Earnings Call: Q3 2017

Aug 24, 2017

Welcome to Broadcom's Limited Third Quarter Fiscal Year 2017 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, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO and Tom Krause, Chief Financial Officer of Broadcom Limited. After market close today, Broadcom distributed a press release and financial tables describing our financial performance for the Q3 of fiscal year 2017. 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 broadcom.com. During the prepared comments section of this call, Hawk and Tom will be providing details of our Q3 fiscal year We will take questions after the end of our prepared comments. Please note that starting with the Q1 of fiscal 2018, we will only provide sequential revenue guidance as a range at the consolidated company level. This is consistent with the majority of our peers and customers. Given the puts and takes at a segment level during a quarter, which often end up offsetting each other, segment guidance is often not the best representation of likely results at a company level. We will of course continue to report and comment on actual results by segment. This Q4 will be a period of transition and we will provide you with some color on guidance by segment during this call before implementing our new approach to guidance in the Q1 of 2018. 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. Good afternoon, everyone. I'm very pleased actually with our performance for the 3rd fiscal quarter with solid contributions from all our segments. We delivered strong financial results with revenue, gross margin and earnings per share all above the midpoint of our guidance. 3rd quarter revenue of $4,470,000,000 grew 6% sequentially and 17% year on year, with all segments delivering year on year growth. On the income front, earnings per share were $4.10 growing by 11% sequentially and 42% year on year. We are also looking forward to completing the acquisition of Brocade and subject to the satisfaction of the remaining closing conditions, we presently expect to close this transaction within our 4th fiscal quarter 2017. However, please note that our guidance and commentary today for the Q4 does not include any contribution from Brocade. Let me now turn to a discussion of our segment results. Starting with White, our largest segment. In the 3rd quarter, White revenue was $2,200,000,000 growing 5% sequentially, 7% year on year. The wide segment represented 50% of our total revenue. Overall, this was a very good quarter for the segment, driven by seasonal strength in set top boxes and robust demand from data centers for both our merchant and custom silicon products. However, we did start to see softness in demand arising from Chinese operators for our optical and broadband access products. Turning to the 4th quarter, we do expect wired segment revenues to decline sequentially from arising from the seasonal weakness in demand for our broadcast broadband access products industry wide. Notwithstanding this softness, we foresee the wide segment to continue to trend up very well on a year on year basis. Moving on to the wireless segment. In the 3rd quarter, wireless revenue was 1,300,000,000 dollars growing 12% sequentially and 27% year on year. The wireless segment represented 29% of our total revenue. 3rd quarter wireless growth was driven by the start of the ramp from our large North American smartphone customer as they started transitioning to their next generation platform. Revenue growth for us was further augmented by a large increase in Broadcom's total dollar content in this new platform. Ramp of this new platform is now in full stride as we begin Q4 fiscal 2017. We expect this to drive very strong sequential growth in wireless revenue for our 4th quarter and year on year we project strong growth in this segment as a result of our content gains. As we also mentioned in our previous earnings call, our product shipment to support the ramp this year of this North American smartphone maker was were pushed out compared to prior years. As we look to the Q1 accordingly of fiscal 2018, unlike what occurred in the last 2 years, we do we presently expect wireless revenue to hold up sequentially. Turning to enterprise storage. In the 3rd quarter, Enterprise Storage revenue was $735,000,000 and represented 16% of our total revenue. This segment grew 3% sequentially, 39% year on year. Growth in the quarter was primarily from our HDD products, while our server and storage connectivity business continue to hold up well. However, as noted in our last earnings call, we do not believe this strength to be sustainable in hard disk drive. And sure enough, we expect a sharp decline in demand for our edge hard disk drive products in the Q4, driven by the start of an anticipated correction in the hard disk drive market. On the other hand, we expect our server and storage connectivity business to start to benefit from the Parely launch as it starts to ramp during the quarter. So despite this anticipated sharp correction in hard disk drive, year on year, we expect this enterprise storage segment to show double digit growth. Finally, our last segment, Industrial. In the 3rd quarter, Industrial segment revenue was $238,000,000 