Broadcom's AI Semiconductor Growth Drives Operating Margin Despite Lower Gross Margins
Broadcom (AVGO) is experiencing a shift in its business mix toward custom AI silicon, which has lower gross margins compared to other products. In fiscal Q2 2026, the company’s gross margin declined by 32 basis points year-over-year to 77.1%, with management projecting further declines into fiscal Q3 2026 as low as 74%. However, operating margin increased significantly in Q2 and is expected to remain stable at around 67% for the next quarter. Despite lower gross margins from AI semiconductors—revenue of which grew by 143% year-over-year—the scale of this high-growth segment has helped Broadcom maintain strong profitability. Operating expenses remained flat, with R&D spending supporting innovation in areas like TPUs and Meta’s MTIA parts. The company is set to report fiscal Q3 results in early September, where the key focus will be whether operating margins hold steady as guided by management.
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Topics: AI silicon gross margin operating margin revenue growth semiconductors