Earnings Call: Q1 2016

Mar 3, 2016

Good day, ladies and gentlemen. Welcome to Broadcom Limited First 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, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO and Tony Maslowski, Chief Financial Officer of Broadcom Limited. After the market closed today, Broadcom distributed a press release and financial tables describing our financial performance for the Q1 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 1 week. It will also be archived in the Investors section of our website at broadcom.com. As you're all aware, Broadcom Limited is the successor to Abago Technologies Limited. Following Abago's acquisition of Broadcom Corporation on February 1, 2016, the first day in our 2nd fiscal quarter, Broadcom Limited became the ultimate parent company of Avago Technologies and Broadcom Corporation. During the prepared comments section of this call, Hock and Tony will be providing details of our Q1 fiscal year 20 16 results, which relate to our predecessor of Vago only. They will then move on to providing background to our Q2 fiscal year 2016 outlook, which will relate to the combined company. 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 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 Austin Hock. Thank you, Ashish. Good afternoon, everyone. As Ashish mentioned, my comments on first quarter results relate only to plastic Avago, while comments for the 2nd fiscal quarter relate to the combined company, Brothome Limited. Now the combination of Classic Avago and Classic Broadcom has produced a new, larger and more diversified company. I'm very pleased to welcome Classic Broadcom employees to the new company. They are truly a very talented group of people who bring a great deal of unique engineering expertise. Talking of which, we are making very good progress on the integration front, have started to realize acquisition related cost synergies, although we are only at the beginning of this exercise. We've also just started the process of pruning some non core classic Broadcom product line. Accordingly, my comments for the 2nd quarter focus only on continuing operations, which do not include these non core product lines classified as discontinued operations. From a segment point of view, we will continue to report results broken out by our 4 end markets, namely, wired, wireless, enterprise storage and industrial. However, starting with our 2nd fiscal quarter, the components of revenue will increase significantly for our wired and wireless segments as a result of the Broadcom acquisition. And I will provide additional color on these changes in my end market discussion. Our Enterprise Storage and Industrial segments will remain unchanged from Classic Evargo. Let me start with a short summary of our Q1 fiscal 2016 results, which only refer to a classic Avago. Revenue for our Q1 came in at 1.78 $1,000,000,000 a 4% sequential decline and in line with our guidance. Our tight control over operating expenses during the quarter helped keep Q1 operating margins flat sequentially at a robust 44% of revenue, despite the sequential decline in revenue. Earnings per share came in at $2.41 better than the midpoint of guidance. Moving on to our expectations for the 2nd quarter, which now include revenue contributions from Classic Broadcom, we expect consolidated revenues to approximately double to $3,550,000,000 We currently anticipate this quarter's revenue level to be the trough for the rest of the fiscal year. So with this, let me now turn to a discussion by segment of our Q1 results as well as our outlook in Q2. Starting with wired. In the Q1, wired revenue grew by 2% sequentially and the wired segment represented 22% of our total revenue. Growth in the quarter was driven by broad strength in our fiber optic business, largely offset by a decline in our ASIC products, reflecting weakness in data center switching. However, starting with 2nd fiscal quarter, in addition to Classic Evargo's custom networking ASICs and fiber optic products, the consolidation of Classic Broadcom will add Ethernet Switching and Routing, Standard Products, Physical Layer, Copper and Optical Standard Products to this segment. In addition, it will also include classic Broadcom's broadband communications solutions for set top box, cable modem and carrier access. In this Q2, we're expecting strength good strength on multiple fronts in the wired segment. We're expecting growth to resume in our customer ASIC business, driven by increase in shipments to wireless base stations and the start of a product ramp into the new data center switches. Our standard ASSP switching, routing and physical layer products are seeing an increase from enterprise demand. Broadband carrier access is experiencing strong activity driven by fiber to the home and DSL deployments in multiple regions including China. And finally, we expect our set top box business