Earnings Call: Q2 2018

Jun 7, 2018

Welcome to Broadcom Limited Second Quarter Fiscal Year 2018 Financial Results Conference Call. At this For opening remarks and introductions, I would like to turn the call over to Ashish Saran, Director of Investor Relations. Please go ahead, sir. 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 market close today, Broadcom distributed a press release and financial tables describing our financial performance for the Q2 of fiscal year 2018. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom's website at www.broadcom.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 at dropkom.com. During the prepared comments section of this call, Hawk and Tom will be providing details of our Q2 fiscal year 2018 results, guidance for our Q3 of fiscal year 2018 and some commentary regarding the business environment. We will take questions after the end of our prepared comments. 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. 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. At this time, I would like to turn the call over to Hock Tan. Hock? Thank you, Ashish, and good afternoon, everyone. I am very pleased with our execution in the Q2 of fiscal 2018. We drove gross margin to 66.6 percent, EBITDA to 52.3 percent and free cash flow to 42.3 percent of revenue, all record achievements for us and a continued demonstration of our robust business model. We were also quite active in executing on our recently announced stock repurchase program. Since the announcement over a 6 week period through June 1, 2018, we have returned approximately $1,500,000,000 to stockholders by repurchasing more than 6,400,000 shares. And we do intend to continue to be active. Consolidated net revenue for the 2nd quarter was $5,020,000,000 just above the midpoint of guidance with strong wired and enterprise storage results, offsetting weaker wireless revenue. As a reminder, before I go and give you more color into this quarter, the Q2 of fiscal 2018 was a 13 week quarter, while the prior quarter Q1 was a 14 week quarter. Segment revenue comparisons reflect this as I discuss performance by segment. Starting with wired. In the Q2, wired revenue was $2,300,000,000 growing 9% year on year, 22% sequentially. The wired segment represented 46% of our total revenue. 2nd quarter wired results reflected strong sequential increase in demand from cloud data centers and a seasonal recovery in broadband access. Solid year on year growth was driven by robust increase in networking and compute offloading in cloud data centers and strong growth in spending by enterprise IT. We also benefited from an increase in spending on broadband capacity expansion by service providers. In contrast, however, spending on video access and in the China optical markets remain sluggish. Turning to the Q3 fiscal 2018, we expect growth in wired revenue in wired revenue, sorry, to continue notwithstanding the ban on shipments to ZTE. We expect demand to remain healthy from cloud data centers and enterprise IT, while broadband access remains robust. Moving on to wireless. In the Q2, wireless revenue was $1,290,000,000 growing 13% year on year, but declining 41% sequentially. The wireless segment represented 26% of our total revenue. 2nd quarter sequential decline in wireless revenue was deeper than usual as shipments to our North American smartphone customers reduced sharply from the atypically exaggerated 1st quarter. We did partially offset this decline from increase in our product shipments to our large Korean smartphone customer as they supported their new product launch. Looking ahead to Q3, we expect to see the beginning of seasonal second half ramp in demand from our large North American smartphone customer as they start to transition to their next generation platform. However, we expect this strength recovery I would say this recovery to be offset by a decline in shipments to our large Korean customer. As a result, we're expecting our overall wireless revenue to be flat, maybe even slightly declined on a sequential basis for the Q3. Let me now turn to enterprise storage. 2nd quarter 2018 enterprise storage revenue was 1 $160,000,000 represented and represented 23% of our total revenue. This, of course, included a full quarter of contributions of over $400,000,000 from the recently acquired Brocade Fiberschannelswitch Business. As you may recall, we had completed the acquisition of this business early in our Q1 of fiscal 2018. And as reported, Enterprise Storage segment revenue grew 63% year on year and 17% sequentially. But if we exclude Brocade contributions, 2nd quarter enterprise storage revenue would have shown stable year on year performance with strong growth from enterprise server and storage markets, partially offset by softer demand from the hard disk drive market. For the Q2, the overall sequential revenue growth was driven by broad strength from the enterprise IT sector. Looking ahead to Q3 of fiscal 2018, we expect continued spending in enterprise IT to drive sequential growth in enterprise storage and growth in cloud storage capacity will lead to a recovery in hard disk drive demand. Finally, our last segment, Industrial. 2nd in the 2nd quarter, Industrial segment revenue was 2 $63,000,000 growing 17% year on year, 5% sequentially. The Industrial segment represented 5% of our total revenue. Refills continued to remain very strong with 20% year on year growth, and we expect this momentum to continue into the Q3. Notwithstanding the strength today, we expect annual industrial revenue growth, however, to be in the mid single digit range on a long term basis. So in summary, our overall business remains robust and stable. Our Q3 fiscal 2018 outlook reflects this with a consolidated revenue forecast of $5,050,000,000 at the midpoint as we experienced continuous strength in wired and enterprise storage benefiting from a very robust cloud data center and enterprise IT spending environment. Year on year, our revenue growth has remained very sustainable. Even with our contributions from Brocade, organic revenue growth for the 2nd quarter would have been in the high single digits. And for the Q3, we foresee this year on year organic revenue growth to modulate towards our long term target of mid single digits. We will continue to keep a consistent focus on improving margins and increasing free cash flow from our business. Our balance sheet continues to be strong with over $8,000,000,000 in cash at the end of the second quarter. We also have $10,500,000,000 remaining on our stock repurchase authorization as of June and reflecting the very strong free cash flow generation we expect during the balance of fiscal 2018, we plan to continue to aggressively repurchase our shares as long as we believe that we can generate superior returns in doing so. With that, let me turn the call over to Tom for a more detailed review of our Q2 financials and Q3 outlook. Thank you, Hock, and good afternoon, everyone. My comments today will focus primarily on our non GAAP results from continuing operations, unless otherwise specifically noted. A reconciliation of our GAAP and non GAAP data is included with the earnings release issued today and is also available on our website atbroadcom.com. Let me quickly summarize our results for the Q2 of fiscal 2018. 2nd quarter net revenue was $5,020,000,000 in line with guidance. Our 2nd quarter gross margin from continuing operations was 66.6%, 60 basis points above the midpoint of guidance. We did benefit from a more favorable product mix in the quarter driven by higher than expected revenue from our wired segment and lower than expected revenue from our wireless segment. Operating income from continuing operations for the quarter was $2,460,000,000 and represented 48.9 percent of revenue. Adjusted EBITDA for the quarter was $2,630,000,000 and represented 52.3 percent of revenue. Our days sales outstanding were 50 days, a 5 day increase from the prior quarter as we saw a reduction in linearity of revenue across the quarter. Our inventory at the end of the second quarter was $1,260,000,000 a decrease of $56,000,000 from the prior quarter. Days on hand remained flat from the prior quarter at 67 days. We generated $2,310,000,000 in operational cash flow, which reflected the impact of $117,000,000 of cash expended on acquisition and restructuring related activities, including Qualcomm and Brocade. Please also note that we did not make any interest payments in the Q2 as these are made on a biannual basis in the 1st and third quarters of our fiscal year. Capital expenditure in the Q2 was $189,000,000 or 3.8 percent of net revenue. As a housekeeping matter, I would also note that CapEx was $61,000,000 higher than depreciation. Free cash flow, which we define as operating cash flow less CapEx, in the 2nd quarter was $2,120,000,000 or 42.3 percent of net revenue and reflects the impact of acquisition and restructuring expenses. On the buyback, just to give you some more clarity. In the Q2, we spent $347,000,000 on repurchasing 1,500,000 shares. These repurchases took place over the last 2 weeks of the quarter. Over the 1st 4 weeks of Q3, we have spent an additional $1,160,000,000 repurchasing 4,900,000 shares. In addition, we returned $766,000,000 in the form of dividends and distributions in the 2nd quarter. Turning to our balance sheet. We increased our cash balance by $1,100,000,000 through the Q2 and ended the period with $8,200,000,000 in cash and $17,600,000,000 in total debt. Now let me turn to our non GAAP guidance for the Q3 of fiscal year 2018. This guidance reflects our current assessment of business conditions, and we do not intend to update this guidance. This guidance is for results from continuing operations only. Net revenue is expected to be $5,050,000,000 plus or minus $75,000,000 Gross margin is expected to be 66.5 percent, plus or minus 1 percentage point. Operating expenses are estimated to be approximately $882,000,000 dollars The tax provision is forecasted to be approximately 7%. Net interest expense and other is expected to be approximately 115,000,000 dollars The diluted share count forecast is for 457,000,000 shares, and it does not include the impact from any share repurchases done after June 1, 2018. Stock based compensation expense will be approximately $320,000,000 CapEx will be approximately 125,000,000 dollars As you may recall, in connection with Regalmas Island to the United States and as a result of the effects of U. S. Corporate tax reform, we had initially expected our effective cash tax rate on a steady state basis to be in the range of 9% to 11% per year. Following the reconciliation, we currently expect our cash tax rate for the balance of fiscal year 2018 to be approximately 7% and our long term cash tax rate to remain in the 9% to 11% range. That concludes my prepared remarks. Operator, please open up the call for questions. Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open. Hi, guys. Thanks for letting me ask a question. I want to start off on the wired side. Hock, last quarter, there was a lot of debate about why the year over year growth slowed so much and you guide for confident sequential growth that you just delivered. Talk a little bit about the visibility going forward. What's driving the slight growth that you're guiding to in the fiscal Q3? And can you still hit the mid single digit growth for the fiscal year in that wired segment? Well, the wired segment for us, especially the networking part of it, that we have very good visibility right now and is largely driven as I indicated in my prepared remarks from the cloud data center guys, the big cloud data center guys. What we also see and that's probably less visible is very strong spending patterns and enterprise. I call that enterprise IT environment, the more traditional enterprise. That's those guys have also been spending. So when you combine the 2 together, that portion of our wide infrastructure business as it relates to networking broadly as we describe it, is very strong. And of course, as an aside, a separate segment we call enterprise storage, benefits gets drafted along with that. So that's why we see very strong business in what storage might call nearline or what I call data center storage business. Very, very strong both of them. And that's very visible in many, many in many of this situation because the cloud data center guys tend to spend in fairly lumpy manner. And so you get that visibility as opposed to a more secular or trended manner as the enterprise IT guys are doing. So to answer your question, bottom line, that will drive our wire business to hit to our goal of mid single digit year on year growth for this year. Perfect. And I guess as my follow-up, switching gears to the wireless side of things, it's good to see that your big North American business is starting to turn up and that the business as a whole has stabilized. Can you just talk about whether via content or the unit side, how you think about seasonality in the back half of the year given that there's so many different moving parts as content per SKU and what different customers are doing? There are a lot of moving parts. It's easier to look at it on a total basis and the fact on a total basis and also that's unusual factors, which we all thought would happen in that as we move from iPhone 8 to iPhone 9 generation coming out, there is some caution in the level of build. And there is, we believe there is. But having said that, we're also seeing orders coming in, in what I call in a normal seasonal pattern of strength. And we do see that very clearly now, and we do see bookings that extend all the way to close to the end of this calendar year from these North American customers. So we see back what you said exactly back to trend to be normal patterns. The difference is what's the mix of the new generation phones versus legacy phones. And that's what might lead to some uncertainty of how much content changes or increases that might be. And very frankly, visibility is not that clear because it's hard to predict what's the what level at what level what will the mix of new generation phones versus legacy generation phones would be. Thanks, Hock. Thank you. And our next question comes from Craig Hettenbach with Morgan Stanley. Your line is now open. Yes, thank you. Hock, this is more of a strategic question of how you view the business. So some of the pushback on the company is that you've been so acquisitive that feeling that there's a need to do more M and A. So just two things on that. Number 1, with the current makeup of the business, can you talk about the long term growth profile as you see it? And then the second part would be, now that you're buying back stock, your view of the opportunities to do M and A versus return cash through buybacks? Well, very interesting question on it. In terms of long term growth of this company in the various franchise businesses that comprise our entire business and company, we've always said and there are no reason to change that at all, to say that long term that we will achieve on a long term basis, if you look over a period extended period of time, an average compounded growth rate, average compounded growth rate is off mid single digits. No reason for us to change. The business model continues to be to demonstrate that, and we do not see anything that makes us think otherwise. Year to year, as we have seen, you may see variations from that mid single digit. You see we saw that 2017 as it compares to 2016. We saw it strongly. Organic growth, taking stripping out the acquisition and the contribution from acquisitions, we saw close to mid double digit mid teens year on year growth in 2017. We are in 2018, and I don't expect that mid teen rate of growth to continue. As I say, it's 1 year, but it is still above in 2018 mid single digits definitely. We expect it to be to moderate down to perhaps single day high single digits conservatively. And we expect that, but that's to be expected. You cannot expect the kind of breadth of our business in connectivity solutions largely and our major positions in a position market position within connectivity solutions, especially in the matter in those markets where franchise products prevail to keep growing higher than the rate of growth of the entire semiconductor industry, not counting memories. There's no way. It has to marginally down, as I said before, to a level which is closer to the growth of the entire industry. We have to follow that. And the only variation to that whole thing as we think through this is simply that every is that like all technology business, every new generation every time a new generation pops up and