Earnings Call: Q4 2016

Dec 8, 2016

Good day, ladies and gentlemen. Welcome to Broadcom Limited's 4th Quarter and Fiscal Year 2016 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 Bob Tan, President and CEO and Tom Krause, Chief Financial Officer of Broadcom Limited. After market close today, Broadcom a press release describing our financial performance for the Q4 fiscal year 2016. GlobeNewswire inadvertently published our publishing the complete publishing the complete document. However, these tables are available for you to review in the copy of the earnings release we furnished to the SEC earlier today. Once updated by GlobeNewswire, you will also be able to obtain this information from the Investors section of Broadcom's website at www.broadcom.com. This conference call is being webcast live and a recording will be available via telephone playback for 1 week. It will also be archived in the Investors section of our website at broadcom.com. During the prepared comments section of call, Hawk and Tom will be providing details of our Q4 fiscal year 2016 results, background to our Q1 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. Hock? Thank you, Ashish. Good afternoon, everyone. Fiscal 2016 was a very transformational year for our company as we complete the acquisition of Broadcom Corporation. This acquisition, the end integration significantly increased our scale, added 7 businesses to Avago's existing portfolio of 12 businesses and roughly double revenue. Since closing the acquisition at the start of our 2nd fiscal quarter, we made great strides in integrating Classic Broadcom. As you may recall, going into the Broadcom acquisition, we had introduced an operating model targeting 60% gross margin and 40% operating margin that we had expected plan, I should say, to progress over the long term. I'm very pleased that we were able to make good progress towards this target 2016. And in fact, since closing the acquisition February 1, 2016, we have driven significant improvement in product margin and spending and exited and in fact exited the fiscal year exceeding this long term target. More recently also on November 28, we had also made good progress on another major milestone with the integration of the Avagos and Broadcom's financial reporting systems. Looking at 2017 beyond, we expect our business to be continuing to be sustainable and in fact becoming much more profitable. We are raising our long term operating margin target to 45%, a significant increase from our prior model. We expect to drive to this long term target through a combination of the full realization of material cost synergies and operating leverage on a larger scale. Reflecting expected improvement in profitability, we announced earlier today a doubling of our dividends. We are comfortable that our projected free cash flow generation will support this significantly higher return to shareholders, while still preserving flexibility on our balance sheet for future M and A opportunities. As and when these new M and A opportunities materialize, they will enable us to further increase capital returns to shareholders. Let me now turn to a discussion of what happened in the 4th quarter. We delivered strong results for our 4th fiscal quarter of 2016 with revenue of and with revenue at $4,150,000,000 up 9% sequentially. This result was at the top end of our guidance, primarily due to better seasonality from our wireless and enterprise storage segments. Earnings per share of $3.47 grew by 20% sequentially. Talking about wired, our largest segment. In the 4th quarter, revenue came in at $2,080,000,000 meeting expectations percent of our total revenue. Revenue for this segment during the quarter was up slightly on a sequential basis. We benefited from increased demand for networking ASICs into data centers as well as strong fiber optic shipments into access and metro networks. Our recently launched Jericho standard product line that target aggregation and edge routing applications continue its ramp during this quarter. We were also able to address the supply chain constraints we experienced in the prior quarter, allowing us to catch up to customer demand in our set top box business. As we look to the Q1 for our wired segment, despite expected declines seasonal declines, I should add, in broadband carrier access and set top box businesses. We anticipate continuing growth in fiber optics and strong increased demand from several cloud data center operators, which will keep our wide revenue in total at least flat sequentially. Moving on to wireless. In the 4th quarter, wireless revenue came in at about $1,350,000,000 and the wireless segment represented 32% of total revenue. Revenue for this segment was up 34% sequentially, a bit stronger than expectations. Growth was primarily driven by the full ramp of the new phone generation at our North American smartphone customer, further enhanced by an increase in Broadcom's cellular RF content and wireless connectivity content in this new generation of phones. We made great progress in relieving F bar filter capacity constraints we experienced in late 2015. Over the course of 2016 fiscal year, we were able to increase FR filter capacity in our Fort Collins fab by approximately 50%. This increase was enabled by our new 8 inches wafer manufacturing process that came online with very good yields. As we look forward, we intend to add more capacity by continuing to convert existing 6 inches lines to 8 inches lines. This very capital efficient conversion