and represented 5% of our total revenue. Revenues here grew by 6% sequentially, 18% year on year. The strong year on year growth, however, included the impact from a large increase in our IP licensing revenue, which as you know tends to be quite lumpy in nature. Notwithstanding, the industrial resales continue to trend up very firmly with high single digit sequential growth and over 10% year on year growth. And we expect industrial resales to continue to trend up strongly in the 4th quarter. So in summary, for the 3rd fiscal quarter, the demand from all our markets continued to be firm and we delivered mid single digit sequential revenue growth that was propelled by the start of the new platform ramp from a North American smartphone OEM. The opening the operating leverage in our model enable us to drive double digits sequential growth in our earnings per share. Turning to the 4th quarter. Even as we foresee sequential revenue declines in other segments, we project the strong wireless growth to accelerate our consolidated revenue growth sequentially by over 7%. Our year on year revenue growth in 2017 has been very robust with double digit second and third quarter results and projected 4th quarter results in a similar range. Strong end markets, more than just wireless, have contributed to this growth, but it would not be prudent to expect this level of growth to sustain long term. We operate in a relatively mature in relatively matured end markets that we assume are likely to grow over the long term close to GDP rates or in the low single digits. Given our strong position for our product franchises, we do not assume market share changes to contribute to our long term revenue growth. However, we do expect our technology innovations to continue to drive content gains and enable us to push our revenue growth rate above those of end markets. And this leads to our assumption around a very sustainable long term year on year target revenue growth of mid single digits as we have previously indicated. With that, let me turn the call over to Tom for a more detailed review of our Q3 financials and Q4 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 our non GAAP data is included with the earnings release issued today and is also available on our website atbroadcom.com. As Hock mentioned and went through, we did deliver very strong financial results for the 3rd quarter starting with revenue at $4,570,000,000 which grew by 6.3% sequentially. As he also just highlighted, year on year growth for the Q3 again was quite substantial at 17.5%, which is well ahead of our sustainable long term growth rate targets of mid single digits. Foxconn was the only greater than 10% direct customer in the 3rd fiscal quarter. Our 3rd quarter gross margin from continuing operations was 63.3%, 30 basis points above the midpoint of guidance. Turning to operating expenses. R and D expenses were $652,000,000 and SG and A expenses were $116,000,000 totaling $768,000,000 or 17.2 percent of net revenue for the 3rd quarter. I'd highlight that this was $19,000,000 below guidance primarily due to lower than projected lower than forecasted project expenses and the tail end of synergies that we're realizing from Classic Broadcom integration activities. Operating income from continuing operations for the quarter was $2,060,000,000 and represented 46.1 percent of net revenue. I'm pleased that we were able to achieve our long term operating margin target of 45% this quarter. Provision for taxes came in at $88,000,000 slightly above our guidance. This was primarily due to higher than expected net income. 3rd quarter interest expense was $112,000,000 and other income net was $12,000,000 3rd quarter net income was $1,870,000,000 and earnings per diluted share was $4.10 Our share based compensation expense in the 3rd quarter was $251,000,000 Moving on to the balance sheet. Our day sales outstanding were 49 days, an increase of 4 days from the prior quarter primarily due to the ramp in wireless revenue late in the quarter. Our inventory at the end of the 3rd quarter was $1,430,000,000 an increase of $120,000,000 from the beginning of the quarter, reflecting an inventory build to support the strong growth expected in wireless in the Q4. We generated $1,660,000,000 in operational cash flow, which includes the impact of an increase in working capital. We also expended approximately $50,000,000 in cash on Classic Broadcom restructuring integration activities in the 3rd quarter. Free cash flow in the 3rd quarter was $1,400,000,000 or 31 percent of net revenue. Capital expenditures in the 3rd quarter was $255,000,000 or 5.7 percent of net revenue. I would highlight this includes approximately $90,000,000 expended on campus construction projects. As you may recall, our CapEx had been running at elevated levels over the last several quarters largely due to the construction of the partially built Irvine campus we had acquired as part of the classic Broadcom transaction. I'm pleased to note that earlier this month at the start of our fiscal quarter, we completed a sale and leaseback arrangement for the Irvine campus and received approximately $443,000,000 in sale proceeds. We will continue to have CapEx expenditures at the Irvine campus as we complete improvements to the lease space throughout the balance of the year. We expect overall CapEx to decline meaningfully starting in 2018 and we will provide more color on that topic on our next earnings call. Moving on to additional items on the cash flow statement. A total of $438,000,000 in cash was spent on company dividend partnership distribution payments in the Q3. We ended the Q3 with a cash and short term investment balance of $5,450,000,000 Our cash balance remains at an elevated level, which we expect will continue through the Q4 in anticipation of closing the pending acquisition of Brocade. Now let me turn to our non GAAP guidance for the Q4 of fiscal year 2017. 