Earnings Call: Q1 2017

Mar 1, 2017

Earnings release

Welcome to Broadcom Limited First Quarter Fiscal Year 20 17 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 Hos Han, 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 Q1 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 made available via telephone playback for 1 week. It will also be archived in the Investors section of our Web site atbroadcom.com. During the prepared comments section of this call, Hawk and Tom will be providing details of our Q1 fiscal year 2017 results, background to our Q2 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 Q1 with revenue of $4,150,000,000 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 Classic Broadcom 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 white, our largest segment. In the Q1, white revenue came in at $2,090,000,000 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 product 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 Q1. Turning to the 2nd fiscal quarter, we forecast wire 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. Now moving on to wireless. In the Q1, wireless revenue came in at about 1 point $18,000,000,000 better than expected, and the wireless segment represented 28% of our total revenue. Revenue for this expected seasonal decline in demand from our major North American customer. Turning now to our projection for the Q2 of fiscal 2017, we expect to hit the bottom of the annual product cycle transition at our major North American customer. However, 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. As a result, we expect our wireless revenue in the Q2 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 Q1, enterprise storage revenue came in at $707,000,000 and this segment represented 17% of our total revenue. Segment revenue grew 26% sequentially, gaining better than expected, driven by stronger shipments of SaaS, RAID and Fiber Channel products. As we foresaw, our hard disk drive and custom solid state drive controllers also had a very strong quarter. And looking into the Q2, however, we believe this resurgence of enterprise storage has to taper off and hence flatten out. Having said that, backlog for enterprise storage products continues up to today to be very strong, but we foresaw what we foresee seasonality to start slowing demand in the 3rd quarter, if not in this late in the second quarter. Finally, turning to our last segment, industrial. In the Q1, industrial revenue came in at $180,000,000 up 11% sequentially, better than expected as we rebuild depleted channel inventory consistent with stronger product resales. The Industrial segment represented 5% of our total revenue. As we look into the Q2, we are anticipating industrial activity to continue to improve seasonally and accordingly we are expecting Industrial segment revenue to increase by high single digits sequentially. With all that, to sum up to simply sum up, this first quarter was strong with revenue flat from the seasonally high Q4 of the preceding year. As we now look into the Q2, 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 Classic Broadcom 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 twenty seventeen could possibly extend into the second half. Nonetheless, we do not expect that the approximate 15% level of year on year growth we are guiding for the Q2 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 Q1 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 atbroadcom.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. Now let me review the Q1 results. Revenue for the Q1 came in at $4,150,000,000 approximately flat sequentially. Foxconn was a greater than 10% direct customer in the 1st 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 $60,000,000 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 and D expenses were 664,000,000 dollars and SG and A expenses were $120,000,000 This resulted in total operating expenses for the Q1 of 784,000,000 dollars or 18.9 percent of net revenue. As Hock mentioned, we have now largely completed the integration of Classic Broadcom and 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 $1,000,000,000 and represented 43.5 percent of net revenue. Provision for taxes came in at $77,000,000 slightly above our guidance. This is primarily due to higher than expected net income. 1st quarter interest expense of 110,000,000 dollars and other income net was $8,000,000 1st quarter net income was 1,630,000,000 dollars and earnings per diluted share were $3.63 Our share based compensation expense in the Q1 was 201,000,000 dollars Moving on to the balance sheet, our days sales outstanding were 43 days, a decrease of 5 days from the prior quarter due to better linearity of revenue in the quarter. Our inventory ended at $1,340,000,000 a decrease of $64,000,000 from the beginning of the quarter. We generated $1,350,000,000 in operational cash flow, which reflected the impact of approximately $313,000,000 for annual employee bonus payments for fiscal year 2016 and approximately $80,000,000 of cash expended on Classic Broadcom restructuring and integration activities, including discontinued operations. I'm very pleased that in the Q1, 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 Q1 was $1,000,000,000 approximately or only 25 percent 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've discussed before running higher than our long term targets. Looking forward, we expect Classic Broadcom related restructuring expenses to continue to decrease as we finish this integration. Capital expenditure in the Q1 was $325,000,000 or 7.8 percent of net revenue. However, we expect long term CapEx largely as a fabless simulator 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 $200,000,000 This includes about $500,000,000 towards campus construction, primarily at our Irvine and San Jose locations and about $200,000,000 towards purchasing of test equipment for consignment at our CMs. A total of $431,000,000 in cash was spent on company dividend and partnership distribution payments in the Q1. We ended the Q1 with a cash balance of approximately $3,500,000,000 Now let me turn to non GAAP guidance for the Q2 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 $4,100,000,000 plus or minus $75,000,000 Gross margin is expected to be 62% plus or minus 1 percentage point. Operating expenses are estimated to be approximately $789,000,000 Tax provision is forecasted to be approximately 70 $4,000,000 net interest expense and other is expected to be approximately $106,000,000 the diluted share count forecast is for 4.50 2,000,000 shares. Share based compensation expense will be approximately $223,000,000 CapEx will be approximately $290,000,000 dollars As you have seen, our Board has declared a dividend of $1.02 per share to be paid later in the 2nd 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 Q3 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 $800,000,000 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 fiber channel sand switching business, the key business that we are focused on will generate approximately $900,000,000 of EBITDA in fiscal 2018. That concludes my prepared remarks. Operator, please open the call for questions. 