Earnings Call: Q1 2019

Mar 14, 2019

Good day, ladies and gentlemen. Welcome to Broadcom Inc. First Quarter Fiscal Year 2019 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Beatrice Rossato, Director of Investor Relations of Broadcom Inc. Please go ahead, ma'am. Thank you, operator, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO and Tom Krause, Chief Financial Officer of Broadcom. After the market closed today, Broadcom distributed a press release and financial tables describing our financial performance for the Q1 of fiscal year 2019. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom's website atbroadcom.com. This conference call is being webcast live and a recording will be available via telephone playback for 1 week. It will also be archived in the Investors section of our website atbroadcom.com. During the prepared comments section of call, Hock and Tom will be providing details of our Q1 fiscal year 2019 results, guidance for fiscal year 2019 and commentary regarding the business environment. We will take questions after the end of our prepared comments. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward looking statements made on this call. In addition to U. S. GAAP reporting, Broadcom reports certain financial measures on a non GAAP basis. A reconciliation between GAAP and non GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non GAAP financial results. So with that, I'll turn the call over to Hock. Thank you, Bea, and thank you, everyone, for joining us today. So we had a good start to fiscal 2019, growing 9% in our 1st fiscal quarter compared to the same period a year ago. The strength of our business model delivered another quarter of sustained revenues, strong earnings and an extremely strong free cash flow. Our semiconductor business held up relatively well. Not surprisingly, our wireless business was down sharply and our storage business underperformed somewhat. However, these challenges were mitigated more than mitigated by our networking business, which grew double digits year over year. In addition, we were very pleased to see that the broadband business has started to recover and stabilize in the quarter. In fact, putting it all together, the semiconductor segment was actually up year over year in the Q1 if you exclude the expected sharp decline in wireless. Turning to infrastructure. This business, which includes SAN switching, mainframe and enterprise software, delivered solid top line results, benefiting from a very robust enterprise spending environment. The integration of CA onto the Broadcom platform is very well underway and we are confident that we can meet, if not exceed in the long term exceed the long term revenue and profitability target that we laid out for CA to you last year. In fact, renewals in our CA business have been strong this past quarter, and we believe we are under the dollar commitments from our core customers will continue to grow. Many of our peers have commented that they are seeing a softening demand environment, especially out of China. While we are experiencing the same demand dynamics, we have factored in much of this macroeconomic backdrop when we provided fiscal 2019 guidance last quarter. As a result, after a solid start to the year, we are reaffirming our fiscal 2019 revenue guidance of $24,500,000,000 Having said that, we expect our semiconductor business to bottom in the 2nd fiscal quarter, driven almost entirely by the seasonal drop in wireless. But looking to the second half, we are confident the semiconductor business will resume very meaningful growth. This will be driven by strong product cycles in both wireless and networking, coupled with a recovery in broadband. Infrastructure software, on the other hand, is expected to sustain throughout the year. So in summary, our diversification strategy is working, and we are effectively managing the decline in wireless as well as the broader semiconductor industry headwinds. Now let me turn over to Tom to provide you with more color on Q1. Thank you, Hock. Consolidated net revenue for the Q1 was $5,800,000,000 a 9% increase from a year ago, and EPS came in at $5.55 an 8% increase from a year ago off of a $441,000,000 weighted average fully diluted share count. In addition, free cash flow was $2,030,000,000 or 35 percent of revenue. I would highlight free cash flow grew 39% year over year. The semiconductor solutions segment revenue was $4,400,000,000 and represented 76% of our total revenue this quarter. This was down 12% year on year on a comparable basis. But as Hock explained, the semiconductor segment was actually up slightly year over year in the Q1, excluding wireless. Let me now turn to our Infrastructure Software segment. Revenue was $1,400,000,000 and represented 24% of revenue. SAN switching continues to perform extremely well. And as Hock mentioned, mainframe enterprise software is off to a good start. Let me now provide additional detail on our financial performance. Operating expenses were $1,080,000,000 Operating income from continuing operations was $3,050,000,000 and represented 52.7 percent of net revenue. Adjusted EBITDA was $3,240,000,000 and represented 55.9 percent of net revenue. This figure excludes $143,000,000 of depreciation. Inventory decreased $50,000,000 from the prior quarter. Similarly, semiconductor receivables were actually down, which is typical for Q1, even though receivables increased $352,000,000 overall due to the CA acquisition. Total current liabilities, excluding debt, increased $2,500,000,000 due to CA. However, excluding CA, total current liabilities, excluding debt decreased meaningfully more than receivables, primarily due to the payment of our annual performance bonus in Q1. In addition, we spent $99,000,000 on capital expenditures. As a result, we had record Q1 free cash flow from operations at $2,030,000,000 or 35 percent of revenue. This represents 39% growth in free cash flow from operations compared to Q1 of 2018. I would note a couple of things. 