Good day, ladies and gentlemen. Welcome to Broadcom Inc.'s 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 Russotto, 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 first quarter of fiscal year 2019. If you did not receive a copy, you may obtain the information from the investor section of Broadcom's website at broadcom.com. This conference call is being webcast live and a recording will be available via telephone playback for one week. It will also be archived in the investors section of our website at broadcom.com. During the prepared comments section of this call, Hock and Tom will be providing details of our first quarter 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 US 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. With that, I'll turn the call over to Hock.
Thank you, B, and thank you everyone for joining us today. We had a good start to fiscal 2019, growing 9% in our first 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 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 first quarter 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. We are confident that we can meet, if not exceed the long-term revenue and profitability targets that we laid out for CA to you last year. In fact, renewals in our CA business have been strong this past quarter. We believe 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 $24.5 billion. Having said that, we expect our Semiconductor Solutions business to bottom in the second fiscal quarter, driven almost entirely by the seasonal drop in wireless. Looking to the second half, we are confident the Semiconductor Solutions 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. In summary, our diversification strategy is working. 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 first quarter was $5.8 billion, a 9% increase from a year ago. EPS came in at $5.55, an 8% increase from a year ago off of a 441 million weighted average fully diluted share count. In addition, free cash flow was $2.03 billion, or 35% of revenue. I would highlight free cash flow grew 39% year-over-year. The Semiconductor Solutions segment revenue was $4.4 billion and represented 76% of our total revenue this quarter. This was down 12% year-over-year on a comparable basis. As Hock explained, the Semiconductor segment was actually up slightly year-over-year in the first quarter, excluding wireless. Let me now turn to our Infrastructure Software segment. Revenue was $1.4 billion and represented 24% of revenue.
SAN switching continues to perform extremely well. 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 $1.08 billion. Operating income from continuing operations was $3.05 billion and represented 52.7% of net revenue. Adjusted EBITDA was $3.24 billion and represented 55.9% of net revenue. This figure excludes $143 million of depreciation. Inventory decreased $50 million from the prior quarter. Similarly, semiconductor receivables were actually down, which is typical for Q1, even though receivables increased $352 million overall due to the CA acquisition. Total current liabilities, excluding debt, increased two and a half billion due to CA. 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 million on capital expenditures.
As a result, we had record Q1 free cash flow from operations at $2.03 billion, or 35% of revenue. This represents 39% growth in free cash flow from operations compared to Q1 of 2018. I would note a couple of things. One, 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 million in APB cash bonuses to our employees. Second, I would also note that we accrued $723 million of restructuring integration expenses, of which that includes $363 million of cash payments in the quarter. In Q1, we returned $4.6 billion to stockholders, consisting of $1.1 billion in the form of cash dividends and $3.5 billion for the repurchase and elimination of 14.2 million AVGO shares.
We ended the quarter with $5.1 billion of cash, $37.6 billion of total debt, 396 million outstanding shares, and 451 million fully diluted shares outstanding. Turning to our fiscal year 2019 guidance. As Hock discussed, we are reaffirming our full year revenue guidance of approximately $24.5 billion, including approximately $19.5 billion from Semiconductor Solutions and approximately $5 billion 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 $1.25 billion. 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 million. CapEx is expected to be approximately $550 million.
As a result, free cash flow from continuing operations is expected to be approximately $10 billion. Finally, stock-based compensation expense is expected to be approximately $2 billion. As we outlined last quarter, we granted approximately 31 million of restricted and performance stock units as part of the multi-year 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 second quarter to be approximately 450 million. This excludes any stock repurchases. Similarly, for modeling purposes, we would expect stock-based compensation expense to be approximately $530 million in Q2. Looking forward beyond Q2, we would expect the share count, excluding any stock repurchases and eliminations, to remain relatively unchanged and the quarterly stock-based compensation in the second half of 2019 to start to decrease slightly each quarter.
We would expect stock-based compensation to level out at approximately $1.5 billion 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 per share throughout the year, subject to quarterly board approval.
We plan to pay out over $4 billion in cash dividends in fiscal 2019. In addition, we remain committed to buying back and eliminating a total of $8 billion of stock in fiscal 2019. That concludes my prepared remarks. During the Q&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. Ladies and gentlemen, if you have a question at this time, please press the stars and one key on your touchtone telephone. Again, we ask that you limit yourself to one question. Our first question comes from Harlan Sur with J.P. Morgan.
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's using it for 200 gig. We hear Amazon's 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 ASICs 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. Now that listening to you really got me going. Yes, in networking, 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 are fully expecting the ramp of Tomahawk 3 as part of the broader data center scale-out with 400 gig pipes interconnect, so to speak, to really start just about right now. In fact, our fiscal Q2 and progressing up to the rest of the end of the year, as more and more of the names you mentioned in hypercloud jumps in and expand and refresh, upgrade, I would say, their data centers.
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 these large cloud types. That's a broad refreshing and upgrading of data centers among these cloud guys. One area is mentioned, Tomahawk 3's 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 a very high-tech product, which we are very deeply engaged in. That brings the content by a multiple factor in this data center ramp.
