Earnings Call: Q3 2015

Aug 26, 2015

Good day, ladies and gentlemen, and welcome to the Avago Technologies Limited Third Quarter Fiscal Year 20 15 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 Avago Technologies. After the market closed today, Avago distributed a press release and financial tables describing our financial performance for the Q3 fiscal year 2015. If you did not receive a copy, you may obtain the information from the Investors section of Avago's website atwww.avagotech.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 avagotech.com. During the prepared comments section of this call, Hawk and Tony will be providing details of our Q3 fiscal year 2015 results, background to our Q4 fiscal year 2015 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, Avago 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. I will touch on Q3 revenue highlights. With a preview of our Q4 expectation. And then Tony will provide a summary of our Q3 fiscal year 2015 financial results. As a note, you may be aware we closed the ImmuneX acquisition on May 5, 2 days into our 3rd fiscal quarter. And accordingly, Q3 results include contributions from Amulet. Now it is ironic that the volatility and recent weakness in the equity markets are in such sharp contrast to the relative stability and predictability, I may add, of our end market demand. Revenue for our 3rd quarter was $1,750,000,000 a 6.4% sequentially increase and above the midpoint of our guidance as all segments performed well. I'm very pleased with our execution, which drove Q3 margins and earnings per share to the high end of our expectation. We continue to see good demand driven by our diverse portfolio of highly differentiated solutions. We believe our focus on sustainable franchises provides us with a firm foundation to consistently deliver strong operating results. Turning to a discussion of our segments, starting with Wireless. In the Q3, revenue from our wireless segment grew by 7% sequentially. Wireless now represented 35 Wireless now represented 35% of our total revenue from continuing operations. As expected, growth within the quarter was driven by the start of a ramp from our North American smartphone OEM as they transition to their next generation platform and the continuation of a product ramp and an Asian handset OEM. Looking at the Q4 of fiscal 2015, we do expect revenue growth to continue in our wireless business with strong growth of over 10% sequentially. We expect this growth to result from the full ramp of the new phone model and our North American smartphone customer, partially offset by the product cycle rollover at the Asian customer. We continue to make very good progress in increasing our SBAR capacity, which we anticipate will increase by approximately 50% by the time end fiscal 2015 compared to that of the prior year. This correlates perfectly well with our expectation for the year over year increase on our fiscal 2015 wireless segment revenues. However, we have been unable to quite satisfy demand from Chinese LTE handset OEMs and have only been able to make limited shipments to them this year. But we do expect to further increase F bar capacity by another 50% over the course of fiscal 2016, which should hopefully enable us to better meet demand from these Chinese customers starting late 2016. In addition, we remain focused on increasing our RF content in new handset releases and expect any new significant design wins could consume significant amount of planned capacity additions, particularly towards the end of fiscal 20 16. And as a result, our capacity for FBA may continue to remain under pressure for an extended time period. Moving on to enterprise storage. Starting with 3rd fiscal quarter, the enterprise storage segment includes Amulek's fiber channel connectivity products. And in this Q3, Enterprise Storage revenue grew 26% sequentially and enterprise storage represented 34% of our total revenue from continuing operations. Much of the strong sequential growth was due to the addition of EmulAgs in the 3rd quarter, but our other enterprise storage business also grew organically in the high single digits sequentially. We experienced strong sequential growth also in custom flash controllers as that product line continues to ramp very nicely. Our server storage connectivity business continued to trend positively with solid demand for 12 gig rate and SaaS products and strong shipments for our PCI Express solutions. Looking towards Q4 2015, we expect Enterprise Storage to continue its momentum. Revenue growth is projected in the lowtomidsingledigits sequentially, driven by a forecast seasonal uptick in the hard disk drive end market, but more importantly, sustained demand in our server storage connectivity businesses. On to wired infrastructure. With the closing of our AMELX acquisition in the Q3, our ASIC and fiber optic sales to AMULEx have now become inter complete transactions and are no longer included in this wide segment revenue. Reflecting this change, our wide segment declined by 3% sequentially in the 3rd quarter, which otherwise would have been up slightly from that of the prior quarter. Wide revenue now represent 21% of total revenue from continuing operations. Our underlying ASIC businesses declined moderately coming off a very strong second quarter where we have seen double digit sequential revenue growth. We remain very optimistic with our expanding ASIC footprint in the routing, switching and high performance computing end markets. We saw strong sequential growth in fiber optics driven