Earnings Call: Q2 2017

Jun 1, 2017

Welcome to Broadcom Limited's 2nd 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 Q2 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 atbroadcom dotcom. During the prepared comments section of this call, Hawk and Tom will be providing details of our Q2 fiscal year 2017 results, background to our Q3 fiscal year 2017 outlook 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. Good afternoon, everyone. I'm actually quite pleased with our performance for the 2nd fiscal quarter with solid contributions from a broad number of our franchises. We delivered strong financial results with revenue, gross margin and earnings per share all above the top line top end of our guidance. 2nd quarter revenue of $4,200,000,000 grew 1% sequentially and 18% year on year. The seasonal sequential decline in our wireless segment was less than expected and more than offset by contributions from all other segments. All segments, even wireless, delivered year on year revenue growth. On the income front, earnings per share were $3.69 growing by 2% sequentially and 46% year on year. Let me now turn to a discussion of our results by segment. Starting with wired, our largest segment. In the Q2, wired revenue was very stable at $2,100,000,000 growing 1% sequentially and 3% year on year. The wired segment represented 50% of our total revenue. Wyatt continued to remain a very consistent end market and performed in line with expectations. As you may recall in the preceding quarter, while revenue included approximately $60,000,000 of revenue related to the assignment of certain manufacturers' right to a customer. This did not repeat in the Q2. However, we were able to more than make up for this amount with growth from enterprise networking and the start of a seasonal increase in demand for our broadband access and set top box products. Turning to the 3rd fiscal quarter, though we expect seasonal strength in broadband and sustained cloud data center spend and consistent with this outlook, we expect wide revenue growth to accelerate into mid single digits sequentially. Moving on to wireless. 2nd quarter wireless revenue was $1,150,000,000 dollars declining by 2% sequentially, but growing 45% year on year. Wireless the wireless segment represented 28% of our total revenue. The low single digit sequential decline in revenue was better than expected due to stronger than anticipated end market demand. The sequential decline was driven by the bottom of the annual product cycle transition at our major North American customer, offset by the ramp of the next generation phone at our large Korean smartphone customer. Generation to generation, we also benefited from a significant increase in Broadcom's cellular and Wi Fi connectivity content. Moving on now to the 3rd quarter, we expect to see the beginning of the second half seasonal growth in our wireless segment revenue. We expect this growth to be driven by the start of a ramp from a large North American smartphone customer as they transition to their next generation platform. On top of this, we are also expecting a substantial increase in our total dollar content from the 8 Broadcom products we will be supplying into this new platform. The national ramp of this next generation platform, however, appears slower this year compared to prior years, but we believe this will likely accelerate in our 4th quarter. Our 3rd fiscal quarter outlook reflects this expectation and notwithstanding the 40% content growth, we project sequential growth in our wireless revenue to only approach double digits on a percentage basis. This outlook also reflects an expected decline in shipments to our large Korean smartphone customers. Let me now turn to enterprise storage. In the 2nd quarter, enterprise storage revenue was $712,000,000 growing 1% sequentially and 36% year on year. Storage segment represented 17% of our total revenue. Surprisingly, this segment continued to hold up and perform as expected. Hard disk drive and custom SSD shipments grew, while SaaS and rate sustained, offset by a seasonal decline in fiber channel shipments. During our previous earnings call, we expressed a cautionary tone around enterprise storage for the Q3. However, we continue to see stability and most of all sustained bookings. We expect storage revenue to grow in the low single digits sequentially into the Q3. And finally, our last segment industrial. In the Q2, the industrial segment revenue was $223,000,000 growing by 24% sequentially, much better than expected primarily due to higher IP intellectual property that is licensing revenue from a large deal we closed in the quarter. Industrial revenue grew 23% year on year and represented 5% of our total revenue. Resales of our industrial products continued to trend up very firmly in the Q2 and we expect this to continue to be strong into the next quarter. As we look to the 3rd quarter, we expect industrial revenue to grow in the mid single digits sequentially. So in summary, demand in the 2nd quarter, historically our weakest