As you expand the top of the rack switch, I can't resist saying, you need to connect data center to data center, what you call DCI, interconnectivity. The approach that is being taken, which we are also very engaged in with multiple OEMs who are supporting the cloud guys, is obviously coherent. Coherent fiber optic connection at 400 gig. We believe we are very much in the lead on that area as well. These are product cycles we are seeing that are continuing the impetus of double-digit growth in networking. 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. That's going into edge routing, core routing among the service providers, especially the telecom guys. We're starting to see the preparation in that happening.
Yeah, we feel very good about networking and the ability to sustain the level of growth we have been seeing.
Thank you, Hock.
Thank you. Our next question comes from Ross Seymore with Deutsche Bank.
Hi, guys. Wanted to echo Mike. 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? Any geographic color, product cycle color would be helpful.
Sure. Sure, Ross. In broadband, happy to say finally, the thing recovered. A big part of it, 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. 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 you call the next generation G.fast or 35b, and we're seeing a lot of that in Europe, some in North American carriers too. 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.
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. 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. Most of that will be only shipping, we believe, in the second half of the year, both fiscal and calendar. 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. I believe that they're kind of a mid-single digit customer right now. We're hearing a lot of evidence that they may be double ordering ahead of some possible sanctions. I'm kind of wondering how you think about that and how you handicap that for your guidance. Thank you.
I probably know as much as you do, seriously, in terms of what's available, publicly available, the concerns and the issues overhanging broadly Chinese exporter, China, specific high tech companies like Huawei from China. They are a good customer, they buy products, which obviously helps their products being competitive in the global export market. I hope they continue to do so. Certainly, the overhang of that is something that we are closely monitoring and are very concerned about. As far as specific things you're mentioning, I'm not able to basically comment on it simply because I don't know.
Okay. Hock, 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 billion rather than the five I think you had before. If that is the case, shouldn't profit margins be higher than what you had? Then the question, there has been some more consolidation in semis and 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&A environment in semis. Thank you.
Okay. You got two questions here, very clever. Let me start with the second one. It's easier. As I say, we have done quite a bit of acquisitions in very strong assets in the semiconductor space. It's obviously something we continue to look at because obviously semiconductor is a core area for us. You also know we're not necessarily limiting ourselves to that. We look towards the broader area of technology, software, and appliances as Brocade would be considered in. We continue to be interested in the semiconductor space, and they are still targets. We'll be continued to be very thoughtful and timely in terms of how we approach those acquisitions. If you have observed our behavior over the last several years, we tend to do it 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. That's what we're doing with CA right now, we're right in the thick of it, as you notice in the numbers we are going through as we drive down to generate the kind of business model we expect to get out of CA. Turning on to the next question you have, which leads to software. Yeah, 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 who consume both mainframes and enterprise distributed software, as opposed to much smaller long tail of non-core customers.
If you look at those core customers we are focusing on, after about at least one quarter now, today more than one quarter of going through selling renewals and adoption of our software, we feel that our business model has been extremely successful. I mean, the growth, as we see of $ that we get through renewals and expansion of huge footprint in those core customers is surpassing our expectations. It's gone double digits. That's only three months, so we're still early stage, we'll continue to push that. As we have also made certain announcements on at least one or maybe two deals we have done on our new PLA model of both mainframe and enterprise-based software. 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.
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 Semiconductor Solutions business. 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'd be helpful if I could get your sort of views on wireless and how that progresses throughout the year, and 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, some place. Sure enough, you did that. Yes, I know. I should note that because that product cycle in wireless is, in all our views, this is mine, very predictable. We will see that happen in our fiscal Q3, Q4 of this fiscal 2019. It will. We're already starting production in our wafer fab, which has longer product cycle on FBARs and some of our products. We will see, for want of better word, because it's so seasonal and it's very meaningful and significant, a sharp bounce back, which adds to our confidence that our full year guidance is something that's going to happen. Very simple. That in the second half, we see that meaningful, you correctly pointed out, somewhat double-digit growth in the semiconductor segment of our business.
As I mentioned in 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 our view, wireless as it has happened in the past. In this particular year, perhaps the difference between this coming year 2019 versus 2018 is simply two things. One is we're probably going to get better share. I've mentioned that before. Secondly, content increase. It always happens year-after-year, as I mentioned. As example, in Wi-Fi, you'll see Wi-Fi 6. Wi-Fi 6 is not just in enterprise and access gateways in service providers. We are seeing Wi-Fi 6, the new generation 802.11ax, in handsets. That drives, I call it strong content increase.
As the increased amount of bands in FBAR 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. All that is going to drive a bounce back with perhaps increased content for our products. As far as volume is concerned, like you, I'll probably be as uncertain as you are how much the volume would be. Regardless, 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.
Understanding the confidence on the semi ramp, your guidance also implies the Infrastructure Software business has to decelerate pretty materially as you go through the year. And it seems like right now in Q1, the CA business must have already been hitting pretty close to the $3.5 billion kind of annualized run rate that you were talking about that was a few years out. I guess, what drove the strength of CA in Q1, and why does that business 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?