1, fiscal Q1 is typically our seasonally weakest cash flow quarter due to the annual performance bonus payment we make to our employees in the quarter that we accrue for throughout the prior fiscal year. In Q1, we paid approximately 530 $1,000,000 in APB cash bonuses to our employees. And second, I would also note that we accrued $723,000,000 of restructuring integration expenses, of which that includes 363,000,000 dollars of cash payments in the quarter. In Q1, we returned $4,600,000,000 to stockholders consisting of $1,100,000,000 in the form of cash dividends and $3,500,000,000 for the repurchase and elimination of 14,200,000 AVGO shares. We ended the quarter with $5,100,000,000 of cash, dollars 37,600,000,000 of total debt, 3 96,000,000 outstanding shares and 451,000,000 fully diluted shares outstanding. Turning to our fiscal year 2019 guidance. As Hock discussed, we are reaffirming our full year revenue guidance of approximately $24,500,000,000 including approximately $19,500,000,000 from semiconductor solutions and approximately $5,000,000,000 from infrastructure software. IP Licensing is not expected to generate a material amount of revenue. On a non GAAP basis, operating margins are expected to be approximately 51%. Net interest expense and other is expected to be approximately $1,250,000,000 We do not contemplate any debt pay down in fiscal year 2019. The tax rate is forecasted to be approximately 11%. Depreciation is expected to be approximately $600,000,000 CapEx is expected to be approximately $550,000,000 and as a result, free cash flow from continuing operations is expected to be approximately $10,000,000,000 And finally, stock based compensation expense is expected to be approximately $2,000,000,000 As we outlined last quarter, we granted approximately $31,000,000 of restricted and performance stock units as part of the multiyear grant that will vest over the next 7 years. As a result, for modeling purposes, we would expect the fully diluted share count in the Q2 to be approximately 450,000,000. This excludes any stock repurchases. Similarly, for modeling purposes, we would expect stock based compensation expense to be approximately $530,000,000 in Q2. Looking forward beyond Q2, we would expect the share count excluding stock repurchases and eliminations to remain relatively unchanged and the quarterly stock based compensation in the second half of twenty nineteen to start to decrease slightly each quarter. We would expect stock based compensation to level out at approximately $1,500,000,000 in 2021. Now on to capital allocation. Our capital allocation strategy remains the same. We plan to maintain the current quarterly dividend payout of 2.65 dollars per share throughout the year, subject to quarterly Board approval, which means we plan to pay out over $4,000,000,000 in cash dividends in fiscal 2019. In addition, we remain committed to buying back and eliminating a total of $8,000,000,000 of stock in fiscal 2019. That concludes my prepared remarks. During the Q and A portion of today's call, please limit yourselves to one question each, so we can accommodate as many analysts as possible. Operator, please open up the call for questions. Thank you. Our first question comes from Harlan Sur with JPMorgan. Good afternoon and congratulations on the solid quarterly execution. Hock, on the strong double digits year over year momentum in your data center networking and compute acceleration segment, you've been shipping your new Tomahawk 3 switching platform now since the second half of last year. I think Google is using it for 200 gig. We hear Amazon is going to transition to 400. We're hearing good things from Baidu, Tencent and all of the cloud guys. Additionally, you're ramping compute acceleration ASIC into some of the big cloud guys as well. Question is, do you anticipate continued double digits year over year growth for the full year here for the networking business as the pipeline here appears fairly strong? Very good question, Harlan. And now that listening to you, you really got me going. Yes, in networking, and it's broader than just data centers, but let's start with data centers. Tomahawk 3, which is the 12.8 terabit top of the rack switch, has just barely started production shipments. In fact, we do expect to we are fully expecting the ramp of Tomahawk 3 as part of the broader data center scale out with 400 gig pipes in the connect, so to speak, to really start just about right now. In fact, Q2 fiscal Q2 and progressing up through the rest of the end of the year as more and more on the names you mentioned in hypercloud jump in and expand and upgrade, I would say, in their data centers and simply because, as you know, expanding the capacity of data centers and pipes is the simplest way to decongest, to minimize or mitigate congestion control in these huge data centers in this large cloud tech. So that's a broad refreshing and upgrading of data centers among these cloud guys. One area is mentioned, thermal tree shipping, which is just starting this quarter in significant volumes. What's also not so perhaps obvious, but is very real for us is the fact that in order to run 400 gigabit per second throughput pipes, you need interconnects, fiber optic interconnects that are built and dedicated in that area. That's very