approach will allow us to theoretically add another 70% of capacity over our existing 6 inches footprint within Fort Collins fab over the next few years. Because of this, we no longer need to keep the idle facility we had purchased in 2,005 in Eugene, Oregon as a backstop pending the outcome of this 6 to 8 inches capacity expansion. Turning now to our projection for Q1 20 7 fiscal 2017. Similar to last year, we expect a seasonal decline in demand and expect our wireless revenue to sequentially decline in the mid teens on a percentage basis at least. Turning to enterprise storage, which is going through something of a resurgence that we expect will continue into the Q1 of fiscal 2017. In the 4th quarter, enterprise storage revenue came in at $561,000,000 and this segment represented 14% of our total revenue. Segment revenue grew 6% sequentially and came in better than expectation. We benefited from the strengthening demand both for our HDD hard disk drive and red host bus adapter products. Looking into the Q1, we expect the strength in the storage end market to continue to show momentum and drive enterprise storage revenue growth to 20% on a sequential basis. We're expecting growth from all our enterprise storage products. In particular, we're expecting a strong ramp in shipments of our custom flash controllers for SaaS enterprise solid state drives that are increasingly being used in place of high performance hard disk drives in data centers. Finally, let's move on to our last segment, industrial. In the 4th quarter, industrial segment revenue came in at $162,000,000 down 20% sequentially. This segment represented 4% of our total revenue as expected, reduced shipments sharply into our channel as we headed towards this seasonally weaker end of the calendar year. Industrial product resales did decline, but only in the mid single digits sequentially, resulting in a sharp reduction in our channel inventory. Accordingly, as we look into Q1, we plan on rebuilding depleted channel inventory and anticipate increasing shipments to our distributors. As a result, we expect revenue in the Q1 from our industrial segment to increase sequentially in the mid single digits. In summary, after a strong close to our fiscal year 2016, we expect a solid start to fiscal 2017 as the demand environment for our entire portfolio of products continues to be very firm. In fact, we expect in the Q1 to largely offset the seasonal decline in wireless revenue through sustained strength from wired products benefiting from growth in cloud, broad strength in enterprise storage and a recovery in industrial. With that, let me now turn the call over to Tom for a more detailed review of Q4 and fiscal 2016 financials. Thank you, Hawk, and good afternoon, everyone. My comments today will focus primarily on our non GAAP results from continuing operations, unless otherwise specifically noted. A reconciliation of our GAAP and non GAAP data is included with the earnings release issued today and is also available on our website atbroadcom.com. Let me start by providing some comments on our long term operating model and an update on our capital allocation return strategy. As Hock highlighted, the integration of Classic Broadcom with IVAWGO is going very well and we have made rapid progress towards achieving our original target operating model objectives. Looking forward to a fully integrated Broadcom, we recently announced an increase in our long term target operating margin a combination of operating leverage driven by long term revenue growth, which we continue to target at approximately 5% per year and the full realization of acquisition related cost synergies from the Broadcom acquisition, all while maintaining a significant investment in research and development. In addition, we recently announced the acquisition of Brocade, which we expect to complete in the second half of fiscal twenty seventeen. We expect that Brocade's fiber channel sand switching business will generate approximately $900,000,000 in EBITDA by fiscal 2018. Turning to our balance sheet. We currently intend to maintain liquidity from cash on hand of approximately $3,000,000,000 to cover expected working capital needs and projected annualized dividends. As we have discussed in the past, we expect to continue to target gross leverage of approximately 2 times EBITDA as long as the cost of that leverage remains attractive. Given our current EBITDA run rate, we don't intend to pay down additional debt going forward beyond the amortization obligations in our loan agreements. Finally, long term, we expect CapEx to run at about 3% of net revenue consistent with our largely fabulous business model. However, you'll see for fiscal 2017, we expect CapEx to run at an elevated level of approximately 1,200,000,000 dollars This includes about $500,000,000 towards campus construction primarily at our Irvine and San Jose locations and about $200,000,000 towards purchasing test equipment to consign the contract manufacturers that support classic Broadcom businesses. In summary, as we reflect on all of this, we are comfortable that we can generate long term free cash flow margins of better than 35%. Turning to M and A and as Hock highlighted in his opening remarks, as we look at the landscape versus the scale of our projected free cash flow generation, we feel that we have reached the point where it makes the most sense to return a more meaningful portion of our cash flow to shareholders in the form of dividends. The substantial increase