Earnings Call: Q1 2015

Feb 25, 2015

Welcome to the Vargo Technologies Limited First 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, of Investor Relations. Please go ahead, sir. Thank you, operator, and good afternoon, everyone. Joining me today are Tom 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 Q1 of 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 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 Q1 fiscal year 2015 results, background to our Q2 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 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. Now as you all are aware, today we announced the acquisition of Amulex Corporation. Amulex is very complementary to Avergo's enterprise storage businesses and aligns very well with the Avago business model. It is a leading supplier of fiber channel and related products selling primarily into server and enterprise storage OEMs that Avago currently serves with our SaaS, Rate and PCI Express switching and fiber optic products. We expect this transaction to allow us to offer 1 of the broader suites of silicon and software storage solutions to the enterprise and data center markets. With that, now I will turn on to more mundane methods related to our recent business performance and Tony will provide a summary of our Q1 fiscal year 2015 financial results. Revenue for Q1 was $1,660,000,000 an increase of 3% from the prior quarter. In particular, wireless growth was much better than expectations with revenue growing sequentially versus the flat to slightly down outlook we had provided during our Q4 earnings call. White and Enterprise storage held up well, but Industrial did show seasonal decline. Now turning to a discussion of our segments, starting with Wireless. In the Q1, as noted, revenue from our wireless segment grew 6% sequentially. Wireless represented 40% of our total revenue from continuing operations and compared to the same quarter last year, wireless revenue grew 90% at 9 0%. Within the quarter, we saw stronger than expected demand from a large North American smartphone OEM, which shall remain nameless and by which enable us to achieve another quarter of record wireless revenue. Given these levels of growth, coupled with our expectation for additional FBAR filter content in upcoming smartphone generations. We expect to remain capacity constrained through the balance of this year, even as we continue to grow our SBAR capacity over the next 12 months. As you know, we have expanded our Fort Collins fab capacity multiple fold over the past few years, but demand has continued to exceed expectations. Turning to Q2 of fiscal 2015. Similar to prior years, we expect a sharp seasonal, some may even call it product lifecycle related decline in demand from our large North American smartphone OEM. However, this decline is expected to be partially offset by product RAM another large handset OEM where our designs have resulted in substantial RF content. Nonetheless, we do expect wireless revenue to decline sequentially, somewhat in the low teens. Year over year, however, we expect to maintain our trajectory of strong growth in this business with 2nd quarter revenue projected to grow over 65% from the same quarter last year. Our strategy and capability to offer highly integrated RF front end solutions incorporating a very high performance F bar filters has been a key driver of our success. Moving on to enterprise storage. In the Q1, enterprise storage revenue came in as expected, growing about 5% sequentially, driven by strength in enterprise and data center spend. Enterprise storage represented 29% of our total revenues from continuing operations. In HDD in hard disk drive, revenues grew by mid single digits sequentially. In server and storage connectivity, we also had a good first quarter with revenue growing in the mid single digit sequentially. This growth was driven by the start of the Gramly based server refresh cycle as well as a strong attach rate for our 12 gigabit SaaS and RAID solutions. Looking forward to the 2nd quarter, in server and storage connectivity, we expect strong growth from increasing adoption of our PCI Express switches and sustained SaaS and RAID shipments. While we expect to see seasonal decline in hard disk drives, Our custom flash controller business in NAND have been ramping. Putting these factors together, we expect low single digit sequential revenue growth for Enterprise Storage segment. On to Wide Infrastructure and Enterprise segment. Our Wide segment performed somewhat below expectations in Q1, revenue declining by 1% sequentially. White revenue now represents the 21% of our total revenue from continuing operations. ASIC revenue was up slightly on a sequential basis with strong growth in Ethernet switching, thanks to our various OEM customers, partially offset by declines in carrier routing and high performance computing. As expected, our fiber optics business declined from that of the prior quarter. We saw growth in power optics shipments into carrier routing more than offset by expected declines from our Ethernet transceiver standard Ethernet transceiver products, especially 40 gigabit, which