Welcome to Broadcom Limited's conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Ashish Saran, Director of Investor Relations. Please go ahead, sir.
Thank you, operator, good morning, everyone. This morning, Broadcom announced we are acquiring Brocade for $5.5 billion in cash, plus $400 million of net debt. In addition, in light of the Brocade acquisition announcement this morning, we also narrowed our revenue guidance to the high end of the range for the fourth quarter of fiscal 2016. We now expect non-GAAP revenues to be between $4.1 billion and $4.175 billion for the fourth fiscal quarter. Press releases on both topics and supplemental information on the transaction are available in the investor relations section of Broadcom's website at broadcom.com. This conference call is being webcast live and a recording will be available via telephone playback and will also be archived in the investor sections of our website.
As a reminder, today's call will include forward-looking statements regarding our future business performance and the expected timing and completion of the proposed transaction, as well as financial impacts to Broadcom. These statements include risks and uncertainties that could cause our actual results to differ materially from the statements made on this call. Please refer to our press releases today and our recent filings with the SEC for information on specific risk factors. Comments made during today's call will primarily refer to non-GAAP financial measures. Now let me turn the call over to our President and CEO, Hock Tan.
Thank you, Ashish, good morning, everyone. As Ashish mentioned, this morning we announced the acquisition of Brocade. As many of you may know, Brocade has built its core around a very strong Fibre Channel storage switching business. Also over the past several years, it has developed and continued to grow an IP networking business. Before I dive into the details, let me first put everybody at ease by confirming that we are not getting into the systems business. We have built a great company, Broadcom Limited, today, selling primarily semiconductors to OEM system vendors. We consider our OEM customers to be strategic partners, we have no desire to compete with them. For that reason, we will be keeping Brocade's Fibre Channel SAN switching business, which sells to many of the same OEM customers that our semiconductor business does.
We will be divesting the other businesses, including the IP networking, which would be competitive with our OEM customers. This approach of acquiring valuable and differentiated assets that enable our OEM partners solutions is what we have done for many years. The Brocade acquisition is both a strategically and financially compelling transaction, and in fact, I think you will find looks very similar to other successful enterprise storage deals we have done, including LSI, PLX, and Emulex. Brocade's Fibre Channel switching business is really the focus of our transaction. It is a leading sustainable business, and it fits very well with our current storage solutions and business model. Brocade pioneered Fibre Channel switching and since then, as I mentioned, has built a very strong market position through technology leadership. The business now has substantial scale, generating approximately $1.4 billion in annual sales and is highly profitable.
It is true that Brocade's Fibre Channel products are sold in the form of an appliance. The value of this appliance, its core IP, intellectual property that is in the architecture, the algorithms, the software, the semiconductor chips embedded in this appliance, all developed over many years by talented Brocade engineers. Brocade sells their Fibre Channel systems to a well-established set of strategic OEM customers, including Dell Technologies, HP, IBM, several others, all of which, of course, have long-standing relationships with Broadcom. In fact, in our enterprise storage business, we sell a lot of non-chip products in the form of boards, adapter cards, commonly referred to as host bus adapters, to these same OEMs. This isn't really uncharted territory for us.
Before I get into more details on this core Fibre Channel SAN business, let me also address the other part of Brocade, which is its IP networking business, includes Ethernet networking, software-defined networking, and wireless access. I want to be very clear that this business does not fit with Broadcom's broader strategy and business model. Rather, as I mentioned, it competes with our networking OEM customers. As you all may know, our semiconductor businesses support many of the same OEMs. Needless to say, we do not intend to start cannibalizing our chip business, and we will never jeopardize our customer relationships in this way. Accordingly, we plan to divest Brocade's IP networking businesses. We will work with Brocade to initiate a sales process for these IP networking assets immediately. Frankly, we do see a lot of value in it for the eventual buyer.