in our dividend announced today is a first step. Long term, we plan to target aggregate dividends approximately 50% of free cash flow on a trailing 12 month basis. Given our free cash flow generation, we believe that this will also allow us sufficient balance sheet flexibility to pursue opportunistic acquisitions that are consistent with our proven business model. One note on the dividend. Our Board has decided to set dividend policy and the projected quarterly dividend amount for the full fiscal year rather than a quarter by quarter basis as it did previously. However, the declaration and the payment of any particular quarterly dividend, if any, is subject to the approval of the Board at the time of distribution. Now looking below the operating line, I want to pause for a minute to provide you a quick update and some color on our tax situation. As you are aware, we are a Singapore company and our IP is predominantly located in Singapore pursuant to our agreement with the Singapore government. When we acquired Classic Broadcom, we intend to align the acquired operations with Classic Avago's existing processes and structure as that structure has demonstrated long term sustainability and relatively higher flexibility to deploy cash globally. This integration of IP occurred in the Q1 of fiscal 2017. As a result of acquisition accounting at the time we closed the Broadcom acquisition, we established a deferred tax liability on our balance sheet associated with the potential tax liability from our planned IP integration. This tax liability will only become payable upon the actual distribution of any earnings resulting from integrating the IP and may be partially offset by any qualifying tax credits and deductions available to us at the time distribution. We expect to distribute these earnings over several years. The payment of these cash taxes will be in addition to the cash taxes that we pay on our regular operations and will over time reduce the deferred tax liability that you see on our balance sheet today. As a result, in fiscal 2017, we expect to pay approximately $400,000,000 in cash taxes, which will include the impact of cash taxes, if any, associated with the IP integration. With that, let me quickly summarize our results for the Q4. Revenue for the Q4 came in at $4,150,000,000 growing 9% sequentially. Foxconn was a greater than 10% direct customer in the 4th fiscal quarter. Our 4th quarter gross margin from continuing operations was 60.8 percent, about 30 basis points above the midpoint of guidance primarily due to better than expected operational efficiency. Turning to OpEx. R and D expenses were $666,000,000 and SG and A expenses were $137,000,000 This resulted in total operating expenses for the Q4 of $803,000,000 slightly below guidance reflecting the benefits from the ongoing realization of acquisition related cost synergies offset by higher bonus accruals due to higher profitability. Operating income from continuing operations for the quarter was $1,720,000,000 and represented 41.5 percent of net revenue. Provision for taxes came in at $73,000,000 slightly above our guidance. This was primarily due to higher than expected net income. 4th quarter interest expense was $106,000,000 and other income net was 9,000,000 dollars 4th quarter net income was $1,550,000,000 and earnings per diluted share were $3.47 $7 Our share based compensation expense in the Q4 was $208,000,000 Moving on to the balance sheet. Our days sales outstanding were up 48 days, a decrease of 4 days from the prior quarter due to better linearity of revenue in the quarter. Our inventory ended at $1,400,000,000 an increase of $92,000,000 from the beginning of the quarter. I would note that the starting inventory for the quarter included the impact of $86,000,000 of step up charges to reflect the impact of purchase accounting. However, our non GAAP results exclude the impact of these step up charges. Therefore, non GAAP inventory days on hand reflect an aggregate change in inventory of $178,000,000 in the quarter, an increase from 74 days to 78 days. We increased inventory for some of our classic Broad products to improve operational flexibility to better meet customer demand. We generated $1,350,000,000 in operational cash flow, which reflected the impact of approximately $124,000,000 in cash expended primarily on Classic Broadcom restructuring and integration activities, including discontinued operations. We ended the quarter with a cash balance of approximately $3,100,000,000 In the Q4, we spent $193,000,000 on capital expenditures. A total of $213,000,000 in cash was spent on company dividend and partnership distribution payments in the Q4. Now let me turn to our non GAAP guidance for the Q1 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 $4,075,000,000 plus or minus 70 $5,000,000 Gross margin is expected to be 61.5 percent, plus or minus 1 percentage point. Operating expenses are estimated to be approximately 785,000,000 be approximately $73,000,000 Net interest expense and other is expected to be approximately $101,000,000 The diluted share count forecast is for 446,000,000 shares. Share based compensation expense will be approximately 210,000,000 dollars CapEx will be approximately $330,000,000 And as a reminder, our Q1 is generally a weaker quarter for operating cash flow due to the payment of our annual employee bonuses relating to the prior fiscal year. That concludes my prepared remarks. Operator, please open up the call for questions. Our first question