took a pause after a strong 4th quarter. However, the Q2 fiscal 2015 in this segment is looking very different. We expect growth in both our ASIC businesses and our fiber optics business. In our ASIC business, we actually expect very strong growth from enterprise switching and routing as well as in storage. In fiber optics, we're expecting more moderate growth in 40 gs shipments driven by increase in demand from the hyperscale data center market. And we are also continuing to see strength in fiber optics demand from fiber to the home and LTE base stations, especially in China. As a result, we expect at least mid single digit sequential growth for our wired segment. And finally, moving to industrial. In the first quarter, our industrial segment performed below our of our total revenues from continuing operations. Resales in this segment declined sequentially in this very seasonally weak quarter with broad declines across all regions except Asia, which remained stable from that of the prior quarter. As you know, we recognize revenue on shipping to our shipping basis to our distributors. And during this period, our industrial product revenues that is shipped into our distributors also declined at a consistent rate to industrial resale as we maintain very tight inventory in the channel, less than 2 months net inventory. Looking in the Q2 of fiscal 2015, we expect sequential recovery in our Industrial segment. In particular, we are seeing strength in North America and Europe, reflecting this recovery and the need to replenish the need and demand, I would add, by distributors to replenish the very low levels of inventory at these distributors, we expect to see sequential revenue growth in the mid teens for industrial business. With this, let me summarize. I'm pleased to report that we had a very strong start to fiscal 2015 with 3% sequential revenue growth in the Q1 due to strong quarter in wireless, good growth in enterprise storage despite flattish wired infrastructure demand and a decline in industrial. Turning to 2nd fiscal quarter, As in past years, as you may know, we've only seen sharp second quarter sequential declines in our wireless business due to seasonal product cycles in the handset market. This year is no different and we are expecting our wireless revenue to be down in the low teens from the prior quarter. However, what is different this year is we expect to offset most of the wireless decline with strength from our 3 other segments: wired up mid single digits, enterprise storage up low to mid single digits, industrial up in the mid teens. And as a result, we expect our 2nd quarter consolidated revenues to be roughly flat from that of the prior quarter. With that, let me now turn the call over to Tony for a more detailed review of our Q1 fiscal 2015 results. Thank you, Hock, and good afternoon, everyone. Before reviewing Q1 fiscal year specifically noted. A reconciliation of our GAAP and non GAAP data is included in the earnings release issued today and is also available on our website atwww.avagotech.com. Revenue of $1,660,000,000 in the first quarter represents an increase of 3% from the prior quarter. Revenue from our Wireless segment came in better than our expectations. The Enterprise Storage segment performed as expected and we saw weaker than expected revenue from the wired and the industrial and other segments. Foxconn was a greater than 10% customer in the first fiscal quarter. Our first quarter gross margin from continuing operations was 59%, which was just above our guidance range of 56.5% to 58.5%, primarily due to better revenue mix and higher manufacturing yields. Turning to operating expenses. R and D expenses were $210,000,000 and SG and A expenses were $83,000,000 driving total operating expenses for the Q1 to $293,000,000 $8,000,000 below guidance primarily because of the lower than anticipated spending on certain R and D engineering materials. Due to capacity constraints, some materials initially intended for R and D projects were instead used to build products for customer shipments and we expect this to continue in the Q2. As a percentage of sales, R and D was 13% and SG and A was 5% of net revenue. Operating income from continuing operations for the quarter was 681,000,000 dollars and represented 41% of net revenue. Taxes came in at $35,000,000 for the Q1, slightly below our guidance given a quarter ago. This was primarily due to a change in the jurisdictional mix of income and the retroactive reinstatement in the quarter of the U. S. Federal Research and Development Tax Credit. 1st quarter net income was $596,000,000 and earnings per diluted share were 2.09 expense was $54,000,000 Other income net was $4,000,000 Our share based compensation in the first quarter was $49,000,000 The breakdown of the expense for the Q1 includes $6,000,000 in cost of goods sold, dollars 19,000,000 in R and D and $24,000,000 in SG and A. In the Q2 of fiscal 2015, we anticipate share based compensation to be approximately 52,000,000 typically occur in the 2nd fiscal quarter of the year. Starting this fiscal year, we are switching to a solely RSU based equity award program instead of a combination of option and RSU awards. 