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 $4,800,000,000 plus or minus $75,000,000 Gross margin is expected to be 63% plus or minus 1 percentage point. Operating expenses are estimated to be approximately 780,000,000 dollars Tax provision is forecasted to be approximately $96,000,000 Net interest expense in other is expected to be approximately 100,000,000 dollars The diluted share count forecast is for 457,000,000 shares. Share based compensation expense will be approximately $261,000,000 CapEx will be approximately $230,000,000 dollars On the Brocade front, we have received regulatory approval in China. And as Hock mentioned subject to the satisfaction of the remaining closing conditions, we presently expect to close this transaction within our 4th fiscal quarter of 2017. That concludes my prepared remarks. Operator, if you could please open up the call for questions. Thank you. And our first question is from Ross Seymore with Deutsche Bank. Your line is open. Hi, guys. Thanks for letting me ask a question. Hock, I know this is our last shot at getting segment guidance, so forgive me for taking advantage of that. But as you talked about the wireless segment, can you give a little bit more color about what you meant by the fiscal Q1 holding up? Does that mean better than seasonal, up or down sequentially? Any more color there would be appreciated. Sure. Well, from Q3 to Q4 and we have said that in the last earnings call, we expect probably to drive up our revenue, careful my choice of what rocket, but drive up about 30% to 40% sequentially on wireless alone. And because of the delayed shipment and everything just shifts back further out, so we expect in Q1 that the wireless revenue would probably hold close to the same level as what we will see in Q4 fiscal 2017. Hope that helps. It does. That helps a lot. And then a question Tom for you, a little bit longer term. You mentioned about the CapEx coming down as we go into next year. So I'm not going to ask you for any more details on that. But as we think about a 35% free cash flow target margin target and a 45% target for your operating margin, I know there's some deltas in between those two, but it doesn't seem like it should add up to quite 10 points. Can you talk a little bit about what might bring that free cash flow margin target a little closer to the 45% operating margin? Or is it not going to approach that? No, Ross. I think that's very fair. As we've seen operating margins and EBITDA margins continue to expand and you look at sort of the one time items this year around the campus activity, some of the things we're doing in the back end, restructuring activities we've taken on, you're going to see that continue to converge. I don't see the interest expense levels or other items that would tax rate dictate any expansion in that number. So I think as we get into the New Year and we update you on the financial model, I think there's certainly room for more conversions. Perfect. Thank you. Thank you. And our next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open. Yes, great. Thanks for taking the question and congrats on the solid results. Tom, I had a question on gross margins. You're guiding Q4 gross margins down, I think about 30 basis points at the midpoint despite the outlook for significantly higher revenue. I was curious if this is simply a function of customer mix and perhaps conservatism on your part? Or are there other factors at play here? I wouldn't say it's conservative. If you look at the mix of business in the Q4, obviously wireless is a much larger percentage of overall revenue. Wireless traditionally, as I think you probably know, does carry below average below Broadcom average gross margins. And so when we see such a change in mix, you're going to see some pressure and headwinds on margins. I think despite all that, however, we're very confident that we can maintain relatively flat gross margins here, which are obviously running at record levels. Great. Thank you. And then as my follow-up Hock, I had a question on your appetite for further M and A. I realize you guys are still working on right now. But beyond that, given what you see in the pipeline and given current valuation levels, I was curious how, I guess, hungry you are in terms of M and A. In the past, you guys have talked about your 15 product groups and I guess 19 including Brocade. But when you think about your pipeline and your team's capacity to run businesses, how many additional product groups do you think you can