to also benefit from some seasonal refresh cycles at key customers. In aggregate, we expect 2nd quarter revenues from wired segment to be approximately 55% of our total revenue from continuing operations. Moving on to wireless. In the first quarter, revenue from the wireless segment declined by 15%, 1 5% sequentially represented 32% of our total revenues. And just to remind you, that's just a Vago Classic. Last year, unusually high demand in the Q1 from our North American customer offset the normal seasonality. This year, however, as we all well know, seasonality returned and there was a product lifecycle related decline in demand from that key customer. We did see a small positive offset from an increase in shipments, while large Korean customer driven by the launch of their new flagship smartphones where we also increased our RF content. Turning to the 2nd fiscal quarter. In addition to Avago Classic RF, FBA filters and power amplifiers, our wireless segment will now include classic Broadcoms, wireless connectivity and custom analog handset solution. And in this Q2 2016 that we're in, we expect the product lifecycle related decline demand from our North American customer to continue to impact our combined wireless revenue. And in aggregate, we expect 2nd quarter revenue from our wireless segment to be approximately 23% of our total revenue from continuing operations. We expect the 2nd quarter though to be the trough for our wireless business for the rest of the fiscal year, And we expect to start ramping up shipments late in our Q3 to support the increase in demand driven by the typical product cycle ramp at our North American customer. In fact, we have already started pre building in significant quantities our RF, F bar filters to support expected ramp, we expect the demand increase from this product ramp to be further enhanced by a substantial increase in our content in this new next generation phone. Classic Broadcom's combo Wi Fi, Bluetooth, GPS and custom analog solutions will further add significantly to our content in these Tier 1 OEMs' leading smartphones. By the same token, of course, we expect the classic Broadcom wireless products to also benefit from of new generation of phones later this year. Let me now turn to Enterprise Storage. In the Q1, this segment revenue grew by 6% sequentially better than expectations and enterprise storage represented 38% of our total revenue, that's revenue of Avago Classic in Q1. This was our largest segment in the Q1. During the quarter, we saw strong demand from enterprise and nearline hard disk drives. Our server and storage connectivity businesses also had a good quarter, led by seasonal growth from fiber channel shipments, while our rate and SaaS businesses largely sustained. Going forward, composition of this segment will remain largely unchanged. However, we expect a somewhat different in the Q2 with seasonal declines impacting both our hard disk drive business and server storage. We expect 2nd quarter revenues from this segment to be approximately 17% of our total revenue from continuing operations. Finally, to the last segment, Industrial. 1st quarter 16 Industrial segment represented 8% of our total revenue. As we had planned in the face of lingering uncertainty in industrial end markets, we decreased shipments into distribution during the quarter and our industrial segment revenue declined by 10% sequentially in the Q1. Keep in mind, we recognize revenue on shipping basis. So but in so industrial resales on the other hand decreased only moderately in the mid single digits on a sequential basis. By region, resales in Asia Pacific was slightly up, Japan flat, Americas down moderately, while Europe declined in the low teens sequentially last quarter. Our prudent approach to distributor shipments, which lack resales resulted in a reduction in channel inventory. Please keep in mind, we as I said again, we recognize revenue only on a sell in basis. And as we look at the 2nd quarter, the composition of this segment will also remain unchanged, Avago Classic and then but anticipating favorable seasonality with the start of the year, we expect a high single digit sequential increase in industrial resales. However, we will continue to manage channel inventory and expect a more moderate increase in shipments into the channel and by a substantial increase in our IP licensing revenue due to a few deals we expect to close within the 2nd quarter. And so in aggregate, we expect 2nd quarter revenue from industrial to be approximately 5% of our total revenue from continuing operations of this combined company. With that with those color, let me summarize for the Q2. With the addition of Classic Broadcom, Wyant now becomes our broadest and largest segment and we are expecting a very strong performance from multiple product lines in this segment. Wireless also becomes broader, but remains tight to a limited