Welcome to Broadcom Limited first 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 first quarter of fiscal year 2017. 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 made 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 comments section of this call, Hock and Tom will be providing details of our first quarter fiscal year 2017 results, background to our second quarter 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 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. Well, we delivered strong financial results for the first quarter, with revenue of $4.15 billion and gross margin at 62.4%, both at the very top end of our guidance. Earnings per share of $3.63 grew by 5% sequentially, while net revenue was essentially flat. Revenue was better than expected in all four segments. The benefits we achieved through business diversification clearly came through this quarter with growth in wired, enterprise storage, and industrial completely offsetting the typical negative seasonality from wireless. The integration of Broadcom Corporation has gone very well and is now mostly complete. We remain focused on driving financial performance towards our long-term operating margin and free cash flow targets. Let me now turn to a discussion of our segment results, starting with wired, our largest segment.
In the first quarter, wired revenue came in at $2.09 billion, better than expected, and represented 50% of our total revenue. Revenue for this segment was up slightly on a sequential basis. We benefited from strong demand for our Ethernet switching and routing products from cloud data center operators. This growth was partially offset by the continuing seasonal decline in demand for our broadband carrier access and set-top box products, which we expect to bottom in this first quarter. Turning to the second fiscal quarter, we forecast wired revenue to experience sequential growth a little bit stronger than what we saw in the prior quarter. We expect the momentum from cloud data center demand to sustain and expect a seasonal increase in demand for our broadband access and set-top box products. Moving on to wireless.
In the first quarter, wireless revenue came in at about $1.18 billion, better than expected, and the wireless segment represented 28% of our total revenue. Revenue for this segment was down 13% sequentially, driven by the expected seasonal decline in demand from a major North American customer. Turning now to our projection for the second quarter of fiscal 2017, we expect to hit the bottom of the annual product cycle transition at a major North American customer. We expect to offset a significant portion of this decline in wireless from a ramp of the next generation phone at our large Korean smartphone customer. This phone comes with an increase in Broadcom's RF and Wi-Fi connectivity content.
We expect our wireless revenue in the second quarter of fiscal 2017 to be still sequentially down, but in the high single digits, better than the more typical double-digit declines we have experienced in prior years. Let me now turn to enterprise storage, which continues to be strong. In the first quarter, enterprise storage revenue came in at $707 million, and this segment represented 17% of our total revenue. Segment revenue grew 26% sequentially, gaining better than expected, driven by stronger shipments of SAS, RAID, and Fibre Channel products. As we foresaw, our hard disk drive and custom solid-state drive controllers also had a very strong quarter. Looking into the second quarter, we believe this resurgence of enterprise storage has to taper off and hence flatten out.
Having said that, backlogs for enterprise storage products continues up to today to be very, but what we foresee seasonally to start slowing demand in the third quarter, if not late in the second quarter. Turning to our last segment, Industrial. In the first quarter, Industrial revenue came in at $180 million, up 11% sequentially, better than expected as we rebuilt depleted channel inventory, consistent with stronger product resales. The Industrial segment represented 5% of our total revenue. As we look into the second quarter, we are anticipating industrial activity to continue to improve seasonally. Accordingly, we are expecting Industrial segment revenue to increase by high single digits sequentially. With all that, to simply sum up, this first quarter was strong, with revenue flat from the seasonally high fourth quarter of the preceding year.
As we now look into the second quarter, we expect the demand environment for our products to continue to be very healthy and our outlook for this quarter's revenue to be virtually flat to that of the prior quarter. It is becoming evident that our broader and more diversified product portfolio has largely mitigated seasonal impacts to consolidated revenue during the first half of the year. This is certainly an intrinsic goal of our business model, just that we did not expect to achieve this so soon. The integration of Broadcom Corporation is clearly going well, and we continue to invest across all our franchise products. We are sustaining our technology leadership and our products are very well received by our customers. Our revenue trajectory from the first half of fiscal 2017 could possibly extend into the second half.
We do not expect that the approximate 15% level of year-on-year growth we are guiding for the second quarter to really be sustainable in the long term. Our long-term operating model will continue to assume mid-single digit annual revenue growth for the consolidated business. With that, let me now turn the call over to Tom for a more detailed review of our first quarter fiscal 2017 financials.
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 also available on our website at broadcom.com. Let me first start out by saying that we are very pleased with the execution this quarter and specifically the progress we've made towards our long-term target model, which remains an operating margin target of 45% of net revenue and a free cash flow margin above 35% of net revenue. Further to what Hock was saying, we also believe that we can achieve these long-term operating targets based on a sustainable long-term revenue growth rate of mid-single digits. Let me review the Q1 results. Revenue for the first quarter came in at $4.15 billion, approximately flat sequentially.
Foxconn was a greater than 10% direct customer in the first fiscal quarter. Our first quarter gross margin from continuing operations was 62.4%, about 90 basis points above the midpoint of guidance, primarily due to revenue at the top end of guidance and a slightly better product mix. This quarter's gross margin also benefited from the impact of approximately $60 million of revenue related to the assignment of certain manufacturing rights to a customer in our Wired segment, which was included in our original guidance. Turning to our operating expenses. R&D expenses were $664 million and SG&A expenses were $120 million. This resulted in total operating expenses for the first quarter of $784 million or 18.9% of net revenue. As Hock mentioned, we have now largely completed the integration of Broadcom Corporation, I would reiterate that we feel comfortable at this level of operating expenses relative to net revenue.
Operating income from continuing operations for the quarter was $1.8 billion and represented 43.5% of net revenue. Provision for taxes came in at $77 million, slightly above our guidance. This was primarily due to higher than expected net income. First quarter interest expense of $110 million and other income net was $8 million. First quarter net income was $1.63 billion, and earnings per diluted share were $3.63. Our share-based compensation expense in the first quarter was $201 million. Moving on to the balance sheet. Our day sales outstanding were 43 days, a decrease of five days from the prior quarter due to better linearity of revenue in the quarter. Our inventory ended at $1.34 billion, a decrease of $64 million from the beginning of the quarter.
We generated $1.35 billion in operational cash flow, which reflected the impact of approximately $313 million for annual employee bonus payments for fiscal year 2016, and approximately $80 million of cash expended on Broadcom Corporation restructuring integration activities, including discontinued operations. I am very pleased that in the first quarter, the business already demonstrated the ability to generate free cash flow close to our long-term target model of 35%. While free cash flow in the first quarter was approximately $1 billion, or only 25% of net revenue, this does include, I want to highlight the impact from the annual employee cash bonus payment as well as cash restructuring expenses and capital expenditures, that as we have discussed before, are running higher than our long-term targets. Looking forward, we expect Broadcom Corporation related restructuring expenses to continue to decrease as we finish this integration.
Capital expenditure in the first quarter was $325 million, or 7.8% of net revenue. However, we expect long-term CapEx, largely as a fabless semiconductor company, to run at about 3% of net revenue consistent with that fabless business model. As a reminder, for full fiscal year 2017, we expect CapEx to run at an elevated level of approximately $1.2 billion. This includes about $500 million towards campus construction, primarily at our Irvine and San Jose locations, and about $200 million towards purchasing of test equipment for consignment at our CMs. A total of $431 million in cash was spent on company dividend and partnership distribution payments in the first quarter. We ended the first quarter with a cash balance of approximately $3.5 billion. Now let me turn to non-GAAP guidance for the second quarter 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 $4.1 billion, plus or minus $75 million. Gross margin is expected to be 62%, plus or minus one percentage point. Operating expenses are estimated to be approximately $789 million. Tax provision is forecasted to be approximately $74 million. Net interest expense and other is expected to be approximately $106 million. The diluted share count forecast is for 452 million shares. Share-based compensation expense will be approximately $223 million. CapEx will be approximately $290 million. As you have seen, our board has declared a dividend of $1.02 per share to be paid later in the second fiscal quarter.