manage? Thank you. Good question. So far, this thing this actually, we have 19 product groups right now. Brocade would add a 20th one. And do we have capacity for more? Yes, our machine is running very smoothly. We can certainly do more. Yes. And, Tush, I think as you know, in terms of capital allocation, we've been focused on maintaining a balance between giving back 50% of free cash flow to shareholders in the form of a dividend and then focusing the balance of the 50% on M and A. And I think we continue to believe we can do that and do it successfully going forward. Obviously, Brocade is the latest instance of it, but now we see an opportunity going forward to maintain that model. Thanks so much. Thank you. And our next question is from the line of Craig Hettenbach with Morgan Stanley. Your line is open. Great. Thank you. Yes, kind of question on the merchant silicon, particularly Jericho versus Tomahawk. One of your key customers recently spoke favorably about some momentum for Jericho. If you can just kind of update us kind of where both of those are and how you're feeling about the ramp in both Tomahawk and Jericho? Well, those are very good. Those two products, by the way, is a whole for each of them is a whole set of generation of Tomahawk switches and Jericho generally are router switches. And so both are used in different place. Once and both are doing very, very well and are very well received in data centers, both public data center, the public cloud data centers as well as even private enterprises. And it's running very well. And in terms of ramp, see, we have constant upgrades to those products. We have launched since last year, Tomahawk and Tomahawk Plus, the Tomahawk 1. We have been launched this year Tomahawk 2. We should be doing Tomahawk 3 by end of this year. And it will keep going on as we engineer new innovative next generation products for our cloud customers, especially our cloud customers who desire higher and higher throughput and bandwidth. And same applies to Jericho, which is a newer product, which is a routing product used in aggregation and spine. And that's also going in the same direction as we create generation and potentially future generation of those products. So we see those 2 to maintain our very, very strong market position in the switch networking connectivity business. Got it. And then just as my follow-up, just your commentary around kind of being able to drive content growth to get just a better growth mid single digits versus the target. Clearly, we see a lot of the wireless growth coming through and you talked about that. But just more broadly across the organization, any areas that you're more optimistic about the ability to drive higher content and market growth? I would say we are very, very broadly positive about content growth because this is the underpinning of our business model, which is using technology, leading edge technology in very proven markets to keep driving innovation and performance for our key customers in each of those applications. We see that in networking. We see that in enterprise storage. We see that in even in industrial and, of course, wireless very much so. So that's the underpinning of our business that every generation and every generation may spend annually to as long as 3, 4 years depending on the particular end market segment it's in, but it will happen. And each time it happens, we provide performance, we provide good value to our customers and that allows us in turn to create a return on the investment in R and D we make to generate basically higher content in the premium prices. Got it. Thank you. Thank you. And our next question is from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is open. Thanks for taking my question. Hock for my first one when we look at your RF content very strong this year. But broadly speaking RF overall is getting to be a bigger part of the bill of materials for large smartphone customers close to 10% or so. Is there a limit to how big it can be? At some point do you think customers will start to complain? Or do you still see enough value being added by RF that we could consider this a growth area for the next several years? And that's the continuing challenge that applies not just to RF, into our broadband access, even into our networking business, which is ability to deliver more and more value features and by extension content, IP into our products. I do not see that stopping, not visibility wise for the next 3 years. I see. And as my follow-up, I think Tom you mentioned you have exceeded your non GAAP operating margin targets already. How much more leverage is in the model? And more importantly, how do you trade off sales growth versus driving towards certain operating margin? Because when I look at many of your other peers in semis, a number of them are targeting perhaps faster growth, but at lower operating margins. So just conceptually, what is how do you drive the right balance between driving to a certain level of profitability versus achieving above industry growth? Thank you. Yes. Vivek, I think I'll piggyback off of Hock. It all ties back to the business model. And I've been here about 6 years and Hock's been here obviously over 10 years