number of large high end smartphone customers, and we expect this current Q2 quarter to be the seasonal trough for the rest of the year. We also expect a seasonal decline in Enterprise Storage, but something of a recovery in industrial. We are very excited by the opportunities in front of us as a combined company to continue to drive our financial model on an even larger scale with broader access to very attractive end markets. We continue to expect we will achieve the $750,000,000 target in annualized cost synergies over the next six fiscal quarters. And we think we might be able to even beat that. We're also working on returning to our long term financial model of driving operating margins back above 40% as quickly as possible. With that, let me now turn the call over to Tony for a more detailed review of our Q1 financials. Thank you, Hock, and good afternoon, everyone. As a reminder, my comments on our Q1 results relate to our predecessor, AGO, while comments including guidance for the 2nd fiscal quarter relate to the combined company. 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 at www.broadcom.com. Revenue of $1,780,000,000 in the Q1 represented a decrease of 4% from the prior quarter. Foxconn and Apple were greater than 10% direct customers in the fiscal Q1. Our first quarter gross margin from continuing operations was 61%, which was at the midpoint of our guidance range. Turning to operating expenses. R and D expenses were $238,000,000 and SG and A expenses were $68,000,000 This resulted in total operating expenses for the Q1 of 306,000,000 dollars 8,000,000 below guidance as we are cautious going into close of the acquisition. On a percentage basis, total operating expenses were 17% of revenue, a reduction from 18% in the prior quarter. As a percentage of sales, R and D was 13% and SG and A was 4% of net revenue. Operating income from continuing operations for the quarter was $783,000,000 and represented 44% of net revenue. Taxes came in at $35,000,000 which is a 5% rate for the Q1, a bit lower than our guidance at 5.5%. First quarter net income was $710,000,000 and earnings per diluted share were $2.41 First quarter interest expense was $41,000,000 and this does not include the ticking fees we incurred in the quarter related to the debt commitments we secured for the Broadcom acquisition. Other income net was $3,000,000 Our share based compensation expense for the Q1 was $57,000,000 The breakdown for the Q1 includes $6,000,000 in cost of goods sold, dollars 28,000,000 in R and D and $23,000,000 in SG and A. In the Q2 of fiscal 2016, we anticipate share based compensation expense will be approximately $195,000,000 Just as a reminder, definition of non GAAP net income excludes share based compensation expense. Moving on to the balance sheet. Our day sales outstanding were 54 days, an increase of 4 days from the prior quarter, caused by linearity of revenue in the quarter. Our inventory ended at dollars a $34,000,000 decrease from the Q4 of fiscal 2015. Days on hand were 64 days, a reduction of 4 days from the prior quarter as we sold raw material and work in process inventories in conjunction with the sale of certain fiber optic subsystem manufacturing and related assets to a third party. We generated $474,000,000 in operational cash flow and ended the quarter with a cash balance of $2,200,000,000 which increased by approximately $350,000,000 from the prior quarter. During the Q1, we also received $68,000,000 from the sale of the fiber optic subsystem assets. In the Q1, we spent $140,000,000 on capital expenditures. For the Q2, we expect CapEx to be approximately $210,000,000 which includes approximately $60,000,000 for campus construction activity primarily at our Irvine location, dollars 50,000,000 for ongoing capacity expansion for manufacturing RF filters at our Fort Collins fab and $10,000,000 of IT integration expenses related to the acquisition. On December 30, 2015, we paid a cash dividend of $0.44 per ordinary share, which consumed $122,000,000 of cash. This dividend was raised by $0.02 from the prior quarter. Since the inception of ABLO's dividend program, in Q2 of 2011 to date, our financial performance has allowed us to increase our dividend each quarter. As you have seen, our Board has also declared a dividend of $0.49 per share to be paid on March 31st this quarter. 