Advanced Micro Devices Inc (AMD) — Q3 2019 Earnings Call Transcript

Thank you, Louise, and good afternoon, everyone. With me are Victor Peng, CEO; and Lorenzo Flores, CFO. We will provide a financial and business review of the December quarter and the business outlook for the March quarter. Let me remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. In addition to GAAP financial measures, we will be disclosing certain supplemental non-GAAP financial measures used by management to evaluate the company's financial results. We provide these measures to facilitate period-to-period comparability for purposes of evaluating continuing business operations by excluding the effects of non-recurring and unusual items, such as amortization of intangibles and certain one-time items related to acquisitions. We believe that sharing these non-GAAP measures will be helpful for analysts and investors in analyzing the company's ongoing core business. A reconciliation of non-GAAP financial information to the closest GAAP measure is included in our earnings release and has been posted on our Investor Relations website. This conference call is open to all and is being webcast live. And it can be accessed from our Xilinx Investor Relations website. Let me now turn the call over to Victor.

Thanks, Matt, and good afternoon, everyone. I'm very excited to report that executing on our strategy has continued to deliver excellent results in FY 2019, with substantial and broad strength in our business in Q3. Revenue was $800 million, up 34% year-on-year, driving non-GAAP operating income up over 60% year-on-year, and non-GAAP EPS up over 40% year-on-year to $0.92 per share. We had growth in each of our primary end markets led by strength in the Wireless Communications, Aerospace and Defense, Test Measurement and Emulation markets. We expect to surpass a record $3 billion of revenue for fiscal 2019 with the Q4 guidance that Lorenzo will cover in his remarks. Now let me share some Q3 highlights. Communication was very strong in the third quarter, driven by the Wireless market where we are seeing growth from the very early production 5G and pre-5G deployments, as well as some LTE upgrades. The strong growth was primarily driven by 5G deployments in South Korea and a very early start of the ramp of 5G deployments in China. Aerospace and Defense revenue was also sharply increased as we expected in the third quarter, driven by broad strength across multiple defense and stage programs. Test Measurement and Emulation revenue was also strong across both the test and measurement, as well as the emulation and prototyping subsegments. If you look at our core Data Center revenue and what I mean by core is not including cryptocurrency, that grew double digits within the quarter and on a year-on-year basis nearly doubled. However, cryptocurrency was off, so there was some offset from that perspective. Now that said, we continue to build a very strong momentum with hyperscalers, where we are expanding our ecosystem for a broad adoption of our products and applications across the compute, storage and networking segments. We had design wins and applications including big data analytics acceleration, machine learning inference, video transcoding, network acceleration, as well as in storage controllers. We have now won designs for SmartNIC applications with multiple hyperscalers and in the FPGA as a service area, we have additional engagements beyond our previously announced deployments with Amazon, Alibaba and Huawei. We also expanded our Alveo board family that we had just launched this past October at our developers forum. We recently added the Alveo U280 product for the previously announced U200 and U250. U280 has a large capacity Virtex Ultrascale Plus FPGA together with high bandwidth memory. These are the 3D memory specs for the ultimate in high performance acceleration of applications such as big data analytics, as well as data mining. In addition, Dell EMC has certified and is now selling the Alveo U200 as an add-on accelerator card for multiple versions of their PowerEdge servers. With respect to our transformation to a platform company, our 28-nanometer and 16-nanometer Zynq SoC products continue to grow very robustly. Zynq sales grew approximately 80% year-on-year led by our 16-nanometer MPSoC products and there was a strength that we saw across a very broad set of applications and communications, automotive, particularly ADAS, as well as industrial end markets. Zynq MPSoC revenues grew over 3x from the year ago quarter. And there are SoC design win momentum also continues to grow. We are now engaged with over 300 unique customers in multiple end markets, which is more than triple the number we had just in the last quarter. We are also seeing increased activity in design wins of our MPSoC and autonomous driving and other forms of automotive applications. These revenues will drive revenue growth in more of the mid- to long-term. So just recently Daimler unveiled at CES their MBUX Interior Assistant in the Mercedes-Benz GLE model and this is powered by one of our MPSoCs that is running a number of image recognitions with multiple neural networks. ZF has also announced a strategic cooperation with us at CES, where again our technology will power ZF's very advanced AI-based automotive control unit for autonomous vehicles. And finally, I'm really pleased to report that we taped out our first 7-nanometer Versal product, the industry’s first ACAP just as we planned. As you may recall, ACAP is a new product category and that stands for Adaptive Compute Acceleration Platform. ACAPs are adaptable, very scalable, they are heterogeneous compute platforms that are both hardware, as well as software programmable and are far more powerful than FPGAs. So we will be sampling our 7-nanometer Versal products to customers in the second half of this calendar year. I'm extremely proud of our team for their execution both on the business results and on the major engineering programs, as we head into the fourth quarter of what's been a truly exceptional fiscal year. So thank you and let me turn it over to Lorenzo now.