comes from the line of Craig Hettenbach from Morgan Stanley. Your line is open. Yes, thank you. A question on networking and you mentioned some strength in ASICs. I know over a number of years you guys have done well in terms of taking share. Can you talk about where you are in that and just kind of maybe the legs of that share gain story on the ASIC side? Well, over the years, you're correct. We have been gaining share and as we talk generally about those shares, generally these ASICs have a long product life cycle and gaining share tends to take a while, a few years before you show up it shows up in revenues. And I guess what we are seeing now is the outcome, the revenue outcome of share we had gained in previous years. And we continue to gain share step by especially with on very, very high speed, high performance networking switches, routers, even vector processing machines. Got it. And then as a follow-up on the wireless front, you mentioned kind of getting caught up on capacity and the 8 inches transition is going well. Up until this point, you've been mostly servicing the 2 high end smartphone OEMs. Any thoughts in terms of the approach going forward on the China smartphone OEM market in terms of is it sizable enough for you guys to engage more on that front? It is sizable. It's just that see, our strength, our basic strategy in wireless, be it RF cellular, analog or wireless connectivity, WiFi that is Bluetooth combo, is about the features, the engineering advances, the innovation we provide with those solutions. And we continue to do that generation after generation. However, this tends to be very expensive, relatively speaking products, but they offer very, very unique differentiated features to our customers. So that's it's usually only a very high end segment of the market that takes this on. And you're right, it would include the Chinese. To the extent that very high end flagship status, premium status phones. But it's a much smaller percentage than our core business, which is largely the flagship phones from our North American customer and our big Korean customer. Thank you. Ladies and gentlemen, we're getting many questions in the queue. So in the interest of time, we ask that we you continue to do one question and one follow-up per questioner. Our next question comes from the line of Blayne Curtis from Barclays. Your line is open. Great results. Maybe just following up on that last question on the wireless segment. You're guiding basically what you did last year. I'm just curious if the moving pieces within that are about the same. If you can just give any comments on what you're seeing in the January versus last year? Pretty much the same, Blayne. You hit it right on. Our wireless business is very, very more predictable. There's a product roadmap. Every generation we come up with every generation of phone, which is every year virtually. We come up with a new set of new product, a new set of features, capabilities that our solution provides for our flagship phone customers. And with it typically more content, as we call it, because there are more bands or there are more features or there are more channels that wireless connectivity needs in delivering the high performance data signals that phones are rapidly becoming. So it is but other than that, the fact that it keeps innovating, it keeps becoming much more and more an engineered product that is very much the same kind of business we have. Great. And then on just the guidance for storage is up quite strongly. You mentioned the ASICs for SSDs. Just wondering within that guidance, how much that was contributing in just broad strokes? And what else if you had to rank the drivers getting that 20% growth? It's no surprise to you guys, right? Right now, I suspect the season I don't suspect the strong seasonality in consumer PCs and hard disk drives are running very strong. It's also partly because enterprises, cloud are buying a lot of hard disk drives because of enterprise grade NAND shortages too. And so we benefit a lot on that on our storage side, but also we're seeing a lot of cloud spending on the storage side of the business, which is where our mega rate, our SaaS storage connectivity, our server storage connectivity side of the business is also showing renewed strengths, even at this late stage of the Grenli generation. See, Pearly is coming middle of next year, when we expect a big lift, but it's interesting to see this lift also happening at this time. So we're seeing across, as I mentioned, pretty much all sectors in our enterprise storage portfolio. Great. Thanks. Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your line is open. Hi, guys. Thanks for letting me ask a question. I guess the first one on the cash return policy. Congrats on doubling the dividend. I just wonder if you could give a little color on how the 50% of free cash flow target was given? And Hock, does that have any implications about your view on the appetite and or availability of good M and A targets and that you're going to more equally balance return of cash to shareholders and M and A? Ross, let me hit that first and then if Hock wants to add something more, you should. At the end of the day, it's a balance, right? We look at the scale of the free cash flow. We look at the M and A landscape relative to that scale, and we wanted to maintain flexibility on the balance sheet and remain in and around our target of 2 times EBITDA in terms of leverage. And so when we put that together, and in light of the