M&A Announcement

Nov 2, 2016

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, and good morning, everyone. This morning, Broadcom announced we are acquiring Brocade for $5,500,000,000 in cash, plus $400,000,000 of net debt. In addition and in light of the Brocade acquisition announcement this morning, we also narrowed our revenue guidance to the high end of the range for the Q4 of fiscal 2016. We now expect non GAAP revenues to be between $4,100,000,000 4.1 $75,000,000,000 for the 4th fiscal quarter. Press releases on both topics and supplemental information on the transaction are available in the Investor Relations section of Broadcom's website atbroadcom.com. This conference call is being webcast live and a recording will be available via telephone playback and will also be archived in the Investors section 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 impact 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, and 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 fiber channel storage switching business. But 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, and we have no desire to compete with them. For that reason, we will be keeping Brocade's fiber channel sand switching business, which sells to many of the same OEM customers that our semiconductor business does. But 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 partner 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 it looks very similar to other successful enterprise storage deals we have done, including LSIGN, PLX and AMULEx. Brocade's fiber 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 business and business model. Brocade pioneered fiber 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 point $4,000,000,000 in annual sales and is highly profitable. Now it is true that Brocade's fiber channel products are sold in the form of an appliance, but the value of this appliance, its core IP, intellectual property that is, 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 fiber 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. So this isn't really uncharted territory for us. Now before I get into more details on this core Fibershell Sand 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. And 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 sales process for these IP networking assets immediately. Frankly, we see we do see a lot of value in it for the eventual buyer. We sell ICs in the great circuit that is to Brocade IP networking business And we do know they have a lot of capability and differentiation. This business has meaningful scale with over $1,000,000,000 in annual sales, a broad set of customer 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, 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 Fiber Channel Switching. As I said, this is a very sustainable franchise with phenomenal profitability. But fiber channel switching is also highly strategic and complementary for Broadcom. Demand for storage continues to grow rapidly and this acquisition fills a key area within our enterprise storage product line that our current portfolio does not address today. Having said that, as you may as many of you out there know that the knock on fiber 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. And 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. However, 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 SAN are a key solution to meet this need. And over 2 thirds of SANS today use fiber channel as protocol of choice, because it is designed to provide a very secure, proven, reliable and dedicated closed loop system with 0 packet loss, which no other protocol can easily replicate. In addition, the key function of Hyper Channel SANS is to enable shared access to storage and server from multiple servers. This is accomplished using FibroChannel switches, which is the Brocade business we are retaining following the acquisition. The FibroChannel SAND market is relatively large or at an estimated $10,000,000,000 plus in annual revenues. All of these are switches, which occupy a niche here at about $2,000,000,000 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 fiber channel SAN that are constantly being upgraded. The introduction of all flash arrays requiring high performance in off IOPS latency not easily addressed by Ethernet and iSCSI solutions will we believe will drive additional upgrade in SAN. So we do see this fiber 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 deliver 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 Q4 of our fiscal year 2016, we are positioned to generate more than $16,000,000,000 of annual revenue at over 40% non GAAP operating margins. Once you take into account the divestiture of the Brocade IP networking business and the Fibershannel 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 $900,000,000 of pro form a 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 form a operating margins of the Brocade fiber channel switch business once integrated will well exceed 50%. We are comfortable increasing our long term operating margin target from 40% to 45%. We believe we can achieve this higher operating margin profile while continuing to grow top line at an average 5% per year. Now 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 $5,500,000,000 equity purchase price plus net debt of approximately $400,000,000 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 form a 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 900,000,000 dollars of pro form a non GAAP EBITDA in fiscal year 2018. Given the purchase price, we think the deal provides for attractive and immediate non GAAP EPS accretion and more importantly and 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 transaction expected in the second half of fiscal twenty seventeen 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. And lastly, it is immediately accretive to our EPS and boost 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. And 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, I mean, it feels