by the start of a ramp in 100 gs shipments and a sustained increase in 40 gs fiber optic module shipments to the hyperscale data center markets, where we are supplying to multiple end customers. We have also added wafer capacity and increased shipments significantly to meet continued strong demand from the fiber to the home market, largely in China. Okay. Moving to turning to the outlook for the wired segment for the Q4. We expect our ASIC business to resume growth, driven by continued strength in data center build outs. We expect demand from hyperscale and fiber to the home markets to sustain for our fiber optic business. Consequently, we expect wide segment revenues to grow in the mid single digits sequentially. Moving to Industrial. For the 3rd quarter, Industrial and Other segment represented 10% of total revenue from continuing operations. And as I mentioned previously, this segment does include our intellectual property licensing business. This segment had much stronger than expected 2nd quarter revenue as I disclosed previously because of a significant IP Licensing business transaction in that quarter. As a result, going to the 3rd quarter, we saw an unusually large revenue decline of 21 percent sequentially in this segment. We found the impact of this single transaction, industrial revenue would have grown in the high single digits sequentially as we replenish inventory at certain of our at certain of our distributors in the U. S. And China. Industrial revenues, having put that in that context, industrial resales in the 3rd quarter were down in the low single digits as we saw softness in Europe and Japan even though China's flat and Americas were up. But while we expect resales in the 4th quarter to improve in China and Europe, uncertainty in industrial market keeps our revenue expectation for this segment to be flat to marginally down sequentially. So to highlight in summary, we believe we have built a very firm foundation for our company anchored by our 4 diverse segments. In Q3, wide storage and industrial performed to plan as expected, and we experienced a gradual start up of the typical annual wireless product cycle. Now in Q4, we expect to gain from the full double digit sequential growth in wireless. We've continued and sustained performance from the rest of the company, resulting in aggregate revenue growth of approximately 6 percent sequentially. The Broadcom acquisition continues to progress well and is very much on track for closing as we indicated early next year. As I plan the integration of our 2 companies, I'm pleased to identify Tony Maslowski as the CFO of the combined company. Tony has done a superb job in Anavago and will be great as we scale up the combined companies. And with that, let me now turn the call over to Tony for a more detailed review of our Q3 fiscal 2015 financials. Thank you, Hock, and good afternoon, everyone. Before reviewing Q3 fiscal year I want to remind you that 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 at our website at www dotavagotech.com. Revenue of $1,750,000,000 in the 3rd quarter represents an increase of 6% from the prior quarter. Foxconn was a greater than 10% customer in the 3rd fiscal quarter. Our 3rd quarter gross margin from continuing operations was 61%, which was at the high end of our guidance range, primarily due to better revenue mix and fab utilization. Turning to operating expenses, R and D expenses were $245,000,000 and SG and A expenses were $85,000,000 This resulted in total operating expenses for the Q3 of $330,000,000 $5,000,000 below guidance, primarily because of cost synergies from the Emulex transaction being realized faster than expectations. As a percentage of sales, R and D was 14% and SG and A was 5% of net revenue. Operating income from continuing operations for the quarter was $733,000,000 and represented 42% of net revenue. Taxes came in at $38,000,000 for the 3rd quarter, slightly below our guidance. 3rd quarter net income was $660,000,000 and earnings per diluted share were $2.24 This is a significant increase from the $347,000,000 in net income and $1.26 in earnings per diluted share from the same quarter last year, which was our Q1 that included results from LSI. 3rd quarter interest expense was $43,000,000 Other income net was $8,000,000 resulting from a number of items including gains from foreign exchange hedging and interest income. Our share based compensation in the 3rd quarter was $63,000,000 The breakdown of the expense for the Q3 includes $7,000,000 in cost of goods sold, dollars 31,000,000 in R and D and $25,000,000 in SG and A. In the 4th quarter of fiscal 2015, we anticipate share based compensation will be approximately 66,000,000 dollars Just as a reminder, our definition of non GAAP net income excludes share based compensation expense. Moving on to the balance sheet, our days sales outstanding were 42 days same as the prior quarter. Our inventory ended at $507,000,000 a $17,000,000 increase from the 2nd quarter. Days on hand were 67 days. We generated 592 $1,000,000 in operational cash flow and ended the quarter with a cash balance of $1,400,000,000 which declined by approximately $1,100,000,000 from the prior quarter, primarily due to the cash consumed by the conversion of our 2% convertible notes, the purchase of Emulex and the conversion of all Emulex notes as described in the earnings release. In the Q3, we spent $148,000,000 on capital expenditures. On June 30, 2015, we paid a quarterly cash dividend of $0.40 per ordinary share, which consumed $104,000,000 of cash. This