# How Broadcom makes money

CXProWealth Business Lens · Broadcom (AVGO) · Q3 FY2026

Read from the 10-Q for the period 2026-05-04 to 2026-08-02, filed 2026-09-10 with the SEC (accession 0001730168-26-000080): https://www.sec.gov/Archives/edgar/data/1730168/000173016826000080/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $29.6B (+98.4% on the year)
- Operating income: $16.0B (operating margin 53.9%)
- Net income: $13.1B (net margin 44.2%)
- Gross margin: 69.1%
- Free cash flow: $13.7B (46.2% of revenue)
- Cash conversion (operating cash flow / net income): 1.08x
- Capital expenditure: 1.8% of revenue

## Where the money goes (Q3 FY2026)

- Products → Total net revenue: $24.3B
- Subscriptions and services → Total net revenue: $5.3B
- Total net revenue → Total cost of revenue: $9.1B
- Total cost of revenue → Cost of products sold: $7.0B
- Total cost of revenue → Cost of subscriptions and services: $641.0M
- Total cost of revenue → Amortization of acquisition-related intangible assets: $1.5B
- Total cost of revenue → Restructuring charges: $12.0M
- Total net revenue → Gross margin: $20.5B
- Gross margin → Total operating expenses: $4.5B
- Total operating expenses → Research and development: $2.9B
- Total operating expenses → Selling, general and administrative: $996.0M
- Total operating expenses → Amortization of acquisition-related intangible assets: $507.0M
- Total operating expenses → Restructuring and other charges: $103.0M
- Gross margin → Operating income: $16.0B
- Operating income → Interest expense: $778.0M
- Operating income → Income before income taxes: $15.2B
- Other income, net → Income before income taxes: $98.0M
- Income before income taxes → Income Tax Expense (Benefit): $2.2B
- Income before income taxes → Net income: $13.1B

## Where the revenue comes from

### Products and services (Condensed Consolidated Statements of Operations - Unaudited)

| Member | Value | Share |
|---|---:|---:|
| Products | $24.3B | 82.0% |
| Subscriptions and services | $5.3B | 18.0% |

The members sum to total revenue.

### Segments (Segment Information (Details))

| Member | Value | Share |
|---|---:|---:|
| Semiconductor Solutions | $20.8B | 70.4% |
| Infrastructure Software | $8.8B | 29.6% |

The members sum to total revenue.

### Regions (Revenue from Contracts with Customers 1 (Details))

| Member | Value | Share |
|---|---:|---:|
| Asia Pacific | $20.9B | 70.8% |
| Americas | $5.5B | 18.6% |
| Europe, the Middle East and Africa | $3.1B | 10.6% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Total net revenue | $29.6B | 100% |
|   Products | $24.3B | 82.0% |
|   Subscriptions and services | $5.3B | 18.0% |
| Cost of products sold | $7.0B | 23.6% |
| Cost of subscriptions and services | $641.0M | 2.2% |
| Amortization of acquisition-related intangible assets | $1.5B | 5.1% |
| Restructuring charges | $12.0M | 0.0% |
| **Total cost of revenue** | $9.1B | 30.9% |
| **Gross margin** | $20.5B | 69.1% |
| Research and development | $2.9B | 9.8% |
| Selling, general and administrative | $996.0M | 3.4% |
| Amortization of acquisition-related intangible assets | $507.0M | 1.7% |
| Restructuring and other charges | $103.0M | 0.3% |
| **Total operating expenses** | $4.5B | 15.2% |
| **Operating income** | $16.0B | 53.9% |
| Interest expense | ($778.0M) | 2.6% |
| Other income, net | $98.0M | 0.3% |
| **Income before income taxes** | $15.3B | 51.6% |
| Income Tax Expense (Benefit) | $2.2B | 7.4% |
| **Net income** | $13.1B | 44.2% |
| Basic | $3 | 0.0% |
| Diluted | $3 | 0.0% |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2016 | $13.2B | -$409.0M | -$1.7B | $3.4B | $723.0M | $2.7B |
| FY2017 | $17.6B | $2.4B | $1.8B | $6.6B | $1.1B | $5.5B |
| FY2018 | $20.8B | $5.1B | $12.6B | $8.9B | $635.0M | $8.2B |
| FY2019 | $22.6B | $3.4B | $2.7B | $9.7B | $432.0M | $9.3B |
| FY2020 | $23.9B | $4.0B | $3.0B | $12.1B | $463.0M | $11.6B |
| FY2021 | $27.5B | $8.5B | $6.7B | $13.8B | $443.0M | $13.3B |
| FY2022 | $33.2B | $14.2B | $11.5B | $16.7B | $424.0M | $16.3B |
| FY2023 | $35.8B | $16.2B | $14.1B | $18.1B | $452.0M | $17.6B |
| FY2024 | $51.6B | $13.5B | $5.9B | $20.0B | $548.0M | $19.4B |
| FY2025 | $63.9B | $25.5B | $23.1B | $27.5B | $623.0M | $26.9B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +23.9% (year before +44.0%): slowing
- Operating income: +89.3% (year before -16.9%): accelerating
- Net income: +292.3% (year before -58.1%): accelerating
- Free cash flow: +38.6% (year before +10.1%): accelerating