seasonal quarter, was stronger than expected. For the 3rd fiscal quarter end markets in wired, enterprise, storage and industrial continue to be strong, while wireless turns around and starts slower than usual seasonal second half ramp, although we do expect it to accelerate dramatically in the Q4. This leads to our projection of consolidated revenue growth of around 6% sequentially for the Q3. With that, let me turn the call over to Tom for a more detailed review of our Q2 financials and Q3 outlook. Thank you, Hogg, 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 with revenue of $4,200,000,000 which grew by 1% sequentially. Year on year growth for the Q2 revenue was 18%, which I would notice continues to be well ahead of our long term growth rate targets of mid single digits. Foxconn was the only greater than 10% direct customer in the 2nd fiscal quarter. Our 2nd quarter gross margins from continuing operations was 63.1%, 70 basis points higher than our prior quarter and 110 basis points above the midpoint of guidance. The improvement in gross margin was primarily due to higher revenue and better than expected IP licensing revenue within our Industrial and Other segment. I would note, we do expect to be able to sustain these gross margins going forward. Turning to operating expenses. R and D expenses were $677,000,000 and SG and A expenses were $122,000,000 totaling $799,000,000 or 19 percent of net revenue for the Q2. This was slightly higher than guidance as we accrued for a larger projected annual bonus compensation expense driven by better than expected operating income. As I mentioned last quarter, we are comfortable at this relative level of operating expense given our current portfolio of businesses. Operating income from continuing operations for the quarter was 1,850,000,000 dollars and represented 44.1 percent of net revenue. We now have line of sight to achieving our long term operating margin target of 45%. Provision for taxes came in at $78,000,000 slightly above our guidance. This is primarily due to higher than expected net income. 2nd quarter interest expense was $112,000,000 and other income net was 3,000,000 dollars 2nd quarter net income was $1,670,000,000 and earnings per diluted share was $3.69 Our share based compensation expense in the 2nd quarter was $216,000,000 Moving on to the balance sheet. Our day sales outstanding were 45 days, an increase of 2 days from the prior quarter due to a reduction in linearity of revenue in the quarter. Our inventory ended at $1,310,000,000 a decrease of $25,000,000 from the beginning of the quarter. We generated $1,580,000,000 in operational cash flow, which does include the impact of an increase in working capital. Expenditures on classic Broadcom restructuring integration activities continues to decline as expected as we expended approximately $50,000,000 in cash on these activities in the Q2. Free cash flow in the Q2 was $1,330,000,000 or 32 percent of net revenue. I would note we are making very good progress towards our long term target of 35%. Capital expenditure in the 2nd quarter was $256,000,000 or 6.1 percent of net revenue. As a reminder, we do expect our long term CapEx to decline to about 3% of net revenue. A total of $437,000,000 in cash was spent on company dividend partnership distribution payments in the 2nd quarter. We ended the 2nd quarter with cash and short term investment balance of $4,450,000,000 Our cash balance is running at elevated levels, which we expect will continue through the Q3 in anticipation of closing the pending acquisition of Brocade. Now let me turn to our non GAAP guidance for the Q3 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 $4,450,000,000 plus or minus 75,000,000 dollars Gross margin is expected to be 63 percent plus or minus 1 percentage point. Operating expenses are estimated to be approximately 787,000,000 dollars Our tax provision is forecasted to be approximately $86,000,000 Net interest expense and other is expected to be approximately 100,000,000 dollars Note this reflects anticipated interest expense on our long term debt of $112,000,000 offset largely by other income including interest earned on our cash balance. The diluted share count forecast is for 456,000,000 shares. Share based compensation expense will be approximately 255,000,000 dollars Capital expenditures will be approximately 240,000,000 dollars As you have seen, our Board has declared a dividend of $1.02 per share to be paid later in this fiscal third fiscal quarter. We are looking forward to completing the acquisition of Brocade, which is proceeding as planned and subject to the satisfaction of the remaining closing conditions. We presently expect to close this transaction on or about July 31, 2017. That concludes my prepared remarks. Operator, please open up the call for questions. And our first question comes from the line of Blayne Curtis with Barclays. Your line is now open. Hey, guys. Thanks for taking my question and great results. I just want to follow-up on the wireless side, you said a