like the Broadcom or Classic Broadcom integration is going really well. But 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 kind of 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 still we are now called Broadcom Limited, I'm trying to confuse these guys. But the integration of Broadcom together with our classic embargo has been going extremely well since our deal closed February 1 this year. I would say it's gone faster and better than we had planned. So at this point, the management team feels very comfortable where we sit today in terms of achieving our both our business, strategic and financial related to acquisition and integration of Broadcom Classic. And because of that, we feel equally comfortable that at this stage, a very well thoughtful strategic acquisition of the Brocade Fibre Channel SEMS business fits the bill perfectly. As you know, acquisitions are opportunistic and all relates to whether the target opportunity is actionable as part of it. It is an opportunity and we see it as very compelling, which is why we're making this move at this time. Got it. And then just as a brief follow-up, you guys have been very good at kind of divesting businesses as part of the acquisitions you've done and it sounds like you have confidence here. So any other thoughts on that in terms of the planned sale of the networking IT? It's what I disclosed in my comments and what you plan to and thank you for your kind words about divesting. We're also very good at integrating, I might add. And 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 fiber channel sand business for sure. It is a very attractive asset, very, very tight. 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, very well with its more recent Ruckus acquisition. As I said though, it's not something that fit into our business model nor our strategy, And but I'm sure you'll fit very well with somebody else strategy and we do know how potentially many many buyers out there who would be extremely interested because it is it has the scale, it has the right market position and it can generate the profitability to address that market. Understood. Thanks. Thank you. And our next question comes from the line of Amit Daryanani with RBC Capital Markets. Your line is now open. Thanks. Congrats on the deal guys. I guess a question follow-up for me too. Could you just touch on how do you get to this $900,000,000 EBITDA target by fiscal 2018 from the deal? Because I think Brocade's core FibroGen sand 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? And is that higher gross margins? Or there's going to be some severe OpEx curtailment? 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. And so when we look at this deal in particular, the sand franchise that Hoch'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. So 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 2 platforms together from a general administrative function perspective. But what we're really focused on is the divestiture and the opportunity to carve out the non sand businesses and the value that will unlock both for us and the eventual buyer of the IP networking business. That's helpful. And 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 divestitures 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, Amuletic's own 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. And 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. So you said you view it as relatively stable. Brocade themselves has suggested that they believe it's a declining asset. I think they've talked about the TAM declining about 5% a year. So can you talk to us a little bit about how your views of the growth potential of their market actually differ from Brocade? 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. But if you look at their business over the last 5 years, it's been flat, very flat in terms of their revenues. And what we do see, why it's relatively flat in the past 5 years, very simple in the sense that you're right, there is approximately 5%, 10% part of this market, this fiber channel SENSE market that especially when it relates to new deployments, which may move over to lower cost, newer tech alternatives and newer technologies that are not so mission critical like iSCSI or something else and basically Ethernet IP. On the other side, that's the headwind. And in that, you're correct. So that's a unit slow gradual potential unit decline because of gradual moves to alternative technology. But I would say it's a very gradual move because this storage, as you know, has extremely risk adverse customers, especially mission critical storage is extremely risk adverse storage customer. So any move is slow. On the other side, equally slowly, the bandwidth, capacity bandwidth especially keeps expanding even in storage, even in this slow mission critical storage now. And that improve upgrade of speed, so to speak, bandwidth or speed of those pipes in fiber channel switching, drives up ASP per port gradually as well. And the offsetting effect of those 2 is what makes the business over the last 5 years relatively very flat. When you postulate over the next 5 years, you're right. That doesn't mean the same thing will happen. But again, as this business like in a lot of businesses, which are where customers are very careful and risk adverse, things change very slowly very, very slowly. And our view of it is, yes, we're now in the midst of 16 gs for fiber channel, used to be 8 gs 5 years ago, 6 years ago. And over the next years, we'll probably migrate to 32 gs 5, 6 years. And so we see the same kind of phenomenon happening. But there will be gradual migration, but there will also remain a very large cost of users that need those kind of attributes that only the fiber 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 can ask my quick follow-up, Brocade also has a services business about half of which supports the sand 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 same business? On the Global Services business, you're right, a big