dividend was raised by $0.02 from the prior quarter. Since the inception of our dividend program in Q2 2011 to date, our financial performance has allowed us to increase our dividend each 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 relating to our outstanding indebtedness and other factors deemed relevant by our Board. During the quarter, we did not repurchase any shares. Let me turn to our non GAAP guidance for the Q4 of fiscal year 2015. This guidance reflects our current assessment of business conditions. We do not intend to update this guidance and this guidance is for results from continuing operations only. We expect net revenue to be $1,850,000,000 plus or minus 25,000,000 dollars Gross margin is expected to be 60.5 percent plus or minus 1 percentage point. Operating expenses are estimated to be approximately $336,000,000 taxes are forecasted to be approximately 42,000,000 dollars and net interest expense and other is expected to be approximately $38,000,000 And finally, the diluted share count forecast is for 296,000,000 shares. That concludes my prepared remarks. Operator, please open up the call for questions. And our first question for the day comes from the line of Vivek Arya from Bank of America. Your line is open. Thank you for taking my question. A question on wireless. I think you guided to over 10% sequential growth. And I believe last year, Apple did some pre builds, so some of the year on year trends are probably distorted. So part first of the question is, how should we think about content growth at your largest customer this generation? And how should we think about seasonality as we look out at Q1? Well, to begin with, in terms of content increase, I guess my best way to describe is, there has been no decline in content in our largest customer to make it clear, number 1. And number 2, we do not really give guidance beyond the current quarter we are in. So I would have to refrain from giving you a sense of what would go on beyond into Q1 of fiscal 2016. But in terms of content, do not expect any reduction in content at our largest customers in wireless. I see. And then as a follow-up, Tony, congrats on your expanded role. How should we think about OpEx trajectory over the next few quarters? And do you expect to take any cost action before you close the Broadcom acquisition? Thank you. To answer your last question first, nothing until close as far as actions that would affect kind of the combined companies. But as far as OpEx going forward, as we've said to you before, 335 and then a steady decline with Emulex getting further and further along the way on their cost cutting, I think is the way we look at it. And then also remember we have the bonus reset in Q1. So we're ahead of plan above 100% right now. So we're accruing above 100% and you'll see that tail off in Q1. So I mean flattish to and again as Hock said, we're not guiding Q1, but I think you can kind of see where it's headed for Q1. 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. Hock and Tony, congratulations on the strong results. I guess Hock, I'll go back and ask another question around FR to follow-up from the Vets question. But if you look clearly in the fiscal Q4, you guys are benefiting from a ramp of a new phone. That ramp should probably be largely over by the end of October going into the January quarter, but you still are clearly undersupplying the overall market for FR and you have a lot of confidence you're building capacity at a pretty healthy clip for the next fiscal year. So I guess I'm just trying to figure out to what extent if the North American guy does see some seasonality going forward, you can find homes for that capacity in any given quarter? Or is that not how they're going to end the quarter? Is it going to take time for you to get incremental content out of Chinese smartphones? I see what you mean. No, well, right now, our fab is as it has been for the past so far the past 12 months, I would say, has been completely full, and we expect it to continue to run full through to the middle of next year. That's based on what we can see in terms of line of sight. Beyond that, frankly, not sure. And as I pointed out correctly, it would give us any opening any additional capacity coming online going forward coming from additional capacity would be very welcome by us in terms of our ability to then ship to various other customers. And you point out one group, obviously, some of the Chinese customers, which we feel we want to be able to support very well and which we have been trying very hard to do as much as we can. But our capacity, as I mentioned, continues to be rather constrained. That's helpful, Hawk. And then I guess as my follow-up, on the Enterprise Storage segment, you did a really nice job kind of going through the different product lines within that division. I might have missed it, but I was kind of curious, did you talk about what the HDD trends were in the just reported fiscal Q3? And then you talked about in the guidance for fiscal Q4, the expectation of a seasonal uptick rate to be just given some of the lackluster data points around PC builds. Help me understand a little bit better why you're confident you're going to see kind of that seasonal increase on the HDD side within enterprise storage? Thanks. Well, to begin with, a lot of our HDD revenues are coming from HTT products sold into nearline, what you call, data centers, enterprises. We virtually do 0 products into notebooks, limited amount only into desktops and most of our revenues and most of our share resides in enterprise and what we call nearline data centers. So obviously, that does have some impact with this entire we have seen some of that. But that impact is has been mitigated by continuing demand from enterprise and data centers. And so there's certain level of offset. Having said that, I'm not for second saying for the last several months that our HDD business is up, it's not. And but we believe we've seen bottom and we believe that there will be some improvement as we head out over the next several months. And perhaps part of it is due to our emphasis on enterprise and data centers. Helpful. Thanks again, guys. Congratulations. Thank you. Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley. Your line is open. Thanks. Hock, in addition to just some of the broad based uncertainty out there, there's also in recent months been some uncertainty about the data center. It looked like your commentary was pretty strong on both ASIC and fiber optic, but hoping you can expand on that in terms of the trend you're seeing at kind of traditional data center as well as with the hyperscale customers. Okay. If I give the impression that data centers are booming, I apologize, it's not intended that way. But we do see our business of various products we have into the data centers, be they from ASICs, fiber optics and certainly into enterprise storage for data centers. We do see stable and in many cases uptrend demand over the last 3 months. And we continue to see that trend continuing in this quarter. I'm not saying it's super strong, but we do not see weakness either. Got it. And within the trends you're seeing, is there anything from a new expand the customer base or traction at specific customers? Are you referring to the wireless segment? No, just staying with data center. Oh, data centers. It's an expanding base for us. But many of our customers are fairly large OEMs. Most of them are. Some that are perhaps end users, but most of them are OEMs. And we do not see any dramatic shift in the collection of customers we service in this enterprise storage or wired segment. Okay. And maybe just a quick follow-up for Tony, just on the very strong gross margin performance. There could be some elements of mix in there, but also maybe from a manufacturing or cost perspective, can you discuss just the trend you've seen in gross margins and the sustainability in that segment? Well, we're very happy with the gross margin performance. But as we've always said, we're we've got some when we actually report a lot of perfection in our yields and fab utilization. As Hock mentioned, we've been 100% now for probably going on 5 to 6 quarters. So again, we think there's good sustainability. The fab will stay full. We hope that yields will stay up. We won't hit any excursions. But I think that we broke the 60 number. We're guiding to a 60 number. We're pretty confident that's something that's sustainable going forward. And if I could add to that, I think we also are benefiting from a fairly strong attractive product mix. Our I mean, if you look at our enterprise storage, industrial and wired networking business, the point I made is very stable. It's on an it continues to be on a steady uptrend and those are extremely good gross margin business. As it keeps expanding, we get a benefit of operating leverage. Got it. Thanks for that. Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your I guess the first one Hock from the highest of level, you described that your business is stable when others are seeing severe volatility. I know you specify the customers, the segments, etcetera, that you address. But in general, what do you attribute that stability to? Because it seems somewhat odd, for example, that your enterprise storage and your industrial business would be up high single digits quarter over quarter on a core basis. Why you think it's different for Avago? Well, I guess maybe the best way, we are not one single product on our end market business as you all know. And in fact, we have 12 separate products in those 4 end markets, 12 separate operating divisions and 12 separate product lines, somewhat even larger. And you might say each of them are in a niche market of their own. So when you come and not all up at the same time, no all down at the same time. Combined consolidated or aggregated as a whole, we have been able to see and we have seen it now for the last 12 months, I would say 4 quarters, a very stable progression of our business. What is more volatile, as I'm paying to point out in my closing remarks, Du, is in enterprise storage, wired and industrial, multiple segments, multiple niches of perhaps offset each other, but it's also in our end market largely that because of perhaps of the niches have been able to be fairly stable. And the only thing that is more, I would call it seasonal and it recurs with fairly regular frequency now so far for the last few years is our wireless business. And that sits on top of an extremely firm foundation. And that's the best way to describe our business. Great. And then I guess one that's a little bit more housekeeping for Tony. In the past, you'd talked about paying down some of the debt on your balance sheet. I know you had a bunch of puts and takes in this quarter itself. But any sort of overall guidance you can give us on cash usage between now and when Broadcom is going to close? Is it a safe assumption to say you'll be building up your cash balance or are there some other puts and takes like you had in this quarter that we should be ready for? Just one word, mattress. Just