Welcome to Broadcom Limited's second quarter 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. Good afternoon, everyone. Joining me today are Hock Tan, President and CEO, and Tom Krause, Acting Chief Financial Officer of Broadcom Limited. After the market close today, Broadcom distributed a press release and financial tables describing our financial performance for the second quarter of fiscal year 2016. If you did not receive a copy, you may obtain the information from the investors section of Broadcom's website at www.broadcom.com. This conference call is being webcast live, and a recording will be available via telephone playback for one week. It will also be archived in the investors section of our website at broadcom.com. During the prepared comment section of this call, Hock and Tom will be providing details of our second quarter fiscal year 2016 results, background to our third quarter fiscal year 2016 outlook, and some commentary regarding the business environment.
We will take questions after the end of our prepared comments. In addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. At this time, I would like to turn the call over to Hock Tan. Hock?
Thank you, Ashish. Good afternoon, everyone. Well, we delivered strong results for our second fiscal quarter of 2016, the first quarter of operations as a combined company. Revenue, $3.56 billion, came in just a shade above the midpoint of our guidance, while earnings per share were significantly higher than guidance. As you all are well aware, demand for hard disk drives and premium smartphones was weak this quarter, Q2. However, we experienced strong product cycles from switching and broadband in our wired segment, enabling company revenues to come in line with expectations. Our larger scale and greater diversity enabled consolidated results to be resilient, mitigating fluctuations in our individual end markets. Earnings came in significantly above expectations, enabled by delivering gross margin at the high end of guidance and driving faster than expected ongoing realization of acquisition-related cost synergies.
Let me now turn to a discussion of our second quarter segment results. Let's start with wired. In addition to Classic Avago's custom networking ASIC and fiber optic products, the combination with Classic Broadcom has added Ethernet switching and routing ASSPs, physical layer copper and optical products. In addition, in this segment, it also includes now Classic Broadcom's broadband communication solutions for set-top box, cable modem, and carrier access. In the second quarter, wired revenue came in at $2.06 billion, and this represented 58% of our total revenue. This is now obviously our largest segment, and it performed better than we had expected in the second quarter. We saw strength across various product lines. We experienced robust demand in switching and routing standard product, including very strong traction for our new Tomahawk switching and Jericho routing platform, especially from the cloud and service provider customers.
In fact, as some of you may know, a key customer today announced a new universal leaf switch and routing platform for next generation data centers, which is based on the Jericho product platform. We also saw strong demand for broadband products from set-top box refreshes driven by the start of adoption of 4K video. Service providers continue to invest in broadband access infrastructure, including ongoing fiber to the home build-outs in China, as well as DSL and cable modem build-outs in Europe. As we look into the third quarter for our wired segment, we expect the strong demand to sustain from the prior quarter and project wired segment revenues to be up in the low single digits sequentially. We're also working on resolving a few potential supply constraints in this particular segment. Moving on to wireless segment. In addition to Avago's FBAR filters and power amplifiers.
Our wireless segment now also includes Classic Broadcom's wireless connectivity and custom analog handset solutions. In this second quarter, wireless revenue came in at $792 million, and the wireless segment represented 22% of our total revenue. As expected, we did see a decline in demand from a large North American smartphone customer, including the anticipated impact of their seasonal product lifecycle related reduction in shipments. This was partially offset by an increase in shipments to a large Asian handset OEM. As we have said before, this second quarter was the trough for this segment for the rest of this fiscal year. Moving on to third quarter, we're expecting a very different picture for our wireless segment, and expect strong sequential revenue growth in the mid-20% range.
The expected growth is driven by the start of a ramp from a large North American smartphone customer as they transition to their next generation platform, enhanced by a substantial increase in Classic Avago's RF content in this new handset. Classic Broadcom's wireless connectivity content will also increase in this new handset. We anticipate our wireless connectivity business to continue to drive significant innovation for mobile Wi-Fi and Bluetooth applications, and expect this product line to be a very key long-term contributor to our wireless segment. Let me now turn to enterprise storage. In the second quarter, enterprise storage revenue came in at $525 million, down 23% sequentially. Enterprise storage represented 15% of total revenues. This segment experienced a sequential decline in revenue driven by a large drop in hard disk drive unit TAM and seasonal weakness in the enterprise server storage connectivity market.