driving this model. And I think margin started out in the 30s when HOT got here as gross margins. They were in the 40s when I got here. I mean the model continues to focus on investing in value added product development and delivering better and better value for customers and for us. So I think what you're seeing is a constant increase in margins both gross margins and then with revenue growth in our operating margins. So we expect that to continue going forward. Vivek, let me add to that. And Tom is exactly right in saying that, think about it. We have 19 product franchises. Each of them are in end market specific end markets. You might almost say niche markets in some cases. And we always start off as niche markets, they add some of them end up as the mass market as the market moves to the niche we happen to have picked. And it's about developing products using technology we have and continuing to evolve the technology, which are the best superb in those end markets we are in. We are number 1 typically in those end markets, number 1 in technology leadership, number 1 in markets. And we keep investing again and again over the years to develop new product generation. We do not manage this business by numbers. We just manage it based on this model, based on addressing market demands and let the numbers fall where they may as long as we believe we're getting value and a good return on investment we make in those niches we are in. We just sustain those niches. And the numbers you see us roll together is what arises as an end result of this business model. We don't try to trade off revenue against margin. That doesn't work. It's the basic business model that says in each of the 19 product groups we are in, we are the best there is and we get the biggest share. And we can and that market continues to need new product innovation and we supply it. And by doing that, the revenue is whatever the revenue turns out to be and the margin gets richer and richer as we provide more and more technology. And the end result is consolidating all these 19 divisions, you get what we show you. And you get a gross margin that continues to expand, as I mentioned, because the nature of this technology market enable us to keep evolving new products with higher content and a higher price premium. Thank you. Thank you. And our next question is from the line of rammed Shah with Nomura. Your line is open. Thank you very much. That was helpful gross margin commentary. I wanted to ask about OpEx because for the quarter you're guiding, it's coming in a lot lower than what I was anticipating. And Tom, I think you've previously sort of guided OpEx closer to like 18% -ish as a percent of sales. And in October, we're going to be closer to 16%. So I'm just I'm curious if 16% is sustainable, what's the right way to think about OpEx going forward? Yes. We'll update this a bit next quarter. But obviously revenue has exceeded our expectations this year and is well ahead of what we would anticipate as long term sustainable growth. So whenever you do that over a short period of time, you're going to look better on the OpEx side as a percent of revenue. I think if you focus on the level. There's some puts and takes around project expense and when people come on board or leave. But at the end of the day that's kind of where we're running and we'll give you an update on how we think about next year, next quarter. Okay. Sure. And then on enterprise stores, just given how much it's up year on year, is it do you think it's reasonable for us to assume that this decline you're seeing in the October quarter may extend beyond this fiscal year that this inventory correction may go on for a couple of periods? Yes. Ramin, you've got a very good question for which I don't have a very certain answer. But you're right, it's we were saying for the last couple of quarters, be careful of our hard drive, looks so good to be true. We'll begin to look that way. And so yes, I tend to like to agree with you to say that it may extend beyond Q4 to even Q1 next year, but and that will likely happen. Having said that, year on year, our storage business seems to be what it should be, which is firm but flattish. That's why we like to see enterprise storage over the long term. What we see this year, 2017, appears to be a bit of a divergence from that. But I think we'll get back to normality perhaps in 2018 and to see it being sort of flattish year on year, which is where enterprise storage should be as a very stable, sustainable, boring business. Okay. Thank you. Thank you. And our next question is from the line of John Kitzer with Credit Suisse. Your line is open. Yes. Good afternoon, guys. Hock, last conference call, you talked about content gains in the handset this year, I think approaching kind of 40% year over year. And clearly, I think we all understand the RF story. I was hoping to get a better understanding if you could talk about what's going on in kind of the combo chip wireless side of the market and other opportunities that you might have to be gaining content on the handset side? You're asking very difficult question for me to try to answer. It's we're multiple we have as I mentioned the last time, we have multiple sockets in