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 is 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? And any more color about that goodness continuing on the North America side into the second half of this year would also be helpful? Thanks. Yes. 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 F bar 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. And the other area in Wi Fi, Bluetooth connectivity, Those two functionality, those two features in phones continue to evolve and with each generation. And as each generation evolves, what it involves in the case of our RF cellular is twofold. 1 is basically more bands as we progress as more and more countries globally progress into 4 gs and eventually even further beyond that, more and more bands, more spectral bandwidth get pulled into the phone. And number of skills of phones get less and less for any major OEM manufacturer simply because of complexity of these phones. And so 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 increased 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 and it particularly is driven on bandwidth, on PO, throughput as we move from to 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 and as we move next generation from AC into ax and further, obviously, difficulty of doing alpha, doing those products in smartphones become correspondingly more difficult, content increases and we benefit from basically content increase. It's a normal phenomenon and 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 percent 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 kind of 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 and even when 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 of 5 years, 10 years is a compounded annual growth of 5%. Not every year necessarily, but long term 5%. And why we feel the need to mention it is, obviously, you saw the numbers for Google guiding for Q2 on the top line, and it's showing 15% year on year from a year ago. That's just 1 quarter and obviously, just 1 fiscal year, one point in time. So 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 on guidance of 5% compounded annual growth in the long term to a 15%, far from it. Yes. And Ross, I mean, I'll 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 were very comfortable achieving those results based on a more normalized long term category of mid single digits. Great. Well, 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. So just following up on just the wireless guide, you've talked in the past sometimes it could be seasonal down 15%, 20%, just high single digits. Just curious between contents and the units, what are you seeing with your 2 large customers in terms of the seasonality and the timing of the ramp of magnitude versus the content gains you're seeing? I don't have specific data between to be able to speed up accurately between units and content. But off the cuff, my sense is, it's largely content. Okay. Great. And then you mentioned strength in switching. I was curious, obviously, you don't want to guide for full year. I was just curious, you talked about some businesses being soft in the second half. There's obviously a big upgrade cycle that's 2,500 gs. 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. And on the switching side, which is a subset obviously of our wired segment, which is our largest segment, but 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. We see and big part of that strength we see is simply because of a very strong data center demand, data center build up 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 Tritons. And as we go later upon the year, all of our DNx was router and aggregation switches. So we see that in 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 and thank you for taking my question. And it's great to see the diversity in the business playing out here. On the strong growth in the storage business, and I'm assuming some of this is your SSD product lines. I believe you guys are supplying enterprise SSD controllers into the top two enterprise and cloud SSD suppliers. And 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 are seeing similar growth trends and do you expect double digits growth in this SSD segment for the full year? I'll be right. Our visibility in SSDs are not as good as perhaps our customers are. A big part of it is there are 3 parts to our enterprise storage, 3 broad parts. One is very related to storage server connectivity that's the RAID stuff and the fiber channel host bus adapter side of it, RAID. And then there is the components we ship into hard disk drives. And 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. And the last and smallest part of our business in enterprise storage is really related to enterprise flash controllers for SSD. And that's really a small part. So we don't get that broad visibility into this SSD market as a lot of other people would. But you're right, right now, it's very, very strong, especially in SaaS. Great. Thanks for the insights there. And then off of the success of Tomahawk and I also hear that your prior generation Trident is still very strong as well and the team is ramping into this upgrade cycle. But you started sampling Tomahawk to, I think it was second half of last year. Just give us an update on the qualifications, customer feedback and when should we see the adoption curve for starting to ramp? Is that going to be kind of 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. And by the way, Tomahawk doesn't fully replace Triton. Triton is used in a different segment versus Tomahawk. And both are going very well as the Jericho products, which are more aggregation, switching and routing. So but broadly, our portfolio of from high end down to even low range, on the low end range of switching and campus switching points, those are all going very well. And 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? Good question. I mean, 