slower ramp. I was just kind of curious, is this the timing or a magnitude? I think you just meant that it's going to be more a Q4, But if maybe you could just wrap some color around that? It's timing. I think it's timing. Last year the similar ramp was earlier in Q it was stronger in Q3 probably because it was earlier. And here, the initial volume in our fiscal Q3 was smaller, made up with content on our side, but definitely Q4 is forecast to be larger. Got you. And then you mentioned this on the storage side, you had some conservatism on the second half and you're seeing growth. Maybe you can just talk about what you're seeing on the storage side that is growing? And then what are you seeing? I think your hard drives where you're most concerned. What's making you feel better about that market? Well, it's growing as we mentioned pretty much single digits, low single digit. I would say it's at a high elevated level and kind of staying there for now in Q3. Q4, of course, as we expressed in a cautionary manner, is a whole new game. Visibility is we obviously are not booking everything in Q4 yet, but we pretty much booked Q3. Perfect. Thanks, guys. Thank you. And our next question comes from the line of Vivek Arya with Bank of America. Your line is now open. Thanks for taking my question and great job on the consistent execution. For my first question Hock, can you please address these recent media reports about the potentially large bid for Toshiba's assets? I realize that details are not public, but there is a very large amount of money involved. And I think investors are keen to know how you are thinking about it conceptually and whether you are still committed to being disciplined around maintaining your free cash flow returns and not taking big technology risks when you consider M and A? We are very committed to our business model of only having franchises very much so. And as I mentioned, all 18 of product lines are product franchises in connectivity solutions. We are also very committed to not only those franchises, but generating lots and lots of free cash flow, which we half of which we will return to shareholders. All that part model, no change. Bottom line, don't believe everything you read out there, please. I see. And then secondly, on the wireless business, I think you gave some good color for Q3. Just one question on Q4 and then maybe longer term. Q4, when I look in the last 5 years, the median sort of sequential growth has been close to 30%. So is that the kind of level that you're thinking about this year or maybe even better given the delayed shipments of those phones and the higher content you suggested? And then longer term on that same wireless team, I think one of your competitors, Qorvo, recently outlined some plans to perhaps take some share at your large customer with a high band pad. And I wanted to see how secure you think your competitive position is on next year's phone models? Thank you. All right. There's a lot of questions and content. Let's start with the serious one. We don't forecast beyond 1 quarter, bad practice frankly, because we could be very sadly wrong. But obviously, what we are also saying is from the limited visibility we see, we see the ramp beginning in our fiscal Q3, which as you know is an off calendar ramp by 1 month July. So we capture a part of that ramp. I believe we believe it's a small part and we expect to capture substantial part of that ramp in Q4. But keep in mind, Con's always, when you compare year on year, we have different content levels from a year ago substantially as I pointed out. So that might kind of confuse the numbers somewhat. But suffice to say, Q3, as we outlined, since the beginning of a ramp, may not be the same level of ramp if you compare to a year ago for the couple of reasons I mentioned. But we also see Q4 to even ramp up even more substantially, obviously, because if Q3 is slower, it's more than likely Q4 in any product ramp, will just show a stronger quarter compared to Q3. So that's it. But other of the specifics, really, I'm not really at liberty to disclose it because we just don't go look that far out. As far as the trash talk you hear out there, seriously, we don't prefer to I prefer not to comment on that. Okay. Thank you. Thank you. And our next question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is now open. Yes, thanks. Hock, just a follow-up on wireless on the content side. Can you give maybe a little bit of context if you split kind of the legacy of Vago on RF relative to the Broadcom kind of connectivity and maybe touch piece? I'm already stretching a lot to say that for certain North American customer, we have very good content, a customer we dearly value. I prefer not to give you any more details other than that. Thank you. Okay. I'll try another one on the networking side. Can you talk about just the trajectory in the merchant silicon business and any new kind of customer adoptions or ramps to think about there? Well, we feel very good about our merchant silicon in switching and now