We sell ICs, integrated circuits that is, to Brocade's IP networking business, and we do know they have a lot of capability and differentiation. This business has meaningful scale. With over $1 billion in annual sales, a broad set of deep customer relationships, strong engineering teams, most of whom have long tenures at the company, and a significant amount of IP developed over many years embodied in the products they offer. We do know too, most of the logical buyers for this business very well and are quite confident in the opportunity a combination with the Brocade IP business will present to them. With that clarifying, let me now talk a bit more about Brocade Fibre Channel switching. As I said, this is a very sustainable franchise with phenomenal profitability. Fibre Channel switching is also highly strategic and complementary for Broadcom.
Demand for storage continues to grow rapidly, this acquisition fills a key area within our enterprise storage product line that our current portfolio does not address today. Having said that, as many of you out there know, the knock on Fibre Channel is that enterprises continue to shift more of their workloads to the cloud, where the server-centric architecture tends to use lower cost Ethernet and IP-based storage. That trend is certainly happening, that's in fact, ironically, a very good thing for our existing switching and routing business. In particular, Broadcom's Ethernet switches, PHYs, NICs, are extremely well positioned to continue to capture that growing cloud opportunity.
We also do perceive a large number of customers, particularly large enterprises like financial institutions, telcos, cable operators, government, need a dedicated and highly secure storage infrastructure for managing and sharing mission-critical data used often in their private data centers or on premises. Storage area networks, or SANs, are a key solution to meet this need. Over two-thirds of SANs today use Fibre Channel as the protocol of choice because it is designed to provide a very secure, proven, reliable, and dedicated closed-loop system with zero packet loss, which no other protocol can easily replicate. In addition, a key function of Fibre Channel SANs is to enable shared access to storage from multiple servers. This is accomplished using Fibre Channel switches, which is the Brocade business we are retaining following the acquisition.
The Fibre Channel SAN market is relatively large at an estimated $10 billion+ in annual revenues. Core of this are switches, which occupy a niche here at about $2 billion in annual revenue. We expect this market to remain relatively stable as it supports services, a critical portion of private data centers, which has a large installed base of Fibre Channel SANs that are constantly being upgraded. The introduction of all-flash arrays requiring high performance in IOPS latency, not easily addressed by Ethernet iSCSI solutions, we believe will drive additional upgrades in SAN. We do see this Fibre Channel business sustaining for a fairly long time. In summary, we believe this acquisition will enhance our enterprise storage business, allow us to better service the needs of our strategic OEMs, and advance our strategy to continue to deliver proprietary and very differentiated technology.
The Fibre Channel business will add to our proven portfolio of leading franchises across a diverse set of technologies, all of which contribute to our very strong financial performance and highly profitable business model. I will now turn it over to Tom to take you through the financial merits of this transaction.
Thank you, Hock, and good morning, everyone. As Hock outlined, this transaction is strategically compelling for many reasons. Let me take you to the financial rationale because it's also extremely strong. As all of you know, if you annualize the midpoint of our guidance for the most recent quarter, which is the fourth quarter of our fiscal year 2016, we are positioned to generate more than $16 billion of annual revenue at over 40% non-GAAP operating margins. Once you take into account the divesture of the Brocade IP networking business and the Fibre Channel switch business is fully integrated onto our platform, which we expect to be completed by the end of fiscal year 2017, we believe that Brocade could add approximately $900 million of pro forma non-GAAP EBITDA to our fiscal 2018 results.
Given the momentum we are seeing in our operating margin expansion already, coupled with our belief that pro forma operating margins of the Brocade Fibre Channel switch business, once integrated, will well exceed 50%, we are comfortable in increasing our long-term operating margin target from 40%-45%. We believe we can achieve this higher operating margin profile while continuing to grow top line at an average of 5% per year. Let me deal with some housekeeping items around the deal. As you may have read in the press release, we are acquiring Brocade for $12.75 per share in cash, implying approximately a $5.5 billion equity purchase price, plus net debt of approximately $400 million. This acquisition will be funded with new debt financing as well as cash on hand. At deal close, we expect our net leverage will be comfortably below 2 times our pro forma LTM EBITDA.
We expect this net leverage to decrease rapidly through the strong free cash flow generation of the combined business, as well as the eventual proceeds from the asset sales that Hock highlighted. Furthermore, as I just went through, we think Brocade will deliver $900 million of pro forma non-GAAP EBITDA in fiscal year 2018. Given the purchase price, we think the deal provides for attractive and immediate non-GAAP EPS accretion. More importantly, as we've outlined in the past, should support cash-on-cash returns well in excess of our own cost of capital, which is the most important metric for our acquisitions. This in line and consistent with the results we have achieved with our other enterprise storage acquisitions, including LSI, PLX, and Emulex.