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 $100,000,000 a quarter and 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. And 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. I appreciate it. Maybe one more, something that came up last quarter was the change in capital allocation strategy. Maybe you can sort of highlight for us your plans on the M and 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 and A pipeline. Maybe you can characterize that for us, please? Yes. I mean 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 and 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 alternatives. So we're going to continue to do that. But 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 Vinay calling in for Craig. Thanks for giving the opportunity to ask the question. So I wanted to touch upon carrier aggregation, like 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 necessary 1 but multiple, and in interest of reducing CapEx in infrastructure is the phenomenon of enabling those bandwidths to combine together into 1, which creates much more capacity throughput. And that's not only an infrastructure, it goes into the fold. And 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 airbag filters, which are FBAR, are much better performing and more integral been able to integrate be integrated into a module to allow that maxing and demuxing of those separate spectral bands. And that's happening as it started very aggressively, obviously, as you've seen in China, continuing to be very much so in China. It's also happening very aggressively in the U. S. Those are the 2 biggest geographies where a lot of that is happening. Started with downlink last year, I think, and is 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. So it's great for us and we see that phenomenon continuing to grow and expand into other regions of the world. Got it. That's helpful. And for my follow-up, I wanted to touch upon gross margins. Pretty good performance in gross margins both in the quarter and the guidance. But I was thinking about how should we think about gross margins for here? And if you can outline like what are the top two drivers of gross margin expansion as we look out towards rest of fiscal 'seventeen? Okay. Well, it's a very interesting point. And as we if you have 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 basis points, 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 various specific actions like taking basically bringing testing very much in house and consigning testers to contract manufacturers instead of leasing test time for our huge volume in semiconductor chips, all those various sections. A lot 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 1 generation to the other, keeps getting richer in terms of the mix. So that's a combination of these two things. And 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. And congrats on looking 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, but 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? Or like 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 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 in those margins. So over the course of that previous year, we're going to look at the business. Obviously, we're very focused on sustainability and then we're going to pay out 50 percent. And so 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. And you're right, consistent with that policy as we get to the end of the year, if we're able to achieve expectations, then we're going to have Doxie 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. You talked a little bit about the drivers, but 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. So 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? Like how should we think about this if we're going farther? Like 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 we can you talk about that a little bit? Well, Stacy, it's actually I think we're going to get into the gross margin where we think we can go. I mean, if I go all the way back to the original Envago 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. And so 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 TEG or 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 $2,000,000,000 to $2,100,000,000 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? Because 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. But then on the prepared remarks, you mentioned that you are starting to see a little bit of pickup on the broadband access side. So just if you could give us a look back on what was different than expectations? And then as we look forward to this year, could we see contribution from both the parts of wire, both the cable side as well as the switching side? That's a very interesting good question actually and very insightful. Let me try to explain it on our wired business. You're right, it's our biggest segment. And in simple terms broadly, there are 2 groups of products here and end markets here. There's switching and routing you correctly put out, and that comes from various fronts, from Gerald 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 even on a year on year especially on a year on year basis because it's growing as we move from 10 gigabit few years ago, a couple of years ago to increasingly 25100 coming up very fast. As that transition happens very fast, obviously, it's driving. And you all hear products like Triton going to Tomahawk, especially in the very high end and Jericho. All these are related to data center switching. And that's very, very that's driving growth on a like all infrastructure on a very, very stable basis, but driving growth very nicely and close to high single digits, even double digits. Then the other part of the segment, which is pretty big too, is our broadband. And here, there's set top box on the CPE side and access gateways like DSL PON on the infrastructure side. And here, the business is stable. It's very stable, has been stable for the last couple of years few years and continues to be very stable, and it's also very seasonal. And you will see that the later part of second half of the year is typically when it dries up, and in the first half of the year is when it shows a seasonal decline. Hence, in my opening remarks, I was mentioning that Q1 fiscal Q1 was probably is probably a very seasonal low point and it gradually picks up seasonally later part Q2, but certainly Q3 and then starts rolling over again. But if you look at it year on year, relatively very, very stable. So we have a confluence of 2 segments mixed together in our wired business, which is what you're seeing. It dilutes basically the strength, the growth of switching and routing, but nonetheless, both are very, very franchised product, very franchised business and drive stability in this company. Thanks, Chuck. And 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. But when I talk with a lot of your peers and ask them about growth in semis over the next 3 to 5 years, they talk about connected cars or Internet of Things or machine learning or 5 gs. 