Yeah. Thank you, Victor. As Victor said, we are very pleased that our focus and execution are delivering outstanding results. Xilinx achieved a significant milestone this quarter, attaining $800 million in revenue for the first time. We exceeded our guidance growing 7% sequentially and 34% year-over-year. This performance is again due to the strength of our Advanced Products, which grew 9% sequentially and 51% year-over-year. All four of our primary end markets showed growth in the quarter. Data Center and TME were strengthened both businesses, as Victor said, excluding a decline in cryptocurrency. Communications increased as significant growth in wireless easily offset an expected decline in wired. Industrial and A&D also grew significantly, as A&D increased more than expected and Industrial was slightly weaker than expected. Automotive, Broadcast and Consumer increased, driven by growth in Broadcast, offsetting an expected decline in Consumer, while the Auto business was flat. Channel revenue was approximately $14 million in line with the expectations. Gross margin was 69% in line with guidance. Operating expense with GAAP OpEx at $294 million and non-GAAP at $289 million was in line with our guidance. And with revenue higher than expected, and gross margin and operating expense in line with expectations, our operating income was higher than expected. GAAP operating income was $258 million or 32.2% and non-GAAP operating income was $263 million or 32.9%. Our GAAP tax rate was 7% for the quarter and the non-GAAP rate was 10%. The primary difference from our guidance and between the GAAP and non-GAAP rate is related to tax reform. Earnings again set a record for the company. GAAP net income was $239 million, which yielded diluted earnings per share of $0.93. Non-GAAP net income was $237 million, which yielded non-GAAP diluted earnings per share of $0.92. Share count increased slightly to just over 256 million shares. The key points on the balance sheet and cash flow. Gross cash was up to $3.5 billion with $1.7 billion in net debt. Note that in fiscal Q4, we have $500 million of debt instruments coming due. Accounts receivable declined to $359 million and is at 41 days. Inventory increased $40 million to $283 million, as we built inventory to support future demand, particularly in Wireless Communication. In sum, we generated $314 million in operating cash flow. This quarter, we returned $92 million to shareholders, almost entirely by dividend. We repurchased $1 million worth of shares this quarter, bringing our total for the year to $162 million, 2.4 million shares at an average price of $66.30. We continue to apply our capital allocation strategy as discussed at our Analyst Day. Now on to guidance for the final quarter of fiscal year 2019. We expect continued revenue growth with sales to be between $815 million and $835 million. With regards to primary end markets, we are forecasting growth in Communications and Data Center and TME, with particular strength in Wireless and TME. After a very strong December quarter, we are expecting Industrial and A&D to decline. We are also expecting a decline across Automotive, Broadcast and Consumer. Channel revenues are expected to be between $0 million and $10 million. Our inventory management processes have taken us close to target levels of inventory, given distributor revenue levels. Gross margin is expected to be 68.5%. GAAP operating expense is expected to grow to $310 million, driven by increased mask and wafer expense and employee compensation. Non-GAAP operating expense will be approximately $305 million. GAAP other income is expected to be approximately $4 million. Our tax rate is expected to be between 6% and 8%, and we expect share count to slightly increase. As I close, I want to highlight our financial performance for the fiscal year-to-date as this longer view clearly demonstrates the consistent strength of our business. Revenue is up 22% compared to the first three quarters of last year. All four of our reported end markets show double-digit growth. Advanced Products are up approximately 40%. Our revenue growth has allowed us to continue to invest in our business while delivering outstanding profitability. Operating income dollars are up greater than 35%. GAAP net income and EPS have more than doubled and non-GAAP net income and EPS are up 30%. Finally, operating cash flow exceeded $800 million, an increase of nearly 40% over the first three quarters of fiscal year 2018. Let me now turn the call back to the operator for Q&A.

Thanks for taking my question and congratulations on the strong growth and execution. It's good to see at least one semiconductor company outperforming. So, Victor, I'm curious, as you are starting to get into these 5G deployments, what is the range of content you are seeing in these deployments and how would you contrast it with 4G? And as part of that, how do you address some investor concern about when there could be competition from ASICs or merchant silicon, right, which we saw back in the 3G and 4G days? Thank you.

In previous calls, we've mentioned that we are involved in nearly all the pre-5G proof-of-concepts and demonstrations, covering both radio and baseband. As we start to observe actual deployments in South Korea and the early stages in China, we have established content in both radio, where we've historically excelled, and baseband. Currently, I would say we have a greater content share in South Korea. Additionally, 5G is set to be a much larger deployment compared to previous generations. We have also made significant innovations with our system-on-chips, particularly with high-performance analog integrated into our RFSoCs. Given our capabilities, we anticipate a greater persistence in the market than in the past. However, ASICs will eventually enter the scene. In this first generation of deployment, it is uncertain whether we will retain the baseband component, but there will be further opportunities in the second and third generations. On the radio side, we are performing very strongly and, particularly with our 7-nanometer Versal product, we believe we have a solid chance of sustaining a presence in baseband as well.