fact that we're very focused on the dividend relative to any buybacks, 50% made sense. What is implied here Ross, the other side to it is our appetite in acquisition hasn't changed at all. If there are interesting businesses out there that are actionable, we will consider and we will act prudently and appropriately. What all these things says in terms of our new cash allocate capital allocation policy is we're basically taking the view that we are taking on a significant amount of our debt as effectively like long term on a long term capital as part of our long term capital. And we feel comfortable in continuing to support that, which then basically opens our self up for the opportunity to really create a lot of flexibility on our balance sheet and our ability to translate a lot of our operating cash flow into cash return for our shareholders, while not at all diminishing our ability to act on transactions that make plenty of sense. Great. I guess as one follow-up, it's very helpful to have the updated target, the 45% on the operating margin. If I pulled that together with the last couple of quarters where you've nicely beaten the gross margin side of the equation, gross margin wasn't mentioned in the levers you're going to use to get to that 45% operating margin. So I just wondered what your thoughts are in the at least the direction of gross margin going forward? Thanks. Oh, no. I didn't mention it. I didn't mention it. And what a key part of our realization of a benefit of all this and particularly on gross margin is our gross margin continues to expand. You have seen that since February 1 this year, quarter after quarter, and we continue to expand even as we guide Q1 fiscal 2017. Q4 fiscal 'sixteen was 60.8 percent gross margin. We're guiding it up to 61.5%. And if you look at it closely, we're stepping up without trying to tell you that's a long term trend. We have been stepping it up about 50 basis points every quarter sequentially. And the benefit and the reason why that's coming from is simply because, very simple, we're getting synergies from material costs. Tom talked about bring investing CapEx into testers, a lot of testers of our silicon based product. These are very expensive testers. We're talking investing $200,000,000 on a lot of testers because we believe we have a more efficient way of doing it. We do our testing through consignment of our test equipment, which we are adopting. Basically, the idea and the whole thing to all that is we're doing we're getting a lot of synergies on material costs, not just on our SG and A line. Great. Thank you. Thank you. Our next question comes from the line of Vivek Arya from Bank of America. Your line is open. Thanks for taking my question and congratulations on I have one question on wired and one on wireless. So Hawk on the wired one, and just on an apples to apples basis, how do you think your wired business has done relative to what you thought when you acquired Classic Broadcom? I know there is a perception that you have stood firm on pricing. Do you think this has distracted from growth in any way? Just how do you think your networking and the cable sides have done in your wired business over the past year? Okay. Our wire business has done very, very well. In fact, to be direct about it, from just before we closed the transaction, that means in the final due diligence stage and all that to looking from that point, starting point over the last 9 months, it's done much better than we had expected it to have done. We've seen this product has been very, very sustainable with our customers, been very, very strategic to a lot of our OEM customers and continuing to be that way. We continue to invest a lot in those areas that we particularly find them to be very, very core and sustainable. And we haven't spent on any investment there. And we are seeing it paid back a lot. And by the way, when I say investment, it's not just hardware, we're investing a lot in firmware, software and support. So that business has done much better than we had originally thought we could get out of it. I see. And as my follow-up, looking forward on your wireless business, usually April is the seasonally trough quarter for your largest customer, but there is often some positive offset from your Korean customer. Can you give us some color on how you're thinking about how April might shape up this time around? Thank you. To be honest, we have no clue for this one. Part of it is how resale is doing especially through this holiday season. That's when we start to know about it in the January timeframe. December is a bit too early to figure it out. But you're right, typically in spring, we have the other large OEM customer in Korea has a nice counterbalance, and that helps. But overall, for wireless, we expect Q2, as always, to be almost, I call it, the bottom of the seasonality. What's very nice for us right now is the strength that I purposely indicate to you guys in my remarks opening remarks in our wired and a strong recovery now as on early recovery in bookings on our broadband set top box and carrier access in bookings recovery would actually then would actually help cushion that seasonality we expect in that March, April time frame, which is our Q2. But that's looking very far ahead, of course, which we, as always, never try to venture in much of an opinion on. Okay. Thank you. Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your line is open. Yes. Good afternoon, guys. Thanks for letting me ask the question. Congratulations on the strong results. I guess guys my first question just around CapEx. Tom, you gave a lot of detail for the fiscal year coming up, but it looks like you guys underspent in the calendar Q4 by quite a bit relative to guidance. What drove that? And as you answer that question, I'm just curious, Hock, I want to make sure I completely understand your commentary around the Oregon fab. Is it that the 6 inches to 8 inches transition or FR has gone so well that you don't need to build out capacity in Oregon to the extent you thought? If you could just help me understand that that would be helpful. Let me hit the first one quickly John and I'll pass it to Hock. The answer is just timing of payments. We had a lot of obligations that we have placed orders and ended up making the payments rolling into Q1 as opposed to banking payments in Q4. So pretty straightforward. Q1 will be your high watermark for CapEx likely in this fiscal year. Okay. It's just timing slippages of payments from Q4 to Q1 basically. But back to Oregon Fab, yes, I know there have been a lot of concerns, comments or chatter out there, at least I hear it then from Ashish about where we selling off this idle potential facility in Eugene, Oregon. And as I said in my remarks, and you hit it right on, John, is and I said that right at the get go when we bought this fab, it's an insurance policy, best way to describe it. It's an insurance policy because we were in the midst of increasing our capacity in Fort Collins by taking all our 6 inches lines, which is entire line group, a year plus ago, 2 years ago, and bringing converting them into 8 inches in phases, but we're converting them to 8 inches and by the time we finish converting all 6 inches we'll get a 72% increase in capacity without any further expansion of the footprint, which is pretty cool, which will be pretty much what we need over the next few years, 72% increase. And our initial couple of phases of conversion, which has happened over the last year or year and a half, has gone very, very well. Yields are up to normal. Everything is running very well. So we feel very comfortable. And in my usual way of making sure we don't overspend money, we don't want to hold on to an idle facility that we pay some operating expenses on an ongoing basis. In other words, I don't need the insurance policy anymore. And then as my follow-up, just to follow on to Blaine's question earlier, I'm just kind of curious within enterprise storage, how large is the SSD business now? And can you help us kind of understand how big that business should get? Is this going to be a similar sized market to HDD controllers over time? Are the dynamics in this market the same? Or how are you thinking about this over a longer period of time? Well, it's to be honest with you, 1st and foremost, I don't have the data in front of me. And if I do, as a policy, we generally don't try to break it out in 10 ways, because then you'll be torturing me every of this earnings call about what is this number gone there now. But broadly, it's not the size of HDD rechannel at this point. And do we hope to cushion some of the long term gradual decline in HDD SoC? Yes, we do. That's why we go into this because that has similar capabilities and designs that we transfer from our transfer engineers from our SoC to this area very nicely. And so we are seeing 2 streams of revenue in our, so to speak, our storage drive business right now. And it's just that in this season where flash is seems to be enterprise flash seems to be in short supply, we're seeing enormous demand from couple of OEM customers. For flash controllers, we do customized flash controls that we do for these OEMs that are used for SaaS based enterprise drives, which are the high performance enterprise drives. So it's very interesting. And it is significant enough to be rather meaningful in the overall mix. Perfect. Thanks guys. Thank you. Our next question comes from the line of Harlan Sur from JPMorgan. Your line is open. Good afternoon. Solid results and great to see the strong dividend raise here. On the data center routing side, strong results. We're still early in the ramp with Jericho and Qumran here. Port deployments, I think, by your cloud customers are still trending about less than 10%. From a silicon port shipment perspective though, I think that the penetration numbers are obviously higher. So I guess the question is, where do you think we are in terms of silicon port shipment penetration for Jericho and Qumran? And then on the routing side, just sticking with that, is the team also benefiting from the data center routing port build out via some of your ASIC engagements as well? Interesting. Yes, but one thing you did say is very correct. The 2 are running almost in a in the 2 will be running in parallel down the road. You're right, most of this routing program, routing core or edge routing and aggregation to some to a larger extent data centers now I used to be using a lot of ASICs, which is great for my ASIC business. What we're also seeing is in some of these cloud guys, they're moving to merchant silicon, which is Jericho, Qumran, as you put it. And that's early stage compared to the ASIC side. So we are very well positioned on the ASIC site and we are good well positioned now as we ramp up Jericho in etch and certain parts of core, our aggregation especially. And to answer your question, it's very early. That Qumran Jericho site is barely you say 10%, I'm surprised. I think it's a bit more than that