Looking to the third quarter, largely due to further hard disk drive unit TAM declines, we expect enterprise storage revenue to decline in the low single digits sequentially. We currently project the third quarter to be the trough for enterprise storage revenue this fiscal year. Regardless of fluctuations in unit TAM, we also expect to continue to gain share in our hard disk drive business. Let me now move to the last segment, industrial. In the second quarter, industrial segment revenues came in at $182 million, up 30% sequentially and represented 5% of our total revenues. Industrial resales grew sequentially mid-single digit, and our revenue here increased as well by the same level as we replenish channel inventory to keep up with the seasonal increase.
Looking at the third quarter, we expect the trend to sustain from the prior quarter and expect mid-single digit sequential growth industrial product revenue driven by continuing high retail projections. However, in IP sales, after a strong and lumpy second quarter, we expect revenue to drop in the third quarter. As a result, we expect revenue in the industrial segment to decline mid-single digits sequentially after a 30% increase in Q2. In summary, therefore, what we expect for the third quarter is sustained performance from networking and broadband, a trough in enterprise storage, a strong seasonal ramp in wireless, driving sequential growth in consolidated revenue of over 5%. We expect earnings to grow even faster. We are projecting earnings per share to grow sequentially at almost double the rate of revenue growth, driven by lower operating and interest expense as a percentage of net revenue.
This, in a nutshell, is the leverage and power of our business model. With that, let me now turn the call over to Tom for a more detailed review of our second quarter financials. Tom?
Thank you, Hock. Good afternoon, everyone. Before I start, my comments today will focus primarily on our non-GAAP results from continuing operations, unless otherwise specifically noted. A reconciliation of our GAAP and our non-GAAP data is included with the earnings release issued today and is also available on our website at broadcom.com. First, before I get into the second quarter results, I would like to take a few minutes to review progress we are making towards our long-term financial model as we work through completing the integration of Classic Broadcom. Fundamentally, just to review, the financial model is the output of the business model that Hock is driving. The most important element of our model is the sustainability of the franchises we invest in over the long term. When we set out to acquire Broadcom, we recognized their collection of well-established businesses with leadership positions.
Built on the back of proprietary and highly defensible technologies, we believe that these franchises were critical to enabling rapidly evolving wireline and wireless ecosystems. While we only have one quarter under our belt, we think that this thesis is very much intact. Another key element is discipline. We are actively managing the portfolio to stay focused on investing in the core franchises while monetizing businesses that do not have clear long-term sustainability. This is an ongoing process that continue to allow us to maximize returns on our R&D investments. Finally, we keep things simple and focused on critical business processes. Given our now larger economies of scale, we can be even more efficient across our global supply chain and sales platforms, as well as our general and administrative functions. This takes us to the three key elements in our financial model, starting with revenue.
While we don't expect the broader semiconductor industry to grow much over the long term, we do believe that our franchises will benefit from some very positive trends, including what seems to be an ever-increasing demand for mobility, bandwidth, and storage. We believe that we have the right set of technologies to support these needs, which gives us confidence in our long-term annual revenue growth rate target of approximately 5%. On the gross margin front, given the market need for our technology and the leadership positions we have, coupled with ongoing cost reductions in our supply chain, we see potential opportunities over time to push gross margins beyond the 60% we've already delivered this quarter. Turning to operating expenses. We believe the completion of integration activities and our focus on return on investment will allow us to drive R&D expenses to 16% of net revenue within the next few quarters.