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 related to our outstanding indebtedness and other factors deemed relevant by our Board. Now let me turn to our non GAAP guidance for Q2 of fiscal year 2016, which include projected contributions from the combined of AGO and Broadcom Corporation businesses. This guidance reflects our current Net revenue is expected to be Net revenue is expected to be $3,550,000,000 plus or minus 75,000,000 dollars Gross margin is expected to be 59%, plus or minus 1 percentage point. Operating expenses are estimated to be approximately $832,000,000 Taxes are forecasted to be approximately 50,000,000 dollars Net interest expense and other is expected to be approximately 161,000,000 dollars The diluted share count forecast is for 443,000,000 shares. And one balance sheet item, the ending cash balance, which is expected to be in the range of $1,700,000,000 to $2,000,000,000 which includes the expected repayment of $300,000,000 of our outstanding debt in the quarter. As mentioned, this guidance excludes the estimated results of certain recently acquired Broadcom businesses, which have been classified as assets held for sale and will be reported as discontinued operations beginning February 1, 1, 2016. In fiscal 2015, we estimate these businesses generated $295,000,000 in annual revenue and consumed $282,000,000 in annual operating expenses. That concludes my prepared remarks. Operator, please open the call And our first question is from the line of Ross Seymore with Deutsche Bank. Please go ahead. Hi, guys. Thanks for letting me ask a question. I guess, Hock, the first one's for you. It sounds like the wired side is particularly strong in your April quarter guidance. Can you walk through a little bit of the sub segments within that that are driving that growth? Sure. Have seen pretty broad based strength even from a both from a Avago Classic as well as the newer product divisions from Broadcom Classic. One clear example is the initial ramp of you probably hit an announcement on data center switching, where our ASIC business are coming in and starting to see a ramp in certain cloud at certain cloud guys through a fairly large OEM. And this has been successful and things are moving along very nicely. And the funny thing is, while the ASIC ramp is happening, the existing products, which is using standard switch products from Broadcom Classic is also seeing a lot of strength, especially in this case from enterprise. The one thing across the border and carrying along that of course our physical layer products and Ethernet switching, which almost in the same direction. So that's pretty much is enterprise largely to answer your question. Couple of product ramps, but largely enterprise. Great. And I guess just my one follow-up, one for Tony. On the OpEx side, it looks like a lot of cuts have occurred already to get to that 832. Can you just update us on the trajectory of that towards that I believe the $550,000,000 in total savings is on a quarterly basis, it looks like you've gotten I think, mathematically over 85% of that already in your guide. So any color you could give would be helpful. So Ross, the thing you're not putting in there is that we have about an $80,000,000 reduction. If you look at those expense numbers I gave you for discontinued ops, we have to pull that out because remember we never counted that in what we thought was the synergies we're going after. The synergies we talked about was pure synergies and then anything from discontinued ops was going to be added on top of that. So I guess could you then taking that out of the equation, can you just talk about the trajectory to your $138,000,000 Sure. The trajectory is like you said is pretty bowl shaped. So we get some immediate things in Q2 and Q3. We get a little bit of slowdown as we enter into the conversion that we're trying to pull off in Q1, Q2. And then you see the rest of it come through in kind of late Q1, Q2, some in Q3 to equal the 18 months. To be specific also, Ross, if I could expand on what you're saying. For the rest of this fiscal year, 9 more months ago, we see barely 1 third of that $750,000,000 we projected on an end state as synergies to even come in less than 1 third to come in. And in the Q1, which is this current Q2, it's barely a fraction of that onethree. That's great color. Thank you. And our next question is from the line of Blayne Curtis with Barclays. Please go ahead. Hey guys, thanks for taking my question and a nice execution. Maybe just looking at the wireless segment, you talked about it bottoming, obviously a well known customer having the correction. You said a substantial increase in content. Last quarter, you kind of talked about percent growth in that business. Obviously, we've seen a kind of a correction since that call. Is that still the target for growth for wireless? Say the last part, what did you say was my target? Since your last earnings call, obviously, that customer has gotten weaker. You talked about it bottoming. Is 20% the right growth to think about for wireless this year? Yes. Probably we'll do better than that. Got you. Thank you. And then just Tony, just a clarification. The businesses that are held for sale, now that you reviewed, is that the extent of the when you look at assets you may sell, is that the extent of it or could there be other businesses you may sell as well? And then within that, is there any of the businesses that you may shut down? What's