it varies in product life cycle from handsets, which is 18 months, to storage, which may be 5, 6 years, to industrial, which may be even longer, that each new generation brings an increased content. So we have a kicker above GDP growth rate. It's always why I say that. Hence, we end up with mid single digits worldwide on a global basis. And we will see that long term. Even as in the short term, we see variations and we saw that in 2017, we're seeing in 2018, but it will inevitably, if you measure it over a long enough period, get down to that mid single digits. Got it. And then just as a second part of that question around how you're evaluating kind of M and A opportunities versus the aggressive steps you're taking on the buyback? We keep doing both as we do basically based on return generate cash, one of the things we are seeing is our cash flow generation, as Tom indicated in his remarks, and especially last quarter and this last quarter is not an unusual quarter as we forecast going forward is our cash flow generation is very, very strong. Our free cash flow was north of $2,000,000,000 last quarter And a big part of it relates to the fact that CapEx, which has been a big consumption of our cash flow over the last 2 years at least, between building up capacity and building up campuses in couple of locations, all right, which involves big amount of money for cost reduction operating cost reduction purposes, but nonetheless, Sakaba level, our CapEx is dramatically dropped as we finish those programs. And as Tom said, we are looking towards CapEx level much lower than we have seen in prior years in prior quarters. So that's enabling our cash generation to be fairly substantial on a quarterly basis, probably north of $2,000,000,000 free cash flow. So that's allowing us a lot more flexibility, which allows us to still look at M and A as we do and still be able to invest those very strong that very strong stream of cash generation in a very good asset return generating asset, our own shares, which is fairly think about it, right? Our shares producing but generating over $8,000,000,000 in the company, our market cap, we're talking over 8% cash on cash return. It's not bad and it's our own chance. So of course, we will keep doing that, especially with the flexibility of generating a lot of cash. But that doesn't mean we stop doing M and A. We are continuing to look and we go by the criteria we have on cash on cash return. And as we see opportunities as we still do, we will act on those M and A opportunities. Thank you. And our next question comes from Amrish Srivastava from BMO Capital Markets. Your line is now open. Hi. This is Gabriel Ho calling in for Ambrish. Thanks for taking my question. I think this question is for Hock. On the wireless, the guidance seems to be implying a flattish on a year over year basis in terms of growth for the fiscal Q3. So my understanding is last year, the phone bill at your large smartphone OEM customer was later than normal. So why is your wireless revenue not growing? And is it due to the content or more of the unit? You know what, it's hard to measure quarter on quarter for various reasons. In my remarks, I was very clear. At this time, last year, Q3, we have both the North American smartphone maker and the Korean high end phone maker going in the same direction. We're not while we are still very positive on the North American phone maker, we are not seeing strength in the Korean phone maker. That's as I said in my prepared remarks, that's the reason we are seeing that difference, the major reason we're seeing that difference. Hi, thanks. As a follow-up on the revenue side, you talked about operating leverage, talked about revenue growth moderating towards the mid-7 digit And how should we think about your OpEx front as well as your gross margin longer term? So if I understood your question correctly, talking about the operating leverage in the model going forward, I think if you look at the operating expenses, they've effectively flattened out here at these levels. We might see them come down a bit, especially as we look into 'nineteen, but it's a fair level. We don't see expenses increasing from here much. And we obviously think we still have a lot of leverage from a gross margin standpoint and continue to see gross margins expand. That's a trend you've seen over the last several years. We don't see that stopping anytime soon. And so when you put that together, we believe that we've got a lot of capacity to continue to improve our operating margins. And then as Hock talked about, CapEx is coming down. I mean, this is largely a fabulous company, a CapEx light company when you look at the fundamentals. And so we're driving CapEx down to more like $100,000,000 a quarter, which suggests you're going to be running much closer to 2% as a percentage of revenue. And so free cash flow margins, which we have a target of 40%, we think that can continue to improve and likely improve, obviously, north of 40% if you do that math. Thank you. And our next question comes from Blayne Curtis with Barclays. Your line is now open. Hey, Thanks for taking my question. I just want to ask on the guidance. I wanted to make sure it sounded like all the segments of wireless would be up, but then you said not to mention ZT. So I was just curious how much of an impact that would be? And then secondly, on just wireless, I just wanted to understand, obviously, it's harder to triangulate content, average content. Legacy is one portion, but there's also the share portion. I'm just wondering if