high-tech products, which we are very deeply engaged in. And that brings the content by a multiple factor in this data center ramp. And then as you extend the top of the rack switch, I can't resist saying, you have to when you need to connect data center to data center, what you call DCI interconnectivity. And the approach that is being taken, which we are also very engaged with multiple OEMs who are supporting the cloud guys, is obviously coherent, coherent fiber optic connection at 400 gig. And we believe we are very much in the lead on that area as well. So these are product cycles we are seeing that are continuing the impetus of double digit growth in networking. And it extends more than that. In routing, we are going to be launching and ramping our new generation router, Jericho 2, probably in Q3 of our fiscal year. And that's going into edge routing, call routing among the service providers, especially the telecom guys. And we're starting to see the preparation in that happening. So yes, we feel very good about networking and the ability to sustain the level of growth we have been seeing. Thank you, Hap. Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Hi, guys. I wanted to echo my congratulations. Sticking on the formerly called wired category, Hock, you mentioned that the I think you said the broadband space had stabilized and recovered. Can you talk a little bit about the product cycles that will be driving demand in that segment? And any geographic color, product cycle color would be helpful. Sure. Sure, Ross. Yes, in broadband, happy to say finally, oh, the thing recovered. And a big part of it that driving the recovery is cable modem, video delivery, DOCSIS, as they call it, 3.1. We're seeing implementations across multiple carriers, service providers of DOCSIS 3.1. So that's very good. What we're also seeing, of course, is in gateway access, which is a big part of broadband among many carriers too is the new generation of DSL, digital subscriber line, as they need to expand capacity and throughput and go to what we call the next generation G. FAS or 35B, and we're seeing a lot of that in Europe, some in North American carriers, too. But what's also equally interesting is as they go to the last mile into households, what we're also seeing is adoption of wireless connectivity or what we all call Wi Fi. And what we're seeing now is as we see these wide gateways, whether it's cable modem DOCSIS 3.1 or digital subscriber line, we are seeing, especially in the back half of the year, enterprises and more and more service providers, telecoms, start to attach the next generation Wi Fi, Wi Fi 6 onto those gateways. And in Wi Fi 6, I'm very, very pleased to note that we are very much in the lead in having developed and productized a whole suite of products that are perfectly addressed towards those enterprise and service providers. And that but most of that will be only shipping, we believe, in the second half of the year, but fiscal and both calendar. And we're looking forward to seeing that happen, but it's a very nice product cycle that will basically push the recovery of our broadband business. Thank you. Thank you. Our next question comes from Timothy Arcuri with UBS. Thank you. Hock, I'm wondering how you handicap Huawei and I believe that they're kind of a mid single digit customer right now. And we're hearing a lot of evidence that they may be double ordering ahead of some possible sanctions. So I'm kind of wondering how you think about that and how you've handicapped that for the full year guidance. I probably know as much as you do seriously in terms of what's available, publicly available and what's and the concerns and the issues overhanging broadly Chinese exporter, China and but the specific high-tech companies like Huawei from China, they are good customer and they buy products which obviously helps their products be competitive in the global export market. And I hope they continue to do so. But certainly, the overhang of that is something that we are closely monitoring and are very concerned about. But as far as specific things you're mentioning, I'm not able to basically comment on it simply because I don't know. Okay. Thanks so much. Thank you. Our next question comes from Vivek Arya with Bank of America. Thanks for taking my question. Actually a quick clarification on a question. I believe Hock, you mentioned software could sustain throughout the year. That suggests annualized closer to $6,000,000,000 rather than the $5,000,000 I think you had before. And if that is the case, shouldn't profit margins be higher than what you had? And then the question, there has been some more consolidation in semis, NVIDIA acquiring Mellanox. Was just curious how you think, if at all, there is an impact on Broadcom? And even if there isn't, how you just think about the M and A environment in semis? Thank you. Okay. You've got 2 questions here, very clever. Let me try to let's start with the second one. It's easier. I mean, as I say, we have done quite a bit of acquisitions in very strong assets in the semiconductor space. And it's obviously an it's something we continue to look at because, obviously, semiconductor is a core area for us. And but you also know we're not necessarily limiting ourselves to that. We'll look towards the broader area of technology, software and appliances as Brocade would be considered. And while we continue to be interested in the semiconductor space and there are still targets, and we'll be continue to be very thoughtful and timely in terms of the time in terms of how we approach those acquisitions. And if you have observed our behavior over the