going straight into the mattress. So again, there's a few things that are going on, but it's really just marching toward the close. So don't expect anything too surprising. There'll be some small immaterial things here and there where we pay for our pensions and so forth, but again nothing material. Perfect. Thanks. Congrats again. Thank you. Our next question comes from the line of Harlan Sur from JPMorgan. Your line is open. Hi, good afternoon and congratulations on the solid quarterly execution. In fact, proving your financial filings, 50% of your revenues get shipped to China, but obviously this is somewhat of a misleading number because only a portion of this actually gets consumed in China. Obviously, the rest gets shipped to the rest of the world. Do you guys have a sense of what percentage of your revenues actually gets consumed in China, China domestic smartphones, wired wireless infrastructure, the China and so on. I assume it's a much smaller number than 50% of your revenues, but anyway you guys can quantify? It's definitely a much smaller number than what we bought as where we ship our products. As you correctly pointed out, that's to a lot of contract manufacturers who produce and re spot. And to answer your question, what percent? Not a clue. It's very hard. Okay. Thanks for that, Hock. And then on the storage and server connectivity segment within the enterprise storage business, obviously, you guys are expecting good growth here in the October quarter. Can you just help us understand the drivers? Is it 12 gig SaaS? Is it RAID? Is it PCI? Or is it your fiber channel based products or maybe a combination of all of the above? And then I guess just a final question is, is your custom enterprise SSD controller segment also contributing to the growth in the October quarter? Thank you. Thank you. The best answer on enterprise storage, we have as you know, we have a broad portfolio of products, some going into the into servers and some going to external storage. So there's a degree of a mix here. But broadly but as I said, because of a broad portfolio of products, which has been very helpful in basically balancing out the portfolio and the revenue mix, We and as long as that end market in enterprise networking, but more so in data centers, hyper data centers, build outs. We have been able to see sustained demand. I won't use the word strong demand, but we don't see a decline. We're seeing very, very stable demand that has been on this trajectory for the last 6 months. We're not seeing it ramp, but we've seen it stable and we've not seen it decline significantly or for any sustained period either. So that's a bad description of how I could characterize what we're seeing here today, which is why our forecast for Q4 is structured accordingly. And as to your second question, would you mind repeating that? Yes. Just wondering if you've the team has seen strong growth in your enterprise SSD controller product line. I'm just wondering if that's also contributing to the growth in the quarter? That's still a small part of our business and it's really not that meaningful. And I would while we while I did mention it and that's because of a sharp ramp up, I would not say to be necessarily something that is very meaningful as to affect the overall portfolio at this time. But we do see significant ramp up in that business that we're in, is very customized flash controllers for enterprises. And we've been able to benefit from that very nicely, but it's not that substantial. Thanks, Hock. Thank you. Our next question comes from the line of Stephen Chen from UBS. Your line is open. Great. Thanks for taking my questions. Hock, first one for you, if I could. In terms of competition in the wireless business, I think it's still pretty clear that your FR technology has immeasurable lead on an apples to apples basis compared to other filter technologies. But as some of your competitors introduce more highly integrated front end modules with either BAW or TC SAW filters combined with power priors. Can you talk about how those type of low cost solutions are highly integrated, how that might compare to your overall pad solutions from a total subsystem or a front end module performance perspective? And what kind of implications that might have from a competitive standpoint longer term? Okay. Fair question. First of all, I want to clarify the RF solution we specialize in and that drives a lot of revenues as you correctly call them in front end modules and within it comprises several discrete multiple discrete elements, largely F bar filters, 1 F bar filter for each frequency band. And combined into a front end module, very different discrete elements, They constitute, as you correctly call it, a front end module or a pad for RF cellular receive and transmit. And in this case, in this particular phenomenon, the physics is what dictated the filters, certain filter, certain bands, frequency bands require FBA filters in order to perform adequately. FBAF and certain other bands could do without FBA filters and need only use SAW filters. And where we excel and where we have a very strong market position, obviously, in those phones, we're requiring frequency bands that can only perform adequately with where our market position is. For those bands and those front end modules because of that, that can do with SAW filters, we don't participate in it because we are while our performance is still far superior, SAW filters is adequate and go for a much lower price. So it's not in that sense, you're comparing apples and