Looking at the target portfolio and the set of core projects we want to support, we feel 16% is currently the appropriate long-term target for R&D expenses. Finally, on SG&A, we clearly see potential opportunities to drive these expenses below 4% of net revenue. In summary, as we look at the second half of fiscal 2016, we expect to see solid revenue growth from the second quarter, which we believe will help drive operating margins to 40% as we exit the year. As we work toward completing integration and the full achievement of cost synergies in fiscal 2017, we think we can drive operating margins north of 40% and sustain those margins longer term. Let me turn to our capital allocation strategy moving forward.
As many of you know, over the last several years, we have focused on M&A, and the returns have allowed us to drive significant value for shareholders. Going forward, we believe acquisition opportunities will continue to present themselves, that under our business model, will drive returns that far outweigh the alternative uses for our capital. As a result, we currently intend to limit the paydown of our outstanding term loans until our gross debt is approximately 2x EBITDA, at which time we intend to start pooling excess cash for the purposes of M&A, as well as review our capital structure generally, including our long-term debt alternatives. As part of our capital allocation strategy, we plan to remain committed to our dividend program and are currently targeting an approximate 10% per year increase.
As a reminder, our board reviews and determines our dividend policy on a quarterly basis based on our financial performance and condition, the contractual provisions relating to our outstanding indebtedness, and other factors deemed relevant by our board. Now let me turn to a quick review of our results for the second quarter. Revenue for the second quarter came in at $3.56 billion, which we believe will be the trough for the rest of this fiscal year. Foxconn was a greater than 10% direct customer in the second fiscal quarter. Our second quarter gross margin from continuing operations was 60%, which was at the upper end of our guidance range, primarily due to better revenue mix with a stronger than expected wired segment and higher fab utilization as we pre-built filters to support the expected second half ramp in wireless revenues.
Turning to operating expenses, R&D expenses were $663 million and SG&A expenses were $146 million. This resulted in total operating expenses for the second quarter of $809 million, $23 million below guidance. This was largely due to faster than expected realization of acquisition-related cost synergies. On a percentage basis for the second quarter, total operating expenses were 23% of revenue. As a percentage of sales, R&D was 19% and SG&A was 4% of net revenue. Operating income from continuing operations for the quarter was $1.3 billion and represented 37% of net revenue. Taxes came in at $53 million, slightly above our guidance. This was primarily due to higher than expected net income. Second quarter net income was $1.1 billion and earnings per diluted share were $2.53. Second quarter interest expense was $150 million and other expense net was $6 million.
Our share-based compensation expense in the second quarter was $186 million, which included the impact from new grants issued to Classic Broadcom employees approximately halfway through the quarter. In the third quarter of fiscal 2016, we anticipate share-based compensation expense will be approximately $221 million, and this anticipates the full impact of the new grants for the quarter. Just as a reminder, our definition of non-GAAP net income excludes share-based compensation expense. Moving on to the balance sheet, our day sales outstanding were 47 days, reflecting the combined company. Our inventory ended at $1.47 billion, and days on hand were 72 days, which includes the impact of an inventory build supporting the strong growth expected in our wireless business. We generated $622 million in operational cash flow, which reflected the impact of approximately $300 million of cash expended on restructuring activities.
We ended the quarter with a cash balance of $2 billion. We believe that we currently need approximately $1.5 billion to operate the business. During the second quarter, we repaid approximately $565 million of our outstanding term loans. We currently intend to repay approximately $1 billion in the third quarter, part of which we expect to fund using proceeds from the two previously announced investors, which are expected to close in the third quarter. In the second quarter, we spent $158 million on capital expenditures. For the third quarter, we expect CapEx to be approximately $230 million, which includes approximately $75 million for ongoing capacity expansion for our manufacturing RF filters and $45 million for campus construction activity.
We expect CapEx to run at an elevated level over the next several quarters, driven by campus construction in our Irvine and San Jose locations, ongoing RF filter fab capacity expansion, and integration related operations and IT investments. A total of $204 million in cash was spent on company dividend and partnership distribution payments in the second quarter. As you will have seen, our board has declared a dividend of $0.50 per share to be paid later in this third fiscal quarter. Finally, let me turn to our non-GAAP guidance for the third quarter for fiscal year 2016. 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 $3.75 billion ±$75 million.