routing as we call it which is the DNx series on the Jericho, Jericho Plus and all that and we have launched that. And they are used not just as routers, they use as aggregation switching in the spine. And so it's a very good application. So we pretty much cover in our merchant silicon even at the high performance, high capacity top of the rack switching. We pretty much covered a full range of requirements. And so that's going along very well. In fact, very, very and the penetration, especially in the cloud guys, is very, very good. Adoption among the hyperscale cloud guys is extremely strong, extremely well used. And while all this is going on, some penetration in enterprise is happening. But here in enterprise, traditional enterprise, our ASIC switch and routers continue to run very, very well through our OEM partners. Got it. Thank you. Thank you. And our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open. Hi, guys. Congrats on the strong results. Hock, just had a couple of questions on your wired segment. 1 of the larger customers in there guided recently and a little weaker than expected for their June quarter and talked about some weakness on the service provider side. So rather than by product type, if you talk about customer types, are you seeing any change in the customer behavior that is under the covers within that mid single digit growth that you're talking about? No, we don't. We see in this third quarter very good data center spending. And as I said, there's a lot of this I assume when you say service provider, you mean the cloud guys. And the cloud guys are very much focused on using merchant silicon on switching and routing connectivity solutions. So and we see very strong spend, which is part of the reason why we are raising our sequential growth in Q3 from Q2 in wired to be mid to up to mid single digits. Of course, it's also helped by the seasonal uptrend we are seeing in broadband access and set top box, which is CPE. That's typical seasonality, but it's not entirely that. It's also switching and routing in data centers. And as my follow-up still within that same segment on the broadband segment that you just talked about, talk a little bit about what DOCSIS 3.1 can mean for you. With that rolling out, is there a chance that things can be a little better than seasonal in your broadband business as we go into the second half of the calendar year? Or are there sets that we need to appreciate? I never try to be too optimistic. At this time of the year, we see always a typical seasonality and boy, are we seeing it now. Now and bookings out Q3 and the beginning part of Q4, very strong booking. But I'd like to consider that seasonality rather than unusual seasonality. This is normal. Great. Thank you. Thank you. And our next question comes from the line of Amit Darianni with RBC Capital Markets. Your line is now open. Thanks a lot. Good afternoon, guys. A couple of questions for me as well. I guess to start off with, as I think of your operating margin target around 45%, you guys are at 44.1% right now and I think Brocade alone once it closes gets you north of that. So how should we think about margins as you go forward? Is it desire to keep taking margins higher? Or do you think there's price elasticity in this market where you could perhaps keep margins the way they are and drive revenue growth faster? Boy, you asked very complicated strategic question. All we We're trying to do it. I know you do. Very impressive questions, but you won't get as impressive an answer though I have to say that because all we are doing is we sell based on the value added we provide our very key customers. That's really what it is. And we believe we deserve and get the value added we provide in our products to the solutions of our customers. And but we think it will drive us to 45% as a fairly, fairly decent way to get there. Yes. Amit, at this point, we're not updating our financial model. We're not updating our operating margin targets. We're very comfortable with 45%. Fair enough. I guess if I just follow-up, as I think of your gross margin guide for the upcoming quarter, you have a nice 6% uptick in sales, but you're talking about gross margins being flat, even though I think the headwind from wireless not being up as much should be a benefit. And last year, I think you got your gross margin up like 40, 50 basis points in July. Why can't we see the same level of leverage given mix might be better this July versus last July? Well, we kind of give you what we see. We hate to miss forecast guys, as you probably know. So we kind of give you something that we're pretty very comfortable with. And we are very comfortable at a midpoint of 63%, which you're right, we achieved it last quarter. Yes, Navedam, I think we're going to be able to sustain in around that number. I think you're right, there's some wireless mix, with slightly headwind. We've also worked through a lot of the Broadcom synergies and the benefits we received there. But I think we plan to sustain that going forward. Thank