last several years, we tend to do it in a very on a measured pace simply because it's important. In fact, it's critical on any acquisition we make that we can integrate it very, very well. And that's what we're doing with CA right now, and we're right in the thick of it, as you notice in the numbers we're going through as we drive down and to generate the kind of business model we expect to get out of CA. Turning on to the next question you have, which is which leads to software. Yes, it's turning out to be a very, very nice deal for us. We actually are seeing for our core customers, and as you recall, we have differentiated customers of CA between very core large customers, which who consumes both mainframes and enterprise distributed software as opposed to much smaller long tail of non core customers. And we look at those core customers, we are focusing on up to about at least 1 quarter now today, more than 1 quarter of going through selling, renewals and adoption of our software. We feel that the business model has been extremely our business model has been extremely successful. I mean, the growth as we see of dollars that we get through renewals and expansion of Hughes footprint in those core customers is pretty is surpassing our expectations. It's gone double digits. But that's only 3 months. So we're still early stage, and we'll continue to push that. But as we have also made certain announcements on at least 1 or maybe 2 deals we have done on our new PLA model of both mainframe and enterprise based software. And this has been very well received in the marketplace by our core customers, and we are hopeful it's something that makes so much sense that we'll expand we expect to see more and more of these significant transactions occurring as we move forward through the rest of the year. All right? Thank you. Our next question comes from John Pitzer with Credit Suisse. Yes, good afternoon guys. Thanks for letting me ask the question. I'll echo my congratulations on the results. Hock, relative to the full year guide, it does imply like many of your semi peers, some pretty meaningfully above seasonal growth half on half on the semi solutions business. And I think you did a good job on some of the prior questions specific to data center and broadband access of some of the bottoms up product cycles that are driving that. I'd be curious or it would be helpful if I could get your sort of views on wireless and how that progresses throughout the year and how you should how you're thinking or how we should be thinking about your content this year versus dependency on units this year within the wireless? Somehow, I knew this was going to come up sometime somewhere, someplace. And sure enough, you did that. Yes, I know. It's actually not that because that product cycle in wireless is, in all our views, is this mine, very predictable. And we will see that happen in our Q3 fiscal Q3, Q4 of this fiscal 2019. It won't. We're already starting production in our wafer fabs, which has longer product cycle on F box and some of our products. And we will see, for want of better word, because it's so seasonal and it's very mean a significant, sharp bounce back, which adds to my our confidence that our full year guidance is something that's going to happen, very simple. And that in the second half, we see that meaningful, you correctly pointed out, somewhat double digit growth in the semiconductor segment of our business. It's as I mentioned in the answer to earlier questions, data center, especially networking, with a whole slew of new product cycles, will generate a big part of that double digit growth. So will, in my view, wireless as it has happened in the past. And in this particular year, perhaps the difference between this coming year, 2019 versus 2018, is simply 2 things. 1 is we're probably going to get better share. I've mentioned that before. And secondly, content increase. It always happens year after year, as I mentioned. Example, in Wi Fi, you'll see Wi Fi 6. Wi Fi 6 is not just in enterprise and excess gateways in service providers. We are seeing Wi Fi 6, the new generation 802.11ax in handsets, and that drives I call it strong content increase. As the increased amount of bands in ad bar that we constantly see as basically wireless continue to proliferate in various areas of the world, continuing to expand an amount of bands, content in this next generation phone. So all that is going to drive a bounce back with perhaps that with increased content for our products. As far as volume is concerned, yes, like you I'll probably be as uncertain as you are how much the volume would be. But regardless, it's there's a lot of mitigating factors, and biggest part of it is pure content increase. That's helpful. Thanks, Hock. Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Hi, guys. Thanks for taking my question. So understanding the confidence on the semi ramp, your guidance also implies the infrastructure software business has to decelerate pretty materially as we go through the year. And I mean, it seems like right now in Q1, the CA business must have already been hitting pretty close to the $3,500,000,000 or kind of annualized run rate that you were talking about that was a few years out. So I guess like what drove the strength of CA in Q1 and why does that business decelerate have to decelerate so markedly as we go through the rest of the year in order to fit into the guidance that you've provided? Stacy, it's Tom. I think one element is we don't want to get into the details between CA and SAN switching, but we're taking a conservative approach. It's just the Q1 out of the gate. We've got 3 