oranges. There are certain bands we are not competitive or we are not well represented and are not competitive, even though our performance may be very good. And for other bands, they require a power filters to achieve a certain performance for the phone makers, and we are very well represented there. And that's how we compete. We differentiate ourselves from largely the salt filter guys. Got it. Thanks for that color. And as my follow-up, maybe a question for Tony, in terms of the expected capacity increase for the F spot filters, You guided to another 50% growth for fiscal 2016. I was wondering if you have any additional color on how that breaks down in terms of expected unit growth in terms of mobile devices as opposed to for the content growth in existing or new devices incremental? Well, again, I think, obviously, Hock said that we're continuing this 50% growth for next year. Don't really have any comment on unit growth or anything like that. No, we obviously believe and that has tend to be our philosophy and our policy on capital expenditures is that we see have a line of sight towards the specific demand before we put in that capacity increase. And sometimes because of that, as we're seeing over the last 12 months or more, we like demand. But having said that, by putting in a 50% for next year, we're pretty certain we're going to need that capacity and use it. Perfect. Thank you. Thank you. Our next question comes from the line of Srini Bajuria from CLSA Securities. Your line is open. Thank you. Okay, a question on wireless. On a like for like basis, what kind of ASP declines do you normally see in FBAR? And then as we head into next year, given that the hyper growth is probably behind us, what sort of ASP trends should we expect? We don't think very hard about ASPs in the products we are in. And it's not just wireless typically, it's across most of our product lines. And a big part of it is our products are very highly differentiated and we offer performance, we offer solutions to our customers. And not to mention, usually our products come in and it's good for a few years or in the case of wireless, maybe a year or so and then the new generation takes over. And when the new generation takes over, it adds in additional features, additional capabilities. So it's very hard to do like to like and we really have stopped looking at ASP degradation in our overall business. Okay, great. And then a follow-up on China. You said you were still capacity constrained. Given that China is driven by mostly reference platforms, I'm just curious as to how well you're positioned within these reference platforms? And as you, I guess, get more capacity online, how quickly can you address this market? Okay. Typically, the products we sell, we sell the RF analog. I mean, this is the extreme of analog performance kind of product. We sell RF analog. We do not sell a digital mixed signal platform. And so as I mentioned to answer to an earlier question, our core focus products are filters. And there are some bands, even those in China, that require FPA filters versus the normal ubiquitous SAW filters. And they would be required in even in many kinds of platform as discrete solutions. And we have obviously no issue about selling about selling discrete ad bar filters to home phone makers in China who require that filters in order to be able to perform well at those specific bands. On top of that, there is this phenomenon of what you call phone operators trying to win multiple bands, trying to uplink or downlink as a single pipe. And that's called the phenomenon of carrier aggregation. And to really do carrier aggregation very well, which we are very good at doing, you really need you really want to have a bar filters operating in that regard. So that provides us the additional opportunity to position our product. And that's something we obviously have been working on very, very vigorously. Thank you. Thank you. Our next question comes from the line of Amit Daryanani from RBC Capital Markets. Two questions for me. One, if I look at the October guide for gross margins, you're guiding it flat to down a little bit even though sales are up 5%, 6% sequentially and the wireless business, which I assume is a higher margin business, is ramping the strongest. So what are the offsets in October that lead to a flattish or down gross margin trend when mix and revenue is in your favor? Well, again, what we've always said is, our print on gross margin is usually against the backdrop of this kind of perfection in the fab. And so what we do is we just say, hey, we're never going to price it for perfection going forward. So that's all you're seeing there. There's nothing there that says that we're not confident that we might be able to overachieve that number, but it's just that's not our way of thinking about gross margin on a go forward basis. Got it. And then just on the enterprise side, could you talk about in dollars how much did Emulex contribute in the quarter? And then you have $109,000,000 assets held for sale on your balance sheet line item. Just talk about what exactly that includes? Sure. So I'll answer the last question first. So through all the various acquisitions, we've had a couple of buildings. So we have a building that we inherited from Emulex that was owned, which is about $45,000,000 in debt asset held for sale and a couple of small buildings as well. And then also remember, with the Emulex transaction, we had a security business that is not core to Avago, a security appliance business called NDAF. And that's