Gross margin is expected to be 60% ±one percentage point. Operating expenses are estimated to be approximately $809 million. Taxes are forecasted to be approximately $59 million. Net interest expense and other is expected to be approximately $141 million. The diluted share count forecast is for 449 million shares. That concludes my prepared remarks. Operator, please open up the call for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star followed by the number 1 key on your telephone keypad. If your question has been answered or if you'd like to remove your line from the queue, you may press the pound key. To allow more time for questions, we ask that each person limit yourself to one question and a single follow-up. Our first question for today comes from the line of John Pitzer from Credit Suisse.
Yeah, good afternoon, guys. Tom, congratulations on the strong results, and thanks for letting me ask the question. Hock, I guess my first question pertains to the wireless guidance for the July quarter. I'm kind of curious about a couple things. Do both the North American and the Korean customer grow sequentially in July, or is it just mainly the North American customer? And when you look at that North American customer, does the July guidance reflect a full quarter's worth of build benefit of their new high-end phone, or is it only a partial benefit in the July quarter with really a full benefit coming in the next quarter?
All right. Boy, are you getting very sticky and picky. All right. To answer your question, it's largely from the certain North American customer that's driving the bulk of the growth. Having said that, the Korean customer does show growth as well on its own, but obviously not to the extent the North American customer is doing, because it's a ramp. I should use the word beginning of the ramp for their next generation phone. Tied to that, this July quarter, our current quarter, Q3, will not show then the full impact of an entire quarter of revenue ramp. It's just the beginning and it's very backloaded.
That's very helpful. Thanks, Hock. Tom, as my follow-up, I'm wondering if you can talk a little bit about the OpEx guidance for the fiscal third quarter. You are showing sequential revenue growth in the fiscal third quarter. You're guiding OpEx effectively flat on a dollar basis. I'm just kind of curious, just given more of the opportunity you have to realize M&A synergies, why only flat and not better than that? What are the offsets?
Yeah, good question, John. It's really the timing of the realization of synergies. Obviously, we did better than we thought we'd do out of the gate first quarter, and you saw that in the results. A lot of what's to go to a certain extent is tied to system integration and a lot of the back office activities. That's very much on target to be completed early in the first quarter of next year. I'd suggest we will see a bit of a pause here this quarter and perhaps a bit in the next, but as you look into the first half of next year, you'll see the full realization.
Perfect. Thanks, guys. Congratulations again.
Thank you. Our next question comes from the line of Blayne Curtis from Barclays.
Hey, guys. I'd like to give a congrats as well. Just in wireless, can you talk about the connectivity business? There was some concern of share loss. You talked about content potentially going up. Can you just walk through where you see opportunities for content to go up and just the barriers around your mobile connectivity business?
Okay. You broke up every few seconds, but if I get it right, you're basically asking, are we seeing content increase in our wireless revenue in terms of participation in all those premium handsets? As I've always said, year-to-year generation, obviously, there are fluctuations in the level of content increase. Over a period of time, we have experience, we have seen, and will continue to see a steady increase in content. This is not just about FBAR, our front-end module content as more and more bands and carrier aggregation features comes into high-end phones. Now that we have Wi-Fi, Bluetooth, wireless connectivity, we are seeing the same phenomenon apply. Exactly. The parallel between those two product lines is pretty amazing from our perspective. It's not coincidental.
It's part of the reason it attracts us to our acquisition of Broadcom, is the fact that we see wireless connectivity as a very strategic product line in handsets, high-end handsets. For instance, fully 80% of data moves through Wi-Fi today in most handsets. Not LTE, but Wi-Fi. So the importance of improved Wi-Fi connectivity performance, particularly in form of capacity, bandwidth, becomes more and more demanding. Improvement becomes more and more needed. As each generation occurs, our belief is that increase in bandwidth capacity, that increase in performance, will follow for the same reasons that increase in requirements for FBAR filters show the same kind of improvement. I've seen in FBAR filters that over the last few years, content has grown by about 20%, fairly steadily. I might almost apply the same principles to wireless connectivity for Wi-Fi and Bluetooth.