quarters to go. As Hock mentioned, we are actually pretty pleasantly surprised with the number of ELA and PLA opportunities that we see in the pipeline. And a lot of our success in terms of growing the dollars of each of these accounts is going to be driven by our ability to convert those into wins. But so far, so good. So I think we're going to take this 1 quarter at a time. But for now, given that we're only 1 quarter into the year, we feel very comfortable reaffirming guidance on the top line. And of course, we feel comfortable with the operating profit as well as the cash flow expectations going forward. But you said CA would sustain through the rest of the year. So does that mean that Brocade has to like come down a lot? Or is it just like overall conservatism that's in the So Stacy, what we said is that the software, the infrastructure software segment would continue to sustain throughout the year. That's our expectation. But we are taking a conservative approach relative to the overall outlook for the business. But if it sustains, wouldn't you be at 5.6 for the year instead of 5? I'll leave that to you, Stacy, to figure out. Okay. Thank you, guys. Thank you. Thank you. Our next question comes from Toshiya Hari with Goldman Sachs. Thank you for taking the question. Hock, I had a question on 5 gs as it relates to your wireless business. Based on preliminary discussions with your customers, what sort of content uplift are you expecting in your wireless business as 5 gs is inserted going forward? And from a timing perspective, do you think is it more of a 2020 dynamic when 5 gs starts to move the needle or is it 2020 and beyond? Thank you. Very good, interesting question. And you're asking areas of very vast uncertainty here. But my sense of it is you'll start to see a little bit of it in 2020, but it will be only a small part. I think it's 5 gs as it impacts content in components, in handsets, high end smartphones, I might add, will only really impact in a big way, I think, beyond 2020. 2020, we'll see some start, but the tax rate, for want of a better word to use, is going to be not that high. But you're right, beyond 2020, as 5 gs comes in and you probably heard and seen that the amount of content especially for on our way it affects us on RF analog F bar. And here in this case, as those F bar content attaches itself more and more to antenna and various other parts of the phone, will be quite significant, but not so in 2020. Thank you. Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley. Yes, thank you. Just a question for Tom. On the back of the strong gross margin upside in the quarter. Can you talk about just trends you're seeing in gross margin for the core semiconductor business and then software and just how we think about expectations through the year? Sure, Craig. Well, you can see that the gross margins are exceptional. They're all over 70% in the quarter. A lot of that is driven by including CA in the business. But you're right, the Syner business continues to increase from a gross margin perspective. Mix helps. As wireless comes down, we benefit, as I think you know, from the rest of the portfolio in semis being at or above the corporate average. But I think looking out longer term, we've talked about this a lot. We continue to see the opportunity to improve gross margins, which directly translates, of course, into our operating margins and our free cash flow conversion. So we see that continuing. Got it. Thanks. Thank you. Our next question comes from Harsh Kumar with Piper Jaffray. Hey, guys. First of all, congratulations, exceptional execution. I wanted to follow-up on the gross margin question, maybe for Tom. They stepped up quite dramatically. On one of the field trips, I think you had mentioned that it really takes an acquisition about a year to and really produce results. So question is, did you capture the vast majority of CA benefits very quickly in 1Q? Or is the best from CA sort of reserved for the back half and later on? No. I mean, I think as you might be able to sort of look through the numbers, we're still not fully optimized around CA. We're only 1 quarter in. So you've seen some meaningful improvement in profitability for the company that includes CA. But when you look specifically at gross margins, it's a number of elements within the CA business tied to gross margins, primarily services as well as support. And so we've taken some actions to improve gross margins and improve the P and L in general. 1 in particular is we business. But as we continue to work through our model, which is But as we continue to work through our model, which is really driving these PLAs we talked about, we see the opportunity to continue to get better returns on our investment, which includes improving our gross margins going forward. So we would expect them to continue to improve, not just this year, but really over the long term. If I could add to that, on CA, we continue to go through transitions. And you're right, it takes at least a year for us to so called In the case of software companies, I believe it will take longer because these are contractual commitments, probably closer to 2 years, But it will get there. But the biggest I think a big part other than the fact that we're combining software and hardware now and CA in the software infrastructure, software side is still transitioning its improvement. And we and some say just 1 quarter, we expect to see more reductions. And these are not just cost of goods sold, but down below the line operating expenses as we go through it better. One, for Q1, is very critical to is the fact that it's product mix. Wireless