Good day, ladies and gentlemen, and welcome to the Avago Technologies Limited third quarter fiscal year 2015 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 Anthony 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 third quarter fiscal year 2015. If you did not receive a copy, you may obtain the information from the investors section of Avago's website at www.avagotech.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 investor section of our website at avagotech.com. During the prepared comment section of this call, Hock and Tony will be providing details of our third quarter fiscal year 2015 results, background to our fourth quarter 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 US 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 expectations. Tony will provide a summary of our third quarter fiscal year 2015 financial results. As a note, you may be aware we closed the Emulex acquisition on May the 5th, two days into our third fiscal quarter, and accordingly, Q3 results include contributions from Emulex. 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 third quarter was $1.75 billion, a 6.4% sequential 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 third quarter, revenue from our wireless segment grew by 7% sequentially. 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 at an Asian handset OEM. Looking at the fourth quarter 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 at 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 FBAR capacity, which we anticipate will increase by approximately 50% by the time we 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. 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. We do expect to further increase FBAR 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 a significant amount of planned capacity additions, particularly towards the end of fiscal 2016. As a result, our capacity for FBAR may continue to remain under pressure for an extended time period. Moving on to enterprise storage. Starting with third fiscal quarter, the enterprise storage segment includes Emulex Fibre Channel connectivity products. In this third quarter, 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 Emulex in the third 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 12G RAID and SAS products and strong shipments for our PCI Express solutions. Looking towards fourth quarter 2015, we expect enterprise storage to continue its momentum. Revenue growth is projected in the low to mid-single digits 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 Emulex acquisition in the third quarter, our ASIC and fiber optic sales to Emulex have now become intercompany transactions and are no longer included in this wired segment revenue. Reflecting this change, our wired segment declined by 3% sequentially in the third quarter, which otherwise would have been up slightly from that of the prior quarter. Wired revenue now represents 21% of total revenue from continuing operations.
Our underlying ASIC business declined moderately coming off a very strong second quarter, where we had 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 100G shipments and a sustained increase in 40G 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. Turning to the outlook for the wired segment for the fourth quarter. 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 wired segment revenues to grow in the mid-single digits sequentially. Moving to industrial. For the third quarter, industrial and other segment represented 10% of the total revenue from continuing operations. As I mentioned previously, this segment does include our intellectual property licensing business. This segment had much stronger than expected second quarter revenue, as I disclosed previously, because of a significant IP licensing business transaction in that quarter. As a result, going to the third quarter, we saw an unusually large revenue decline of 21% sequentially in this segment. Without 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 distributors in the U.S. and China.
Industrial revenues, having put that in that context, industrial resales in the third quarter were down in the low single digits as we saw softness in Europe and Japan, even though China was flat and Americas were up. While we expect resales in the fourth 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. To highlight in summary, we believe we have built a very firm foundation for our company, anchored by our four diverse segments. In Q3, wired, storage, and industrial performed to plan as expected, and we experienced a gradual startup of the typical annual wireless product cycle.
In Q4, we expect to gain from the full double-digit sequential growth in wireless with continued and sustained performance from the rest of the company, resulting in aggregate revenue growth of approximately 6% 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 two companies, I'm pleased to identify Tony Maslowski as the CFO of the combined company. Tony has done a superb job in Avago Technologies and will be great as we scale up the combined companies. With that, let me now turn the call over to Tony for a more detailed review of our third quarter fiscal 2015 financials.
Thank you, Hock, and good afternoon, everyone. Before reviewing third quarter fiscal year 2015 financial results, 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.avagotech.com. Revenue of $1.75 billion in the third quarter represents an increase of 6% from the prior quarter. Foxconn was a greater than 10% customer in the third fiscal quarter. Our third 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&D expenses were $245 million, and SG&A expenses were $85 million.
This resulted in total operating expenses for the third quarter of $330 million, $5 million below guidance, primarily because of cost synergies from the Emulex transaction being realized faster than expectations. As a percentage of sales, R&D was 14%, and SG&A was 5% of net revenue. Operating income from continuing operations for the quarter was $733 million and represented 42% of net revenue. Taxes came in at $38 million for the third quarter, slightly below our guidance. Third-quarter net income was $660 million, and earnings per diluted share were $2.24. This is a significant increase from the $347 million in net income and $1.26 in earnings per diluted share from the same quarter last year, which was our first quarter that included results from LSI. Third-quarter interest expense was $43 million.
Other income net was $8 million, resulting from a number of items, including gains from foreign exchange hedging and interest income. Our share-based compensation in the third quarter was $63 million. The breakdown of the expense for the third quarter includes $7 million in cost of goods sold, $31 million in R&D, and $25 million in SG&A. In the fourth quarter of fiscal 2015, we anticipate share-based compensation will be approximately $66 million. 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 42 days, same as the prior quarter. Our inventory ended at $507 million, a $17 million increase from the second quarter. Days on hand were 67 days.