the right time line in thinking about those assets going away? Well, like I said, this is our initial cut of the businesses as of close. So we're going to go aggressively and try to find buyers. And then like I said, we go into our other modes of either harvesting or complete shutdown. It does not preclude us from adding businesses to the list as we go forward. So again, this is just part of the standard operating procedure around here, but this is the day one list we're chasing. Perfect. Thanks guys. And our next question is from the line of Craig Hettenbach with Morgan Stanley. Please go ahead. Hi. This is Anay calling in for Craig. My first question is on the Broadcom's merchant silicon business. Like what fraction are you seeing for the 25 gs Tomahawk product lineup? That transition from 10 to 25 gs on the hyperscale side was something everybody is looking for. Okay. Well, there's a lot of traction. And I mean, the trend is definitely accelerating and in no small degree is pushing what we are seeing here and what I articulated in some in my remarks. Very good traction of 25 gig and hyper data center guys and even some enterprise guys who are building data centers of their own. That's what's driving a lot of strength also in the Broadcom Classic business. And I may add even the ASIC business of Avago Classic is 25 gig and it drives not just only switching, which is what you mentioned here at Tahmaha, it also drives to a large degree the associated product related to Ethernet, though that's still early, but definitely physical layer products, which is a big chunk of Broadcom Classic Wired segment as well. So all this is tending to port it all along connectivity solution. Got it. That's helpful. And for my follow-up, turning to the broadband business from classic Broadcom, the new sort of STMicro, like looking to exit the set top of business, what do you think are implications for profitability or share for you guys? No, nothing. We don't dream we don't think about those things. We don't dream about those things. We just put our head down and keep grinding away. Got it. That's really helpful. Thank you. Our next question is from the line of Toshiya Hari with Goldman Sachs. Hi, good afternoon and thank you for taking my question. The first question is on the RF business. Hock, you talked about content growth at your largest customer potentially being higher than 20%. But how would you size your content opportunity in the smartphone market overall going into the back half of the year and perhaps going into 2017? Well, I've said that in remarks in previous earnings calls. And so this is a bit of a this is to reiterate or reaffirm what I said a little before, which is typically year after year, each generation, we increase our content in this very high end smartphone market in excess of 20% content every year regardless of unit increases. And we all know the units of phones in this very high end top of the pyramid smartphones is not it's maybe 20%, maybe 15%, 20% of that entire market made by a few key branded manufacturers. And we are very well positioned there. And our growth rate not about unit growth, it's about content. And if this continues the same trend offset, the content keeps growing over 20% a year. This coming generation and on back half of this fiscal and calendar year remains very much on track to follow that same trend. Okay, very clear. My second question is on M and A. I appreciate you just closed the deal, the Broadcom deal, but can you maybe talk about your appetite for further M and A going forward and how you would balance M and A versus debt repayment or returning cash to shareholders? Our first priority and Tony doesn't mind me opening my mouth time, otherwise he will jump in and say what you're talking about. The first priority is we pay down debt, absolutely. 2nd priority is and simultaneous to it as evidenced by an increase in our dividends. If we are confident of our cash flow generation, which we are, we do we return cash, excess cash we consider more than what we need to operate this company even as we scale some to shareholders and evidenced by increasing dividends. And right now, we're not doing much on M and A. It could be furthest from our mind at this point. And I agree. Okay, great. Thank you so much. And our next question is from Vivek Arya with Bank of America Merrill Lynch. Please go ahead. Thank you for taking my question and congratulations on the consistently strong execution. Just one clarification and then the question. On the clarification on the sales guidance for Q2, I'm wondering, Tony, how much is excluded for the recent optics divestiture and then the $300,000,000 that you said might be held as discontinued ops? Because I'm just trying to get apples to apples of your guidance versus consensus expectations, and I want to make sure that I am excluding some of those things that have that are in