you could comment on your visibility of your share at that customer at the North American customer. We don't really like to talk about share on that because in the overall scheme of things, Blaine, it makes no difference to us. It might make a big difference to somebody else, which I won't mention. But in overall scheme of things, we look at our business as 20 product divisions, 4 different segments. Some segments are up, some segments are down quarter to quarter, but overall, very, very, very stable and sustainable, I mean, broadly answered. So I really don't have that much to comment on in terms of share, and we really don't want don't like to comment on share. I should tie to that. But in regards to your first part about ZTE, Again, this is we're trying to be looking at it from a very high level. And until we have the ability to ship out, clearly ship out and now to ZTE. We really prefer that, again, as we sit here, not to comment on it. Where we stand now is products are not shipping. And that's our position at this point. Next question please. Okay, thanks. Thank you. Our next question comes from Amit Daryanani with RBC Capital Markets. Your line is now open. Yes. Thanks for taking my questions. I guess I have 2 as well. First, just on capital allocation, now that buybacks are part of your broader capital allocation, does the bar for M and A for deals for you essentially become higher because plan B would be assuming you buy your own stock buying something at an 8% cash yield with no integration issues. So I'm curious, does the bar for deals become higher? Or how do you look at the cash and cash targets today now that you have the option to do buybacks? Look, I think Hock said it well. I'll just reiterate it maybe with a little more color. But basically, it's a returns driven phenomenon. You can see our views on the returns of our buying back our own stock based on our execution of the buyback over the last month plus. So I think that's self evident. Going forward, as Hock said, we always look to drive double digit returns from an M and A standpoint. Obviously, we think we know how to do integration. And so we'll take a risk adjusted view of it. But as long as we think we can find opportunities that are well in excess where we can buy our own stock at, we'll obviously take a very close look at that. But without that in mind, obviously, the stock over the last month plus has looked attractive to us based on the stock that we bought back and continue to do so, as Hock said, given the returns. Got it. And then if I could just follow-up on the wireless segment and I understand some of the near term discussions you've been having on this. But as you think about the next several quarters in fiscal 2019 on a broader level, do you think you're positioned to grow your wireless revenues in aggregate in fiscal 2019 at this point? Or are the compares going to be such that it's going to be hard to show growth next year in that business if units remain flat with your 2 largest customers there? We don't give outlook even beyond 1 quarter, much less the year. And frankly, we're not about to really change that practice of policy because then we'll be doing nothing but a lot of this in every earnings call. We'll give you our strategic view of the whole thing and that hasn't changed. Again, we've got great franchises in those in every segment, including especially wireless. And to ask me for what 1 year looks like, we don't comment on that. Fair enough. Thank you. Next question please. Our next comes from John Pitzer with Credit Suisse. Your line is now open. Yes, good afternoon guys. Hock, Tom, congratulations on the strong quarter. Thanks for letting me ask the question. Hock, just maybe I'll ask the wireless question a little bit different. I understand the impact that mix might have as far as your revenue growth in the back half of the year. But as you think sort of flagship to flagship at your North American customer, how should we think about content growth this time around and perhaps differentiate between RF and other applications? And I guess on the RF stack, we'll start to see some initial 5 gs modems coming out at the end of this year. I'm just wondering what kind of visibility you have for continued growth of FBAR as the world transitions from 4 gs to 5 gs? Oh, I mean, strategically, if you go to 5 gs and you go deeper and deeper into 5 gs which runs what they call the ultra high band frequency or maybe it's not so ultra high. But nonetheless, when you talk about anything 3 gigahertz and beyond, you need to you tend to push towards more and more FVAR content. That's given. That's very well proven. That's very well known. Now when would 5 gs really come in and what fashion they will come in because the initial phones will likely be claimed to be 5 gs, but truly 5 gs. So the specification doesn't have to be as rigorous for performance. People will try to phone makers may use, especially on the lower end, not higher end, use soft alternative as soft filters and get away with it because performance doesn't matter, just a socket. But when you really get deeper and deeper into 5 gs, you need FVAR filters to make it work, given. So think of it long term content will step up. No question. Not only more frequencies, but frequencies that demand the need for ad val. Beyond that who knows? Go ahead. And then specifically, as we think flagship to flagship this year for your North America customer, do we think about your RF content growth and or potential growth elsewhere with things like connectivity or