part of it relates to the hardware, they the appliances they sell in fiber channel and a small part of it relates to the hardware they sell on Ethernet IP networking as well. For the part related to fiber channel, of course, we'll keep it because it's really part and parcel of the support sales after sales service and support that goes with the appliance they would sell in fiber channel. So that will go hand in hand with it, which is why we say that their annual revenue is roughly in the $1,400,000,000 category at this point. We include service first as part of it. Got it. Got it. Thank you, guys. Thank you. And our next question comes from the line of John Pitzer with Credit Suisse. Your line is now open. Good morning, guys. Thanks for letting me ask the question. Hock, the accretion you talked about for Brocade sounds like it's just the Brocade revenue that exists today. I'm just kind of curious, given the argument you can make that maybe the switch is more critically important than the adapter. I'm kind of curious about revenue synergies you might see with your existing portfolio given Brocade's sort of positioning within fiber channels and specifically some of the Emulex assets that you picked up? Interesting question, John, and they are really unrelated. The Emulex business, the whole spas adapter at the whole site of the business totally different from the switch. And really, we do not think of our business in that way. They're totally separate. They are required, frankly, to run very on their own very independently. And then clearly we do not see that synergies. So you don't expect revenue synergies in the core storage business today? No, we don't. That's helpful. And then Tom, just to follow-up on the accretion. I'm just kind of 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%. And 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? Yes, good question, John. I mean back to the main point. The sand business has a standalone operating margin already that's very attractive. And then you have actually quite an interesting amount of profitability in the non sand 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 $1,000,000,000 of revenue at pretty attractive gross margins. And when you look at just the direct spending to support those businesses, the operating profitability is actually pretty reasonably attractive. And of course, folks at Brocade have articulated pretty well. I mean, they have a pretty interesting growth strategy that's still in its earlier days with that business. And so we see a lot of opportunity for strategic buyers in the area. That's helpful. Thanks guys and congratulations. Thank you. And 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, but they have often diluted your organic growth. So the question is, is growth important for Broadcom? And how does that fit into your overall strategy for the company? Okay. Very, very good question. Gives me a chance to spread my propaganda a bit more one more time. Growth is of course very important, but what's also the most important thing from our viewpoint in pulling together a portfolio of very, 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 relevant very relevant to its marketplace, to its customers. And the measure of sustainability and also being a franchise is among other things growth coupled with profitability. How it's been, how it's valued by its customer base, by its app in its application is what customers are willing to pay in terms of value for the products we deliver. So it's a combination of both, balancing growth with sustainable profitability. And we have outlined before that of the 19 product franchises we have today and with Fibre Channel SENSE that will make it the 20th, not every product line grows 20% a year, though we do have product lines within 2019, which grow in excess of 20% for the last on a compounded annual basis and see that going on. We do we have some product lines that grow in the low single digit and some that grows mid to high single digit. And a combination of that of those growth rates is what we present to you as really our business model. And our business model long term over the next 5, 10 years, and we have articulated that before is we see a business model, obviously 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 5, 10 years and profitability continue to expand. That's really where we drive ourselves to it. Got it. Very helpful. And as my follow-up, I think you mentioned leverage will stay under 2 times, which I assume does not include any proceeds from the IP networking divestiture. And 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, Becky. To see net leverage, obviously exiting this quarter. If you do, half is going to already be trending down. It will tick back up pending when the deal closes, those targets in the second half of the year. But I think the point is it's going to given the cash flow of both Broadcom as well as additional cash flows that the Brocade acquisition will throw off, we're going to be comfortably below 2 times on a go forward basis. And 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. And 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, but you can go into some of your thinking of what your plans are? Yes. I don't want to get into too much detail. Obviously, we have committed financing today. We have cash flows from both companies. We have excess cash and we have a lot of flexibility frankly on how we decide to finance. We've been primarily financing in the loan market, both in institutional term loan B market as well as the A loan market. That remains an option for us. And then of course, we'll also be looking more and more at the bond market as we get into early calendar year '17. So 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 you need to get to that 2x net leverage for you to entertain something else? And 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 looking at future acquisitions? Let me take the first part. Tom will take the numbers for you. We'll throw out