you. And our next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is now open. Yes, great. Thanks for taking the question and congrats again for the strong results. I had a question on the long term revenue growth target. Obviously, you guys are committed to the mid single digit target that you put out a couple of quarters ago. But as you pointed out, you grew 18% in the April quarter. If we take the midpoint of your July quarter guide, I think you guys have the quarter growing about 17%. I realize the growth rate in enterprise, for example, is not necessarily sustainable. But what prevents you from raising the target to say high single digits on a long term basis? On a long term basis, no, because don't forget the characteristics of our product lines, all 18 of them, even the 19th one eventually, Brocade, they are very sustainable. That's the single most important criteria, sustainable franchises. I mean, they deliver value added and they keep delivering it generation after generation. They're not there to grow like weeds. They're not. And but they grow like GDP pretty much, economic growth. We've an adder for the fact that each generation provides further value added, which entitles us to have slight premium, but not much. And hence, it's mid single digits, which is GDP, but plus that slight premium. No more than that. And that is long term the sustainable basis because it's the nature of the products we invest in, nature of our business model. What you see now, I think, is a short term event, which is driven the 18%, 17%, 18% as you mentioned year on year in Q2 from last year is driven by 2 parts is my view on this whole matter. 1 is wireless. The Q2 of a year ago is not because the Q2 this year is strong as much as the Q2 a year ago in wireless was unusually weak for good reasons, many of which I'll now go into, but you all know that. And this quarter is more of a normal Q2, perhaps somewhat buttressed by a strong launch of our big Korean customer. But it's kind of stronger than we expected, as I mentioned. So there's a big part of that double digit growth is wireless growth driving in and that's 30% of our total revenues approximately. So if it grows a lot, it has that impact. And the second part of it is on infrastructure, our business in wired, industrial and enterprise storage. This year 2017 business is just strong. The pipe just rose. And I think that's the other part that drove this double digit growth. But you don't see that every year. In fact, I think this year is fairly unusually strong for infrastructure, apart from wireless infrastructure itself. So that combination is what creates this 18% growth. I would not for a second like you guys to think believe that this is something we will sustain for the next 5 years. What we feel comfortable we can sustain for the next 5 years is what we have said before and will continue to deliver hopefully over the next 5, 10 years, which is mid single digit growth on average year after year. Okay. Got it. Thank you. And then as my follow-up, I just wanted to ask a follow-up question on M and A. And I realize the topic can be a little bit sensitive here. But Hock, you told us to not believe everything we read in the papers. Is it okay for us to walk away thinking that you're not making the bid for that specific asset or again, I think the gentleman asked the question. Let me reiterate. Please do not believe everything you read and we do not comment on any rumors and pure speculation in the headlines. But we continue to focus on our franchise stable business model with lots of free cash flow. Understood. Thank you. Thank you. Thank you. And our next question comes from the line of Harlan Sur with JPMorgan. Your line is now open. Congratulations on the solid results and outlook and just great execution by the team. On the topic of free cash flow, you guys generated 32% free cash flow margins. If I normalize for your target of 3% CapEx, you guys actually did 35% free cash flow margins, which is your target model. But I'm wondering, despite the great cash generation, do you guys still have some restructuring acquisition related cash charges, which would imply that the normalized free cash flow even now is better than what you printed? And maybe if you guys could quantify some of those cash restructuring charges? Yes. No, you're right. You're doing your math absolutely right. The company when you take into account the elevated CapEx for mostly the campus investments we're making that you're aware of and some incremental restructuring charges and frankly, some working capital headwinds as the business continues to grow, You quickly get to 35%, which is where we want to be. And obviously, we're going to continue put up those numbers going forward. But based on where we see revenues and the gross margins and operating expenses that we outlined for you, we think that's achievable. Great. And then for my follow-up question within enterprise storage, you guys have got a leadership position in server RAID and SaaS controller solutions. And