Welcome to Broadcom Limited's second quarter fiscal year 2018 financial results conference call. At this time, 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. 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 second quarter of fiscal year 2018. If you did not receive a copy, you may obtain the information from the investor 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 one week. It will also be archived in the investor section of our website at broadcom.com. During the prepared comment section of this call, Hock and Tom will be providing details of our second quarter fiscal year 2018 results, guidance for our third quarter 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 statement made on this call. At this time, I would like to turn the call over to Hock Tan. Hock?
Thank you, Ashish. Good afternoon, everyone. I am very pleased with our execution in the second quarter of fiscal 2018. We drove gross margin to 66.6%, EBITDA to 52.3%, and free cash flow to 42.3% 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 announcement over a six-week period through June 1st, 2018, we have returned approximately $1.5 billion to stockholders by repurchasing more than 6.4 million shares. We do intend to continue to be active. Consolidated net revenue for the second quarter was $5.02 billion, just above the midpoint of guidance with strong wired and enterprise storage results offsetting weaker wireless revenue.
As a reminder, before I go on and give you more color into this quarter, the second quarter 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 second quarter, wired revenue was $2.3 billion, growing 9% year-on-year, 22% sequentially. The wired segment represented 46% of our total revenue. Second 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 remained sluggish.
Turning to the third quarter of fiscal 2018, we expect growth in wired revenue 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 second quarter, wireless revenue was $1.29 billion, growing 13% year-on-year, but declining 41% sequentially. The wireless segment represented 26% of our total revenue. Second quarter sequential decline wireless revenue was deeper than usual as shipments to our North American smartphone customer reduced sharply from the atypically exaggerated first 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 third quarter, we expect to see the beginning of seasonal second half ramp in demand from a large North American smartphone customer as they start to transition to their next-generation platform. However, we expect 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 decline on a sequential basis for the third quarter. Let me now turn to enterprise storage. Second quarter 2018 enterprise storage revenue was $1.16 billion, and represented 23% of our total revenue. This, of course, included a full quarter of contributions of over $400 million from the recently acquired Brocade Fibre Channel switch business. As you may recall, we had completed the acquisition of this business early in our first quarter of fiscal 2018.
As reported, enterprise storage segment revenue grew 63% year-on-year and 17% sequentially. If we exclude Brocade contributions, second 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 second quarter, the overall sequential revenue growth was driven by broad strength from the enterprise IT sector. Looking ahead to third quarter 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. In the second quarter, industrial segment revenue was $263 million, 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 third quarter. Notwithstanding the strength today, we expect annual industrial revenue growth, however, to be in the mid-single-digit range on a long-term basis. In summary, our overall business remains robust and stable. Our third quarter fiscal 2018 outlook reflects this with a consolidated revenue forecast of $5.05 billion at the midpoint. As we experience continued 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 without contributions from Brocade, organic revenue growth for the second quarter would have been in the high-single digits. For the third quarter, 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 billion in cash at the end of the second quarter. We also have $10.5 billion remaining on our stock repurchase authorization as of June 1st. 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 second quarter financials and third quarter 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 at broadcom.com. Let me quickly summarize our results for the second quarter of fiscal 2018. Second quarter net revenue was $5.02 billion, in line with guidance. Our second 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 segments and lower than expected revenue from our wireless segment. Operating income from continuing operations for the quarter was $2.46 billion and represented 48.9% of revenue.
Adjusted EBITDA for the quarter was $2.63 billion and represented 52.3% of revenue. Our days sales outstanding were 50 days, a five-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 $1.26 billion, a decrease of $56 million from the prior quarter. Days on hand remained flat from the prior quarter at 67 days. We generated $2.31 billion in operational cash flow, which reflected the impact of $117 million 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 second quarter, as these are made on a biannual basis in the first and third quarters of our fiscal year. Capital expenditure in the second quarter was $189 million or 3.8% of net revenue.