Hey 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 first quarter out of the gate. We've got three 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. 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. So far so good. I think, we're going to take this one quarter at a time, but for now, given that we're only one quarter into the year, we feel very comfortable reaffirming guidance on the top line.
Of course, we feel comfortable with the operating profit as well as the cash flow expectations going forward.
You said CA would sustain through the rest of the year. Does that mean that Brocade has to come down a lot? Is it just overall conservatism that's in the number?
Stacy, what we said is that the Infrastructure Software segment would continue sustaining throughout the year. That's our expectation, but we are taking a conservative approach relative to the overall outlook for the business.
If it sustains, wouldn't you be at 5.6 for the year instead of five?
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 5G 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 5G is inserted going forward? From a timing perspective, do you think, is it more of a 2020 dynamic when 5G starts to move the needle, or is it 2020 and beyond? Thank you.
It's a very good, interesting question. You're asking areas of very vast uncertainty here. 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 5G 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 will see some start, but the attach rate, for want of a better word to use, is going to be not that high. You're right. Beyond 2020, as 5G comes in, and you probably heard that, it seemed that the amount of content, especially for on us, on way it affects us on RF analog FBAR.
Here in this case, as those FBAR 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 the gross margins are exceptional. They're over 70% in the quarter. A lot of that is driven by including CA in the business. You're right, the standard 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 and semis being at or above the corporate average. 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. We see that continuing.
Got it. Thanks.
Thank you. Our next question comes from Harsh Kumar with Piper Jaffray.
Yeah. Hey, guys. First of all, congratulations. Exceptional execution. I wanted to follow up on the gross margin question, maybe for Tom. It 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 hum and really produce results. 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 think as you might be able to sort of look through the numbers, we're still not fully optimized around CA. We're only one quarter in. You've seen some meaningful improvement in profitability for the company that includes CA. 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. We've taken some actions to improve gross margins and improve the P&L in general. One in particular is we announced a deal with HCL and have outsourced a lot of our service activity to HCL going forward for the CA business. 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.
We would expect them to continue to improve, not just this year, but really over the long term.
If I could add to that.
Thanks, guys.
On CA, we continue to go through transitions. You're right, it takes at least a year for us to so-called hum. In the case of software companies, I believe it will take longer because these are contractual commitments, probably closer to two years. It will get there. I think a big part, other than the fact that we're combining software and hardware now, and CA in the Infrastructure Software side, still transitioning its improvement. At some stage, just one quarter, we expect to see more reductions. 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, is the fact that it's product mix. Wireless is down and the other products are humming along, semiconductor products.
Remember, year-by-year, nature of a product life cycles in those semiconductor products, we always have an opportunity to expand by delivering more value to our customers, expand our gross margin around 50-100 basis points on just its natural cadence. That, and mix, I think, is adding a lot of tailwind to our improvement in gross margin.
Thank you. 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. This rebound you're gonna 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. This is flattening out units. This sounds like it's gonna be a much stronger rebound than normal just on content alone. Correct me if I'm wrong, but you've got three big areas that you're playing with, just enhances alone. Of course, your standard ball business, which covers everything above 2.4 gig. You're doing more products in the antenna congestion area now, because I know you're doing antenna flexures and that problem's getting much more acute over the next year, especially as 5G comes on. The Wi-Fi, 802.11ax, like you mentioned, not only enterprise, but we're seeing that in handsets.
Isn't it the case that you've got a big lead over your closest competitor, maybe Qualcomm here. 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 at the beginning of next year? I know units are an issue, but given Wi-Fi itself is being deployed, and you play stronger to that, it should last longer, shouldn't it?
Ed, we love all your comments, but I want to be very straight down the center simply. We see a rebound. My view, it's a normal rebound. It's a normal rebound, and while content increases, it's not really over the top by that much either. Don't forget, comparing it against last year, it's relatively an easier compare. We definitely see a rebound, and it will be a good rebound, but 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 2019, the fact that there'll be an improvement.
Great. Thanks.
Thank you. Our next question comes from Aaron Rakers with Wells Fargo.
Yeah. 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'd 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 of quarters, and how do you assume that that can grow through the course of this year? Thank you.
Okay. Very good, interesting question. In storage, we have a mixed bag here. A lot of it, not all of it, but a lot of it relates to hard disk drives. As you know, hard disk drives, nothing to yell over these days. We see that no different from the others. Our mitigating factor here is that most of our hard disk drive, in fact, all our hard disk drive component sales goes to nearline or basically data centers. We do relatively less in PC, desktops or mobile. We do see the impact of it being weak, but not as extreme as obviously the industry is saying. That helps mitigate it, but that's not a growth area. Where we see hopefully better new product cycle coming in is the fact that a tie to the storage is, especially on flash, SSDs, is PCI Express.
Second half of the year, we're seeing a strong push in the marketplace on PCI Express Gen 4. We're in a lead on it. We see a lot of interesting opportunities related to that, be it in storage or even be it in, without saying beyond monster, in offload computing from viewpoint of machine learning, GPU to GPU connectivity. It's also related to storage. 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.
Great. 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. 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. I'm talking domestic demand product and our product shipped to those regions used in that region indigenously is down. It's 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 other regions. 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.