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 and A is the better way to address some of those things as they become real over time? Thank you. Great question. It gives me an 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, but we are the technology leader. And we don't get there by not investing. We invested, as my remarks said, and I'd say it 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. And 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. So we invest very heavily. And you look at our total R and D, we invest in total $2,700,000,000 a year as a company. In R and D, we're the best engineers out there, we're the best products in this area. So that's really where we continue to sustain leadership in our franchise products. In some of those flights of fantasy somewhat that you've covered earlier, we're not I'm not saying it won't happen. I mean, right, let somebody else take and knock their heads, silly, and then we'll buy the company if it's successful. Thank you. Thank you. Your next question comes from Toshiari with Goldman Sachs. Great. Thanks for taking my question and 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 and 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 pass the data, aren't you? As our combination rolling, it is. And you obviously know out there, it's also timing of some of the shipments and purchases by our 2 largest customers. So there's a bunch of a few factors involved with it, one of which was there's timing, the quarter differences in timing. There's a fact that you're right, Korean customer coming in with a vengeance to try to recover share. All and broadly, we're also talking about content increases as each new generation comes in. And it's not even a Korean customer, it's also the major North American customer. And it's a mix of all these factors. Have I said that and broken it out in detail? No. We don't try to analyze that to any degree. But those multiple factors mix pulled 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. And 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. But when you think about your wireless business and your RF business specifically on say a 3 year view, how do you think about the opportunity in China today? Well, there are opportunities for us in China and but the focus of our success and our product success in wireless, especially content increases year on year, is as you know, we push the cutting edge on technology, be it wireless WiFi connectivity or RF cellular. We push the envelope. And that tends to go very much largely to the flagship class phones. That top of the pyramid where it's where a big part of it has been the 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 the value we see in our products come help. As China evolve over time, having seen that opportunity exists, they will move from feature phones to low end smartphones to now some premium phones. And we begin to get traction on even those premium phones to the extent that those brands in China use it. And that's why 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. But 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. And 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. And our last question comes from the line of John Pitzer with Credit Suisse. Yes, 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? Or 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 in sourced, the guys building the NAND building their own controller? Or do you think eventually you'll end up in a situation where it's all outsourced? That's a very compelling insightful question. And we see the SSD controllers for enterprise to be a large 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 rechannel of hard disk drives. So that will happen. Client because of 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. But 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, and we are one of those few people who can do it very well. That's helpful. And then 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'm wondering 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. Our main 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 customer multiple OEM customers at the end of the day. So that's a very interesting model for us. And what is overriding all this is obviously the need for more 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. So we have big advantages in this area simply because of the strength of the intellectual property we have in making very complex in engineering, very complex SoCs, but also interface high very high speed interfaces or SerDes, as we call it. So all that plays to our advantage, we've been able to do it. And we continue to do that, and we continue to as it goes from 10 gigabit 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. So and with that expansion of features, we benefit from content increases simply because you're providing your customer more throughput and it's not a 1 on 1 scaling. It's more and more 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 2. And we provide a lot of value in that. And 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, we you hear about now 4 ks TVs or video delivery. So moving on to high definition HD and eventually moving even to 8 ks. It will be interesting to see how 8 ks is going to be accepted since the human eye may not even notice the difference, but people want that. And they want that. We're able to provide that. But it might take a bit longer. That's why I say broadband to us is a we look at it as a much more stable, gradually evolving market even as OTT, the hype behind OTT and all that comes into play, which we participate in. But in data centers, it's serious stuff. More and more data are being basically pushed through pipes, stored, processed as social media keeps expanding. And that's why we are seeing this past quarter and current quarter extraordinarily strength in the demand for switching and routing. That's great. Thanks guys. Appreciate it. That concludes Broadcom's conference call for today. You may now disconnect.