typically, these products tend to track server shipments. So given Intel Skylake server CPU launch and you've got AMD's EPYC server CPU launch, both I think which are ramping now. Is this contributing to the growth here in the July quarter and maybe through the second half of this calendar year? Not in the quarter we just ended Q2, not necessarily much in the July quarter Q3. But certainly we expect Pearly, which is the generation you're talking about for Intel launching Skylake, the Purely generation in storage will start to ramp up, you're right, back half of this calendar year, really back half of this calendar year. Great. Thank you. Thank you. And our next question comes from the line of John Pitzer with Credit Suisse. Your line is now open. Yes, good afternoon guys. Thanks for letting me ask the question and congratulations on the strong results. Hock, I want to talk a little bit about the wired results just for the April quarter. There's a lot of different businesses inside of wired, but the 3% year over year growth rate, I think is kind of the slowest growth rate that we've seen since the financial crisis. And so I'm just kind of curious if you could give us a little bit of color as to what actually happened in the April quarter, where there was strength and where there might have been some relative weakness? And then as you think about sort of the reacceleration into July, maybe some color around segments within wired would be helpful as well. Wow, that's interesting very confusing question. But let me try somewhat. And for the rest, I might have to take it offline another time because there are a lot of moving parts. And you're correct in our wired segment, which represents 50% of revenue, we throw in the kitchen sink. Not really, all related to wired. There's actually a couple of chunks on broadband, which is broadband access, carrier access as well as CPE set top box. And in Q2, those were not that strong, obviously. It starts ramping up seasonally Q3, Q4 or Q3 of Q4. So there is that effect that is not as strong. And year on year, a year ago, if you recall, that was the Summer Olympics. So we're comparing games to Summer Olympics, which will make it tough. And in Q3, Q4, there's no there's post Summer Olympics of last year, so it begins to look very good, which is what accelerates this in the second half. In switching and routing, no, we continue to feel very, very good. Whether it's in ASIC or merchant silicon, offtake delivery shipment continue to hit all time high in those two segments. Hope that gives you enough flow. And then third thing that messes it up is we are building block products like PHYs, retimers, which are more unique to the designs that have been used as well as fiber optics, which has gone through very interesting gyrations and cycles That may mess up the number. But the 2 broadest area, broadband compared to a year ago is a hard compare because of Summer Olympics. But switching and routing, be it SMA, continues to be a very, very strong franchise, whether it's in the form of an ASIC or in the form of merchant silicon, even though they're both selling into very different end market end users. That's helpful. And Hock, maybe for my follow-up on the ASIC side, I sort of have a general question. You've always had a strong switching routing ASIC business. It's my understanding they're also doing ASICs for things like SSD controllers and perhaps for things like inference or deep learning. I'm just kind of curious, how do you think about the ASIC IP that Broadcom has? And would you consider that a franchise? And is it leverageable into areas beyond just switching and routing? Oh, yeah. You hit it right on. We do deep learning ASICs, that means customized deep learning chips for specific customers. We do that because we have all the IP in the hardware needed. Keep in mind, I believe deep learning is very much as much a software play, much more than a hardware play. But we are happy to enable that for specific large customers in ASICs. We've customized hardware, which we do even right now be it training or inference, but we do that. Then on SSD controllers, yes, we do a huge amount of SSD controllers, relatively speaking, for basically for enterprises only, larger enterprises, but they're all packed in our enterprise storage business. They are not packed in our wired business. And that business is doing very well as you probably can gather today. Okay. Thank you. Thank you. And our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is now open. Hi, guys. Thanks for taking my questions. First, I wanted to ask about the cash flow. So again, we can see the margins are bumping up if you normalize close to 35%. What about the payout ratio? So the payout ratio is still running around 5%. We're not close to 50. What's stopping you from bringing it closer to 50 earlier? What's the trajectory that we should be thinking about the targeted payout ratio? Yes. Stacy, I think we reiterated a couple of quarters back when we put in place the updated financial policies that we're