at this point. But then it could be data it could be that we may be looking at different parts of different sets of data. But it's definitely not onethree yet. It's in the range of, I would call it, 20 percent to 35% of those spots available because there's still a lot of the ASIC being used. But that push that trend over the long term, we think, is towards standard open merchant silicon. You're right. We're seeing that especially not just only in the cloud, hyper cloud Tier 1 guys, we're seeing that among the operators who are pushing for standard silicon, standard source for their networks and data centers. And that's also putting a lot of pressure in push in driving up use of Jericho especially, but it's also interesting in the sense that many OEMs are now coming working with us on both sets in parallel, which is why I say there will be coexistence of the 2 approaches in ASIC, silicon for routing and together with merchant silicon. Okay. Thanks for the insights there. And then on the broadband connected home, it seems like the pay TV service providers in developed countries are getting ready to make a more aggressive push out of 4 ks UHD services, which I think should result in a set top box upgrade cycle. So given your leadership in satellite cable, IP set tops, is this going to start to be a growth tailwind for the team in 2017? I'd like to believe that one replaces the other though, but you're right. And for once, they can't just use software to upgrade it. They actually need a bloody new chip, which is good for us. But we are seeing it, but it's a gradual trend. It's not a one it's not an ever launch. It will be a gradual trend, and we are in the midst of it or the beginning the early part of the uptrend on 4 ks. Thanks, Hock. Thank you. Our next question comes from the line of William Stein from SunTrust. Your line is open. Great, thanks. Let me add my congratulations on the excellent results. My question relates to carrier aggregation. You've cited this in the past as one of the future drivers of your RF content. And I'm wondering if you can update us to better understand where we are in the growth in that of that phenomenon driving that part of your business? We're in the midst of carrier aggregation, as you know now. It's happening a lot in the U. S, is happening in China in space too, which is, by the way, a good way for us to sell our chips even to the low cost sensitive Chinese phone makers. They still need carrier aggregation in China, and those are very difficult chips to do. And we have the best performing chips, we get a very good share in that even in China, where they're even cost sensitive. In other words, they have chip stuff everywhere except the carrier edition chip, which is interesting. But in terms of the big flagship phone makers that I mentioned earlier, they have it all in spades. This is usually downlink carrier aggregation. In another year or 2, we will see uplink carrier aggregation in addition, all towards saving infrastructure costs, base station costs and power. And that will be another lift. That's why I say year by year, as I look over the next several years, that RF cellular payments that we develop and sell to those flagship phone makers continues to get more and more complex, more and more content. Great. If I can follow-up with one more on the pending Brocade acquisition. Any update on the anticipated timing or in the process to sell the piece of that business that you're planning to divest? Tom, go ahead. No, no. It's just as we discussed when we announced the deal, we are targeting the second half of our fiscal year and all the regulatory filing processes that have to take place are on track. As for the divestiture, we don't have any specifics to report at this point, but we remain pretty confident that we're going to be able to have a successful outcome there. And that's off to a very good start and progressing well and hope to report on that relatively soon. Great. Thank you. Thank you. Our next question comes from the line of Stacy Rasgon from Bernstein Research. Your line is open. Hi, guys. Thanks for taking my questions. I had a question on your margin target. You obviously got to the 40% operating margin target pretty quickly, raised it to 45%. Do you need the Brocade deal and the benefits in that in order to reach that 45%? Or do you think you could get there even without Brocade? Brocade deal may accelerate it somewhat, but not really make a difference. We are trending towards It may take us a bit longer without Brocade, may or may not, but we'll get there. We are very confident. This model now is a long term model. Obviously, it's not a model just for 'seventeen, fiscal 'seventeen. I would say it's a model over the next 3 years that we would meet or exceed that 45% operating margin with or without Brocade. Got it. Thank you. That's helpful. For my follow-up, just a quick one on your debt balance. So obviously, you're going to be holding on the debt for now. But as far as I understand, it's mostly or even all floating rate. How do you think about that situation in what may potentially be a reflationary environment that we're heading into? It's a good question. It's something we monitor and focus on as you might expect. I think the key takeaway is that our credit quality continues to improve. And I think that's going to drive a lot of our decision making around how we think about floating versus fixed in our long term capital structure. But got to leave it there in terms of talking about specifics