Closing of the transaction is expected in the second half of fiscal 2017, subject to regulatory approvals in various jurisdictions as well as approval of Brocade shareholders. The board of directors of Brocade and the executive committee of the board of directors of Broadcom have both unanimously approved the transaction. In summary, we feel that this is a strategically and financially compelling transaction for multiple reasons. It will strengthen our leadership position in enterprise storage and add a complementary franchise to our portfolio. It will be accretive to gross and operating margins, which will support our new enhanced operating margin target of 45%. In the process, it will also continue to further diversify our end market revenue exposure. Lastly, it is immediately accretive to our EPS and boosts our free cash flow. We expect this will allow us to support meaningful increases in future returns to shareholders.
This concludes our prepared remarks. Operator, please open up the call for any questions.
Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. In the interest of time, we do ask that you limit yourself to one question and one follow-up question. You may then press star one again to return to the queue for any further questions. Our first question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is now open.
Yes, thanks. Hock, just given the timing, it feels like the classic Broadcom integration is going really well. As you've done a number of deals, can you talk about the expected integration of Brocade, this business, if there's any differences from prior deals you've done, and just bandwidth as you manage this process?
Okay. Very good question. Very interesting question. Yes, to answer the first part, the integration of Broadcom, classic Broadcom, I should say, since we are now called Broadcom Limited. I'm not trying to confuse you guys, but the integration of Broadcom together with our classic Avago has been going extremely well since our deal closed February 1st this year. I would say it's gone faster and better than we had planned. At this point, the management team feels very comfortable where we sit today in terms of achieving both our business, strategic, and financial objectives related to acquisition and integration of Broadcom classic. Because of that, we feel equally comfortable that at this stage A very well thoughtful strategic acquisition of the Brocade Fibre Channel SAN business fits the bill perfectly.
As you know, acquisitions are opportunistic. It all relates to whether the target opportunity is actionable as part of it. It is, it's an opportunity, we see it as very compelling, which is why we're making this move at this time.
Got it. Just as a brief follow-up, you guys have been very good at divesting businesses as part of the acquisitions you've done. It sounds like you have confidence here. Any other thoughts on that in terms of the planned sale of the networking IP?
It's what I disclosed in my comments and what you plan to. Thank you for your kind words about divesting. We're also very good at integrating, in my head. In terms of divesting, well, yes. To be very direct, the IP networking business of Brocade is a business that is growing. It is growing much faster than the Fibre Channel SAN business, for sure. It's a very attractive asset. It is addressing a market, as you all know, which is a great opportunity these days for many of the OEMs we know very well, especially when it relates to campus networking with a wireless strategy tied to it. We fully understand, we fully support that, the thinking behind Brocade entering this particular area of the market very well with its more recent Ruckus acquisition.
As I said, though, it's not something that fits into our business model nor our strategy. I'm sure it'll fit very well with somebody else's strategy. We do know of potentially many buyers out there who would be extremely interested, because it has the scale, it has the right market position, and it can generate the profitability to address that market.
Understood. Thanks.
Thank you. Our next question comes from the line of Amit Daryanani with RBC Capital Markets. Your line is now open.
Yep, thanks. Congrats on the deal, guys. I guess a question follow-up from me too. Could you just touch on how do you get to this $900 million EBITDA target by fiscal 2018 from the deal? Because I think Brocade's core Fibre Channel SAN is, by their own estimates, runs at 67%-68% gross margins. Could you just help us understand how do you get to that EBITDA target? Is that higher gross margins, or there's going to be some severe OpEx curtailment?
A good question. I think as similar to other deals we've done in the past, these franchises, when they're separated and integrated onto our platform, are in fact a lot more profitable than you might realize in their own right. When we look at this deal in particular, the SAN franchise that Hock's been outlining actually carries gross margins comfortably north of what you described, and operating margins that are already running very close to 50% in their own right. When we think about this deal, we don't really think about the opportunities as much from synergies. It's going to be quite modest and sort of your typical synergies you would achieve from integrating two platforms together from a general administrative function perspective.