We're also looking forward to completing the acquisition of Brocade, which is proceeding as planned, and we presently expect to close this transaction in our third quarter of fiscal 2017. I am pleased that we were able to reach an agreement with Arris earlier this quarter for the sale of Brocade's network edge business for $800 million in cash, plus the additional cost of unvested employee stock awards. Following Brocade's recent results, we continue to feel very comfortable that Brocade's Fibre Channel SAN switching business, the key business that we're focused on, will generate approximately $900 million of EBITDA in fiscal 2018. That concludes my prepared remarks. Operator, please open the call for questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number 1 key on your touchtone telephone. In the interest of time, we ask that you limit yourself to one question, and if necessary, one follow-up. Your first question comes from the line of Ross Seymore with Deutsche Bank.
Hey, guys. Thanks for letting me ask a question. I guess, Hock, the first question's on the wireless side. It's good to see the content rising at other customers besides just your big North American customer. Can you just talk a little bit more detail about what's driving that content up? Is there anything unique, or is it basically the same goodness that you've seen in the North America side? Any more color about that goodness continuing on the North America side into the second half of this year would also be helpful. Thanks.
Yeah. Ross, thanks for the question. Yes, in fact, it's a phenomenon we have been indicating to you guys for the last several years, which is over the medium term, long term, I would say, our strength, our franchise in cellular RF, in cellular analog, the front end cellular analog, which includes FBAR and power amplifiers and all the circuitry and component that goes in front of the transceiver in the handset for cellular. That's one area. The other area in Wi-Fi, Bluetooth connectivity. Those two functionality, those two features in phones continue to evolve and with each generation. As each generation evolves, what it involves in the case of our RF cellular is twofold. One is basically more bands as we progress, as more and more countries globally progress into 4G and eventually even further beyond that, more and more bands
More spectral bandwidth get pulled into the phone. Number of SKUs of phones get less and less for any major OEM manufacturer simply because of complexity of these phones. Because of more bands, it requires more filters, more components like power amplifiers, low noise amplifiers, and because of that, necessary content increases. I should also add the difficulty of engineering those products increase fairly exponentially, which therefore drives towards better and better content for us into those very high-end flagship smartphones. In the case of wireless connectivity, the same phenomenon is happening, it particularly driven on bandwidth, on PO throughput as we gradually move from what used to be much lower bandwidth in Wi-Fi to today's AC, as we move from single user to multiple users, as we move next generation from AC into AX and further.
Obviously, difficulty of doing those products in smartphones become correspondingly more difficult, content increases, we benefit from basically content increase. It's a normal phenomenon, we expect to see that continuing into the medium term.
Great. That's helpful. I guess, for my one follow-up, both you and Tom, Hock mentioned about the 15% growth not being your long-term assumption. Just wondering why you're bringing that up. Is there something you're seeing now that gives you pause that things are going to slow down, or is this just a reminder that the level we are now is not the base assumption in your business model?
I think the fairest way to answer that is we have articulated last fiscal year very clearly, even a year ago when we acquired Broadcom, as long as a year ago, that with our scale and with our diversification of product portfolio, our long-term model, our 5 years, 10 years, is a compounded annual growth of 5%. Not every year necessarily, but long term, 5%. Why we feel the need to mention it is obviously, you saw the numbers for [inaudible] we're guiding for Q2 on the top line, it's showing 15% year-on-year from a year ago. That's just one quarter, obviously just one fiscal year, one point in time.
We felt it necessary to just mention it, that do not just take it and extrapolate that to say that we have moved away from our broad model or guidance of 5% compounded annual growth in the long term to a 15%. Far from it.
Ross, may I just add, I also want to reiterate, we don't believe we need to have this accelerated revenue growth to hit our financial targets, which we remain very focused on, specifically the free cash flow margins of 35%. We're very comfortable achieving those results based on a more normalized long-term category of mid-single digits.
Great. Congrats on those results. Thanks a lot.
Your next question comes from Blayne Curtis with Barclays.