We generated $592 million in operational cash flow and ended the quarter with a cash balance of $1.4 billion, which declined by approximately $1.1 billion 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 third quarter, we spent $148 million on capital expenditures. On June 30th, 2015, we paid a quarterly cash dividend of $0.40 per ordinary share, which consumed $104 million of cash. This dividend was raised by $0.02 from the prior quarter. Since the inception of our dividend program in the second quarter of 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 fourth quarter 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 $1.85 billion ± $25 million. Gross margin is expected to be 60.5% ± one percentage point. Operating expenses are estimated to be approximately $336 million. Taxes are forecasted to be approximately $42 million, Net interest expense and other is expected to be approximately $38 million.
Finally, the diluted share count forecast is for 296 million shares. That concludes my prepared remarks. Operator, please open up the call for questions.
Sure. Ladies and gentlemen, if you have a question for the speakers at this time, you may dial star then the number one key on your keypad. That's star, then one. If your question has been answered, or if you wish to remove yourself from a queue, you may press the pound key. 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 hard question on wireless. I think you guided to over 10% sequential growth. I believe last year, Apple did some pre-builds, so some of the year-on-year trends are probably distorted. Part first A of the question is, how should we think about content growth at your largest customer this upcoming 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 one. Number 2, we do not really give guidance beyond the current quarter we are in. I would have to refrain from giving you a sense of what would go on beyond into Q1 of fiscal 2016. In terms of content, do not expect any reduction in content at our largest customers in wireless.
I see. As a follow-up, Tony, congrats on your expanded role. How should we think about OpEx trajectory over the next few quarters? 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 the combined companies. As far as OpEx going forward, as we 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. Also remember, we have the bonus reset in Q1. We're ahead of plan, above 100% right now. We're accruing above 100%, and you'll see that tail off in Q1. Flattish to, again, as Hock said, we're not guiding Q1, I think you can kind of see where it's headed for Q1.
Thank you.
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your line is open.
Yeah, good afternoon, guys. Hock and Tony, congratulations on the strong results. I guess, Hock, I'll go back and ask another question around FBAR to follow up from Vivek's question. If you look clearly in the fiscal fourth quarter, 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. You still are clearly under-supplying the overall market for FBAR, and you have a lot of confidence you're building capacity at a pretty healthy clip for the next fiscal year. 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 at any given quarter, or is that not how the dynamic works?
Is it going to take time for you to get incremental content out of Chinese smartphones?
Oh, I see what you mean. No. Well, right now, our fab, as it has been so far the past 12 months, I would say, it's 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. As I pointed out correctly, it would give us 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. 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.
Our capacity, as I mentioned, continues to be rather constrained.
That's helpful, Hock. 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, could you talk about what the HDD trends were in the just reported fiscal third quarter? You talked about in the guidance for fiscal fourth quarter, the expectation of a seasonal uptick for HDD. 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 that seasonal increase on the HDD side within enterprise storage. Thanks.
To begin with, a lot of our HDD revenues are coming from HDD products Sold into nearline, what you call data centers, enterprises. We virtually do zero products into notebooks, limited amount only into desktops, and most of our revenues and most of our share resides in enterprise and what you call nearline data centers. Obviously, that does have some impact with this entire seasonality that we've seen over the last several months. We mentioned last quarter too, as PC weakened, we have seen some of that. That impact has been mitigated by continuing demand from enterprise and data centers. There's certain level of offset. Having said that, I'm not for a second saying for the last several months that our HDD business is up, it's not.
We believe we have seen bottom, and we believe that there will be some improvement as we head up 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'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 was 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 gave the impression that data centers are booming, I apologize. It's not intended that way. We do see our business, the various products we have into the data centers, be they from a certain amount ASICs, fiber optics, and definitely into enterprise storage for data centers. We do see a stable, and in many cases, uptrend demand over the last three 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. Within the trends you're seeing, is there anything from a new customers? I think you called out two customers, is there something that might be helping you as well in terms of as you expand the customer base or traction at specific customers?
Are you referring to the wireless segment?
No, just staying with data center.
Data centers. It's an expanding base for us. Many of our customers are fairly large OEMs. Most of them are. There's some that are perhaps end users, but most of them are OEMs. We do not see any dramatic shift in the collection of customers we service in this enterprise storage or wired segment.
Okay. 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, 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. As we've always said is that when we actually report, a lot of perfection in our yields and the fab utilization. As Hock mentioned, we've been 100% now for probably going on five to six quarters. 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.
If I could add to that, I think we also are benefiting from a fairly strong, attractive product mix. If you look at our enterprise storage, industrial, and wired networking business, the point I made is very stable. It continues to be on a steady uptrend. Those are extremely good gross margin business. As it keeps expanding, we get the 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 line is open.
Hi, guys. Thanks for letting me ask a question. I guess the first one, Hock, from the highest of levels, you described that your business is stable when others are seeing severe volatility. I know you specify the customers, the segments, et cetera, that you address. 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 when others are seeing weakness. Can you talk a little bit about why you think it's different for Avago?
Well, I guess maybe the best way, we are not one single product or end market business, as you all know. In fact, we have 12 separate products in those four end markets, 12 separate operating divisions and 12 separate product lines, somewhat even larger. You might say each of them are in a niche market of their own. Not all are up at the same time, nor are 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 four quarters, a very stable progression of our business. What is more volatile, as I'm paying to point out in my closing remarks too, is in enterprise storage, wired and industrial.
Multiple segments, multiple niches, 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. 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. That sits on top of an extremely firm foundation. That's the best way to describe our business.
Great. Thanks for that. 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, and 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. Again, there's a few things that are going on, but it's really just marching toward the close. 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 JP Morgan. Your line is open.
Hi, good afternoon, congratulations on the solid quarterly execution. Perusing 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, China Telecom, and so on. I assume it's a much smaller number than 50% of your revenues, but any way you guys can quantify?
It's definitely a much smaller number than what we report as where we ship our products, as you correctly pointed out. That's to a lot of contract manufacturers who produce and re-export. To answer your question, what %? Not a clue. It's very hard.
Okay. Thanks for that, Hock. 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 SAS? Is it RAID? Is it PCI, or is it your Fibre Channel-based products or maybe a combination of all of the above? I guess just a final question 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, as you know, we have a broad portfolio of products, some going into servers and some going to external storage. There's a degree of a mix here. 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, 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 stable demand that has been on this trajectory for the last six months. We're not seeing it ramp, but we've been seeing it stable, and we've not seen it decline significantly or for any sustained period either.
That's the best description of how I could characterize what we're seeing here today, and which is why our forecast for Q4 is structured accordingly. As to your second question, would you mind repeating that?
Yeah, just wondering if 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 October quarter.
That's still a small part of our business, and it's really not that meaningful. While I did mention it, and that's because of a sharp ramp up, I would not say it to be necessarily something that is very meaningful as to affect the overall portfolio at this time. We do see significant ramp up in that business that we're in, which is very customized flash controllers for enterprises. We've been able to benefit from that very nicely. It's not that substantial.
Thanks, Hock
Thank you. Our next question comes from the line of Stephen Chin from UBS. Your line is open.
Great. Thanks for taking my question. 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 FBAR technology has a measurable lead on an apples-to-apples basis compared to other filter technologies. As some of your competitors introduce more highly integrated front-end modules with either BAW or TC SAW filters combined with power amplifiers, can you talk about how those type of low-cost solutions that 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, are in front-end modules, and within it comprises several multiple discrete elements, largely FBAR filters. One FBAR filter for each frequency band. Combined into a front-end module of different discrete elements, they constitute, as you correctly call it, a front-end module or a PAD for RF cellular receive and transmit. In this case, in this particular phenomenon, the physics is what dictated. The filters, certain bands, frequency bands, require FBAR filters in order to perform adequately. FBAR and certain other bands could do without FBAR filters and only use SAW filters. Where we excel and where we have a very strong market position, obviously, are in those phones requiring frequency bands that can only perform adequately with FBAR filters.
That's where our market position is. For those bands and those front-end modules because of that can do with SAW filters, we don't participate in it because while our performance is still far superior, SAW filters is adequate and go for a much lower price. In that sense, you're comparing apples and oranges. There are certain bands we are not well represented and are not competitive, even though our performance may be very good. For other bands, they require FBAR filters to achieve certain performance for the phone makers, and we are very well represented there. That's how we compete. We differentiate ourselves from largely the SAW filter guys.
Got it. Thanks for that color. As my follow-up, maybe a question for Tony, in terms of the expected capacity increase for the FBAR 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 further content growth in existing or new devices incremental.
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.
We obviously believe, and that has tend to be our philosophy and our policy on capital expenditures, is that we have a line of sight towards the specific demand before we put in that capacity increase. Sometimes because of that, as we're seeing over the last 12 months or more, we lack demand. 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 a line of Srini Pajjuri from CLSA. Your line is open.
Thank you. Hock, a question on wireless. On a like-for-like basis, what kind of ASP declines do you normally see in FBAR? As we head into next year, given that the hypergrowth 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. It's not just wireless, typically, it's across most of our product lines. A big part of it is our products are very highly differentiated, and we offer performance, we offer solutions to our customers. Not to mention, usually our products come in and it's good for a few years or if in the case of wireless, maybe a year or so, then a new generation takes over. When a new generation takes over, it adds in additional features, additional capabilities. It's very hard to do like to like, and we really have stopped looking at ASP degradation in our overall business.
Okay, great. A follow-up on China. You said you were still capacity constrained. Given that China is driven by mostly reference platforms, I am just curious as to how well you are positioned within these reference platforms. 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. This is the extreme of analog performance kind of product. We sell RF analog. We do not sell a digital or mixed signal platform. As I mentioned to answer to an earlier question, our core focus products are filters. There are some bands, even those in China, that require FBAR filters versus the more ubiquitous SAW filters. They would be required even in many kinds of platform as discrete solutions. We have obviously no issue about selling discrete FBAR filters to 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 with multiple bands, trying to uplink or downlink as a single pipe.
That is called a phenomenon of carrier aggregation. To really do carrier aggregation very well, which we are very good at doing, you really want to have FBAR filters operating in that regard. That provides us the additional opportunity to position our product. That is something we obviously have been working on very vigorously.
Thank you.
Thank you. Our next question comes from the line of Amit Daryanani from RBC Capital Markets. Your line is open.
Yep. Thanks a lot. Good afternoon, guys. Two questions for me. One, if I look at the October guide for gross margins, you're guiding it flatted 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. What are the offsets in October that lead to a flattish or down gross margin trend when mix and revenues are 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. What we do is we just say, "Hey, we're never going to price it for perfection going forward." 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 that's not our way of thinking about gross margin on a go-forward basis.
Got it. Just from the enterprise side, could you talk about in dollars, how much did Emulex contribute in the quarter? Then you have $109 million asset sales for sale on your balance sheet line item. Just talk about what exactly that includes.
I'll answer the last question first. Through all the various acquisitions, we've had a couple of buildings. We have a building that we inherited from Emulex that was owned, which is about $45 million in asset held for sale, and a couple of small buildings as well. Also remember with the Emulex transaction, we had a security business that is not core to Avago, a security appliance business called Endace, and that's about another roughly $40 million of that. As you might have seen, we had a sale of a certain part of our business to Hanhai earlier this week, and that makes up the remainder of that asset sale for sale. It's a big number because it's $100 million, 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 Freedman from Sterne Agee. Your line is open.
Great. Thanks, guys for taking my question. Congrats on the strong results. 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? I would think that with the mix of business moving to higher frequencies in FBAR, those, I believe, use smaller amounts of die space. 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 mixed dynamics here, and I don't want to answer it wrong 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 FBAR filters on every six-inch wafer, which we are still using, each of those filters do become typically smaller. However, there's a change in the mix too, because depending on which band it is, some of these filters are larger or smaller. Might be larger than even the other bands they are replacing. There's one dynamic that goes the other way.
Two, 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 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. The way we address the scale-up is we make the filters smaller, which helps. Also they then pull into a front-end module, as I mentioned before, or PAD, as you call, which basically works with power amplifiers within the module. As you will probably know, the number of power amplifiers remains substantially the same, even as more filters go into the same module.
Basically, our leverage on revenues on those PADs effectively become less, which almost is saying that that's the price discount, the more bands of FBAR filters we sell in each phone. That does happen, and that's counter, obviously, in terms of a linear ASP increase as the number of bands increase. There's these two mix-up dynamics, and the end result of all that is, yes, a 50% increase in capacity of wafer outs does 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 than 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?
Oh, I don't have the data on me. That's pretty specific and precise. 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 said, China and Americas was okay for us, so we probably reduce it less. In Germany, in Europe, and Japan, we probably pull it back much more.
Terrific. Again, congrats on the really strong results. Thanks for allowing my question.
Thank you.
Thank you. The last question that we're going to be taking today is from the line of Ambrish Srivastava from BMO Capital Markets. Your line is open.
Hi, thanks for taking my question. This is Kulwant Patel for Ambrish. A question on the enterprise storage, the Fibre Channel portion of the business. Your competitors saw weakness in their reported results. Can you comment on what you're seeing in Fibre Channel?
Well, Fibre Channel is a business that is faced with roughly, on a long term, a gradually flat to declining trend. Let's get ourselves there. Having said that, new generation pops up and enhances the ASP. 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's flat.
All right. Thanks. A question on the FBAR capacity. In a past call, you talked about moving from six inch to eight inch. Can you comment on your progress on that and when you expect most of your production to be on eight inch 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 eight inch. That conversion is going very nicely. We got the knowhow technology kind of figured out and locked in. No more than 10% or so. We won't get to the point where we'll convert all to eight inch until 2017, is my belief. It's a whole new project. What we are seeing now, which is in production or going to production, is an ability to obviously do the conversion on one line.
Great. Thank you.
Thank you. That's all the time that we have for questions for today. 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 fourth quarter fiscal year 2015 financial results.
That concludes Avago's conference call for today. You may now disconnect.