discontinued ops or that you have divested already. Ops portion of in my final statement was the disc ops portion of Broadcom assets is sub $300,000,000 So you can do the math on that for the full year and you're talking about $80,000,000 ish $80,000,000 or less. Got it. And then my larger question, I know Hock that you are focused on the current business right now. But one thing we often hear is that companies are trying to essentially balance the amount of exposure they have to the smartphone market. And I understand your F bar business is doing extremely well. You are seeing the content gains. But when I look at the connectivity business, I don't see the same potential for content gains. So is that a fair assessment? And if it is, then do you think that perhaps that business and perhaps focusing on other areas, whether it's wired or storage or others? And by wireless, you mean the wireless connectivity, which is Wi Fi, Bluetooth, GPS and all that related things inside high end smartphone? That's right. No, we well, we definitely highlight it. It's definitely not in discontinue ops, obviously. And we believe it is a sustainable franchise. That's how we classify business. It's one of our sustainable franchise as is ever. And evolution of the technology of next generation Wi Fi has been particular keeps coming in improvement of performance, issues of coexistence between Wi Fi, Bluetooth and now cellular bands is a major, major issue that Broadcom Classics are very good at addressing. And as we especially we start going to 5 gs, Wi Fi, next generation has come and that is already starting to happen. And we our expertise, our unique technology in EPRA would actually come to bear in even improving Wi Fi modules that can perform that can surpass performance of anything else in the marketplace today. So that to us is a very, very complementary product line to our cellular F bar business. Don't know, it's a sustainable franchise. Thank you. And our next question is from the line of Harlan Sur with JPMorgan. Please go ahead. Hi, good afternoon and solid job on the quarterly execution. On the broadband connected home business, this is a business that's often thought as a relatively slow growth segment. However, cables are going through a pretty big major upgrade cycle to DOCSIS 3.1. Akka, as you mentioned, you've got PON in China, which continues to be relatively strong. Then we have the pay TV service provider move to 4 ks UHD over the next several years. What's your confidence level on the growth prospects in the broadband business this year? Well, there are 2 parts to the broadband business. One is a large part of it is mainly CPE relates to set top box in particular for us. Though there's some over the top stuff like Roku, which we're participating to, but truly is set top box as the primary one chunk of it on our broadband and the other chunk of it is what I call carrier access, which is really gateways, infrastructure gateways, which are the DSLs and the GPON mostly. And then there's the set top box. The set top box business is my favorite line again, a sustainable franchise. We are very well positioned. We have great technology, fight a lot of it to the fact that we have all the bits and pieces of technology including DOCSIS 3.1. We're the only guy the first one and only guy certified in it. But we also have all the technology that integrates in 1 chip, a digital solution. And we are not the only one, but as somebody said with the exit of SD Micro, it perhaps strengthened our market position and indicates how difficult this business is. So that but having said that, the client side set top box, including satellite, it's not something that's going we foresee any dramatic growth, but we do foresee stable, sustainable levels, which is a big chunk of our business. Now on the carrier access, which is gateways, infrastructure gateways, that's very exciting on growth. We see all the evolution in new generation, 2.5 gs and even GPON going to 10 gs, applying same to well closet DSL. All that is happening and that requires new capability to generate new generation of products which we have in ample supply. Broadcom Classic, the guys are phenomenal. They're there and they always generate the products better faster than anybody else and we're doing it Tier 2. And that business as emerging countries and even developed countries like regions like Europe upgrade their infrastructure towards more broader capacity in connectivity. They're going for 10 gs and we're seeing initial ramp to it. It's pretty cool. And we see there is a lot of strength to it. And here comes the other complementarity to our Barco Classic business. We also sell the lasers, the optics that go hand in hand with many of this carrier access stuff. Great. Thanks for the insights. We're very positive about this. Great. Thanks for the insights, Ben. And then Tony, on the April quarter guide, sort of