the numbers for you and consistent with what he has said so far. But on our side broadly, I've also said there's really 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. And if they meet these criteria and these opportunities meet these criteria and are available to be acquired, we will acquire them. And as Tom hinted, we've reached the scale on the businesses we have under us today, the 19 businesses, where as I said, the cash flow generation, the profitability and cash flow generation have enabled us to be very, very flexible about addressing opportunities if and when they show up. So it's very opportunistic too. The answer is, it's not us on the prowl looking for specific companies and reaching out to those is when they are available and they meet the criteria I just outlined tied to our business model that we buy them. And it's in some sense, the Brocade acquisition is opportunistic being available. It's something we've known about for a while. It's not something that we woke up today a couple of months ago. We've known the value of the fiber channel sand franchise. It's just a question of opportunity that leads us to get there. And what's very fortunate for us, as Tom indicated, is we're generating lots of cash flow as Broadcom made that after with the Broadcom Classic acquisition, we are exceeding our cash flow generation, but bringing down the debt very fast. We have very good access to the debt markets today. So it's really a good position for us to be in and being able to step up into this acquisition as this opportunity becomes actionable and available. Yes. I mean, I think the key is the criteria hasn't changed and it's not going to change. As Hock says, we are a participant on M and 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. And as long as we can find those opportunities at the right price points, then we think that's the best way to drive value. And in addition to that, we're going to continue to be able to increase our capital returns, in particular around dividend because of the scale that we are now afforded to have, given the number of deals we've done in all of our organic growth. Thank you. Thank you. And our next question comes from the line of William Stein with SunTrust Bank. Your line is now open. Great. Thank you for taking my question. Hock, is there any shared IP between Brocade's 2 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, but we don't think so. We don't think so. We think they are very separable. The FibroGen SAND 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 ks, they cited a couple of competitors to the Fibre Channel Sand Business and 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? Or 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. And for us, I believe, not speaking from Cisco, but I believe this is a product within a broader portfolio within your broader portfolio of selling systems to end users like AT and T or Bank of America, networking equipment. And in many ways, no different from other OEMs. And all we simply do, as I said, is we do not go to the AT and T or Bank of America to actually sell or Brocade don't actually go there to sell their fiber channel sand by itself. It's really sold mostly through OEMs, be they Dell or EMC until recently or HP, who basically integrate or VAS for that matter, who integrate their client, the fiber channel switch with storage arrays, other Ethernet switching arrays, given servers, data centers as a complete system that they offer and sell to the end user, the enterprises. Cisco does that too. So this is a product that right now that Brocade is offering to some of the OEMs that fills up our VAS, that fills up the entire array of integrated systems when they that they offer to those end users as Cisco does it. And there's a lot of also intermingling too between their 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 then I don't think twice about offering it as would HP, not the other direction. So there's a lot of collaboration going on as well as competition. And we do not see that as necessary a critical issue that we will be perceived as trying to compete against an OEM customer. Far from it, we are enabling is the best way to do it. And we have been more than happy to enable, even Cisco, if they want to use somebody's fiber channel switch. We do that in the Ethernet switching now and I see that being able to continue in fiber channel switching. Okay. That's helpful. Thank you. Thank you. And our next question comes from the line of Harlan Sur with JPMorgan. Your line is now open. Hi, good morning. Thanks for taking my questions. So given Vokaid's 70% share of the fiber channel switching market combined with your already existing leadership in the fiber channel HBA market, where it's also basically a duopoly there. And you also supply the target silicon to a lot of the fiber channel San Array guys. Many of the customers that buy your HVAs also buy the switches as well. So do you anticipate any regulatory issues given that you now own the entire Fibre Channel hardware ecosystem, issues of pricing power, bundling, etcetera? Do you guys anticipate any regulatory concerns? We see competitors across each of the areas we talk about. Postpart adapters goes on the surface. And that's we there are 2 very strong 2 strong players in this market. We are one of them, but there's another one who is under that was QLogic, now Cavium that is just as strong and operate and to an answer to an early question very, very independently. On our side, as you know, our business model is every one of our product franchises up 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. And so it's separate. It is just as coming back to this in fan switching, there is Cisco, as I said, a very obviously a much larger company player in its own right. It also has whole suite of product line appliances, which Brocade doesn't, except the digital Brocade doesn't. And there's also a whole host of alternative technologies, as I mentioned earlier, that are stately nibbling and