going to evaluate that once a year at the end of our fiscal year. So that'll be in October, November time frame. We're going to look back over our last fiscal year, look at that cash flow generation, look at the sustainability of the businesses that we're focused on and then make an assessment, obviously, with the board's approval around a recommendation. But what I want to reiterate is you're right. As we continue to perform, if we maintain that which we plan to do our 50% payout, then that's going to lead to, obviously, an increase, and potentially a substantial increase in the dividend coming into the year. Got it. Thank you. For my follow-up, I don't want to beat a dead horse, but can you refresh us on your definition of a franchise? What are the characteristics of a business that meets that definition? And frankly, would it be possible for a NAND flash business to qualify as a franchise under your definition? Good try. Okay. Let me give you our definition of franchise, which is very open and I'm glad you asked. Give me a chance to repeat the mantra. No, a franchise basically is we do only components, semiconductor components and it's just components broadly is simply that it operates the product line operates in a niche. It doesn't have to be mass market. Most times it's a niche. It's a niche where the markets have been established and will likely continue to be established for the foreseeable future. So we must have established end markets that are sustainable, 1. And in that niche, in that market, we are the market leader. And more than the market leader, especially because we are the reason for us being the market leader, we are the technology leader. We have to have the IP. We have to have the technology and the capability to continue to lead in that particular market. And that's it. There's nothing financials about it. The financial is a fallout, a corollary fallout from those key criteria. And each of our 18 product lines meet those criteria. You make your own call whether NAND meets that criteria. Got it. Thank you, guys. Thank you. And our next question comes from the line of Ambrish Srivastava with BMO. Your line is now open. Hi. Thank you very much. And I'm glad I'm restricted, so I can't publish. I don't have to describe what you meant by franchise to clients. But thanks for letting me ask a question. I wanted to go back to your wired franchise, Hock. You talked about and this is a follow-up to John Pitzer's question. With regard to near areas and all within the umbrella of the 5% that you've articulated for the company quite well over the last couple of years. Is this something that is a one off that you've done? Or do you see this as a broader volume with multiple customers as we go through the year and next year? Would you repeat that, Pan? I must admit some part in your question. Yes. The deep learning ASIC that you are rolling out, is it a one off for one customer or do you see this expanding to multiple customers? It's an that date learning product we're doing for multiple customers today are all customized solutions, hardware solutions on our side. They are not software based solutions. We do it falls into our ASIC category. And we have all kinds of intellectual property, all largely hardware based like SerDes, much more than SerDes, memories, you name it, all kinds of stuff that goes into training and inference on a deep learning chip. We have all that IP, but we're only doing hardware. We're not making no pretensions to trying to make it a full solution. So it's an ASIC solution and it covers multiple customers and it probably covers multiple generations going forward. But it's really simply an ASIC solution. Got it. Thank you very much. That was it. Just one question. Thanks. Thank you. And our next question comes from the line of Srini Pajjuri with Macquarie Securities. Your line is now open. Thank you. Hock, I just want to ask a clarifying question to the previous answer. Some of your peers are putting this market opportunity at close to $30,000,000,000 I just want to hear your thoughts of how big the ASIC opportunity for deep learning in your opinion is if you take maybe a 3 year view on this? I have no clue to be honest. Seriously, no, it is our franchise here is the intellectual property capability we have of implementing silicon solutions that does deep learning. We could just as well have the IP implemented to do high performance computing or as we do now a lot switching and routing. This we do in deep learning. And for us, deep learning is not seen necessarily as a franchise. It's our ASIC capability that is a franchise. Got it. And then I know you said you don't want to comment on your competitors' trash talk. But if you could maybe comment on in terms of your BAW performance, I think historically the reason you had such a significant share was you had a significant performance advantage over your competitors. I'm just trying to understand if of your peers are closing the gap or at least narrowing the gap. And as we look out to the next couple of years, just