looking at the combined entity and looking at your guidance for April, it looks like you guys are taking out about $120,000,000 per quarter in OpEx. So how much of that is coming from the discontinued ops and how much of that are the true cost synergies? Like I said, it's probably $80,000,000 and then you could do the math and that's what we have as savings. And like Hock said, it's still just the tip of the iceberg of the synergy. Okay. Thanks a lot. And our next question is from the line of John Pitzer with Credit Suisse. Please go ahead. Yes. Good afternoon, guys. Thanks for letting me ask the question. Hock and Tony, great job on execution. Hock, getting back to the classic Avago wireless business, the FBAR business, given the weakness in the North American customer in the near term, is there opportunity to transition some of that capacity into the Chinese smartphone market or do you suspect that North American customers' capacity needs in the second half of the year are going to be such that you're going to still be capacity constrained for most of this year? Yes. To answer your question and I made it and I did a passing reference to that in my opening remarks. Out fab today 8 inches half of it is 8 inches now by the way converted and we continue to gradually convert it. It's full, virtually full. We are rebuilding products for FR filters in particular for the expected ramp of our North American customer. We are. And so it's pretty full. And frankly, because of that, we do sell to other customers, but we obviously have a commitment, very clear commitment to be sure that we continue to support this North American customer. And that's always very important, not least of which, they are the ones who drive the most interesting content within their phones. That's helpful, Hock. And then a little bit on the combined wired I mean, clearly, the acquisition of Broadcom on the surface is more than justified by sort of the financial justification. But I'm just kind of curious, when you look at the wired business and classic Avago and classic Broadcom, have you started to see opportunities for revenue synergies? And as you answer the question, I was hoping I'd get a better understanding of how your ASIC business compares, contrasts with the Broadcom ASSP business? They're not the same actually. And that's why I made a point to say it earlier. They coexist because I'll tell you this, we go to customers and we love our customers. So we go to these OEM customers. And we basically our ASSP switch, for instance or router is a full turnkey solution. It's not just a piece of silicon. It has it needs to be architect in a certain way first and it has all the software specs that ties to it. So it's a full turnkey solution that can support a customer. As opposed to that, all our ASIC business does is my customer has to architect the switch. They have to then basically all they're buying from us is a piece of silicon. They even do some of the front end RTL sometimes and we do the back end, but we do the supply chain of course. By the end of the day, all the software, we don't do. They provide it. Our ASIC business has 0 software. So what we sell is a piece of silicon, finished, no dump, but there's no that all it is, is hardware, no software. So what we're really offering this thing and we sell both to the same customer very often. It's really up to the customer and some customers will look at it and say, I want to invest a lot of software, invest in architecture and just buy the ASIC from us and they spend a lot of operating spend R and D to do that or they invest much less, very little, they build a box and they buy a turnkey SoC with software from standard switching. So to the customer, it's not competition. It is a business model alternate 2 business model alternatives. 1, where they spend less or less R and D OpEx, okay, and maybe get time to market faster with a complete solution quickly or through that they spend the R and D, architect it, write the software and go often enough later to market and basically try to put secret sauce on their own, which they are limited to do and we will support the customer on both models to us and to them is a business model choice rather than competition. Perfect. Very helpful. Thanks, Hock. Thank you. And our next question is from Chris Caso with Susquehanna Financial Group. Please go ahead. Yes, thank you. I just had a follow-up question on some of your earlier questions with synergies and specifically on the synergies on the COGS side. Can you talk about the timing in which you expect to see some of the COGS synergies? And from a COGS side, which I suppose is largely manufacturing, do you expect that savings would come faster or slower than the average you said about a third of the total for the total year? Well, so specifically in Q2 here, there's very little COGS in there. So I mean, if any, we get something late in the