Broadcom reported strong AI-related order growth but noted lower gross margins for ASIC products compared to non-AI items, causing market uncertainty about 2026 revenue. Industry experts explained that lower ASIC margins are common due to customer-driven design changes and production timing.
Growing backlog, shrinking margins
Broadcom stressed it holds at least US$73 billion in AI product backlog orders, expected to be gradually fulfilled over the next six quarters. Yet this figure fell slightly short of Wall Street estimates. CEO Hock Tan also noted that while AI-related revenue is growing rapidly, its gross margin remains lower than that of non-AI products.
Revenue from "non-AI business" is projected to remain flat in the next quarter, and Tan declined to provide forecasts for overall AI revenue, injecting uncertainty into the 2026 market outlook.
Market reacts to margin pressures
Broadcom's statements have significantly impacted capital markets. On one hand, strong demand for ASICs appears to negatively affect gross margins; on the other, the lack of confident AI revenue guidance for 2026 has fueled investor doubts.
Industry insiders interpret the market reaction as somewhat unreasonable since lower ASIC gross margins are well-known within the sector. Both Broadcom and MediaTek have previously acknowledged this trend during earnings calls, suggesting the market should recognize this reality.
Tan's reluctance to offer AI revenue projections also reflects inherent challenges in predicting ASIC production timelines. Although ASIC orders are increasing, customers may adjust designs or delay mass production—factors beyond IC designers' control—making precise forecasting difficult.
CSPs gain design control
The real concern might not be ASICs' inherently lower gross margins compared to proprietary platform products but rather the evolving role of large cloud service providers (CSPs). These CSPs have strengthened their chip development capabilities to cover most front-end design processes, requiring ASIC vendors mainly for critical IP components and back-end packaging and manufacturing services.
Projects lacking core architecture design naturally yield lower margins. As these major customers enhance their production capacity, the share of low-margin products rises, exerting pressure on overall profitability.
However, as MediaTek has pointed out, although ASIC gross margins are weaker, operating margins partially compensate, keeping the impact on total product profitability manageable.
Growth over margins
High-performance computing chip supply chain players agree that even though ASIC businesses—especially those with large volumes—have lower gross margins, they represent the only avenue for IC design firms to achieve revenue growth amid the current cloud AI boom. More opportunities are likely to emerge, making it unlikely that companies will abandon this segment solely due to slimmer profit margins.
For traditional IC design houses like Broadcom, Marvell, and MediaTek, entering the ASIC market comes with an acceptance of some margin dilution. Balancing "profit preservation" against "revenue growth and new business expansion," these companies decisively choose the latter. Moreover, more firms are joining to capture second-tier customer demand.
Clearly, lower gross margins are an acceptable trade-off for IC design firms seeking to broaden their business and technology scope in the AI era.
Article translated by Charlene Chen and edited by Jerry Chen