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 39 days, an improvement from the prior quarter's 42 days. Our inventory ended at $500,000,000 days on hand were 67 days, which decreased 3 days from the 4th quarter as we reduced inventory, which we had built up in prior quarters support the strong growth in our Wireless segment. We ended the quarter with a cash balance of $2,600,000,000 and we generated $481,000,000 in operational cash flow. Our first quarter is also when we pay our annual bonuses relating to the prior fiscal year. In the Q1, we spent $162,000,000 on capital expenditures. On November 18, 2014, in our 1st fiscal quarter of 2015, we closed the sale of the Axia business and received approximately $650,000,000 in cash. On December 31, 2014, we paid quarterly cash dividend of $0.35 per ordinary share, which consumed $89,000,000 of cash. This dividend was raised by $0.03 from the prior quarter. Since the inception of our dividend program in Q2 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 related to our outstanding indebtedness and other factors deemed relevant by our Board. During the quarter, we did not repurchase any shares. In the Q2 of fiscal 2015, we anticipate paying approximately $600,000,000 towards reducing our outstanding term loan, which will reduce our annual interest expense by about $22,000,000 based on current interest rates. In addition, as we announced today, we expect to invest approximately $600,000,000 for the acquisition of Immulex Corporation and we currently expect this transaction to close in the second half of our fiscal 2015. We expect this acquisition to be immediately accretive to earnings per share on a non GAAP basis. We plan to align Immulex with IVAGO's business model over the course of our fiscal year 2016. And once aligned, we expect ImmuLEX businesses to contribute approximately $250,000,000 to $300,000,000 in annual net revenue with improved operating margins. Now let me turn to our non GAAP guidance for Q2 of fiscal year 2015. This guidance reflects our current assessment of business conditions and we do not intend to update this guidance. This guidance is for results from continuing operations only. Net revenue is expected to be in the range of down 3% to up 1% from the 1st quarter. Gross margin is expected to be 58.5 percent plus or minus 1 percentage point. Operating expenses are estimated to be approximately $294,000,000 Taxes are forecasted to be approximately $37,000,000 Net interest expense and other is expected to be approximately $49,000,000 which anticipates paying approximately 600,000,000 dollars towards the reducing of our outstanding term loan within the quarter. And finally, the diluted share count forecast is for 289,000,000 shares. That concludes my prepared remarks. Operator, please open up the call for questions. Thank Your first question comes from the line of John Pitzer of Credit Suisse. Please proceed. Yes. Good afternoon, guys. Congratulations on the strong results. Hock, I guess my first question is around FBAR capacity and CapEx. CapEx in the January quarter was down sequentially a little bit lower than I would have thought. Are you guys still on target for sort of that $600,000,000 for the year? And by how much do you think that that will increase your FBAR capacity? And how do we think about linearity of that spend? Why don't I let Tony take that on especially on your CapEx. Yes. So we're still on track for full year 600,000,000 dollars We had probably about $15,000,000 to $20,000,000 that was right on the edge of the quarter that could have gone either way. And that's why we guided to the new number for Q2. And then as we said before, we believe that FR capacity will increase significantly this year. By the end or to be more precise, by the middle of next year, we expect IFR capacity to be double what it is currently. That's very helpful. And I guess sticking on FR as a follow-up. So the North American customer comes down in the April quarter, but that's offset by content growth at another customer. I'm kind of curious if you can give us Hock an update on what you're seeing relative to FBAR content in the China market specifically and how you think that might trend over time? Well, it's never a monotonic increase in capacity, but then it's a question that always we think about real hard. But it's just that as more and more phones become multiple band enabled, they become where you can roam multiple locations. And now if you ask specific of that broadly worldwide, but if you ask specifically China, there are multiple categories of those phones in China even if they are smartphone. There are those unique to China. And for those phones that I found and smartphones that are unique to China, obviously, the Chinese LTE bands by the way, are very much bands that do use a very, what I call, friendly to FBAR usage. And couple that with the tendency to make them Wi Fi enabled And then you basically increase the number of bands requiring EPBA in those phones. So to answer your question, the Chinese phones tend to be very EPBA friendly. Now it's not always that way because there