Hey, guys. Thanks for taking my question and congrats on the great results. Just following up on just the wireless guide. You've talked in the past, sometimes it could be seasonal, down 15%-20%, sometimes single digits. Just curious, between contents and the units, what are you seeing with your two large customers in terms of the seasonality and the timing of the ramp magnitude versus the content gains you're seeing?
I don't have specific data to be able to split up accurately between units and content, but off the cuff, my sense is it's largely content.
Okay.
All right.
Great. You mentioned strength in switching. I was curious, I know obviously, you don't want to guide for a full year. I was just curious, you talked about some businesses being softer in the second half. There's obviously a big upgrade cycle that's 25/100G. Just curious your perspective as you look at the rest of the year, the trajectory of the switch business.
That's a very interesting question. On the switching side, which is a subset, obviously, of our wired segment, which is our largest segment. Just if you look at our switching and routing side, if I were to put it together, which is really data center networking business, we continue to see strength through the rest of the year. A big part of that strength we see is simply because of a very strong data center demand, data center build-out by the cloud operators. We're seeing that now, and I suspect that phenomenon will still continue, particularly when we start to ramp up the newer generation with high bandwidth of Tomahawks and Tridents. As we go later on in the year of our StrataDNX router and aggregation switches.
We see that this momentum to be fairly good based on demand, intrinsic demand out there on data center expansion, especially into the cloud, but also from the fact that we are launching a few very key new products in this year. Okay?
Thanks, guys.
Thanks.
Your next question comes from Harlan Sur with JPMorgan.
Good afternoon, thank you for taking my question. It's great to see the diversity in the business playing out here. On the strong growth in the storage business, I'm assuming some of this is your SSD product lines. I believe you guys are supplying enterprise SSD controllers into the top 2 enterprise and cloud SSD suppliers. I think your top customer here just grew their enterprise SSD business, I think 20% sequentially and 20% year-over-year in the December quarter. Wondering if you guys have seen similar growth trends, do you expect double-digit growth in this SSD segment for the full year?
I'll be direct. Our visibility in SSDs are not as good as perhaps our customers are. A big part of it is, there are three parts to our enterprise storage, three broad parts. One is very related to storage server connectivity, that's the RAID stuff, the Fibre Channel host bus adapter side of it, RAID. Then there is the components we ship into hard disk drives. Hard disk drive has experienced, as you well know, a strong surge over the last several months, probably because flash have been in short supply. The last and smallest part of our business in enterprise storage is really related to enterprise flash controllers for SSD. That's really a small part. We don't get that broad visibility into this SSD market as a lot of other people would. You're right.
Right now, it's very, very strong, especially in SAS.
Great. Thanks for the insights there. Off of the success of Tomahawk, I also hear that your prior generation Trident is still very strong as well. The team is ramping into this upgrade cycle. You started sampling Tomahawk II, I think it was second half of last year. Could you just give us an update on the qualifications, customer feedback, when should we see the adoption curve for T2 starting to ramp? Is that going to be 2018 timeframe?
For very competitive reasons, I really hate to give you specifics here. Suffice to say, it's very well-received. We have a lot of momentum on our entire switch portfolio. By the way, Tomahawk doesn't fully replace Trident. Trident is used in a different segment versus Tomahawk, and both are going very well, as are the Jericho products, which are more aggregation, switching, and routing. Broadly, our portfolio from high-end down to even low range, on the low-end range of campus switching points, those are all going very well. I suspect it's all largely due to the strength in data center spending that still we see continue, particularly more recently, seems to be a very strong conversion of enterprises into the cloud.
Thanks, Hock.
Your next question comes from William Stein with SunTrust.
Great. Thanks so much for taking my question. Congrats on the very strong results and outlook. I wanted to address the free cash flow margin trajectory. Tom, I think you referred to some of this in your prepared remarks, but I'd like you to maybe highlight what, aside from the restructuring expenses that are still being paid and the temporarily higher CapEx that you're experiencing, what are the other drivers to get you to the 35% free cash flow margin, and what sort of timing should we think about for that?