What we're really focused on is the divestiture and the opportunity to carve out the non-SAN businesses and the value that that will unlock both for us and the eventual buyer of the IP networking business.
That's helpful. I guess just as a follow-up, I think Brocade has some nice shiny headquarters 15, 20 minutes away from you guys, which is probably worth a lot of money. Is real estate divestiture something you would look at as well? Because I imagine you don't need that much property so close to where you guys are already located.
Good, insightful question. You seem up to speed on Brocade. The answer is, as part of most deals we've done in the past, I can certainly remember back to LSI and PLX, Emulex owned property, so certainly Broadcom does. This is no different. They do own a headquarters up on 237 in San Jose, and that's something we'll be evaluating as part of the deal, just like we've done on all past transactions.
Perfect. Thank you, guys, and congrats.
Thank you. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is now open.
Hi, guys. Thanks for taking my questions. I wanted to ask about your views of the growth potential of this market. You said you view it as relatively stable. Brocade themselves have suggested that they believe it's a declining asset. I think they've talked about the TAM declining at about 5% a year. Can you talk to us a little bit about how your views of the growth potential of their market actually differ from Brocade's? What's changed, if anything?
No, we don't have any views, obviously, far from it, from our view to differ from guys who have been running this for years. If you look at their business over the last five years, it's been flat, very flat in terms of their revenues. What we do see, why it's relatively flat in the past five years, very simple in the sense that you're right, there is approximately a 5%, 10% part of this market, this Fibre Channel SANs market, that especially when it relates to new deployments which may move over to lower cost, newer tech alternative, and newer technologies that are not so mission-critical, like iSCSI or something else, basically Ethernet IP. On the other side, that's the headwind, and in that you are correct. That's a slow, gradual potential unit decline because of gradual moves to alternative technology.
I would say it's a very gradual move because storage, as you know, has extremely risk-averse customers, especially mission-critical storage is extremely risk-averse storage customers, so any move is slow. On the other side, equally slowly, the bandwidth, capacity bandwidth especially, keeps expanding, even in storage, even in the slow mission-critical storage. Now, that improve, upgrade of speed, so to speak, of bandwidth of speed of those pipes in Fibre Channel switching, drives up ASP per port gradually as well. The offsetting effect of those two is what makes the business over the last five years, relatively very flat. What you postulate over the next five years, you're right. That doesn't mean the same thing will happen. Again, like in a lot of businesses, where customers are very careful and risk-averse, things change very slowly.
Our view of it is, yeah, we're now in the midst of 16G for Fibre Channel, used to be 8G five years ago, six years ago. Over the next five years, we'll probably migrate to 32G, five, six years. We see the same kind of phenomenon happening. There will be gradual migration, but there will also remain a very large core of users that need those kind of attributes that only the Fibre Channel protocol offers, as I said, which is a very secure and reliable storage network, which even today, iSCSI, Ethernet does not offer.
Got it. That's helpful. Thank you. If I could ask my quick follow-up. Brocade also has a services business, about half of which supports the SAN business. What will be going on with that business? Will you be divesting that as well, or will you be keeping the portion that supports the SAN business?
On their global services business, you're right. A big part of it relates to the hardware, the appliances they sell in Fibre Channel, and a small part of it relates to the hardware they sell on Ethernet IP networking as well. For the part related to Fibre Channel, of course, we'll keep it, because it's really part and parcel of the support, after sales service and support that goes with the appliance they would sell in Fibre Channel. That will go hand in hand with it, which is why we say that their annual revenue is roughly in the $1.4 billion category at this point. We include services as part of it.
Got it. Thank you, guys.
Thank you. Our next question comes from the line of John Pitzer with Credit Suisse. Your line is now open.
Yeah. Good morning, guys. Thanks for letting me ask a question. Hock, the accretion you talked about for Brocade sounds like it's just the Brocade revenue that exists today. I'm just curious, given the argument that you can make that maybe the switch is more critically important than the adapter, I'm curious about revenue synergies you might see with your existing portfolio, given Brocade's positioning within Fibre Channel. Then specifically, some of the Emulex assets that you picked up.