those high end flagship status smartphones, multiple sockets doing multiple key functions in those phones. So to be able to pick up one versus the other, they are different, you're right, the first answer. So I can't answer for broadly across, except to say that broadly across, as you go from 1 generation to the next in those flagship smartphones, The functions we do drive towards more and more complexity, more and more functionality and certainly more and more performance. And to do it, chips get the chips we do, the the same thing applies as we go from 802.11ac, AM first, AM first to AC, AC second wave and in the next year or 2 to AX. It goes to more and more performance, multiple users. And with it, a larger and larger chip that requires more and more investment to make it perform and which allows us to ask for higher and higher price for the value we provide to the end users. And they're all the same, whether it's wireless whether it's a Wi Fi, Bluetooth connectivity or GPS, analog, which we also do or even the touchscreen controller. All that has the same characteristics that each generation of phone requires more and more performance and complexity. That's helpful. And Hock, maybe for my follow-up. In your prepared comments, you did call out kind of optical and optical China as areas of weakness. Can you just remind me again how big of the wired business that is? And do you think this is a 1 quarter phenomenon or and we get back to some sort of growth sometime in the January timeframe? Or how are you thinking about kind of the demand pause you're seeing in that part of the wired business? I could give you something, but I've been a selfish person that I am in the bigger scheme of things. Wired, we hodgepodge a bunch of stuff together, all of them very strategic to us. On one side, we have networking. On the other side, we have broadband from set top box to broadband access gateways, networking switches, routers, whether it's merchant silicon or ASICs to interconnects, fiber optic interconnects and building block physical layer products and embedded SoCs, embedded CPUs, what do you call them, used in things like VoIP phones and what you call terminal point of sale terminal. You can see how broad it is. And to be honest, yes, we point out so there are always put and takes. And couple of product lines are soft, other product lines are strong. And we'd like to give you a bit of color, but sometimes I regret giving you too much color because you start speaking on it particularly. And really it does it have an impact in this particular quarter, but it may not impact the next quarter. You get what I mean? So broadly, look at it as a broad spectrum of wired combining networking as well as access product lines. And that just moves along in a very, very stable manner growing anywhere from 5% to 10% on an annualized basis, best way to look at it. Because involved in it are product lines that grow very slowly and some that are very more exciting as you guys like to point out. If I talk about the exciting things, you might extrapolate to see the whole 50 my revenue growing like wheat when it doesn't. So I do want to be very careful in making sure I clarify all this for you guys. Perfect. Thank you very much. Thank you. And our next question is from the line of Harlan Sur with JPMorgan. Your line is open. Good afternoon and good to see the diversification in the business playing out here. Your ASIC design win pipeline is pretty strong. You've got switching and routing, service provider, AI, deep learning and a whole bunch of other mixed signal and analog stuff. It's very diverse like the business, diversity of applications, end markets. Can you just talk about the competitive landscape within your ASIC business? And we all know the benefits of ASSP are off the shelf, but is the team seeing an uptick in customers wanting to do ASICs? And if so, what's driving this trend? Customers wanting to do ASICs. To be honest with you, it's harder and harder to do ASICs now from a broad industry trend. As you go from 28 nanometers, which seems like history, to 16 nanometers to now increasingly 10 and 7, the cost of designing ASICs is exponentially growing. And you can probably understand why as the process and the process technology and equipment goes up very, very sharply. So unless you are a player, a system guy with very high volume, a system OEM or even end user with very large volume of a particular part, it's very expensive for you to want to do ASICs for your particular needs. And if you do, we're happy to address it, but we're finding out at this kind of at this stage of very high bandwidth because you need and to address those high bandwidth, high throughput, you need very advanced CMOS technology, becomes very, very expensive. And to be honest, I think we can foresee a trend towards merchant silicon in those networking applications. Great. Thanks for the color there. And then on the storage side, I didn't hear you mention anything about your SSD business. You guys obviously are supplying into 2 of the top 3 enterprise SSD companies. I think on the enterprise SSD side, they're not seeing as much issues shortage wise just because that's where the highest profitability per bits