touch? Well, it's things are as you're saying, moving along, we all like to think about is how soon will normalcy in flagship phones recover come back to what you call normalcy. We don't know. And how do you know what is content versus unit volume, especially when normalcy is not there? I'm not trying to dodge your question. I'm saying is you can't tell because right now shipments are not really normal, even as we see bookings coming in strongly, and hopefully, we like to see it normal. But then we don't see the North Korean customer being as strong as it should be. That's helpful. Thank you. And our next question comes from Stacy Rasgon with Bernstein Research. Your line is now open. Hi, guys. Thanks for taking my questions. Let me ask that question in a different way. So I know last year around this time you gave us a number for content you said at your North American customer was up 40%. Obviously that may have changed a bit given the mix and it sounds like you're suggesting mix going forward of new phones versus legacy is an unknown. But if the mix, I guess, in the 2019 was the same as what we saw this year, what do you think your content at your North American customer would be? That should be a math problem you ought to be able to do. Yes. But even I tell you how are you going to check it against revenues, which is what we're going to know is most important because a legacy phone will vary. If the mix of legacy phones start increasing dramatically, you will reflect on the different set of content. What you're asking is what's the content is not really what the content, what's the revenue over the next few quarters, what it's going to look like. And based on you're trying to do simple math on content, when I say you have an unknown equation, which says the legacy phones may increase in percentage, which then dilutes any increase in content. And then the revenue won't reflect what you're looking for. I'm basically trying to answer your question for you by saying that, that if you're looking for what else on simple correlation between content increase and revenue change, I'm saying there are other factors that are coming in that might dilute that whole equation. And so answering that question that you have that you asked in simple terms doesn't answer the underlying interest that you have. I would say in broad scope, content direction and trend hasn't changed at all. But the mix of legacy, the mix of phone SKUs and in some situations, if you look beyond a North American OEM and look at other high smartphone makers, which we sell to and their varying performance, all are skelure numbers. Okay. Let me ask you a question on Well, you know what I mean? Your math request is easy. And I'll tell you the math request is that the trend in content increase has not changed. Okay. So you're still It doesn't give you anything. Okay. But I mean your old kind of like long term kind of normalized outlook was for kind of like end market units to be relatively flat given call it premium phones aren't growing very much. You're right. But they have kind of mid double digit kind of over the long term mid double digit increase. You're not changing that long term point of view. And that was a portfolio by the way, that had nothing to do with mix. That was a portfolio point of view as I understand it. Are you still holding to that long term portfolio view for content increase? Yes. There will be long term content increase still and there will still be long term content increase. I'm more interested to know that there's a mix change and there's a unit change now that we're all seeing. Okay. Do you have a follow-up question? I do. Let me ask about storage really quickly. So obviously, that's growing well right now. I think in conjunction with the networking portion of enterprise, they've got similar drivers. I'd say storage historically has tended to be quite a bit more lumpier though than the wired business and it just rose 17% sequentially, it looks like on a mostly organic kind of quarter. I guess how should we think about the drivers of that and I guess the lumpiness that may continue with that going forward? I think historically you've given, again, a longer term kind of view of that business overall is roughly flattish plus or minus? Like how should we be thinking about the near term drivers of that and how those may play out over the rest of the year? Okay. Let me correct some misperceptions and maybe it's our fault for not articulating it clearly enough. If you strip out Brocade, I was trying to say, as an add on, if you do a year on year comparison, you have to strip out from current year fiscal 'eighteen results. Our revenue in enterprise storage year on year is single digit growth. As you expect enterprise storage to typically happen. And this is a very stable kind of business. It doesn't do cut wheels and funny stuff like that, but it's very stable and extremely, extremely sticky and profitable. That's storage. And it will be. And even on fiscal 'eighteen, we've seen super strength, especially with nearline data cloud, data center buying more high capacity drives hard drives, we'll still grow maybe closer to high single digits year on year, which is unusual for enterprise storage. What perhaps confused the mix is we now add year on year comparison brocade and that leads to that 17%. Otherwise, year on year, please don't expect double digit growth on storage. At best, flattish to single digits is the one that's possible. Wasn't the 17% a sequential number or am I measuring am I remembering that wrong? Yes. It's