Thank you.

Hi. This is Vinay calling in for Joe. Congrats on a very strong quarter. I wanted to follow up on your comments on Zynq and MPSoC, right? Growth there remains very strong. Like how much of that is just TAM expansion due to new applications versus share gains that you're seeing? And like how much visibility do you have for that business like how should we think about growth over the next couple of years there?

Yeah. I think it's attributed to both those and I would add one other. But let's first cover those two. I mean, certainly, we are winning in a lot of traditional applications and use cases that we have in the past and by the strength of both of our execution and the innovative architecture we're winning more. But there are, again, in many cases what we've displaced or the real competition we've had is more with ASSPs and other nontraditional competitors. So there's definitely TAM expansion. The third element I believe is everybody is moving towards more standard platforms. The whole intelligent connected world is really happening. People have data strategies, digital strategies and so they can't have custom kind of incompatible kind of solutions and this cuts across multiple end markets, right? So we think in general we see a move towards more standardized platforms and the Zynq first and second generation are just absolutely ideal for that kind of architecture.

Got it. That's very helpful. I wanted to follow up on your Aerospace and Defense business. Traditionally there's been a little lumpy, but you're seeing real growth on new platforms and like how is the backlog there, and like anything you can share about your visibility for that business going forward?

I'll make a comment and maybe Lorenzo can speak to the backlog. Generally, our overall Aerospace and Defense sector is definitely on track for a record annual performance. You may notice shifts from quarter to quarter, as it's cyclical, influenced by the timing of those programs. There are periods when purchasing increases and others when they are more focused on digesting past purchases. From a trend perspective, we are encouraged by a relative and more rapid adoption of advanced technologies in that segment than we have seen previously. Although it still takes a considerable amount of time to move from design win to production, we are noticing some change in that area. Now, regarding the backlog, I'll let Lorenzo elaborate.

Yeah. No. I guess, I would say, simply that we don't breakout backlog by end market for disclosure. Our backlog in general for this quarter is quite strong. But as Victor pointed out, in A&D business or actually as you pointed out in your question, A&D business is lumpy. But if you look overall the trend year-on-year is significant growth based again on the expansion of the types of designs we're in, as well as the coming to market with the designs that we won in the past. So I think both things set up the trend longer term with some broad strength.

Got it. Very helpful. Congrats again.

Yeah. Good afternoon. Thank you for taking my question. I guess, first question is on the gross margin side of things. Can you talk about, I guess, particularly on the comp side, what you're doing there, if at all, to drive margins higher, particularly with next-generation products? And how we should think about the trajectory as we move forward? And if I could just throw in the second question here. How are you thinking about tax rates into fiscal 2020? Thanks.

Okay. We'll try to cover everything. I'll address the first part and Lorenzo will handle the second. Regarding gross margin, you're correct that a substantial part of our growth is linked to actual production deployments, especially with 5G. This, along with various product mixes, does lead to a slight reduction in gross margin. To drive gross margin, we implement several strategies, not only for wireless but across the business. This includes a variety of cost-saving measures and maintaining disciplined operations. However, the most significant factor is our innovation, as seen with RFSoCs. We are delivering much greater value to our customers, resulting in mutual benefits. At the system level, we are effectively reducing costs, power consumption, and even weight. By innovating and offering unique capabilities, such as those found in RFSoCs, we can enhance our value proposition. There isn't a single solution we rely on; instead, we consistently focus on multiple strategies. Innovation is the primary driver, especially as we started with integrating SoCs like the initial Zynq and continue on that innovative path.

So, I think, Victor covered the gross margin piece quite comprehensively. So I'll just get on the tax rate. I will say we haven't provided specific guidance for FY 2020 on the tax rate. But if you look at the general expectations for tax in FY 2019, we were thinking we'd be in the 10% to 12% range. The quarter-to-quarter lumpiness has come from as the tax reform regulations have solidified, there are different pieces that we have to incorporate into the quarterly tax rate that we are providing for. But over the long-term, I would expect to get back to that more normalized rate. But again I have to take the caveat, we haven't given specific FY 2020 guidance yet, C.J. Hope that helps.

Hi. Thank you very much. I had a question on China, Victor, and of course, all the concerns could change in a tweet. But how are you thinking about risk mitigation? You have a pretty meaningful exposure and I thought I heard you say that some of the 5G strength was coming from China as well. So just help us understand or give us your perspective on how you're thinking about it? And then my quick question follow-up is could you talk a little bit about the growth and the traction that you talked about that Alveo, if I'm pronouncing it correctly was the second half phenomena. So is that contributing to the margins being slightly below and just talk about the ramp at least? Thank you.

The situation with trading in China continues to be closely monitored. It is challenging to make predictions, so we are considering appropriate actions for various scenarios while being cautious not to act impulsively. