AI semiconductor segment, which includes broadband, enterprise networking, and wireless, remains in the doldrums, down 5% year-over-year.11 While there are some sequential bright spots, the overall picture is one of a market still struggling to find its footing. This creates a tale of two Broadcoms: the high-growth AI and software juggernaut and the legacy, cyclical semiconductor business awaiting a broader market recovery.
The financial discipline remains a core tenet of the Broadcom story. The company generated an impressive $6.4 billion in free cash flow, even with the weight of VMware-related debt. The capital allocation strategy is clear and consistent: dividends, debt repayment, and opportunistic buybacks. This operational rigor is what allows Broadcom to make massive acquisitions like VMware and integrate them effectively to drive shareholder value.
Software Pivot
Broadcom’s Q2 FY2025 earnings call highlighted the adoption and promising future for VMware and its mainframe software, with the VMware Cloud Foundation (VCF) emerging as a cornerstone of enterprise modernization. Adoption of VCF among Broadcom’s 10,000 largest customers soared from 70% in the prior quarter to an impressive 87% in Q2 FY2025, reflecting strong confidence in the platform’s ability to meet enterprise needs. This rapid uptake has driven the successful transition from perpetual vSphere licenses to the VCF subscription model, fueling a 25% year-over-year increase in infrastructure software revenue to $6.6 billion. The momentum, sustained over the 18 months since Broadcom’s acquisition of VMware, has delivered double-digit annual recurring revenue (ARR) growth, underscoring the stability and scalability of this revenue stream.
Enterprises are increasingly leveraging VCF to build modernized private clouds, enabling workload repatriation from public clouds and supporting advanced container-based and AI-driven applications critical for digital transformation. Financially, the infrastructure software segment, dominated by VMware, achieved a remarkable 93% gross margin and a 76% operating margin, up from 88% and 60% respectively the previous year, reflecting disciplined integration and strong profitability. With most VMware contracts spanning three years, CEO Hock Tan noted that the subscription transition is more than halfway complete, with approximately one to one-and-a-half years remaining to fully convert existing customers. Looking ahead, Broadcom projects Q3 FY2025 infrastructure software revenue at $6.7 billion, a 16% year-over-year increase, signaling sustained demand and growth potential. This trajectory positions VMware as a pivotal player in enterprise cloud infrastructure, with VCF enabling organizations to optimize costs, enhance flexibility, and prepare for AI-driven workloads, ensuring long-term relevance in a rapidly evolving technological landscape.
The mainframe software division under the stewardship of industry veteran Greg Lotko is also going from strength to strength. I spent time with Greg and his leadership team earlier this week and the continued innovation and focus on delivering value for their clients was palpable. The ‘Beyond Code’ focus was a key takeaway with the team having trained over 350 mainframe professionals on Broadcom’s dime to infuse the workforces of their clients. When you couple this focus on value with core innovation, in the AIOps and DevOps arenas specifically, it is not surprising to see the mainframe component of the wider Broadcom software story flourishing.
Looking Ahead
Based on what I am observing, the narrative for Broadcom is solidifying around two powerful, long-term trends: the build-out of AI infrastructure and the enterprise shift to hybrid cloud. The key trend that I am going to be tracking is the durability of the AI growth. Management’s forecast for sustained momentum into 2026 is a bold call, and its realization hinges on the continued, aggressive deployment by a concentrated set of hyperscale customers.
Based on my analysis of the market, my perspective is that Broadcom has positioned itself as a "picks and shovels" provider for the AI gold rush, benefiting from both custom silicon and the essential networking that ties it all together. Going forward, I am going to be looking for how the company performs on the execution of its XPU roadmaps with its "three customers and four prospects" and how quickly the new Tomahawk 6 switch translates from strong interest into meaningful revenue. The announcements significantly de-risks the medium-term growth story. HyperFRAME will be closely monitoring how the balance between networking and XPU revenue evolves in future quarters, as this will be a key indicator of the health and breadth of the AI segment.
As I mentioned in my segment on the Schwab Network previewing the earnings print, the non-correlated nature of Broadcom’s business cannot be overstated as people look at the prospects for the business. With businesses as diverse as Semiconductors, AI, Operations software, mainframe, Brocade and Symantec the business is poised to both benefit from the wider AI trend but also benefit from super cycles in the mainframe space with the new z17 that is largely non-correlated with AI.
Ron Westfall | Analyst In Residence
Ron Westfall is a prominent analyst figure in technology and business transformation. Recognized as a Top 20 Analyst by AR Insights and a Tech Target contributor, his insights are featured in major media such as CNBC, Schwab Network, and NMG Media.
His expertise covers transformative fields such as Hybrid Cloud, AI Networking, Security Infrastructure, Edge Cloud Computing, Wireline/Wireless Connectivity, and 5G-IoT. Ron bridges the gap between C-suite strategic goals and the practical needs of end users and partners, driving technology ROI for leading organizations.