probably some level of sequential. Now you're right, that sequential I'm trying to discourage you while I'm looking at it sequentially. Look at it year over year. Sorry. Thanks. Okay. So you're saying roughly flattish year over year excluding Brocade? Okay. Thank you. Yes. Roughly flattish year on year excluding Brocade. And our next question comes from Vivek Arya from Bank of America Merrill Lynch. Thanks for taking my question. I also had 2. So Hock, the first one, I understand we don't want to talk about specific content. There does appear to be some more competition in high mid band pads. Do you think that is just the desire for large customers to just be just have supplier diversity? Or do you think competition is catching up in technology? And if it's the latter, what are you doing to make sure that you're sort of maintaining your competitive edge involved based technologies? Okay. Good question. In every franchise product line franchise we have, and we have 20 of them, We are in the lead. That's the definition of why we call it franchise, and that's our business model that we are the lead, whether we grow it organically ourselves or acquire and strengthen and sustain those, we're the number 1 in each of the segments. No different in wireless. Be they in wireless, we sell most notably RF front end, ad bar filters, in other words, built into it or Wi Fi, Bluetooth combo chip, as we call it, wireless connectivity. Very much, we're the number 1 and in the lead. And we always, having said that, have competition. You can do the world is such, you always have competitors. But we are always in the lead, and we always, as our key business model, continue to invest as we need to, to continue, if not extend our lead. And to answer your question, in RF front end, which I assume that's what you're addressing rather than wireless connectivity or Wi Fi Bluetooth where there's nobody is within range in RF front end. We are very much in the lead. And we have that lead now for many years, and we continue to invest to keep that lead. And it has not changed. And then, believe me, it has not changed the lead that we have in being able to design and design those RF front end components, which includes a lot of it, F bar filters are key element of strength and power amplifiers, less so and the normal features and little components that add up to an RF front end. But especially when it relates to EPO, we're in the lead in architectural, we're the best at creating those RF front ends that enable high end phones to deliver the kind of performance and bandwidth that they generate for that you see around you. And we continue to make sure we are very much in the lead. So as far as we're concerned, that hasn't changed. The business hasn't changed. The franchise, to answer your question directly, is not at all in jeopardy. Maybe that's clear answer to all you guys out there. We do not see and this is not trying to be cavalier or complacent. Well, far from complacent in any one of our franchise business. We remain we continue to remain the lead, and we ensure we'll continue to be in the lead, not as we look forward, 1 generation, 2 generations. That hasn't changed. The franchise is not in jeopardy. Got it. And as my follow-up, very strong performance on the gross margin side. I think, Tom, you were mentioning that you expect perhaps more upside. What's driving this upside? Is it just mix? Is it something else? And is there a way to quantify what the longer term opportunity is to take gross margins to? Thank you. Good question. I mean, obviously, it is mix as well. I mean, if you look at the growth, as Hoch's been articulating around cloud and enterprise IT, we've added Brocade. These are all very margin accretive activities. As revenue grows as well, we're seeing our businesses that were lower performing, carried with it lower gross margin, some of that acquired from Broadcom, in particular, continue to improve. As you know, it takes several years to go from actually designing in the product to shipping new products in volume, some of the businesses we've owned for less than a couple of years. And so all those things, as well as the day to day normal operating improvement is driving gross margins up. Clearly, we're focusing on value accretive R and D. So we're spending nearly $3,000,000,000 in R and D. All of that is focused on delivering greater and greater value to the customer. That's also very gross margin accretive. So that gives us confidence that we can continue to improve it from these levels. Another way of also let me expand a bit on what Tom is saying also is, here's the thing, if you look at the strategy of this company and the product and the business and the market characteristics and how we address the market. You see, we pick those franchise products and those products are strategic components typically of the customers in each of the end markets we address. And as I say, one of the things that's great about technology business is it constantly evolves. I'm not using the word disrupt. I'm using the word evolution. It evolves. It goes up, switches increases in bandwidth. The top of the rack switch we're launching now is 12.8 terabit. Features a lot, but let's use capacity. The routers, we have same situation. The SerDes we have out there to support our building block products and a few a bunch of other products we have, has gone from has now reached a level of 102 gigabit per second. As we go up higher and higher, the bar in challenging our products goes up correspondingly. I almost want to say use the word