quarter. And I think you'd see more material COGS changes in the second half. And I think that's the way it will work on COGS. If you took COGS at its own line, it's probably going to implement itself in the middle of those 6 quarters roughly, but very little into Q2 right now. Okay, great. That's helpful. And then with regard to the integration of the classic Broadcom business, clearly approaching the businesses a bit differently. Could you talk perhaps about how you plan to manage the businesses in terms of organization, how you're measuring against goals and management incentives? What you may be doing differently as opposed to how Broadcom has managed in the past? What we have done as you gather from the way we would talk about discontinuing businesses versus continuing operations is we have identified the core businesses that are extremely, extremely sustainable key criteria, but also very and continue to lead by technology leadership, which we encourage them to keep investment. And that's what we aligned. We're very focused. So we identify a bunch of these businesses and we put a General Manager in charge of each of those business is responsible for their entire P and L except support functions on SG and A. Otherwise they're responsible for product development, positioning their product, marketing their products and developing their products. And each of them run by management team under General Manager reporting directly to me. And they have specific targets and goals. And it's not and the biggest overwhelming goal for each of them is sustain their leadership. And that comes in 2 parts, market leadership and technology leadership. So we'll let them invest as much as they need to sustain it, but we want them to be very focused on continuing to be very strong in the market they are in, in a narrow market they are in, and we define that very clearly with them each other, and we continue that way. And so anything that is not those core businesses is what we really call discontinue operation. We do not go to look at adjacent markets. We do not go shooting up into the stars and send people to masks or stuff like that. No, we don't do that. We focus on the core business and the key thing is sustainability and being a technology leader. And we have identified a bunch of them as we have in Envato Classic. You just add it all together and we have a fairly flat organization. Each business runs by a management team with their own general manager and a set of goals. That's great. That's really how we run the business. That's good color. Thank you very much. Thank you. And our next question is from the line of Srini Pajjuri with CLSA Securities. Please go ahead. Thank you. Hi, Tony. On the debt payment, if I look at your business, I think it's going to generate close to almost $5,000,000,000 free cash flow. Just wondering how much of that free cash flow is available to you to pay off the debt given if I recall correctly Broadcom and majority of that was offshore. So I'm just wondering how that changes with Avago? Well, again, not much has changed on the cash flow of the Broadcom business. So remember, about 70% of it is semi trapped, meaning that it can't be used for probably general purposes, but we can use it for debt purposes on a worldwide basis. The other 30% is similar to the Avago cash flow, which is untrapped. And the Avago portion remains untrapped. So you're right. I mean, we could probably take on bigger goals around the debt and so forth. But for right now, we'll just kind of post that on a quarterly basis to you what we're kind of planning to pay off. And I think you can see that if we hit our goals on synergies and everything else, we'll quickly get back down to an EBITDA ratio of less than 2 probably within a year or so if we execute on our synergies and so forth. So we're not too concerned about the debt we took on and we took on debt at a lower ratio than we did even on the LSI ton. Okay, great. And then on the non core asset that you classified, Hawker, Tony, it looks like it's coming off of the wireless segment. I'm just wondering if you can provide any more color as to why you decided this business to be non core? And then also, do you have a potential buyer lined up? And if so, when do you expect the deal to close? Well, to answer your question, it's more than just one business that we put into non core product lines, not necessarily from wireless. But really the truth is for obvious reasons, we really prefer and not at liberty to divulge more details because we are running a process. Got it. Thank you. And ladies and gentlemen, this concludes our Q and A session for Thank you, operator. Thank you for participating in today's earnings call. We look forward to talking with you again when we report our Q2 fiscal year 2016 financial results. Ladies and gentlemen, that concludes Broadcom's conference call for today. You may now disconnect.