Well, good question. I think that's sort of the point of the prepared remarks, is if you look at where we are from an operating margin perspective, you look at the fact we've restructured the balance sheet around now fixed rate debt. If you look at our sustainable tax rate of 4.5% and cash taxes of approximately $100 million a quarter, you take out the restructuring costs, which are bleeding off here pretty quickly. You take out the one-time campus initiative, the one-time tester initiative this year, which will sort of play itself out here over the next couple of quarters. Frankly, we're largely there, and that's probably the real takeaway. Of course, that doesn't take into account what we would expect to be second half seasonally uptrends from a revenue perspective.
That's helpful. Appreciate it. Maybe one more. Something that came up last quarter was the change in capital allocation strategy. Maybe you can highlight for us your plans on the M&A front from here, despite the higher dividend, the significantly higher free cash flow that you're going to be generating, I guess, after these temporary expenses fall off, would seem to me to continue to support a good M&A pipeline. Maybe you can characterize that for us, please.
Yeah, there's no real update there other than we outlined very clearly that we're going to continue to drive giving back 50% of free cash flows to investors on the dividends, which of course at these levels would imply that we're going to have the ability to continue to increase the dividend pretty meaningfully here over the next couple of years, certainly. Beyond that, we've used M&A to drive returns, obviously, over the last several years pretty effectively. We continue to see opportunities to do that. Brocade is the latest example of being able to put capital to work in an interesting opportunity that drives better returns than our alternative. We're going to continue to do that. Given our scale, we have the opportunity to do that mostly off of the balance sheet, particularly with most opportunities that arise.
Great. Thanks.
Your next question comes from Craig Hettenbach with Morgan Stanley.
Hello, this is Anay calling in for Craig. Thanks for giving the opportunity to ask the question. I want to touch upon carrier aggregation. This is one of the key growth drivers for your RF business. Hock, can you provide us an update on the trends you're seeing by geography for that and what that means for your portfolio?
Okay. Carrier aggregation, as you well know, is the phenomenon of especially benefiting operators who have multiple spectral bandwidth, not necessarily one, but multiple, in interest of reducing CapEx in infrastructure, is the phenomenon of enabling those bandwidths to combine together into one, which creates much more capacity throughput. That's not only in infrastructure, it goes into the phone. We are probably one of the leading enablers in the phone of making that happen, simply because not just of architectural design of the cellular RF analog, but it's also the fact that FBAR filters, which are FBAR, are much better performing and being able to be integrated into a module to allow that muxing and demuxing of those separate spectral bands. That's happening as it started very aggressively, obviously, as you've seen it in China, continuing to be very much so in China.
It's also happening very aggressively in the U.S. Those are the two biggest geographies where a lot of that is happening. Started with downlink last year, I think, and it's now moving on to uplinking, not just downlinking, which of course then part of the reason why it's helping create, not the only reason, but one of the reasons creating increased content in our cellular RF demand. It's great. It's great for us, we see that phenomenon continuing to grow and expand into other regions of the world.
Got it. That's helpful. For my follow-up, I wanted to touch upon gross margins. Pretty good performance in gross margins, both in the quarter and the guidance. I was thinking about how should we think about gross margins for here, and if you can outline what are the top two drivers of gross margin expansion as we look out towards the rest of fiscal 2017?
It's a very interesting point. If you look back to a year ago when we just closed the Broadcom transaction, every quarter since then, we have been able to expand our gross margin in the range of roughly 40, 50 basis points sequentially. A big part of it is as we settle down the portfolio, as we start to get the benefit of larger scale in purchasing materials and as very specific actions like basically bringing testing very much in-house and consigning testers to contract manufacturers instead of leasing test time for our huge volume of semiconductor chips, all those various actions. A big part of this expansion of gross margin comes from our scale and our ability to leverage on the scale in direct materials.
It also helps that our product margin, as we move from one generation to the other, keeps getting richer in terms of the mix. That's a combination of these two things. In terms of where would it go from here, frankly, I don't know. Best indicator is probably look at history.
Got it. That's helpful. Congrats on kicking on a good quarter.
Thank you.
Your next question comes from Stacy Rasgon with Bernstein Research.