are. And I think some of your customers are growing these businesses like 30%, fifty percent year over year. I'm just wondering, are you seeing these kind of trends in the business? Or do you think that this segment is also sort of subject to some of the supply constraints? You're obviously reading the signs out there, all very correct that enterprise SSDs are very much in demand, very much in short supply, but nonetheless on a trend basis growing very rapidly and we are supplying a lot of the flash controllers into those assets. Those SSDs among a particular few of those very successful SSD suppliers. And sure, and we are benefiting from that from and I agree with you. But again, on an overall scheme of things, even in our storage business, it helps add to our total revenue of $700,000,000 to $800,000,000 every quarter and we love that. But again, there are puts and takes in the overall scheme of things. And it helps us get our revenues. Does it move the needle? Some, but not tremendously. But back again, we see it because we are the lead in enterprise flash controllers. So we do get the benefit from that back to the franchise model. We're the lead. We're the one we are the one with the technology and we keep put our head down and continue to grind and benefit from that growth. So we do see that growth. Great. Thanks for the insight, Chuck. Thank you. And our next question is from the line of Blayne Curtis with Barclays. Your line is open. Hey, guys. Thanks for taking my question. Hock, I did want to ask you, obviously, the focus is on the North American customer. But if you could just comment on the Korean customer, your ability to hold share and grow content. They obviously just launched a new phone and but as you look into next year as well, if you just comment on your ability to continue to grow there as well? We have the same phenomenon, actually a very parallel phenomenon. They're both well, the Korean customer obviously have a range of phones from high end flagship phones down to feature phones, low end smartphone. And our products are very well represented in the markets we are good at in their flagship phones and still there. And our ability to keep driving away on new products, new technology continues unabated. Every year, new generation, we're there. And I do want to ask you on the non mobile WiFi side, 802.11ax, when did you when do you expect to see some revenue from that? And what type of driver could it be for you? Well, that's very interesting question. We are sampling our chips now. We're enabling the enterprise access points market and trying to enable the basically the enterprise access markets in ax. And we're sampling now and we probably won't get into production until around middle of next calendar year. And that's how these things how long these things take because a lot of software, not just hardware, but we're very positive about it and we're pushing it very nicely. Thanks guys. Thank you. And our next question is from the line of Amit Daryajnani with RBC Capital Markets. Your line is open. Yes. Thanks a lot. Good afternoon, guys. I guess to start off with on the free cash flow side, you guys had obviously fairly strong free cash flow conversion this quarter despite the working capital inefficiencies you had. So maybe just help me understand the working capital inventory uptick that you had this quarter, does that all sort of get rectified in the October quarter or given the fact this product was delayed a little bit, at least the launch was, does working capital normalize more in Jan April for you guys for next year? Yes. We'd expect things to normalize this particular quarter given where we are with our fiscal year end. We see a big ramp at the end of Q3 and then it normalizes in Q4. So we'd expect that to shake out and be more back to normal in Q4. Got it. And then I guess just on the Brocade transaction, any change on the revenue and EBITDA contribution that you guys had expected when you announced the deal to today? And could you just remind me what approvals are remaining at this point for you guys to get done? Because I think you just got China approval recently. Yes. No change. I think Brocade just came out with their earnings results this afternoon as well. And the sand business which is the business we targeted with Brocade continues to perform well and in line with our expectations. And so it's going to be a business we think generates $1,300,000,000 plus of revenue and $900,000,000 plus of EBITDA on a run rate once integrated. On timing, I think Willhawk and I mentioned Q4, we're highly confident that we're going to be able to get there this quarter, obviously, being delayed. No one likes that, but we are working through various approvals. We did get in Ofcom. What's left is CFIUS. CFIUS plays a very important role and we certainly respect that. And we're in active dialogue. We've been through that with them multiple times before. And I think like I said, we're pretty confident we're going to be able to get there this quarter. Perfect. Thank you. Thank you. And with that, ladies and gentlemen, we conclude our Q and A session and program for today. Thank you for participating. You may all disconnect. Have a wonderful afternoon.