is down and the other products are humming along, semiconductor products. And remember, year by year, nature of our product life cycles in those semiconductor products, we have an we always have an opportunity to expand by delivering more value to our customers, expand our gross margin around 50 to 100 basis points on just its natural cadence. That and mix, I think, is adding a lot of tailwind to our improvement in gross margin. Our next question comes from Edward Snyder with Charter Equity Research. Thanks a lot. Hock, I'd like to if we could maybe touch back on wireless real. This rebound you're going to see in the second half of the year, I understand you've got a year over year issue here because we were kind of weak last year. But this is flattening out units. This sounds like it's going to be a much stronger rebound than normal just on content alone. I mean, correct me if I'm wrong, but you've got 3 big areas you're playing with just enhancements alone. Of course, your standard BAW business, which covers everything about 2.4 gig. You're doing more products in the antenna congestion area now because I know you're doing antennaplexers and that problem is getting much more acute over the next year, especially as 5 gs comes on. But the WiFi, 802.11ax, like you mentioned, not only enterprise, but we're seeing that enhance it. And isn't it the case that you've got a big lead over your closest competitor, maybe Qualcomm here? So should we expect, 1, to see a bigger rebound just on content, 2, for maybe this to have more legs than we'd otherwise expect to begin next year? I know units are an issue, given WiFi itself is being deployed, this and you play strong into that, it should last longer, shouldn't it? Ed, we love all your comments, but I want to be playing down very straight down the center simply. We see a rebound. My view is a normal rebound. And it's a normal rebound. And while content increases, it's not really over the top by that much either. But don't forget, comparing it against last year is relatively an easier compare. So we do see we definitely see a rebound, and it will be a good rebound. But it's not and it will not be an extraordinary rebound. Just want to emphasize that, just your normal rebound. It's not hard to compare year on year against last year versus second half fiscal twenty nineteen, the fact that there will be an improvement. Our next question comes from Aaron Rakers with Wells Fargo. Yes, thanks for taking the question and also congratulations on the quarter. A lot of questions on wired and wireless have been asked, but I wanted to ask about the storage business. The storage business, I think you've mentioned was up. I don't know if you framed how much in this quarter, but I'm curious on kind of similar questions as prior. What kind of things are we to be focused on in that piece of the business over the next couple quarters? And how do you assume that, that can grow through the course of this year? Thank you. Okay. Well, very good interesting question. In storage, we have a mixed bag here. A bag most a lot of it, not all of it, but a lot of it relates to hard disk drive. And as you know, hard disk drive is nothing to yell over these days. And we see that no different from the others. Our mitigating factor here is that most of our hard disk drive in fact, all hard disk drive component sales goes to nearline or basically in data centers. We don't do we do relatively less in PC, desktops or mobile. So we do see the impact of it being weak, but not as extreme as obviously the industry is saying. So that helps mitigate it, but that's not a growth area. Where we see that hopefully better new product cycle coming in is the fact that tied to the storage is especially on flash SSDs, is PCI Express. 2nd half of the year, we see pushing a strong push in the marketplace on PCI Express Gen 4. We're in a lead on it, and we see a lot of interesting opportunities related to that, be it in storage or even be it in without saying the amounts are in offload computing from a viewpoint of machine learning, GPU to GPU connectivity, but it's also related to storage. And that push on PCI Express Gen 4 is what's quite interesting in storage over the next well, I should say over the rest of this year, especially the second half. All right? Thank you. Thank you. Our next question comes from William Stein with SunTrust. Thanks for taking my question. Hock, if you cut through the end markets and look instead at the business on a geographic basis? I am well aware that when you ship to one region, there may not be consumption in that region that China is a big export economy certainly. But can you talk to the pace of demand that you're seeing in China as best you can tell it, in particular relative to inventories there? Thank you. Good question. No surprise. Across the regions, as far as I'm concerned, China is the weakest. We all see that. We all know that. And I'm talking domestic demand product and our new our products shipped to those regions, used in that region indigenously is down and is the weakest region. It also has collateral impact we see to some extent on certain sectors in Japan and certain sectors in Europe, less so in the U. S, but broadly so China has an impact beyond just the region itself. China, it also impacts to a couple of other regions. But North America continues to be quite decent, and that's what helps us mitigate this overall macroeconomic situation. Thank you. Ladies and gentlemen, thank you for participating in today's question and answer session as well as today's call. This does conclude the program. You may all disconnect and have a wonderful day.