As a housekeeping matter, I would also note that CapEx was $61 million higher than depreciation. Free cash flow, which we define as operating cash flow less CapEx, in the second quarter, was $2.12 billion or 42.3% of net revenue and reflects the impact of acquisition and restructuring expenses. On the buyback, just to give you some more clarity, in the second quarter, we spent $347 million on repurchasing 1.5 million shares. These repurchases took place over the last two weeks of the quarter. Over the first four weeks of the third quarter, we have spent an additional $1.16 billion repurchasing 4.9 million shares. In addition, we returned $766 million in the form of dividends and distributions in the second quarter.
Let me turn to our non-GAAP guidance for the third quarter of fiscal year 2018. This guidance reflects our current assessment of business conditions, we do not intend to update this guidance. This guidance is for results from continuing operations only. Net revenue is expected to be $5.05 billion ±$75 million. Gross margin is expected to be 66.5% ±one percentage point. Operating expenses are estimated to be approximately $882 million. The tax provision is forecasted to be approximately 7%. Net interest expense and other is expected to be approximately $115 million.
The diluted share count forecast is for 457 million shares, it does not include the impact from any share repurchases done after June 1st, 2018. Stock-based compensation expense will be approximately $320 million. CapEx will be approximately $125 million. As you may recall, in connection with re-domiciling to the U.S. 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%-11% per year. Following re-domiciliation, 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%-11% range. That concludes my prepared remarks. Operator, please open up the call for questions.
Ladies and gentlemen, if you have a question at this time, please press star then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. In the interest of time, we ask you to please limit yourself to one question and one follow-up. 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 guided for a confident sequential growth, which 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 third quarter, 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 it's 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 at enterprise. I call that enterprise IT environment, the more traditional enterprise. Those guys have also been spending. When you combine the two together, that portion of our wide infrastructure business as it relates to networking broadly as we describe it, is very strong. Of course, as an aside, a separate segment we call enterprise storage, benefits get drafted along with that.
That's why you see very strong business in what storage might call nearline or what I call data center storage business. Very strong, both of them. That's very visible in many this situation, because the cloud data center guys tend to spend in a lumpy manner. You get that visibility as opposed to a more secular or trended manner as the enterprise IT guys are doing. To answer your question, bottom line, that will drive our wide business to hit to our goal of a mid-single-digit year-on-year growth for this year.
Perfect. I guess as my follow-up, switching gears on 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 effect of total basis. Also there's unusual factors which we all thought would happen in that as we move from iPhone 8 to iPhone 9 generation coming up, that there is some caution in the level of build. There is. We believe there is. Having said that, we're also seeing orders coming in what I call in a normal seasonal pattern of strength. We do see that very clearly now. We do see bookings that extend all the way to close to the end of this calendar year from these North American customers. 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.
That's what might lead to some uncertainty of how much content changes or increases there might be. Very frankly, visibility is not that clear because it's hard to predict at what level, or what will the mix of new generation phones versus legacy generation phones would be.
Thanks, Hock.
Thank you. 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. Some of the pushback on the company is that you've been so acquisitive that the feeling that there's a need to do more M&A. 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? The second part would be, now that you're buying back stock, your view of the opportunities to do M&A versus return cash through buybacks.
Well, very interesting question on it. In terms of long-term growth of this company and 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 we will achieve on a long-term basis, if you look over an extended period of time, an average compounded growth rate of mid-single digits. No reason for us to change. The business model continues 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. We saw that 2017 as it compares to 2016. We saw it strongly. Organic growth, stripping out the acquisition, the contribution from acquisitions. We saw close to mid-double digit, mid-teens, year-on-year growth in 2017.
We are in 2018, I don't expect that mid-teen rate of growth to continue. As I said, it's one year, but it is still above in 2018, mid-single digits, definitely. We expect it to moderate down to perhaps high-single digits, conservatively. 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 market position within connectivity solutions, especially in those markets there 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 modulate down, as I said before, to a level which is closer to the growth of the entire industry. We have to follow that.
The only variation to that whole thing as we think through this, is simply that like all technology business, 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 five, six years, to industrial, which may be even longer, that each new generation brings an increased content. We have a kicker above GDP growth rate, is always why I say that. Hence, we end up with mid-single digits worldwide, on a global basis. We will see that long-term, even as in the short-term we see variations, and we saw it in 2017, we're seeing it in 2018, but it will inevitably, if you measure it over a long enough period, get down to that mid-single digits.
Got it. Then just as the second part of that question around how you're evaluating kind of M&A opportunities versus the aggressive steps you're taking on the buyback.
We could do involved as we do basically based on return on investment as we generate cash. One of the things we are seeing is our cash flow generation, as Tom indicated in his remarks, especially last quarter. The last quarter is not an unusual quarter as we forecast going forward, our cash flow generation is very, very strong. Our free cash flow was north of $2 billion 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 worldwide, which involves big amount of money for operating cost reduction purposes, but nonetheless, suck up a lot of CapEx, dramatically dropped as we finish those programs.
As Tom said, we are looking towards a CapEx level much lower than we have seen in prior years, in prior quarters. That's enabling our cash generation to be fairly substantial on a quarterly basis, probably north of $2 billion free cash flow. That's allowing us a lot more flexibility, which allows us to still look at M&A as we do and still be able to invest that very strong stream of cash generation in a very good return-generating asset, our own shares. Think about it, our shares producing, we're generating over $8 billion in the company. Our market cap, we're talking over 8% cash on cash return. It's not bad, and it's our own shares. Of course, we will keep doing that, especially with the flexibility of generating a lot of cash. That doesn't mean we stop doing M&A.
We are continuing to look, we go by the criteria we have on cash on cash return. As we see opportunities as we still do, we will act on those M&A opportunities.
Got it. Thank you.
Thank you. Our next question comes from Ambrish Srivastava from BMO Capital Markets. Your line is now open.
Hi, this is Gabriel calling in for Ambrish. Thanks for taking my question. I think this question to 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 third quarter. My understanding is last year, the phone build at your large smartphone OEM customer was later than normal. Why is your wireless revenue not growing? Is it due to the content or more of the unit?
You know what? It's hard to measure quarter and quarter for various reasons. In my remarks, I was very clear. At this time last year, third quarter, we have both the North American smartphone maker and the Korean high-end phone maker going in the same direction. While we are still very positive on the North American phone maker, we are not seeing strength in the Korean phone maker. As I said in my prepared remarks, that's the reason we are seeing that difference. The major reason we're seeing that difference.
All right. Thanks. As a follow-up, on the revenue side, you talk about operating leverage, talk about revenue growth moderating towards a mid-single digit. How should you think about your OpEx front, as well as your gross margin longer term?
If I understood your question correctly, talking about the operating leverage in the model going forward, I think if you look at operating expenses, they've effectively flattened out here at these levels. We might see them come down a bit, especially as we look into 2019, but it's a fair level. We don't see expenses increasing from here much. We obviously think we still have a lot of leverage from a gross margin standpoint and continue to see gross margins expand at the trend you've seen over the last several years. We don't see that stopping anytime soon. When you put that together, we believe that we've got a lot of capacity to continue to improve our operating margins. Then as Hock talked about, CapEx is coming down. I mean, this is largely a fab-less company, a CapEx-light company, when you look at the fundamentals.
We're driving CapEx down to more like $100 million a quarter, which suggests you're going to be running much closer to 2% as a percentage of revenue. 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.
Okay, thanks.
Thank you. 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 ZTE. I was just curious how much of an impact that would be. Secondly, on just wireless, I just want 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. Thanks.
Oh, we don't really like to talk about share on that because in the overall scheme of things, Blayne, it makes no difference to us. It might make a big difference to somebody else, which I won't mention, but in the overall scheme of things, we look at our business as 20 product divisions, four different segments. Some segments are up, some segments are down quarter to quarter, but overall, very stable and sustainable. I mean, broadly answered. I really don't have that much to comment on in terms of share, and we really don't like to comment on share. I said dice with that.
In regards to your first part about ZTE, again, we're trying to be looking at it from a very high level, and until we have the ability to clearly ship out to ZTE, we really prefer that, again, as we said, 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.
Yep. Thanks for taking my questions. I guess I have two as well. First, just on capital allocation, now that buybacks are part of your broader capital allocation, does the bar for M&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. 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?