are ways they can do to cut that curtail performance and therefore substitute Advair for perhaps lower performing SAW filters. And they do, do that. And there's a mix of that going on right now particularly with the capacity constraint. But over the long term from phones that are basically multi mode, multi band, 3 mode phones going to 5 mode phones as they call them in China, you just need a fairly significant increase in net bar content. Very helpful. Thanks, Achin. Congratulations again. Thank you. Your next question comes from the line of Vivek Arya of Bank of America Merrill Lynch. Please proceed. Thanks for taking my question. And Hawke once again managed to surprise us with your acquisitions. Now if I look at consensus estimates for Emulex, it shows around $400,000,000 of revenues at around $40 ish million of net income. But I believe Tony you said about $250,000,000 revenue. So I just wanted to get some clarification around those numbers. Sure. So basically, we'll still go through the same process where certain parts of the business will be looked at closely. And what we believe is that it's going to be closer to that as the exit of 2016. So we term. And as you can tell with that number and then we improve some of the operating margin, it's definitely accretive to future numbers. Got it. And as my follow-up Hock, you mentioned additional FBAR content in next generation phones with your flagship customers. Is that due to additional bans? Or are just traditional filters being replaced by FBAR? I'm just trying to understand is overall RF content going up in these flagship phones? Or are you gaining more share? No, it's architecture. It's really related to RF architecture. And it's an RF architecture that pushes a lot that allows a lot more bands to be crammed into very limited space in smartphones to be able to handle multiple, multiple bands for world roaming phones. And it's putting them all into modules, front end modules, which both includes power amplifiers and EPAR filters. So it's really architectural related and an ability to contain many more bands within the same limited constraint space. Got it. Thank you. Your next question comes from the line of Ross Seymore of Deutsche Bank. Please proceed. Hi. This is Jihan calling in for Ross Seymore. Hock, I was wondering if you can discuss and give a little bit more color on some of the strategic drivers behind the Emilex acquisition? Sure. But I really don't have much at this stage to add on than what I provided in my opening remarks, which is we believe fiber channel is an interest in fiber channel over Ethernet as well that includes that. It's a very interesting obviously connectivity protocol. And we are very big in enterprise storage, as you know, particularly after our acquisition and integration of LSI. So we do have SaaS, as I said. We do have SADA and PCI Express with PLx acquisition and the need for high density port solution on data center connectivity. So we come across fiber channel very often adjacent to the sockets, adjacent to the systems and chips that we provide to those same OEM customers in enterprise and data centers. So it's a very logical and strategic next step for us to add fiber channel and fiber over Ethernet into our suite of component solutions and software. Thank you. And in the quarter, wired business was down a little bit more than you had expected. Given the performance of your customers, NEXUS 9,000 products, we would have thought that it would have come in a little bit higher. Can you discuss the growth that we should think about for the year in the wired business? Well, it's probably more where the quarter cuts over and the timing of shipments and all that. And by the way, we're not really down more than we expect. We're down 1% overall. And I thought that flattish more than down. And you're right, it didn't grow as much, but seems like we're making up for it in this current Q2 quarter, where we expect to see high single digit growth in our ASIC shipments to our various enterprise networking customers. Can we have the next question please? Thank you. And the next question comes from the line of Craig Hettenbach of Morgan Stanley. Please proceed. Yes. Thanks. A follow-up question on Emulex. As you get that portfolio to where you see the business, the run rate exiting 2016, Can you provide a sense of just kind of longer term what the growth outlook could be for that? And then second just kind of with Zenimulus just your approach having gone through LSI just some background there? Well, we see that this fiber channel business is really a fairly a very sustainable stable business. We see that long term, well medium term, let me phrase that, in the mid single digit growth. It's a kind of business where we see a lot of barriers to entry, obviously. And we see a very unique technology, which is very hard to replicate. Those are all the criteria that fits our business model. And we basically see a necessity to focus on the strength of this business, fiber channel, fiber channel over Ethernet. And all that ties together for the kind of business and particularly coupled with the fact that this Emulex sell to the