Thanks for that, I apologize, the connection. I'm in Taiwan. Could you also talk about the strength you're seeing in switching, where are you in the ramp of Tomahawk, and do you expect to see growth in the switching segment as a whole for that piece?
Well, we are seeing very strong booking, very strong demand for our switching and routing product lines. Along with that, we carry related products like spines, retimers, all that stuff that's needed to connect the various parts, ends, or elements of a data center. It's one big set of content, one might say that. In particular, obviously, the switching and routing. Tomahawk, as you know, launched much earlier than the new Jericho. Tomahawk is still on a ramp. It's still on a pretty decent ramp, I should say. We're seeing very strong demand for it this quarter, particularly on the application. Obviously, it is used for top-of-the-rack switching for data centers. It's among the cloud and service provider guys.
What we're also seeing, very interestingly enough, that was least recently launched by some of our OEM customers, some more advanced OEM customers, is the use of our Jericho product line. That's more router. Another way to describe it is a deeply buffered switch. That is increasingly been launched to use as the spine of the data center architecture. Why I put the emphasis to the spine is today, we just start to see the launch of that same product line, deeply buffered, on the leaf of that same data center. Both are on an accelerated revenue ramp as we're experiencing today. A big part of this could be a product upgrade cycle, we think, we also believe there's also very strong underlying built-up demand in cloud computing data centers, be they in North America or among the hyper data center guys or in China.
Great. Thanks, Chris.
Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley.
Yes, thank you. Just following up on wired and the comments of resolving some supply constraints. Does that have implications as you go out into Q4 in terms of the ability to work through those and what type of visibility you have there?
Yeah. Visibility is increasing by leaps and bounds every day, actually. Yes. There is supply constraint in certain areas, and that does extend out lead time somewhat, which we are working very hard to improve, simply because we believe the demand is real out there. Yeah, it does extend to Q4, and we are starting to have visibility on bookings and backlog into Q4 as we sit here right now.
Got it. Just as a follow-up in wireless, can you provide any update on the transition from six inch to eight inch in FBAR in terms of how that's going? As part of that, as you guys have been supply constrained, the wild card is China in terms of if you get enough supply coming online, the ability to service those customers, how does that outlook look like maybe into fiscal 2017?
Our move from six inch to eight inch in our wafer fab for FBAR in Fort Collins is progressing very much on schedule. Our capacity have increased very much on track to what we've indicated to you guys right now. We believe we have no constraints in being able to supply all our customers as we approach the seasonal peak this second half of this year.
Got it. Thank you.
Thank you.
Thank you. Our next question comes from the line of Vivek Arya from Bank of America.
Thanks for taking my question. Hock, on wireless, you mentioned content growth has been around 20% or so a year for the last few years on your FBAR RF filters. As you look out the next few years, what kind of content growth opportunity do you see for the combined FBAR and the connectivity portfolio that you have now?
Very good question, looking out what is always a very scary proposition, obviously, because I'm guessing, technology changes. I don't call disruption, I call evolutionary, even if it's very evolutionary these days, we have a very clear roadmap out three years, I won't even dare to go beyond three years. It's still hard to predict, my estimate and guess will be this will continue to keep doing the same level on a combined basis for the next two, three years.
All right. As a follow-up, Hock, as we take a step back and think about where you guys are when I look at other larger cap semiconductor companies, most of your larger cap peers are dedicating 100% of the free cash flow to dividends and buybacks. Your preference has been to prefer more M&A so far. Again, as you look out the next two, three years, do you see Broadcom continuing to prefer M&A versus dividends and buybacks? Do you think there will be a mix between the two as you have
Well, that's a very good question, as Tom articulated, I think very eloquently at the beginning of his remarks, we have been very thoughtful about this basic issue. I call it an issue. It really isn't. In a way, it's a bit of a high-class problem because we think there are still opportunities, significant opportunities out there for us in Broadcom Limited to continue to pursue the strategy we've adopted over the last several years of creating shareholder value by acquisition in this space. We believe that, hence, as Tom articulated, we are positioning ourselves, we are creating a capital allocation strategy that will enable, that will position us very well to do that. To answer your question in a word, yeah, we think there are opportunities out there that are very interesting and opportunistically and carefully, we will keep pursuing that strategy.
Thank you.
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank.
Hi, Hock. I had one for you on the wired business. You mentioned what was going on in a couple of the different areas, but you never mentioned what was happening in the traditional Avago ASIC business. I guess the first part of it in wired, what was going on in that, and how do you see that going forward? As we look into the July quarter, the broadband segment, can you talk about the puts and takes within that subcomponent of your wired business as well?
Sure. Thanks. Oh, no. On those traditional, you call it traditional, I call it the classic Broadcom networking ASIC and fiber optics business is still chugging along very nicely. We're still seeing growth, and both on fiber optics as well as on traditional ASIC. The reason we don't say as much about it is because what we are seeing in comparison to the standard switching product portfolio that we're seeing out of classic Broadcom is very strong by comparison in this area of standard switching and routing. It's extremely strong and probably, as I indicated, driven by data centers in the cloud guys who are seeking standard solutions versus the enterprise side, which is more driving towards using ASIC-based solutions by the OEM.
Great. Thanks. I guess as my follow-up, switching back over to the wireless side momentarily, the pace of the ramp you said is very solid in the July quarter, and sounds like it'll continue in October. Is there a timing difference in the start of that ramp between the Classic Avago and the classic Broadcom side?
No, really isn't. There isn't. Like moving from one to the other, no, I don't think so. We have not seen it. I think it's just that there are some sectors that are strong. I know you asked a question earlier about more the broadband set-top boxes example of carrier access. The areas we are seeing a lot of strength, one I mentioned is standard switching and routing. The other area we're seeing a lot of strength is broadband carrier access, which is PON and DSL, and associated with it, enterprise wireless access point. All those connected together in a basically pushing into an infrastructure to some extent, as well as campus environment. We're seeing extreme strength too, in that area. Similar to what we're seeing the level of strength in standard switching and routing.
I see more as specific areas, specific segments or niches in the overall wire market. Not all are growing at the same rate. Some are growing less, as I indicated, and in networking ASICs or fiber optic interconnects. In carrier access and standard switching and routing, we're seeing very strong demand.
Great. Thank you.
Thank you. Our next question comes from the line of Harlan Sur from J.P. Morgan.
Hi, good afternoon and great job on the quarterly execution. We've also heard demand is pretty high for Tomahawk and Jericho, and there's, I think, another product called Qumran. You talked about the supply constraint, Hock. I just wanted to confirm, are the supply constraints associated with Tomahawk and Jericho and Qumran, are these the real bottlenecks? When do you anticipate this situation to get better?
Well, we're working through it, and a big part of it is the lead time from the wafer fabs have extended somewhat. These products also take a more extended period of time to go through the manufacturing process, front-end and back-end. We're working to obviously accelerate this, compress this cycle time, and we believe we should be able to get there within a matter of couple of months, maybe no more than three months. It is a process. A big part of it too is demand that came within the lead, shorter than the lead times necessary to produce those parts.
Great. Thanks for the insights there. This is just a follow-up from Ross' question. The broadband products are obviously a good part of the mix in wired, both set-tops and access. Looks like you had seasonal growth and some product cycles, as you mentioned prior in Q2. Within the growth outlook for wired in Q3, is the broadband business contributing to this growth as well in fiscal Q3?
Well, we'd like to put it this way. If you saw the forecast I have provided, the way we're putting our forecast together, we see it's very strong. Even in Q2, we saw that in terms of revenues, the numbers been very strong. We're not saying that Q3 will continue on the same trajectory. We're just saying that Q3 will sustain at a high level that we achieved in Q2 for both broadband and wired. We're not saying we'll continue on that trajectory of growth that we saw in Q2. Put another way, we are saying in Q3, wired is not growing much, but sustained at a high level we saw in Q2.
Got it. Okay. Thanks for that, Hock.
Thank you. Our next question comes from the line of Toshiya Hari from Goldman Sachs.
Hi, thanks for taking my question and congrats on a strong quarter. My first question is on cost synergies. Could you maybe quantify what you realized in Q2 for us and what the outlook is for Q3? Related to that, have you by any chance discovered any incremental opportunities to cut costs beyond your initial target of $750 million?
Let me take that. I think when we talked about the deal, we announced it, and I think obviously since we closed, our target has been $750 million of line of sight synergies, which both hits the gross margin line as well as the operating margin line. I think by and large, we're still committed to that target. When you think about quarter to quarter, it's sometimes a little bit difficult to articulate, but let me put it this way. I think by the time we finish the year, exit the fiscal year, we'll be roughly halfway through our target, which is a bit ahead of plan. We'll realize the rest in the first half of fiscal 2017. Hopefully that gives you a little bit of support on it.
Okay. That's helpful. Thank you. My follow-up, I think over the past couple of quarters, you've talked about potential opportunities to raise pricing in the classic Broadcom business. Have you already taken action in some areas? If not, when should we expect you to do so? What's the likely impact to gross margins as you take those actions over the next couple of quarters or year or two? Thank you.
Hate to correct you. Hopefully you don't take it any other way. I don't think we ever mentioned about raising prices in classic Broadcom or classic Avago for that matter. We never did that. What you may mistake is that when we sell to the same customer multiple product lines, and because of the benefit of being able to supply multiple products to the same customer at the same time for platform sale, we're able to increase revenue. Not necessarily prices, in fact, far from that. We've done nothing of that sort.
Okay. I appreciate that. Thank you.
Thank you. Our next question comes from the line of Romit Shah from Nomura.
Yeah. Thanks, Hock. I'm just trying to better understand how to think about wireless for the second half of the fiscal year. I believe it's unusual that the July period, as it is this year, is the big quarter for wireless. Even in fiscal 2014 where you had big content gains, it was October that was really the quarter where you saw the big sequential growth. First question is I'm curious why seasonality in wireless appears to be different this year. Why is July the big quarter instead of what's normally been October?
Okay. Start off, Romit, July has never been the big quarter. July, being Q3, has never been the big quarter for us if you look back multiple years, never has been. The big quarter has always been the October quarter, Q4, and never been July, simply because July is the initial ramp quarter. Okay? In the back half of the July quarter, precisely in the month of partially July, that we start to see shipments because of the lead time taken to manufacture. We ship to the contract manufacturers of our OEM at that time. You see a small part of it in the July quarter.
You see a full quarter of impact virtually in the October quarter and potentially, if you look back two years ago, you continue to see in the first quarter of fiscal 2017 that ends January 2017 before it rolls over, the typical seasonality roll over where the trough will be the second fiscal quarter that we just finished. No different. We are seeing that now. What may puzzle you perhaps when you say why is your wireless revenue ramping 20-odd%
Right
in Q3 this year, perhaps might be the best way to describe is for the various reasons I mentioned and you guys are very well aware of, Q2 this year for the particular generation of phone we're talking, referring to, has seen particular weakness known to everyone. You're starting off from a bottom that is deeper than the Q2, say, last year or the year before for that matter. When you come up from such a bottom to a new generation of phone, which you still have to ramp up in the same fashion with the same kind of profile to reach a certain level of supportability of supply, then we suddenly see this big mid-20s ramp up. You're right, prior years, Q2 to the Q3 may not hit that 20-odd %. You'll take Q3 to Q4 to hit that.
This year, it's really not Q3 that's different. Perhaps it's Q2 that's different.
Should we take your comments to mean that October for wireless would accelerate quarter-over-quarter versus July?
Yeah, that would be the normal tradition. Yes.
Okay. All right. That helps.