I think Hock said it well. I'll just reiterate it maybe with a little more color. Basically, it's a returns-driven phenomenon. You can see our views on the returns of buying back our own stock based on our execution of the buyback over the last month plus. I think that's self-evident. Going forward, as Hock said, we always look to drive double-digit returns from an M&A standpoint. Obviously, we think we know how to do integration, so we'll take a risk-adjusted view of it. As long as we think we can find opportunities that are well in excess of what we can buy our own stock at, we'll obviously take a very close look at that.
With 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. 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, 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? 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 two largest customers there?
We don't give outlook even beyond one quarter, much less the year. Frankly, we're not about to really change that practice or 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, that hasn't changed. Again, we got great franchises in every segment we're in, including especially wireless. To ask me for what one year looks like, we don't comment on that.
Fair enough. Thank you.
Next question, please.
Our next question comes from John Pitzer with Credit Suisse. Your line is now open.
Yeah, 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? I guess on the RF stack, we'll start to see some initial 5G 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 4G to 5G.
Strategically, if you go to 5G and you go deeper and deeper into 5G, which runs what they call the ultra-high-band frequency. Maybe it's not so ultra-high, nonetheless, when you talk about anything 3 gigahertz and beyond, you tend to push towards more and more FBAR content. That's given. That's very well proven, that's very well known. When would 5G really come in, and what fashion they will come in, because the initial phones will likely be claimed to be 5G, but not truly 5G, so the specifications doesn't have to be as rigorous for performance. Phone makers may use, especially on the lower end, not higher end, use alternatives like SAW filters and get away with it because performance doesn't matter. Just a socket.
When you really get deeper and deeper into 5G, you need FBAR filters to make it work, given. Think of it long term, content will step up. No question. Not only more frequencies, but frequencies that demand the need for FBAR. Beyond that.
And then-
Who knows? Go ahead.
Specifically, as we think flagship to flagship this year for your North American customer, how do we think about your RF content growth and/or potential growth elsewhere with things like connectivity or touch?
Well, things are, as you say, moving along. We all like to think about is how soon will normalcy in flagship phones come back to what you call normalcy. We don't know. How do you know what is content versus unit volume, especially when normalcy is not there. I'm not trying to dodge the question. I'm saying is, you can't tell. Right now, shipments are not really normal, even as we see bookings coming in strongly, hopefully we like to see it normal, we don't see the Korean customer being as strong as it should be.
[That's all for now].
Thank you. 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 a different way. I know last year around this time, you gave us a number for content. You said that 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. If the mix, I guess, into 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.
Yeah. Even I tell you, how are you going to check it against revenues? Which is what I-
I see
kind of know is most important. 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, it's not really what the content. What's the revenue over the next few quarters? What is it going to look like? Based on you trying to do simple math on content. I say you have an unknown equation, which says the legacy phones may increase in percentage, which then dilutes any increase in content. The revenue won't reflect what you're looking for. I'm basically trying to answer your question for you by saying that if you're looking for on a 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.
answering that question 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 haven't changed at all. 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-end smartphone makers, which we sell to, and their varying performance, all our skew are numbers.
Okay. Okay, let me ask you a question on storage.
You know what I mean? Your math request is easy. I'll tell you the math request is that the trend in content increase has not changed.
Okay. you're still-
It doesn't tell you anything.
Okay. Your old long-term normalized outlook was for end market units to be relatively flat, given call it premium phones aren't growing very much.
Correct.
They have mid-double digit over the long term, mid-double digit content increase. You're not changing that long-term point of view. 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?
Oh, yeah. There'll be long-term content increase still. 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. 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 as roughly flattish, plus or minus. How should we be thinking about the near-term drivers of that and how those may play out over the rest of the year?
Let me correct some misperceptions there, 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 Brocade from current year, a fiscal 2018 result. Our revenue in enterprise storage year-on-year is single-digit growth. As you expect enterprise storage to typically happen.
It's a very stable kind of business. It doesn't do cartwheels and funny stuff like that, but it's very stable and extremely sticky and profitable. That's storage. It will be. Even on fiscal 2018, 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 show or confuse the mix is we now add year-on-year comparison Brocade
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 norm for storage.
Wasn't the 17% a sequential number, or am I remembering that wrong?
Yeah. It's probably some level of sequential. Now, you're right. I'm trying to discourage you from looking at it sequential. Look at it year-on-year.
Okay.
Sorry. Thanks.
You're saying roughly flattish year-over-year excluding Brocade. Okay. Thank you.
Yeah. Roughly flattish year-on-year, excluding Brocade.
Thank you. Our next question comes from Vivek Arya. You're from Bank of America Merrill Lynch. Your line is now open.
Thanks for taking my question. I also had two. 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 bands. Do you think that is just the desire for large customers to just have supply diversity, or do you think competition is catching up in technology? If it's the latter, what are you doing to make sure that you're sort of maintaining your competitive edge in both these 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, FBAR 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. We always, having said that, have competition. You can't do enough. The world is such, you always have competitors.
We are always in the lead, we always, as our key business model, continue to invest as we need to continue, if not extend our lead. 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 even 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. It has not changed. Believe me, it has not changed. The lead that we have in being able to design, architect and design those RF front-end components, which includes a lot of it, FBAR filters are a key element of strength, and power amplifiers, less so, and the normal switches and little components that add up to an RF front-end.
Especially where it relates to FBAR. 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. We continue to make sure we are very much in the lead. As far as I'm 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 clearly answer to all you guys out there, is we do not see, this is not trying to be cavalier or complacent. We're far from complacent in any one of our franchise business. We continue to remain in the lead, and we ensure we'll continue to be in the lead as we look forward 1 generation, 2 generations. That hasn't changed.
The franchise is not in jeopardy.
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? Is there a way to quantify what the longer-term opportunity is to take gross margins to? Thank you.
Good question. Obviously, it is mixed as well. If you look at the growth Hock'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 sums that we 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. 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&D. We're spending nearly $3 billion in R&D. All of that is focused on delivering greater and greater value to the customer. That's also very gross margin accretive.
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 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. 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 bunch of other products we have, 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 product, and it gets harder and harder as generation progresses in every one of our product. Even a simple thing as PCI Express generation 3 going to generation 4. It's 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.
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. That's what drives the gross margin. All this, the spending is mostly in R&D. The spending is not in making the product; it's not in cost of manufacturing going up. It's more in the R&D spending to design and enable the product to come out. It's normal that the gross margin goes up. It's also normal that the cost of doing R&D is stepping up, too. 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.
It doesn't increase as fast as the value we add to our customers. That's why you translate it to higher and higher 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. That's the explanation for why our gross margin has been trending or creeping up generation after generation, year after year.
Thank you.
Thank you. Our next question comes from Harlan Sur with J.P. Morgan. 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. 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. It does seem like more and more of the cloud titans are trying to do their own silicon. Do you guys think that this is just a transitory phase and that merchant silicon will eventually fill this void? 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. You know what? I'll be direct with you. I don't know the final outcome and answer either. 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. In fact, in many situations on large cloud guys who have the scale to ask for unique ASICs, some of those unique ASICs get their platform from our merchant silicon. It becomes like, in many cases, and now we are saying it's almost an ecosystem play. It's a whole fabric or network play. It's not one component by itself. We're seeing that. I would say both. Both merchant silicon is moving along very strongly, as is ASIC or semi-ASIC, semi-custom development.
When you say that the cloud guys want to do their own silicon, I would phrase it to say they can only do so much of the silicon. As you know, there's a 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 other drawing, 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 billion of revenues. Our scale 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 product.
In other words, our cost of developing seven nanometers spread across such a wide spectrum of products is very cost effective as the IP, intellectual property, we developed to support many of our unique products, very low. You see that in the kind of financial performance Tom articulated.
Yeah. Thanks for the insights there, Hock. Then question for Tom. You guys have a full quarter of Brocade under your wings. You were targeting $900 million in annualized EBITDA post synergies or 60% EBITDA margins. Given the company's total margin profile that you're driving right now, 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 real good about Brocade. Obviously, revenues are. It's a public company, and everyone knows where the top line on SAN was. Revenues are strong, and a lot of that's reflected in the storage business and the results there. In terms of margins, obviously, it was 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. If you do that math, obviously, it is a business that's meeting, if not exceeding our expectations, but I don't want to get any more detailed than that.
Great. Thank you.
Thank you. That concludes Broadcom's conference call for today. You may now disconnect.
Well done.