same kind of the enterprise OEM customers that we currently sell with our server storage connectivity solutions. So all that ties together to make sure it's a very natural extension to our enterprise storage business. And we see that our model is mid single digit growth annually and improving profitability as we manage this the way we manage the rest of our businesses as Tony indicated. Got it. And then if I could follow-up on the ASIC business. If I go back to the Analyst Day a couple of years ago, you had talked about gaining share. Since that time, you even added LSI. So can you talk about where you stand in terms of some of the expected share gains you expect in ASICs and then also the visibility which typically tends to be a little longer term in that market? ASICs. I never think ASICs in terms of market share. Unfortunately, I do think ASICs we pick and choose our ASIC customers very carefully and we support those customers simply because we very unique technology and very expensive technology in some ways. And we base and in ASICs, as you know, the business is tough to scale unlike standard or ASSP products. So our business strategy in ASIC is very strong IP and we basically are rather selective about the customers, usually OEM customers and not necessarily OEM customers. We do support data certain specific data center customers do, but very pick but very selectively. And we tend to only select those where we believe we have opportunity to grow our business very well with the particular customer we support ASIC ASIC with. And to answer your question, the last 3 years we've been very successful. And integrating in the LSI ASIC business to our AVago Classic ASIC business before the acquisition has combined to provide a business that's pretty that's doing very well in the sense that it's roughly $700,000,000 to $800,000,000 and it has financial criteria that meets what we need. And that what we need to keep reinvesting and generating really state of the art technology in terms of process libraries, in terms of the best studies in the marketplace and the most robust set of IP in memories and processing. So it's a business model we believe has been very, very successful. And we like to see the same with our by the way our storage portfolio. Got it. Thanks for that, Haak. Your next question comes from the line of Jim Carvallo of Goldman Sachs. Please proceed. Thanks for the excellent results. Maybe first sticking on the Amulex theme. Obviously, there's been a pretty intense competitive environment over the years with QLogic in that space. When you think about that mid single digit revenue growth you're targeting, how much are you factoring in additional incremental competition and balance that against some of the incremental capability that you can add in filters or other things into that market? We do balance both in and we believe by the way that the market is relatively stable. Maybe you call the word bottom out, but I call it stable. And what brings in a lot of stability to the market is, Jim, as you probably may know is fiber channel over Ethernet as well, which sort of counteract some perhaps slight declines in certain situations like UNIX based service. But overall, we think it is there. And we believe we can bring in certain capabilities, certain features and performance that will enable us to grow this not much, but all we believe in the mid to low single digits. That's pretty much where all we are looking for. And for us to be able to do that and focus on it totally would also enable us to create operating margins, operating returns on our investment and operating margin as Tony indicated close to the range of what we used to for the rest of our businesses. It won't happen at a time. It will probably take a year. Sure, sure. And for the follow-up, you mentioned the 90% year over year growth in wireless. Can you help us disaggregate that between unit growth in the market? And then against customer new customer wins and then that architectural dynamic that you talked about driving incremental growth with existing customers. So if we disaggregate it between market unit growth, Avaco customer wins and then the 3rd bucket being that architectural dynamic driving increased content, how would you break 90% down? Well, Jim, you just answered your own question. Impossible, because we are comparing apples and oranges. There is definitely a change in architectural content. And as we go into a new architecture of integrating into front end modules, multiple bands of power amplifiers and filters in 1 module. You can compare to a module that used to have 2 bands to one that now has 9 bands. And so the content increases, the dollar gets priced differently. I hate to say I'm not trying to evade your question, but I don't have an answer for you except to say that it's very different. And the market is evolving, is evolving into its architecture especially where high end smartphones, which is where a lot of our applications are, a lot of our products go into, I'll be honest, into high end phones. Those high end phones can afford the rather high performance, very space constrained architectures that our