By Juby Babu<\/p>\n
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, \u200band shares fell 5% in extended trading.<\/p>\n
Broadcom has jumped into the AI chip business, which has \u200cinvestors nervous about the profitability and costs of enormous investments. The company has a backlog of $73 billion that it anticipates shipping \u200cover the next 18 months, CEO Hock Tan said on a post-earnings call, but his lieutenant said profit margins could drop.<\/p>\n
“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 \u2060throughout the year by the revenue mix \u200cof infrastructure, software and semiconductors.<\/p>\n
Broadcom’s AI customer concentration, coupled with future lower margins for AI system sales, drove the drop in shares, according to Kinngai Chan, senior \u200dresearch analyst at Summit Insights.<\/p>\n
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 \u200bin the future quarters, namely the second half of fiscal 2026,” he said.<\/p>\n
The decline in gross \u200cmargins 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.<\/p>\n