Interesting question, John, they're really unrelated. The Emulex business, the host bus adapter at the host site of the business, totally different from the switch. Really, we do not think of our business in that way. They're totally separate. They are required, frankly, to run on their own very independently. Then really, we do not see that synergies.
You don't expect revenue synergies in the core storage business today?
No, we don't.
That's helpful. Tom, just to follow up on the accretion, I'm just curious if you have a cost synergy target. I think you said in a question earlier that the core business that you're acquiring is now about a 50% op margin, and you think you can take that to 58%. I guess my question is, I'm trying to get an understanding of the profitability of the businesses you're thinking about divesting and what the implications might be for the price you're able to get for those assets.
Good question, John. Back to the main point. The SAN business has a standalone operating margin already that's very attractive. You have actually quite an interesting amount of profitability in the non-SAN business that we plan to divest when you exclude all the public company costs and the overhead related to Brocade. I think for a strategic buyer in particular, what you're going to see is quite a bit of synergies between the IP networking assets and whoever sees the most value in acquiring these product lines. Because at the end of the day, what you have, as Hock said, is over $1 billion of revenue at pretty attractive gross margins. When you look at just the direct spending to support those businesses, the operating profitability is actually pretty reasonably attractive. Of course, folks at Brocade have articulated pretty well.
They have a pretty interesting growth strategy that's still in its earlier days with that business. We see a lot of opportunity for strategic buyers in the area.
That's helpful. Thanks, guys. Congratulations.
Thank you. Our next question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is now open.
Thanks for taking my question. Hock, I wanted to ask the growth question in a different way as to how it relates to your overall company strategy. Over the last few years, you have managed to spot the right acquisitions. You have integrated them very well. They have often diluted your organic growth. The question is growth important for Broadcom, and how does that fit into your overall strategy for the company?
Okay. Very good question. Gives me a chance to spread my propaganda a bit more one more time. Growth is, of course, very important, what's also the most important thing from our viewpoint in pulling together a portfolio of very valuable franchise products, as we put it, is sustainability. Every product line in our portfolio gets measured and constantly assessed, obviously, before we acquire it, currently while we are running it, and ongoing into the future on its sustainability, that it continues to be very relevant to its marketplace, to its customers. The measure of sustainability and also being a franchise is, among other things, growth, coupled with profitability. How it's seen, how it's valued by its customer base in its application is what customers are willing to pay in terms of value for the product we deliver.
It's a combination of both, balancing growth with sustainable profitability. We have outlined before that of the 19 product franchises we have today, and with Fibre Channel SAN, that will make it the 20th. Not every product line grows 20% a year, though we do have product lines within the 19 which grow in excess of 20% on a compounded annual basis and see that going on. We have some product lines that grow in the low single digits and some that grow mid to high single digits. A combination of those growth rates is what we present to you as really our business model.
Our business model long term over the next five, 10 years, and we have articulated that before, is we see a business model translating to a financial model, a sustainable financial model where revenue grows at least 5% a year on a consolidated basis for the next five, 10 years, and profitability continues to expand. That's really where we drive ourselves towards.
Got it. Very helpful. As my follow-up, I think you mentioned leverage will stay under two times, which I assume does not include any proceeds from the IP networking divestiture. My question is, do you still retain the flexibility to boost the dividends, and how important is that on your priority list? Thank you.
You're right, Vivek, we're going to see net leverage obviously exiting this quarter. If you do the math, it's going to already be trending down. It'll tick back up pending when the deal closes. Obviously, we've targeted the second half of the year. I think the point is given the cash flow, both Broadcom as well as the additional cash flows that the Brocade acquisition will throw off, we're going to be comfortably below two times on a go-forward basis. When you think about the dividend, yes, I think we've been very clear that's a priority, and we look forward to reporting to you on that when we report Q4 results.
Thank you.
Thank you. Our next question comes from the line of Chris Caso with CLSA. Your line is now open.