solutions, RF solutions provide. In low end smartphones and some of them like Trimod phones in China where there's only limited number of bands needed, could probably make do with discrete filters and power amplifiers and they do. And we don't really compete much in those areas. We tend to compete it towards new architectural phones. So year on year there's been a distinct change. Sure. That's very helpful. Thank you and congratulations again. Thank you. Your next question comes from the line of Edward Snyder of Charter Equity Research. Please proceed. This is Carlos Manigotti for Ed. One for Tony. There has been several comments over the last few quarters about your filter fab running full, but you've also said that CapEx to expand that far capacity pays for itself well within a year. So given the rate of spending that you guys have had all through 2014, is it safe to assume that the capacity of your FBAR fab was materially higher at the end of 2014 than at the beginning? Yes, that's correct. And as Hock mentioned, we're going to go through another doubling here sometime in 2016 mid 16 or so. So no, we still believe in 2016. We still firmly believe that the CapEx spending in FBAR is wildly justified. And again, we're still very with a cautious eye to say that we only build what we would need to build. So yes, this last year has been probably earmarked with kind of a 100% and the current year is probably also as we've mentioned capacity constrained as well. So not much of the dynamics have changed significantly there. And then as a follow-up, capacity to your largest customers. Do you feel like you've got enough headroom and FBAR to take back or expand your share of BAW filter demand outside of your largest customer this quarter? I guess the best way to answer your question is the honest way, which is we're very much on allocation of our FV capacity today. And we've been that way now for the last several months. And we expect to be that way for the next several months. Thanks guys. Your next taking my question. Congratulations on the strong results in our company. If I could ask an SBAR question as well and then I'll follow-up with a NAND question. On the SVRC, you're doubling your capacity. But if I look at your revenue run rate and you're continuing to run that capacity full, we could be looking at well north of $1,000,000,000 in a single quarter for your FBAR business. That business does appear to run at above average corporate margins. Would you like to offer whether there's something wrong in the math that I'm running and whether we should be thinking of a new peak gross margin number for your model next year? That's a lot of things you're throwing in the same mix. Number 1, dollars 1,000,000,000 a quarter sounds fairly extreme. And the reason is simply this, could be first we're nowhere close to $1,000,000,000 a quarter yet, as you know. I mean, 40% of our revenues right now is not quite there yet, but I know what you mean by a doubling of it. But it may be 1 quarter, but it's not the whole year. So I just want to make that point. It could get there in 1 quarter and at the right point at the peak season, but it won't sustain because of the seasonality of product life cycles of the players in it. So that's a fair so I hope that answers your question. In terms of gross margin, sure, we have never made any boats about where that there has been a ceiling to our gross margin. All we have said is we don't know where it is, but over time as our product mix and our business become more and more efficient and our product mix hit the right spot, hit the sweet spot of certain markets, sure, we do see continuing improvement or expansion of gross margin. And you see that last quarter and you probably see that again in our guidance this quarter. And it's all related to product mix. Absolutely. No, the numbers have been fabulous. The one thing I see investors have some questions regarding the business that you sold off that services the NAND controller market versus your commentary on your introductory remarks that you have a custom NAND controller. Can you maybe clear it up a little bit or clarify what it is that you sold versus what pieces of the business you continue to invest in? Yes, of course. Whether you pick up the little things, but it is a fair question. Yes, we sold off our business as well as intellectual property and capability in developing standard flash controllers for solid state drives and we did that And we sold that off. And we do not have any standard flash controller capability of no products, no revenues right now in our product portfolio. We sold it all off happily too, because we believe we are not prepared to keep investing into display, which we believe could get very competitive. Having said that, we do retain some intellectual property and capability within our hard disk drive division, operating division where similar capabilities exist in terms of designs, understanding how to develop flash controllers for custom flash controllers. And we do that for very selected customers, sort of in a form of an ASIC flash controllers for enterprise market specifically on low volume on