in many cases exponentially. You have to spend the money to deliver those kind of very high technology products. And it gets harder and harder as time as generation progresses in every one of our product. This even a simple thing as PCI Express generation 3 going to generation 4 is a huge challenge for most silicon guys out there. We can do it. SerDes going from 25 gigabit to 56 gigabit to 112 gigabit, as I said earlier. We are finding less and less people out there able to come even close to what we do. And because of that, we are because of that, we're delivering high content. When we increase bandwidth, which is a big part of what we do, higher bandwidth allows more data transfers, allows us to get better value for those products. And that's what drives the gross margin. All this is the spending is mostly in R and D. The spending is not in making the product more in not is not in cost of manufacturing going up. It's more in the R and D spending to design and enable the product to come out. So it's normal that the gross margin goes up. It's also normal that the cost of doing R and D is stepping up too. And as Tom said, we're very disciplined on how we make sure we get a good return. But really, the cost of manufacturing more and more sophisticated, higher performance product doesn't change, doesn't increase as fast as the value we add to our customers. And that's why you translate it to high and high gross margin. The same applies in wireless to RF front end. Guys, I like to say that it's harder and harder. The value goes up, but the cost of manufacturing goes up less. And that's the explanation for why our gross margin has been trending or creeping up generation after generation year after year. Thank you. And our next question comes from Harlan Sur with JPMorgan. Your line is now open. Good afternoon, guys, and great job on the quarterly execution. Your data center ASIC pipeline is very strong and I assume contributing to the strong year over year growth in wired. And our sense is that the pipeline is getting stronger and more diversified in terms of customers and product types, switching, routing, AI, deep learning, smart NICs and so on. And it does seem like more and more of the cloud titans are trying to do their own silicon. So you guys think that this is just a transitory phase and that merchant silicon will eventually fill this void? Or do you get a sense that better silicon optimization via ASICs will be a sustainable trend? And I think this question also applies to your analog ASIC business as well. Well, very interesting question. And you know what, the answer I'd be direct with you. I don't know the final outcome and answer either, but we see strength today and looking forward to the next generation in both merchant silicon and ASIC implementations of the kind of products we do. We're both. And in many situations, on large cloud guys who have the scale to ask for unique ASICs, those some of those unique ASICs get their platform from our merchant silicon. And so it becomes like in many cases, it's and now we are saying it is, it's almost an ecosystem play. It's a whole fabric or network play. It's not one component by itself. And we're seeing that. And I would say both, both merchant silicon is moving along very strongly as is ASIC or semi ASIC, or semi custom development. And this is when you say that the cloud guys want to do their own silicon, our phrase is to say, they can only do so much of the silicon. As you know, there's whole spectrum when you do a silicon from right at the front end definition, architecture definition, chip definition to the front end design RTL all the way to the back end. And I've been right, no cloud guy can cut across the entire spectrum. They'll do only parts of it. There's always room for a silicon supplier like us who are able to do across the entire spectrum and with $20,000,000,000 of revenues, we our scale is enables us to not only do things better than most other suppliers out there in silicon, but it also gets us to the scale of cost that is hard to match and across a wide diversity of products. In other words, our cost of developing 7 nanometer spread across such a wide spectrum of products is very, very cost effective as the IP intellectual property we develop to support many of our unique products very well. And you see then the kind of financial performance Tom articulated. Yes. Thanks for the insights there, Hawk. And then question for Tom. You guys have a full quarter of brocade under your wings. Were targeting $900,000,000 in annualized EBITDA post synergies or 60% EBITDA margins. Just given the company's total margin profile that you're driving right now, it seems like you guys are kind of already there, but wanted to get your view. Can you just help us level set where you are relative to your targets and how much more you think you can drive versus prior expectations? Fair question. I think at this point, we feel a little good about Brocade. Obviously, revenues are as a public company, and everyone knows where the top line on sand was. So revenues are strong and a lot of that's reflected in the storage business and the results there. In terms of margins, obviously, it's a margin accretive deal. A lot of the costs on the OpEx side have come out. There's a little bit left to go, but it's largely done. So if you do that math, obviously, this is a business that's meeting, if not exceeding, our expectations, but I don't want to get any more detail on that. Thank you. That concludes Broadcom's conference call for today. You may now disconnect.