Hi, guys. Thanks for taking my questions. For my first one, you've talked a lot about free cash flow margins. I wanted to dig a little bit into the payout ratio. You're paying out right now about a little over 30%. Target is 50%. Should we think about that sort of level going up to 50% in line with the margins going up to 35% or more? How should we think about the trajectory of reaching your target on the payout ratio? That seems like something that's more in your control, maybe even quicker than the margins themselves. Well, they kind of go hand in hand, Stacy. I think what we're going to do and what we've sort of articulated in the past is we're going to get to the end of the fiscal year, we're going to look back
At the free cash flow trajectory and those margins over the course of that previous year, we're going to look at the business. Obviously, we're very focused on sustainability. We're going to pay out 50%. All you're seeing is the general trajectory improving from where we exited last year to where we are here exiting Q1 and guiding Q2. You're right. Consistent with that policy, as we get to the end of the year, if we're able to achieve expectations, we're going to have the ability to be in a position to raise that dividend consistent with getting back to the 50% on an LTM basis.
Got it. Thank you. That's helpful. For my follow-up, I also wanted to dig into gross margins a little bit. Hock, you talked a little bit about the drivers, I heard you say earlier that you're sort of comfortable with your level of OpEx spending as a percentage of revenue, which implies that the operating margin improvement toward the model from here comes from gross margins. It's not that much. It's only about 150, maybe 200 basis points from where we are. And this is even before you buy Brocade, which comes in at gross margins in the 70s. Given all the levers that you just talked about in Brocade coming in, why should 64%-65%, which is where that would take you, why should that be the upper limit? How should we think about this if we're going farther?
I don't see any reason why I shouldn't expect the gross margins to go even higher than that unless there's something else, mix or something else that ought to be taking it down. Can you talk about that a little bit?
Well, Stacy, as Hock said, I think we're going to get into gross margins and where we think we can go. I mean, if I go all the way back to the original Avago with gross margins in the 30s, obviously, we're always focused on continuing to improve on our gross margins. I think the insightful part of the question is, we are in our seasonally weak part of the year. When you do look at the general seasonality of the business and where things are, I think you have to take a whole fiscal year approach to looking at where operating margins will land and could land and apply that to how you're thinking about the model. That's the only guidance I'd give you.
Got it. Thank you.
Your next question comes from Vivek Arya with Bank of America Merrill Lynch.
Thank you for taking my question. Congratulations on the good results and the consistent execution. For my first one, Hock, your wired business has essentially been in this $2 billion to $2.1 billion range for the past year on a quarterly basis. Can you give us some puts and takes on what's done well, what's been different than expectations? My read is that the switching parts has probably done fairly well with all the cloud opportunities, but your broadband access and set-top box has perhaps not done so well. On the prepared remarks, you mentioned that you are starting to see a little bit of pickup on the broadband access side.
Just if you could give us a look back on what was different than expectations, as we look forward to this year, could we see contribution from both the parts of wired, both the cable side as well as the switching side?
That's a very interesting, good question, actually, very insightful. Let me try to explain it on our wired business. You're right, it's our biggest segment. In simple terms, broadly, there are two groups of products here and end markets here. There's switching and routing, you correctly put out. That comes from various fronts, from general standard switching and routing, as well as ASICs, which is also parked in there, as would be building block products as well as fiber optics components. That business is very enterprise driven, correctly, and it's actually done very well, especially on a year-on-year basis, because it's growing. As we move from 10 gigabit a few years ago, a couple of years ago, to increasingly 25 and 100 coming up very fast. As that transition happens very fast, obviously it's driving.
You all hear products like Trident going to Tomahawk, especially in the very high end, and Jericho. All these are related to data center switching, and that's driving growth on infrastructure on a very, very stable basis, but driving growth very nicely, close to high single digits, even double digits. The other part of the segment, which is pretty big too, is our broadband. Here, the set-top box on the CPE side and access gateways like DSL PON on the infrastructure side. Here, the business is stable. It's very stable, has been stable for the last few years and continues to be very stable. It's also very seasonal. You will see that the later part of the second half of the year is typically when it drives up, and in the first half of the year is when it shows a seasonal decline.