want to understand how much advantage you'll still have in BAW? Remember my definition of a sustainable franchise? We don't stop investing. I mean, contrary to myths out there, we actually every time we pick a particular product line as our core product lines as month 2018, we invest as much as we have to maintain if not lengthen our lead. No different here. We don't stay put at the generation of last year or 2 years ago or 3 years ago. We continue to invest. The lead to be direct review never closes. And that's the key part of our model. We will invest and given that your market we've been the market leader in that niche, we can afford to out invest anyone out there. We've been in R and D for this entire company, as you noticed that in totality, some of it packed up in cost of sales for product engineering as we bring it to production, the rest of it in R and D. We spend on product development in this company every year $3,000,000,000 and that's not counting CapEx $3,000,000,000 And we are very, very conscious of the fact that we have to maintain, if not even increase that level of spending where we need to in specific areas to ensure that we are the leader, both in technology, which leads to market leader. So not that easy to narrow the lead in terms of coming to compete with us. Got it. Thank you. Thank you. And our last question comes from the line of Stephen Chien with UBS. Your line is now open. Hi, thanks for taking my questions. Hock, if I could, I wanted to follow-up on your earlier comments on the storage your storage business and the guidance for stable demand again in this fiscal Q3. I was wondering, when looking back earlier this year when the storage business was seeing better demand because of some of the shortages in NAND flash for SSDs, I was wondering if your customers are providing you much commentary on whether the current hard drive demand is in line with broader demand or if there's still some element of NAND SSD shortages that are helping hard drive demand? This is a very hard market to predict at this point because there are a lot of multiple dynamics going on in terms of it's not just about flash demand being reaching very high levels, which is driving everything else. Probably is, but that was probably late 2016, early 2017. Today, I guess all these big all these increased prices in memory, whether DRAM flash is non hard drives as much as DRAM and flash is leading to careful spending by enterprises and operators and cloud guys and data center guys. They're all being very careful. So suddenly, you have a demand that is there, that is needed, but people are not spending. And you will have this stop and starts going on. So it's all very confusing is what I'm trying to come to get on. And I'm not sure we have any better visibility than even our customers. Our customers have better visibility on than us for that matter. It's just very confusing and all we can see is that demand has flattened out for our products, be they SSDs or be they SSD flash controllers, I should clarify, all Vide components, rechannels and preamps for hard disk drive. All we see is that in a quarter ago, we were saying got to be careful about Q3. Well, Q2 has come and gone. Q2 was good. Q3 continues to look good. But then I'm going to turn to you and say Q4 may cave. Who knows? We're still booking Q4, but it may not be as strong. And a big part of that uncertainty lies in the fact that there are more than just simply a shortage of flash or DRAM that's creating this uncertainty. I think it's much more than that. It's also the change in spending patterns even in the short term of data center guys, cloud guys and enterprises because of higher memory prices. Okay. I appreciate those considerations. And just a quick follow-up. For your wireless connectivity business, I know much of that revenue is still driven by mobile type applications. But I was wondering how meaningful is your exposure to enterprise type access points today? And any exposure in like automotive hotspots potentially going forward? Thanks. Oh, they are. I guess the best way to describe is broadband carrier access are increasingly even set top box which includes set top box both CPE that is as well as central office are starting to sprout Wi Fi as another means. You have GPON, EPON, you have DSL, VDSL, now Wi Fi into the picture. So it's all good. And we are very, very well positioned in all this, including next generation. So it is giving us more content to be put this way at every access point, which may help the growth. But it's still not as big, by the way, as the phone by comparison the volume. But it's a decent amount of volume and gives us a very sustainable franchise in this area as well. And Stephen, just housekeeping, but that business line that product line is in our wireline segment, not in our wireless segment. Thank you for clarifying that. Yes, it sits in wired, not in wireless. Got it. Thanks, Tom. Thanks a lot. Thanks. Thank you. And that concludes Broadcom's conference call for today. You may now disconnect.