## Operating figures stated in the filing

- Revenue share of largest direct customer (a distributor): 50.0% (as of 2026-08-02). "Direct sales to one semiconductor solutions customer, which is a distributor, accounted for 50% and 46% of our net revenue for the fiscal quarter and three fiscal quarters ended August 2, 2026, respectively, and 32% and 30% of our net revenue for the fiscal quarter and three fiscal quarters ended August 3, 2025, respectively." (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Revenue share of largest direct customer (a distributor): 32.0% (as of 2025-08-03). "Direct sales to one semiconductor solutions customer, which is a distributor, accounted for 50% and 46% of our net revenue for the fiscal quarter and three fiscal quarters ended August 2, 2026, respectively, and 32% and 30% of our net revenue for the fiscal quarter and three fiscal quarters ended August 3, 2025, respectively." (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Revenue share of top five end customers: 55.0% (as of 2026-08-02). "We believe aggregate sales to our top five end customers, through all channels, accounted for approximately 55% and 50% of our net revenue for the fiscal quarter and three fiscal quarters ended August 2, 2026, respectively, and approximately 40% of our net revenue for each of the fiscal quarter and three fiscal quarters ended August 3, 2025." (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Revenue share of top five end customers: 40.0% (as of 2025-08-03). "We believe aggregate sales to our top five end customers, through all channels, accounted for approximately 55% and 50% of our net revenue for the fiscal quarter and three fiscal quarters ended August 2, 2026, respectively, and approximately 40% of our net revenue for each of the fiscal quarter and three fiscal quarters ended August 3, 2025." (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Remaining performance obligations (committed backlog): $179.2B (as of 2026-08-02). "Certain multi-year customer contracts in our semiconductor solutions segment and infrastructure software segment, including contracts where customers do not have termination rights, contain firmly committed amounts and the remaining performance obligations under these contracts as of August 2, 2026 were approximately $ 179.2 billion." (Item 1. Condensed Consolidated Financial Statements — Unaudited)
- Share of contract liabilities on contracts terminable for convenience: 58.0% (as of 2026-08-02). "As of August 2, 2026 , approximately 58 % of contract liabilities related to contracts subject to termination for convenience provisions ." (Item 1. Condensed Consolidated Financial Statements — Unaudited)

## Key insights

### Operating costs fell while revenue rose 85.5%

Operating expenses dropped 6.54% to $4.50B, so operating income grew by more than gross margin itself did and reached 53.9% of revenue.

Revenue was $29.6B against $15.95B a year earlier, and gross margin $20.46B against $10.70B. Operating expenses went the other way, to $4.50B from $4.82B, which left them at 22.0% of gross margin against 45.0% a year earlier. Research and development fell 5.08% to $2.90B, or 9.78% of revenue against 19.1%. The filing attributes the lower research cost to "lower compensation, including stock-based compensation, resulting from a decrease in headcount". _(from the filing)_
The margin rose in each quarter of the fiscal year. Operating income was $8.56B on $19.31B of revenue in the first quarter, $10.79B on $22.19B in the second and $15.96B on $29.59B in this one: 44.3%, 48.6% and 53.9% of revenue in turn. In the same quarter a year earlier, operating margin was 36.9%. _(from the filing)_
Our reading: the result rests on a cost base that has not grown with the business. Part of the fall is stock-based compensation, which the filing says declined on fully vested awards and a smaller headcount, so some of the saving may not recur. The margin structure holds only while costs stay far behind revenue. _(analysis)_

### Software brings 45.9% of operating income from 29.6% of revenue

Infrastructure software kept 83.7% of its revenue as segment operating income against 61.3% in semiconductors, so the smaller segment carries an outsized share of profit.

Infrastructure software earned $7.33B of segment operating income on $8.75B of revenue, an 83.7% margin. Semiconductor solutions earned $12.77B on $20.84B, a 61.3% margin. The filing notes that the gross margin of semiconductor solutions "has typically been lower than our infrastructure software solutions". _(from the filing)_
The two segment shares of operating income, 80.0% and 45.9%, add up to more than the whole. Segment results leave out stock-based compensation, amortization of acquisition-related intangible assets and restructuring charges, which the company reports as unallocated expenses and subtracts only from the company total. _(from the filing)_
The mix explains why gross margin moved far less than operating margin. Gross margin rose 2.03 points to 69.13% of revenue while operating margin rose 17.01 points. The filing credits revenue growth, "partially offset by a higher mix of semiconductor solutions net revenue, which has a lower gross margin than infrastructure software." _(from the filing)_
Our reading: chips supply the growth and software supplies the margin density. As semiconductors take a larger share of revenue, the average gross margin per dollar leans toward the lower-margin segment, even while total profit rises. _(analysis)_

### One distributor carries about 71% of chip revenue

Direct sales to one distributor were 50% of total revenue against 32% a year earlier, equal to about 71% of semiconductor revenue this quarter.