on how we might think about solving the floating rate risk going forward. But we do recognize it. Sorry, go ahead. But we do recognize it. Got it. Thank you, guys. Thank you. Our next question comes from the line of Ian Ng from MKM Partners. Your line is open. Yes, thanks for taking my question. You've done a great job of targeting big OEMs of the world. What are your thoughts on automotive OEMs? I mean, is this something potentially to go after one day? It seems every semiconductor company, large ones like Intel and Qualcomm and Samsung are talking about it. Thanks. Oh, what I assume you don't I mean targeting OEMs as customers, right? Because we see OEMs as our customers, right? We know yes, well, see, our business model is very financially driven. We sell components. We sell very engineering based components where in each of our product lines, business units, we are the not just the market leader, we are the technology leader very, very clearly. And this can be niche market, some of them will become big end markets. Regardless, that's our business model. And our acquisitions, as you put it, is not about targeting any specific area, it's more about targeting businesses out there that become available that have a very strong potential to be to meet those criteria I mentioned about, established markets, technology leader and very successful in the areas they are in the market, be they niche or mess. And if automotive is 1, yes, we might end on automotive if there are potential opportunities there, but we don't stretch and go out of way to look at specific end markets where we want to play. Thanks. And for my follow-up perhaps more of an update on the IT back end consolidation and update on the synergies there. You talked about financial systems in the prepared comments and does that go into Q2 and Q3 of this year? Yes, we are not done with our synergies yet, especially on the operating synergies, OpEx synergies in below the line SG and A. And we will start having we are now running on 1 ERP system, which is great, which would be which would help us a lot in terms of headcounts and expenses to be able to run it much more efficiently. And we will also see other synergies in other areas that in IT, workplace services that Real Estate and a few other areas. And they all will come in over the course of at least the next 6 months, if not 9 months. Thank you, Huck. Thank you. In the interest of time, we will take our last question from the line of Amit Daryan Nani from RBC Capital Markets. Your line is open. Hi, this is Jerry Ong on behalf of Amit. Just two quick questions and thanks for squeezing us in. I think first off, it looks like just based on modeling to the midpoint of guidance that operating margins could be about slightly north of 42%. I know you guys just talked about 45% as a long term target. Going forward, is the getting to that 45% number, is it going to be more gross margin or operating or OpEx in terms of synergies? Both. We expect long term to answer your question May 45 comes from. It comes from both places. As you see us keep expanding our gross margin and we see that continuing for some period of time. We'll start to approach particularly product mix as well together with cost synergies and scale on manufacturing overheads as we cover as we broaden our product lines, scale our product lines over the same set of manufacturing support teams to come closer and closer to 65%. Our OpEx, R and D and SG and A will run closer and closer to 20% if it's not already there. R and D will continue to be at 16%, 17 So you can see where our 45% is. Now that's not going to happen in 2017, guys. But this way over time we will be able to drive this whole thing. And let me add also the revenue trajectory and how the revenue bumps around, especially related to the 5% targets we have also will help drive that number. Yes. Yes. Thanks for that clarity. I think that helps quite a bit. Next question, just congrats on the dividend increase and probably not trying to push my luck here, but I would say the 2 other factors that investors struggle with is the lack of buybacks and not including optioned expenses in the model. Can you just talk to your process around those two dynamics? Sure. I'll take it. On the latter question around SBC, we certainly break it out very explicitly in our comments and our results. So we think we're addressing that pretty much head on. In terms of the buybacks, I mean, we've addressed this a number of times. We look at dividends as a more permanent return to capital, a better indication how we feel about our business. Obviously, we talk a lot about the sustainability of the franchises that we own, and I think that's consistent with our model. Thank you. At this time, I'd like to turn the call back over to Ashish Saran, Director of Investor Relations, for closing comments. Thanks, operator. I'd like to confirm that GlobeNewswire has now released the corrected earnings press release, which includes financial tables. The updated press release has also been uploaded to our website atbroadcom.com. Thanks, everyone for participating in today's earnings call and we look forward to talking with you again when we report our Q1 fiscal year 2017 financial results. That concludes Broadcom's conference call for today. You may now disconnect. Ladies and gentlemen, once again, thank you again your participation in today's conference. This now concludes the program and you may all disconnect your phone lines at this time. Everyone have a great day.