about another roughly $40,000,000 of that. And then as you might have seen, we had a sale of a certain part of our business to Han High earlier this week, and that makes up the remainder of that assets held for sale. It's a big number because it's $100,000,000 but it's roughly buildings, businesses and this most recent transaction. Perfect. Thank you. Thank you. Our next question comes from the line of Doug Friedman from Stern AG. Your line is open. Great. Thanks guys for taking my question and congrats on the strong results. If I could, I just want to make sure I fully understand the 50% increase in FBAR capacity. When you're measuring capacity, are you talking about a 50% increase in wafer output? And I would think that with the mix of business moving to higher frequencies in FBAR, those, I believe, use smaller amounts of dye space. So are you looking for a larger increase in units than the 50% if that 50% in fact is wafers? Can you just offer some clarity there? There's a bit of mix dynamics here and I don't want to answer it halfway and give you the wrong sense going forward. There are a couple of dynamics and we're not sure where this whole thing will fall out. But you're right in that regard. Each new generation of F bar filters on every 6 inches wafer, which we are still using, each of those filters do become typically smaller. But however, there is a change in the mix too because depending on which band it is in, some of these filters are larger and or small, might be larger than even the mix than the bands, the other bands they are replacing. So there's one dynamic that goes the other way. 2, keep in mind this is as we sell more and more of those bands, which per phone, you might add, which is the content increase in phones we have been espousing all this time and it's true, which is every a new generation of a phone, be they Galaxy or otherwise, would tend to contain more bands, the world phone concept, the broader roaming concept. More bands will get into a phone. The scale up is pretty substantial. And the way we address the scale up is we make the filter smaller, which helps. But also they then pull into a front end module, as I mentioned before, or paired, I think, which basically works with power amplifiers within the margin. And as you will probably know, the number of power amplifiers remain substantially the same, even as more filters go into the same module. So basically, our leverage on revenues on dose pads effectively become less, which almost is saying that that's the price discount, the more bands of AVAR filters we sell in each phone. And that does happen. And that's counter, obviously, to in terms of a linear ASP increase as the number of capacity of wafer hours, that's not necessarily mean capacity of wafer hours, that's not necessarily mean a similar increase in revenue a year from now. Okay, terrific. Thanks for all that color. If I could move to one of your smaller segments, industrial. Hock, I believe you made the comment that you shipped less into distribution and they shipped out that you reduced their inventory. Can you give us a sense by how much you believe you reduced the distributors carrying inventory in the quarter? I don't have the data on me. That's pretty specific and precise. It probably by almost a few weeks of carrying inventory is the best way to describe. Precisely, I don't have any And it's not the same every location. As I say, China and Americas was okay for us. So we probably reduce it less. But in Germany, in Europe and Japan, we'll probably pull it back much more. Terrific. And again, congrats on the really strong results. Thanks for allowing my questions. Thank you. And the last question that we're going to be taking today is from the line of Vambrish Srivastava from BMO Capital Markets. Your line is open. Hi, thanks for taking my question. This is Koolan Patel for Ambrish. I have a question on the enterprise storage, the fiber channel portion of business. Your competitors saw weakness in their reported results. Can you comment on what you're seeing in fiber channel? Well, I mean, fiber channel is a business that is faced with roughly on a long term, a gradually flat to declining trend, right? We don't get ourselves there. Having said that, new generation pops up and enhances the ASP. So overall in dollar terms, it is not far from being flat and we have seen demand being flat is the best description I have. The best way to characterize it is flat. All right, thanks. And a question on the FBAR capacity. In the past calls, you talked about moving from 6 inches to 8 inches Can you comment on your progress on that and when you expect most of your production to be on 8 inches for the FBAR? Well, right now and into fiscal 2016 going forward, beyond this quarter, we will only have one line, maybe about 10%, 15% of our capacity on going into 8 inches And that conversion is going very nicely. And we And we won't get to the point where we will convert all to 8 inches until 2017 is my belief. And so whole new project. But what we are seeing now, which is in production or going to production is an ability to obviously do the conversion one line. Great. Thank you. Thank you. That's all the time we have for questions for today. So I would like to turn the call back over to management for closing remarks. Thank you, operator. Thank you for participating in today's earnings call. We look forward to talking with you again when we report our Q4 fiscal year 2015 financial results. That concludes Avago's conference call for today. You may now disconnect.