The filing reports that direct sales to one semiconductor solutions customer, a distributor, were 50% of net revenue this quarter against 32% a year earlier. Semiconductor solutions was 70.4% of revenue, so that one channel equals about 71% of the segment's revenue. The company also believes its top five end customers, through all channels, took about 55% of revenue against about 40% a year earlier. _(from the filing)_
A distributor is a channel, not the final buyer. The company recognizes most product revenue when title transfers in Penang, Malaysia, and reports regions by shipment location, which is why Asia Pacific shows $20.9B, or 70.8% of revenue. The filing says it expects "to continue to experience significant customer concentration in future periods". _(from the filing)_
Our reading: the growth and the concentration are the same fact seen twice. The products that drove the quarter are custom accelerators built for a small set of very large buyers, so each buyer's deployment plans now move a larger part of the total. The filing notes that AI orders in particular can make quarterly revenue fluctuate significantly. _(analysis)_

### Competitive edge

- **Committed backlog of $179.2B outruns a year's revenue** Firmly committed remaining performance obligations of about $179.2B, including a long-term custom accelerator contract, exceed the $63.9B of revenue in the whole last fiscal year.
- **Capital spending is just 1.8% of revenue** With manufacturing mostly outsourced, free cash flow was $13.7B, 46.2% of revenue, and operating cash flow of $14.2B exceeded net income of $13.09B.
- **Most new software contracts cannot be cancelled** The company no longer offers termination for convenience on most new software contracts, which lets it book licenses upfront and firms up what customers owe.

### What to watch

- **A customer's lease payments are now partly Broadcom's risk** Under its new AI XPV platform, Broadcom backstops a customer's rack lease payments to a financial partner, so a default could cost cash, not only orders.
- **The company expects AI racks to compress gross margin** Cost of products sold rose to 28.8% of product revenue from 27.7%, and the filing expects AI accelerators and racks to lower future gross margin.
- **One foundry makes most of Broadcom's wafers** Manufacturing is mostly outsourced, with TSMC producing the great majority of wafers and a few suppliers providing most materials, including memory chips.

## Operating income by segment

- Semiconductor Solutions: $12.8B (80.0% of operating income)
- Infrastructure Software: $7.3B (45.9% of operating income)

## Investor view

**Custom AI chips took Broadcom's operating margin to 53.9% while its operating expenses fell**

### How it makes money

Broadcom earns in two segments. Semiconductor solutions brought in $20.8B this quarter, 70.4% of revenue, led by what the filing calls "custom AI accelerators and AI networking products": chips designed for its customers, including what it calls "the leading frontier AI labs", and made by contract manufacturers. Infrastructure software, built largely on the VMware portfolio, brought in $8.75B, 29.6% of revenue. _(from the filing)_
Software is the richer segment per dollar. Infrastructure software earned $7.33B of segment operating income on $8.75B of revenue, an 83.7% margin, against $12.77B on $20.8B, or 61.3%, in semiconductors. Software produced 45.9% of operating income from 29.6% of revenue. Segment figures leave out stock-based compensation and the amortization of acquired intangibles, which the company reports as unallocated expenses. _(from the filing)_
The income statement splits revenue differently from the segments. Products, $24.3B or 82.05% of revenue, now includes upfront license revenue from software contracts the customer cannot terminate, recognized when control transfers. The company moved that revenue out of subscriptions and services and restated the prior year to match. Subscriptions and services, the remaining support, subscription and service revenue, was $5.31B. _(from the filing)_
Most chips reach customers through distributors. Direct sales to one semiconductor distributor were 50% of revenue this quarter. The company recognizes most product revenue when title passes in Penang, Malaysia, and reports regions by shipment location, which is why Asia Pacific shows $20.9B, 70.8% of revenue. The region says where products ship, not where the end customer is based. _(from the filing)_
Very little of the revenue has to be reinvested in plant. Operating cash flow was $14.2B against net income of $13.09B, capital expenditure was 1.8% of revenue, and free cash flow came to $13.7B, a 46.2% margin. The company operates a primarily outsourced manufacturing model, so most of the factories sit on its suppliers' balance sheets. _(from the filing)_

