A Broadcom sign is pictured as the company prepares to launch new optical chip tech to fend off Nvidia in San Jose, California, U.S., September 5, 2025. REUTERS/Brittany Hosea-Small
Dec 11 (Reuters) - Broadcom projected first-quarter revenue above Wall Street estimates on Thursday, but said that margins would fall due to a higher mix of AI revenue, and shares fell 5% in extended trading.
Broadcom has jumped into the AI chip business, which has investors nervous about the profitability and costs of enormous investments. The company has a backlog of $73 billion that it anticipates shipping over the next 18 months, CEO Hock Tan said on a post-earnings call, but his lieutenant said profit margins could drop.
"We expect first-quarter consolidated gross margin to be down approximately 100 basis points sequentially, primarily reflecting a higher mix of AI revenue," CFO Kirsten Spears said on the call. The margins will be affected throughout the year by the revenue mix of infrastructure, software and semiconductors.
Broadcom's AI customer concentration, coupled with future lower margins for AI system sales, drove the drop in shares, according to Kinngai Chan, senior research analyst at Summit Insights.
The backlog "is still coming from only five customers and includes systems, which have a higher price tag. System sales will carry lower gross margin and ... are expected to become a larger part of total sales in the future quarters, namely the second half of fiscal 2026," he said.
The decline in gross margins may raise a concern that costs related to contract chip manufacturer TSMC may squeeze the value Broadcom can realize from its custom AI processors business, according to Gil Luria, analyst at D.A. Davidson.
Broadcom works with hyperscale cloud providers such as Google and Meta Platforms to design and manufacture the processors, known as ASICs, offering a key alternative to Nvidia's graphics processing units.
Big U.S. cloud providers are expected to spend more than $400 billion on AI this year to build out data centers needed to support services such as ChatGPT, Copilot and Gemini.
But the growing spending, limited evidence of real-world AI productivity gains, soaring valuations and a web of circular investments have stoked fears of an AI bubble.
Tan said in a statement that Broadcom's AI semiconductor revenue — encompassing both the custom chips and networking chips used in AI data centers — is expected to double to $8.2 billion in the fiscal first quarter.
Broadcom forecast quarterly revenue of about $19.1 billion, compared with analysts' average estimate of $18.27 billion, according to data compiled by LSEG.
The company reported revenue of $18.02 billion for the fourth quarter ended November 2, compared with estimates of $17.49 billion.
(Reporting by Juby Babu in Mexico City; Editing by Maju Samuel and Alan Barona)