In my opening remarks, I was mentioning that fiscal Q1 is probably a very seasonal low point, it gradually picks up seasonally later part Q2, but certainly Q3, then starts rolling over again. If you look at it year-over-year, relatively very, very stable. We have a confluence of two segments mixed together in our wired business, which is what you're seeing. It dilutes basically the strength, the growth of switching and routing. Nonetheless, both are very franchised product, very franchised business, and drive stability in this company.
Thanks, Hock. As my follow-up question, it's a somewhat longer-term question. You're obviously doing quite well in the wireless business, and that can continue for some time. The cloud business is also doing quite well. When I talk with a lot of your peers and ask them about growth in semis over the next three to five years, they talk about connected cars or Internet of Things or machine learning or 5G. Do you feel Broadcom is investing adequately to pursue those markets? Is it a part of the company that is looking at those longer-term areas, or do you think M&A is the better way to address some of those things as they become real over time? Thank you.
Great question because it gives me the opportunity to expound a little propaganda here. Again, that we've always articulated. The franchise products we are in, we are the technology, we are also the market leader in those areas, in those niches. Some of them are very large niche, we are the technology leader, we don't get there by not investing. We invested, as my remarks said, and I said many times, very heavily in those areas we are in. We develop products that generally, in those franchise areas, before anybody else do it out there. That's why we can sustain it, that's why our margins are the way it is, because we provide products that allow our customers to differentiate and innovate themselves. We invest very heavily.
You look at our total R&D, we invest in total, $2.7 billion a year as a company in R&D. We have the best engineers out there, we have the best products in this area. That's really where we continue to sustain leadership in our existing franchise products. In some of those flights of fantasy, somewhat, that you've covered earlier, I'm not saying it won't happen. I'll be direct. Let somebody else knock their heads silly, and then we'll buy the company if it's successful. Thank you.
Thank you.
Your next question comes from Toshiya Hari with Goldman Sachs.
Great. Thanks for taking my question, congrats on the strong quarter. I had one short-term question and then another longer-term question. On the short-term question, with regards to wireless, you talked about trends at your Korean customer offsetting the seasonal trends at your North American customer, therefore, you're guiding Q2 to be down only high single digits relative to history being down about 15, I recall. Is the upside versus historical seasonality, is that all coming from dynamics at your Korean customer or dynamics in terms of units or content at your North American customer trending better than history as well?
You're really trying to parse the data, aren't you? It's all a combination, [rolling]. It is. You obviously know out there, it's also timing of some of the shipments and purchases by our two largest customers. There's a few factors involved in it, one of which was there's timing, the quarter differences in timing. There's the fact that, you're right, Korean customer is coming in with a vengeance to try to recover share. Broadly, we're also talking about content increases as each new generation comes in. It's not even the Korean customer, it's also the major North American customer. It's a mix of all these factors. Have I sat there and broken it out in detail? No. We don't try to analyze that to any degree.
Those multiple factors mix, pull together to basically indicate that the seasonality, the downward seasonality that we saw a year ago, is perhaps less pronounced this year.
Okay, great. That's helpful. Then as my follow-up, another question on wireless, specifically around China. Obviously, you're tied to the North American customer and the Korean customer in a big way today. When you think about your wireless business and your RF business specifically on say, a three-year view, how do you think about the opportunity in China today?
Well, there are opportunities for us in China. At the focus of our success and our product success in wireless, especially content increases year-on-year, as you know, we push the cutting edge on technology. Be it wireless Wi-Fi connectivity or RF cellular. We push the envelope. That tends to go very much largely to the flagship class phones. That top of the pyramid, where a big part of it has been our major North American customer and the Korean customer, plus a few other guys spread around. That's where our strength is. That's where the demand and value we see in our products come help. As China evolve over time, having said that opportunity exists, they will move from feature phones to low-end smartphones to now some premium phones.