chipping on future storage requirements, especially out in the cloud. So I don't think by any stretch of imagination, we control any particular niche, any particular market here, particularly when in the days today's day of virtualization, software defined storage, hyperconverged, 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 their viewpoint. So 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. And then back on the question on growth, if you look at Brocade switching business just over the last, I think, 4 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 16 to 32 gig, 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 fiber channel as well. So 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 CAGR on a go forward basis? The storage coming back to earth, for me, the storage market is a very slow moving market. We begin for that reason, we love it actually. It's very stable, very sticky, good one to use. In other words, things don't change very fast because customers, at least the enterprise, are very, very risk adverse. So things move very slow. Product life cycle, you're probably correct, from going from 16 to 32 or probably takes 6 years, gradually move over with some push. And it's but then new deployments also very carefully added slowly. And one of the nice things about the market, this fiber channel is very focused on is from our viewpoint, large enterprises with a need for almost on premise storage capability and that ties to using having very mission critical data requirements and the fact that this is a very secure, reliable network. And all that leads to a fact that things change very slowly in this market. So 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 high ops requirements performance requirements. I'll be honest and say things are still trundled along very much unchanged. So 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 these scenarios and within all these scenarios it doesn't impact our financials by any meaningful extent. Yes. Harlan, I think that speaks to the scale, right? I mean, that's why we sort of went back and reiterated our long term model around mid single digit revenue growth. I mean this deal, while contributing over $1,000,000,000 of revenue, is not going to change in any meaningful way how we think about the portfolio and how it grows over the mid and long term. We're not buying this business fiber channel sense because we think it will grow dramatically over the next 5 years or 10 years. We think we foresee to be in the range of what it was over the last 5 years, which is pretty stable. And my definition of stability is it could be plusminus5% and it could be flat for all I know, but it is in that region. And the nice thing about this ecosystem is things don't change. That's right. Okay, great. Thank you for the insights and congratulations on the deal. Thank you. Thank you. And our next question comes from the line of Ambrish Srivastava with BMO. Your line is now open. Hi, all answered. Thank you. And our next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open. Hi, guys. Congratulations on other great deal here. As you look at the synergies from the deal, I know you guys have very accretive margins. I think you mentioned 77% margins on the fiber channel business. What savings what OpEx savings are you seeing from the deal? Well, it's the typical integration. I will be direct about this. SG and A, especially the G and A side and even SG and A would be leveraging on the Broadcom platform, which has been very for us very successful in driving. And our platform today for SG and A is down to about 3% to 3.5% of revenues, as what it is, which will create by itself OpEx synergies. R and D, we don't see ourselves having to do anything, but we never do for any of our franchise products. We'll continue to invest and if anything else keep investing to ensure sustainability. So the rail synergies out of it all comes in 2 parts. One is focusing it as a separate as basically splitting and separating the fiber channel SAND from IP networking business and basically in its own right and 2, sitting in on our platform on SG and A on supports functions that will enable it to leverage on a very lean and efficient platform. And that's the synergies we'll get out there. Got it. Thanks. Thank you. And 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 and Brocade primarily sells to OEMs. So 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 bulkhead business as very similar in that respect and chip business is not that much different, is about selling intellectual property frankly. Intellectual property in the form it could be take the in the intellectual property could take the form of architecture, the software or the hardware, which in most cases for us are thinking chips. Many of our businesses, of our 19 businesses today now into 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 switching has both architecture, software as well as hardware in the form of chips, but it's all about intellectual property embedded in it. And in our mega rate business, which is storage server connectivity that we have talked about that I 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, which is like a subsystem. So that also applies. In the case of fiber channel SAN for Brocade, it has grown up over time where is, as I mentioned before, architectural software and also hardware, not in the form of chips, which is which it does the chips as well as the semiconductors that I mentioned, but it also puts an encasing box around it as an appliance. So frankly, it's delivering a solution, an IP intellectual property solution in the form of not just software, but also a box. And that's how we see the fiber channel send business from Brocade to be, which whereas in our switching business, we basically deliver architecture software, several some levels of software, and also the chip just the chip, we don't do the box. So it's just a variation on the theme. But the call 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.