Yes. Thank you. Good morning. I wonder if you could go into some of the plans regarding the financing of the deal. Obviously, I guess the magnitude of that financing depends upon the proceeds of the sale of some businesses. You can go into some of your thinking of what your plans are?
Yeah. I don't think we want to get into too much detail. Obviously, we have committed financing today. We have cash flows from both companies. We have excess cash. We have a lot of flexibility, frankly, on how we decide to finance. We've been primarily financing in the loan market, both in the institutional Term Loan B market as well as the A Loan market. That remains an option for us. Then, of course, we'll also be looking more and more at the bond market as we get into early calendar year 2017. We remain highly flexible in terms of how we think about funding the deal.
Okay. As a follow-up, I guess you've been keeping us busy with deals over the past few years. I guess the question is, after this, what would be the potential for something else? As you would need to get to that 2 times net leverage for you to entertain something else. I guess, Hock, you had provided some details about what you'd be looking for in the future and some of the criteria from a financial and strategic standpoint. What in terms of markets and I guess how far would Broadcom seek to go in terms of end markets and in looking at future acquisitions?
Let me take the first part. Tom will throw out the numbers for you and consistent what he has said so far. On our side, broadly, I've also said that we do not reach a point where we say we're done, because there's a lot of opportunities out there as we perceive in this marketplace. Our basic simple strategy is that we see out there in the marketplace, technology product businesses with very good technology, leading edge technology that offer very differentiated and high-value products in very sustainable end markets. If these opportunities meet this criteria and are available to be acquired, we will acquire them.
As Tom hinted, we've reached the scale on the businesses we have under us today, the 19 businesses, where, as I said, the profitability and cash flow generation have enabled us to be very flexible about addressing opportunities if and when they show up. It's very opportunistic too. The answer is it's not us on the prowl looking for specific companies and reaching out to those. It's when they're available and they meet the criteria I just outlined, tied to our business model, then we buy them. It's in some sense, the Brocade acquisition is opportunistic, been available. It's something we've known about for a while. It's not something that we woke up to a couple of months ago. We've known the value of the Fibre Channel SAN franchise. It's just a question of opportunity that leads us to get there.
What's very fortunate for us, as Tom indicated, is we're generating lots of cash flow, as Broadcom with the Broadcom Classic acquisition, we are exceeding our cash flow generation. We're bringing down the debt very fast. We have very good access to the debt markets today. It's really a good position for us to be in, and being able to step up and do this acquisition as this opportunity becomes actionable and available.
Yeah, I think the key is the criteria hasn't changed, and it's not going to change. As Hock says, we are participant on M&A, but we've got very disciplined approach on how we do this. We talked about that in the past. We look at cash on cash returns when we're trying to drive real value. We're not just trying to do modestly accretive transactions, and that's all based on buying franchises, as we've talked about many times, that deliver sustainable revenues and are very profitable. As long as we can find those opportunities at the right price points, then we think that's the best way to drive value.
In addition to that, we're going to continue to be able to increase our capital returns, in particular around the dividend, because of the scale that we are now afforded to have, given the number of deals we've done and all of our organic growth.
Thank you.
Thank you. Our next question comes from the line of William Stein with SunTrust Robinson Humphrey. Your line is now open.
Great. Thank you for taking my question. Hock, is there any shared IP between Brocade's two businesses that could introduce challenges or opportunities when you separate the IP networking business?
That's a very good question. We do not believe so. Obviously, you never know for certain until we dive into it and actually handle it. We don't think so. We think they are very separable. The Fibre Channel SAN business, and the IP networking business are extremely separable.
Thank you for that. One follow-up, if I can. Notwithstanding your introductory comments, in Brocade's 10-K, they cited a couple of competitors to the Fibre Channel SAN business. The first one was Cisco, which I think is a meaningful customer. Can you elaborate on perhaps how you mitigate or compartmentalize the competitive effect that that might have? Is there some misunderstanding that I have and maybe that competition doesn't really exist?