### What shifted

The growth came from products. Product revenue rose 117.3% to $24.3B from $11.2B, while subscriptions and services grew 11.15%, so products rose to 82.05% of revenue, up 12.01 points. The filing attributes the semiconductor gain to "strong demand for our networking solutions, primarily custom AI accelerators and AI networking products" and the software gain to its VMware Cloud Foundation product, including license revenue on contracts customers cannot terminate. _(from the filing)_
Costs did not follow revenue. Operating expenses fell 6.54% to $4.50B from $4.82B. Research and development fell 5.08% to $2.90B, which the filing puts down to "lower compensation, including stock-based compensation, resulting from a decrease in headcount". Operating expenses took 22.0% of gross margin, against 45.0% a year earlier. _(from the filing)_
The margin climbed through the fiscal year. Operating income was $8.56B on $19.3B of revenue in the first quarter, $10.79B on $22.2B in the second, and $15.96B on $29.6B in this one: 44.3%, 48.6% and 53.9% of revenue in turn. _(from the filing)_
Gross margin moved far less than operating margin. The filing credits revenue growth, "partially offset by a higher mix of semiconductor solutions net revenue, which has a lower gross margin than infrastructure software." Cost of products sold rose 125.4%, faster than product revenue, to 28.8% of product revenue from 27.7% a year earlier. _(from the filing)_
Revenue concentrated further. The largest distributor carried 50% of revenue against 32% a year earlier, and the company believes its top five end customers took about 55%, against about 40%. Below operating income, interest expense fell to $778M from $807M on lower debt balances, and net income reached $13.09B against $4.14B, or $2.68 a diluted share against $0.85. _(from the filing)_

### Risks in the filing

Customer concentration and customer capital. The company depends on a small number of end customers and says some may cancel, reduce or delay orders because of a "lack of access to sufficient capital" or "delayed or cancelled AI infrastructure buildouts". It adds that top customers have pressed to lease its accelerators and full racks instead of buying them, which can bring backstops, guarantees and counterparty credit risk. _(from the filing)_
The cycle. The filing calls semiconductors highly cyclical and says the AI upturn "may not be sustainable due to a market correction, the perceived existence of an AI spending "bubble" or other factors." If AI customers cut their plans or cannot earn enough to support their spending, the company says that could have a material adverse effect on its results and cash flow. _(from the filing)_
Supply. Manufacturing is mostly outsourced, and most wafers come from TSMC, which also makes chips for competitors, could prioritize other customers and has raised prices. The bulk of manufacturing materials, including memory chips, comes from a few suppliers, some of them single-source. Capacity or memory shortages could leave customer demand unmet. _(from the filing)_
Margins, trade and regulation. The company says the sale or leasing of AI racks and accelerators "will likely increase our operating margin but compress or lower future gross margin". It also names export controls, tariffs, China-Taiwan relations, and regulatory investigations or inquiries in Korea, Japan and the European Union into certain of its contracting and business practices. _(from the filing)_
Two of these risks already show in the numbers. Concentration rose sharply this quarter, both through the largest distributor and across the top end customers, and the financing platform has turned customers' access to capital from a background risk into a contractual one through the backstop. The supply and gross margin risks are, so far, warnings rather than results. _(analysis)_

## Founder view: mechanisms

### Custom chips designed with a few very large buyers

Instead of selling one standard chip to many buyers, Broadcom designs accelerators and networking silicon to the specification of a few customers that each buy at enormous volume. Each design win is costly and uncertain, but once won it ties the customer to Broadcom's design for a product generation and supports multi-year commitments. The filing describes winning business as lengthy and expensive, and notes that losing one generation can cost the next. _(analysis)_

### A cost base that does not grow with revenue

Broadcom runs a deliberately lean operating structure: research focused on a limited set of product lines, small sales and administrative costs, and a headcount that fell while revenue surged. When revenue climbs on that fixed base, almost all of the extra gross profit reaches operating income. The filing attributes the lower research and administrative costs to a smaller headcount. _(analysis)_

### Software sold on terms the customer cannot cancel

Following the VMware acquisition, Broadcom moved its infrastructure software toward contracts without termination for convenience. Those contracts let it book the license portion upfront and give it firmer visibility into what customers owe. The filing states that it no longer has such termination provisions for the majority of new software contracts. The trade-off is lumpier reported revenue and more weight on each renewal. _(analysis)_

### Other people's capital builds the capacity

Broadcom owns few factories and, through its AI XPV platform, does not own the racks its customers deploy either. Foundries fund the fabs, financial partners buy the racks and lease them to the AI labs, and Broadcom supplies the design. In the filing's words, the platform "bridges the gap between the current cash flows of the leading frontier AI labs and significant upfront investments required for their businesses." The price is a backstop on the customer's lease payments. _(analysis)_

## Member research

Signed-in members read, on the page: what Broadcom's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Broadcom 10-Q for the period to 2026-08-02: https://www.sec.gov/Archives/edgar/data/1730168/000173016826000080/ (2026-09-10)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02