We begin to get traction on even those premium phones to the extent that those brands in China use it. That's when they need the technological engineering edge that we provide in our products. Until then, they need less of it, except with exceptions like carrier aggregation, when we obviously are the leader in providing solutions for carrier aggregation on a discrete basis. On an integrated basis into smartphones, it's really the flagship phones, and now increasingly premium phones making its way into flagship phones that we see the demand. That transition is happening in China, albeit on a very gradual basis, but we're very patient people. We'll wait for it.
Thank you.
Our last question comes from the line of John Pitzer with Credit Suisse.
Yeah, good afternoon, guys. Thanks for sneaking me in, and congratulations. Hock, my first question is kind of a follow-up on the enterprise storage side. You rightfully pointed out that today the SSD controller business is the smallest part of that business. I'm kind of curious, as you look out over time, do you see that market developing similar and potentially getting to be the size of the HDD controller market? Is there something inherent about the growing complexity of the raw NAND itself, which means that there will always be kind of a large portion of that controller market which is insourced, the guys building the NAND actually building their own controller? Do you think eventually you'll end up in a situation where it's all outsourced?
That's a very insightful question. We see the SSD controllers for enterprise to be a lot of it will be outsourced. Why? Because there are certain IP inherent in those enterprise flash controllers that are very tricky to do, not dissimilar from the read channel of hard disk drives. That will happen. Client. Because the nature of client, it's not so complex. Technology IP required is not so extreme. We see that as probably less opportunistic for us, though one never knows. Certainly on enterprise, which is where we are very focused on, we see a lot of need for intellectual property blocks, features that few people can do. We are one of those few people who can do it very well.
That's helpful. Hock, as my follow-up, I think a lot of us in the investment community understand sort of the wireless, both on the RF and on the connectivity side, the content ASP story. I wonder if you could talk a little bit about that same dynamic in your wired business and maybe differentiate between switching and routing versus set-top box and broadband access. How do we think about sort of the ASP trends in those two segments over time? Or just your content going into the CapEx dollars being spent in the wired market.
Well, if you talk about switching and routing, it's really more than just chips or mere little building blocks of chips. It's really as much an architectural play, especially in the higher-end top of the rack, in what you call leaf and the spine side of the data centers. And here is where our model is going beyond just selling pieces of silicon. We sell a lot of firmware and software that goes hand in hand to enable those chips to work with multiple OEM customers at the end of the day. That's a very interesting model for us, and overriding all this is obviously the need for larger and larger, more and more throughput, especially in data centers, and especially in top of the rack and all the way to the spine.
We have big advantages in this area simply because of the strength of the intellectual property we have as in making very complex engineering, very complex SoCs, but also interface, very high-speed interfaces or SerDes, as we call it. All that plays to our advantage, being able to do it. We continue to do that, and we continue to as it goes from 10 gigabits to 25 to 50 to 100, and maybe even, and going on in the future to 200 gigabit to 400 gigabit. We believe we are investing heavily to ensure that we can develop those kind of products and develop it first and better than anybody else. With that expansion of features, we benefit from content increases simply because you're providing a customer more throughput, and it's not a one-on-one scaling.
It's a lot of value for our customers to be able to go from 25 gigabit or 10 gigabit to 100 in the next year or two. We provide a lot of value in that. By the way, in broadband, it's not dissimilar, except that maybe it's not evolving as rapidly simply because it's a much more stable market. For instance, you hear about now 4K TVs or video delivery. It's moving on to high definition, HD, and eventually moving even to 8K. That will be interesting to see how 8K is going to be accepted, since the human eye may not even notice the difference. People want that, and they want that, we're able to provide that. It might take a bit longer.
That's why I say broadband to us is a much more stable, gradually evolving market, even as OTT, the hype behind OTT and all that comes into play, which we participate in. In data centers, it's serious stuff. More and more data are being basically pushed through pipes, stored, processed as social media keeps expanding. That's why we are seeing this past quarter and current quarter, extraordinarily strong in the demand for switching and routing.
That's great. Thank you, guys. Appreciate it.
That concludes Broadcom's conference call for today. You may now disconnect.