No, you're not. I think you did say it correctly. For us, see, I believe, not speaking for Cisco, but I believe this is a product within their broader portfolio of selling systems to end users like AT&T or Bank of America networking equipment. In many ways, no different from other OEMs. All we simply do, as I said, is we do not go to the AT&T or Bank of America to actually sell. Brocade don't actually go there to sell their Fibre Channel SAN by itself. It's really sold mostly through OEMs, be they Dell or EMC until recently, or HP, or VARs for that matter, who integrate the Fibre Channel switch with storage arrays, other internet switching arrays, even server data centers as a complete system that they offer and sell to the end user, the enterprises. Cisco does that, too.
This is a product that right now that Brocade is offering to the OEMs, or VARs, that fills up the entire array of integrated systems that they offer to those end users as Cisco does it. There's a lot of also intermingling, too, between the OEMs and some of their appliances that they used to offer. For instance, if Bank of America wants Cisco switch, but a NetApp storage array, someone would offer it, and NetApp would not think twice about offering it, as would HP, and all the other directions. There's a lot of collaboration going on as well as competition, and we do not see that as necessarily a critical issue that we would be perceived as trying to compete against an OEM customer. Far from it. We're enabling them is the best way to do it.
We would be more than happy to enable even Cisco if they would want to use somebody's Fibre Channel switch. We do that in Ethernet switching now, and I see that being able to continue in Fibre Channel switching.
Okay, that's helpful. Thank you.
Thank you. Our next question comes from the line of Harlan Sur with J.P. Morgan. Your line is now open.
Hi, good morning. Thanks for taking my question. Given Brocade's 70% share of the Fibre Channel switching market, combined with your already existing leadership in the Fibre Channel HBA market, where it's also basically a duopoly there, and you also supply the target silicon to a lot of the Fibre Channel SAN array guys. Many of the customers that buy your HBAs also buy the switches as well. Do you anticipate any regulatory issues given that you now own the entire Fibre Channel hardware ecosystem, issues of pricing, power, bundling, et cetera? Do you guys anticipate any regulatory concerns?
We see competitors across each of the areas we talk about. Host bus adapters goes on the surface. There are two strong players in this market. We are one of them, but there's another one that was QLogic, now Cavium, that is just as strong and operate, and answer to an early question, very independently. On our side, as you know, our business model is every one of our product franchises runs on its separate management team and runs on its own financial merit. They don't lean on each other, and they should not. They are sustainable. They are a franchise in their own right, not because of anything else. It's separate. Coming back to this SAN switching, there is Cisco, as I said, obviously a much larger company player in its own right.
It also has a whole suite of product line appliances which Brocade doesn't, except those which Brocade doesn't. There's also a whole host of alternative technologies, as I mentioned earlier, that are steadily nibbling and chipping on future storage requirements, especially out in the cloud. I don't think by any stretch of imagination we control any particular niche, any particular market here, particularly when in today's day of virtualization, software-defined storage, hyper-converge, you are having massive changes in the dynamics of the market where the area of so to speak markets should be defined in a broader context from that viewpoint. No, we do not see ourselves operate behaving that way, nor the market allowing us to behave that way.
Okay, great. Thanks for the insights there. Back on the question on growth, if we look at Brocade's switching business just over the last, I think, four quarters, it's been on sort of a low single digit year-over-year decline trajectory. I know you've talked about a flattish growth profile for the company going forward. You talked about the move from 16G to 32G, which is Still on the come, and you also mentioned the move to things like NVMe, SSD-based storage protocols, which need a faster fabric network, and that's probably going to be Fibre Channel as well. When do you anticipate a lot of these future trends that will start to kick in, and when can we start to think about sort of that flattish kind of figure on a go-forward basis?
The storage, coming back to Earth for me, the storage market is a very slow-moving market. For that reason, we love it, actually. It's very stable, very sticky, a good one to use. In other words, things don't change very fast because customers, at least the enterprises, are very risk-averse. Things move very slow. Product life cycle, you're probably correct, from going from 16 to 32, will probably take 6 years, gradually move over, with some push. New deployments also very carefully added slowly. One of the nice things about the market, this Fibre Channel is very focused on, is from our viewpoint, large enterprises with a need for almost on-premise storage capability, that ties to using, having very mission-critical data requirements, and the fact that this is a very secure, reliable network.