I'm not here to make forecasts. Let's take that in. If I say by the pattern by which the phone components are consumed and the phones are produced and then shipped, sure, Q4 is usually the peak quarter of any year rather than Q3.
Yeah. When you mean peak, you're talking quarter-over-quarter change instead of absolute dollars.
You're right. Absolute dollars obviously depends on how many phones of that particular generation were just sold. Right.
Okay. Then just one other question, Hock. I think I have a sense of what the answer is, but I just wanted to hear your rationale for selling the wireless IoT business. It's an opportunity we hear that's measured in tens of billions of units, and I think some of your competitors have highlighted IoT as being one of the more significant growth drivers over the next few years.
Okay. Well, remember some of the criteria for what Tom called as our franchise product? We only have products that we consider meet certain very tight criteria of Being a franchise, the most important is sustainability. We're building a business for 10 years. We're not building a business for 12 or 24 months. I'll be direct. Most of the IoT products out there, and it's early on in the cycle, obviously, are very much consumer-driven. We obviously thought things very hard and are very disciplined on making sure we reserve, we invest in product lines. We invest a lot in product lines that are very sustainable for many, many years, rather than product lines where we have to keep investing as the product line changes every other year.
From our viewpoint, because of that and because of the tight discipline we put ourselves under, we believe that this is a product line we prefer to have someone else with a different set of perspectives investing and nurture than for us to deal with. Doesn't mean that they are wrong, we are right, or we are wrong, they are right. All it is beauty lies in the eyes of the beholder.
Okay. Thank you.
Thank you. We have time for one more question. Our final question for today comes from the line of Amit Daryanani from RBC.
Yep. Thanks for squeezing me in, guys. I guess two questions from me as well. On the wired segment, could you talk about how much incremental backlog did you end up building, or how much revenue did you leave on the table because of the supply constraints that you had in the segment? Just trying to get a sense of, is there a potential to pick this back up in the October quarter when things normalize?
This is a very hard question to answer. The fact of the matter is, no, we don't know how to answer that question, to be honest, because it would be rather speculative. I mean, many of the designs are very sole source design for a particular OEM. Obviously there's no switch around. Having said, from the bigger macroscopic system, doesn't mean that that opportunity doesn't disappear to somebody else who are able to do, find a different set of boxes as opposed to components. It's something we are not able to predict or, for that matter, estimate.
Got it. I guess just as a follow-up, in your 10-K, you guys disclose you guys signed a multi-year agreement with your largest customer. Could you just talk about what led to that development and what sort of parameters are there that give you comfort around maybe the content numbers or your allocation over the next several years, along with pricing?
No, it's a combination of several factors. One is, you know our overall business model in this company, it applies across the multiple product lines. We sell franchises, I call it. We compete basically on technology. We have technology. I mean, we are a walking example of lots and lots of technology in various areas. Not all areas, but in various areas that we feel we are very strong in. Technology includes engineers and IP. We pride ourselves in, therefore, using that technology to create, develop products which are very differentiated for leading customers in the market we participate in. We really do. Those customers, we take very seriously. We are very loyal. We go 100% in for the customer, and we invest to develop those products.
In return, we ask for certainty, we ask for partnership, and we tend to like to enter into long-term, strategic partnership with the customer, where they will continue to use us for future generations of products, which enables us to continue to invest into developing technology and products which enable them to be successful. That investment is not just technology in the case of the 10-K filing that we talked about. It was also capacity, unique capacity in FBAR. It fits very, very nicely. This is not an unusual kind of transaction. We do that with many of our major strategic customers who we like to call partners, but that would be rather presumptuous because they are customer and we are the supplier.
We give them technology, we give them value, and we hope we do enough of that they will sign up for long-term partnership with us, which enable us to continue to invest and sustain that franchise, as you call it. That's just a manifestation of one of many that we do.
Perfect. Thank you, and congrats on the quarter, guys.
Thank you.
Thank you for participating in today's earnings call. We look forward to talking with you again when we report our third quarter fiscal year 2016 financial results.
Thank you. That concludes Broadcom's conference call for today. You may now disconnect.