specific customers. And we continue to do that because that part of the business retains behind with us And we have the capability inherent within our hard disk drive division, our SoC division. And if it makes money, we'd be happy to do it. But it is really it's really not the standard flash business, very different from standard flash business which we sold off. Okay. Thank you. And your next question comes from the line of Harlan Shure of JPMorgan. Please go ahead. Congratulations on the solid quarter. On the wired business, the team has been benefiting from the transition to 40 gig in the data center. However, with all these new initiatives starting in the second half of this year around 25 gig and 50 gig. Does this end up being another growth driver for you guys for both the ASIC and for your fiber OpEx business? Yes. I don't know about whether it can be a new growth driver, but certainly a lot of demand for programs for us to look at to develop Surdist that will and from Surdist developing switching fabric that drives 25 and even 50 gigabit. We are we by the way, we are I think one of the very few guys today with silicon, working silicon that can drive what they call 56 gigabit PEM4. I got to put in that little bit of propaganda, so I'll let you guys know that. And that drives the 50 gigabit standards that is now being promulgated through IEEE. So this obviously offers us opportunities given our capabilities in these specific areas. Yes. Yes. Thanks for that Hock. And then on the enterprise storage with the 12 gig SaaS array controllers and storage connectivity product segments. Can you just kind of help us understand where we are in that upgrade cycle? Is this a tailwind for enterprise storage for the next 12 months or longer? And it's kind of more of the near term strength coming from HPC or hyperscale or traditional enterprise or all of the above? A lot of it is coming from a combination. As you know, as you've been hearing, some momentum in enterprise spending and data center build out and spending and going on. And as that happens, couple that with the launch of Intel Grandly that supports 12 gigabit from the previous generation of 6 gigabit. So yes, there is a tailwind as we go through that refresh cycle as it always happens to be the case in this case in servers enterprise driving server storage connectivity. So we're benefiting from that. And that's partly why you see our business growing sort of mid single digits sequentially so far in the last couple of quarters or so. It's helped by this push that launched late last year. That won't sustain forever, but so far so good. Thanks, Hock. Your next question comes from the line of Stephen Chin of UBS. Please proceed. Great. Thanks for taking my questions. Another question on the networking business if I can for your ASICs. I was wondering if some of the recent M and A going on in the foundry ASIC world, if that is benefiting you at all or not in terms of new conversations with potentially more ASIC customers? And also related to that, can you talk a little bit about the about how your the buy dye optics at one of your customers, how that demand is proceeding so far? Okay. Let me answer the first one. On the buyback thing, hate to say it, because it's exclusive to a particular customer. And I can't I don't really want to comment on it. I'm sorry about that. I hope you don't mind. But because it's a Now coming back Now coming back to the ASIC consolidation, don't really see that much of it on our side. And part of the reason for it is, as I say, in ASIC, we're not out there looking for market share. We have very unique capabilities in the sense of we're very low power, we're very leading edge process technology through working with TSMC, but we're very, very robust serializer, deserializer, very strong, robust IP in memories as well as processing, a lot of that not just from a Bago Classic, but with LSI combined with us and great relationships with selected list of OEMs and who are somewhat winners in so far in the enterprise networking business. So as they grow, we grow along with them. And as I've made a remark earlier, so as a particular customer announced the gain in share, we do see benefit of that. Having said that sometimes we're also supporting another customer who doesn't, so that kind of balances out somewhat. But because of our unique technology and our unique business model of trying to select very be very selective for the customers we support, which tends to lend itself to very large successful OEMs. We do not see that much all these M and A activity you're referring to down at the ASIC businesses. Okay. That's helpful. Thanks, Hock. And just as a follow-up, in terms of, again, the wired infrastructure business, looking a little further out beyond the current at least mid single digit sequential growth that you're guiding for in Q2, how I guess what kind of visibility do you have into later in the fiscal year in terms of this demand for your ASIC business, whether it's Surtees or other products related to networking? Thanks. Our visibility tends to be good for 1 to 2 quarters. That's it. And that's probably the lead time on our products, what we need what we demand for our products in supply chain to support those customers. 1 to 1.5 quarters as far as we go. Beyond that, no, we don't really have that great visibility. Great. Thank you and congrats on the strong results. Thank you. Your next question comes from the line of Steve Smithee of Raymond James. Please proceed. Great. Thanks a lot for the opportunity. I was hoping you guys could talk a little bit about the opportunity you see in the optical business this year. What sort of headwinds and tailwinds do you see off that business over the course of the year? What? Optical business. Oh, the optical fiber optics business, the transceiver business. Correct. You're referring. Well, it's a mixed bag. See, we are now we participate a lot in the datacom, short reach datacom and that's nicely chugging along. There's price competition to be honest about it, but we try not to play as I've said many times before in the standard fiber optics lower bandwidth products, we tend to go up very fast. We're now doing 40 gig. Our sweet spot is pushing 40 gig including the buy die that someone referred to earlier, which is a 2 by 20 form of unique form of 40 gig and then standard 40 gig and we're pushing now 100 gig and we're working on various form of 100 gig and going even beyond 100 gig for core routing. That's where our strength is. So I'm really not a very good indicator of the broader fiber optics market. But in terms of datacom, our strength is up towards the high bandwidth. On the low bandwidth, I'd like 1 gigabit, 10 gigabit, I measure and then on some of the storage products like 8 gigabit and 16 gigabit, 16 is not so bad. You can mention anything below that. It's a price it's a very price competitive environment and we try to not be too engaged in it. I won't say we're not out we are out of it, we can't be because we have to support many of our OEM customers even though our share is very low. We're not looking at our focus is really on higher end whether it's proprietary or not so proprietary, very high bandwidth datacom. And that's growing very well as in data centers, especially the larger data centers are pushing from 40 gig to in some cases leapfrogging 40 gig to go to 100. And of course, somebody indicated 2550 provides additional opportunities. And when you start talking about 25, you're talking about having to drive shorter short reach or even longer reach native 25. This makes it very tough to produce lasers, VCSELs, laser so to speak that does 25 gigabit. We are one of the few guys who can do it. And we happily sell that to guys who do 100 gigabit InfiniBand today. We are the supplier of the VCSELs for instance. So that one is one side of it. Our other strength in telecoms is we don't do that much transceivers in long reach telecoms except medium reach few kilometers in data centers. Other than that for transport, we don't do much at all. We do provide no coherent transceivers, but we do it at a component level, we can line arms dealer and we do that very well. And for instance, we also do component level to fiber to the home in China. And that one we can't provide enough products for the market or not for that matter for LTE supporting base station fiber optics. We can't provide enough of those components to those particular markets. That one, we have a pretty full set too. Great. Thanks for that color. And just as a follow-up, turning to the wireless market, you guys obviously have a lot of confidence in your business by ramping the CapEx pretty significantly there. I was hoping you could talk about this in the context of maybe 4 or 5 year type range. Obviously, some of the great strength here has been driven by the move to LTE and or at the sort of LTE Advanced. But it seems like say 5 gs doesn't come for until maybe 2018, 2020. So how do you keep in mind adding capacity versus you've got a lot of LTE switching over the next couple of years versus the length of time before 5 gs starts to come in? Correct. 4 gs will be reversed for a while, LTE will be reversed for a while as you know because Europe has barely begun to spend anybody money. And now they are starting to U. S. Already spent their money and we're in the midst of China. So it's all good not to mention emerging countries. But to answer your question more directly, kind of hate to disappoint you, but our CapEx plan, we tend to build and I mentioned that many times before in a year ago or 2 years ago, so maybe it's time to refresh that. But we tend to lack demand in our capacity builds. We basically see the whites of the eye in demand before we start rushing to build capacity. We don't build in anticipation of demand. We tend not to do that. We don't run our business that way. Great. Thank you. So if you ask me about 5 gs, no, I'm not even there, sorry. Not even there. Got it. Thank you. Thank you. I would now like to turn the call over to Ashish Saran for closing remarks. Thank you, operator. Thank you everyone for participating in today's earnings call and we look forward to talking with you again when we report our Q2 fiscal year 2019 results. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.