All that leads to the fact that things change very slowly in this market. While you're right, that I did point out things like all-flash arrays coming in, that pushes the need for bigger pipes, higher speeds to address all-flash arrays, with their latency requirements and IOPS requirements, performance requirements. I'll be honest and say things are still trundling along very much unchanged. We are asking ourselves whether it's going to grow a few points a year over the next 5 years, be flat, or drop a few points a year. Either, we factor in all the scenarios, and within all these scenarios, it doesn't impact our financials by any meaningful extent.
Yeah. Harlan, I think that speaks to the scale, right? That's why we sort of went back and reiterated our long-term model around mid-single-digit revenue growth. This deal, while contributing over $1 billion in revenue, is not going to change in any meaningful way how we think about the portfolio and how it grows over the mid-long term.
We're not buying this distance Fibre Channel SAN because we think it will grow dramatically over the next 5 years or 10 years. We foresee it to be in the range of what it was over the last 5 years, which is pretty stable. My definition of stability is it could be ±5%, and it could be flat for all I know, but it is in that region. The nice thing about this ecosystem is things don't change.
Yep. That's right. Okay, great. Thank you for the insights, and congratulations on the deal.
Thank you.
Thank you. Our next question comes from the line of Ambrish Srivastava with BMO. Your line is now open.
Hi, all answered. Thank you.
Our next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open.
Hi, guys. Hock, congratulations on another great deal here. As I look at the synergies from the deal, I know you guys have very accretive margins. I think you mentioned 77% margins on the Fibre Channel business. What OpEx savings are you seeing from the deal?
Well, it's the typical integration. I'll be direct about this. SG&A, especially the G&A side, and even SG&A, would be leveraging on the Broadcom platform, which has been, for us, very successful in driving. Our platform today for SG&A is down to about 3% to 3.5% of revenues as what it is, which will create by itself OpEx synergies. R&D, we don't see ourselves having to do anything, but we never do for any of our franchise products. We continue to invest, and if anything else, keep investing to ensure sustainability. The real synergies out of it all comes in two parts. One is focusing it as a separate, splitting and separating the Fibre Channel stand from IP networking business, and basically in its own right.
Two, sitting in on our platform on SG&A, on support functions that will enable it to leverage on a very lean and efficient platform. That's the synergies we'll get out of it.
Got it. Thanks.
Thank you. Our last question comes from the line of David Wong with Wells Fargo. Your line is now open.
Thank you very much. Hock, you talked about how your interest is not in getting into the system business, Brocade primarily sells to OEMs. Will Broadcom be tapping into all of Broadcom's current data storage business, or is there some revenue and profit from Brocade's storage that might go away because you're not doing any system stuff or you don't want to do system stuff?
Let me clarify that. Brocade's business, as many of our semiconductor businesses, we see Brocade's business as very similar in that respect, chip business is not that much different, is about selling intellectual property, frankly. Intellectual property, the intellectual property could take the form of architecture, the software, or the hardware, which in most cases for us, thinking chips. Many of our businesses, of our 19 businesses today, now this is the 20th, are purely only in hardware, and to some extent, architecture, but not much. Some other businesses, like our Ethernet switching business and routing business, has both architecture, software, as well as hardware in the form of chip. It's all about intellectual property embedded in it.
In our MegaRAID business, which is a storage server connectivity that we have talked about that acquired from LSI, it has both architecture and a lot of software, and the hardware is in the form of not just chip, but add-on boards, card, boards, which is like a subsystem. That also applies. In the case of Fibre Channel SAN for Brocade, it has grown up over time where it's, as I mentioned before, architectural, software, and also hardware, not in the form of chips, which it does the chips as well, the semiconductors that I mentioned, but it also puts an encasing box around it as an appliance. Frankly, it's delivering a solution, an IP, intellectual property solution in the form of not just software, but also a box.
That's how we see the Fibre Channel SAN business from Brocade to be, which whereas in our switching business, we basically deliver architecture, software, some levels of software, but also just the chip. We don't do the box. It's just a variation on the theme.
Great.
The core is about intellectual property embedded either in software or hardware or combination of both.
Okay, thanks.
Thank you. That concludes Broadcom's conference call for today. You may now disconnect.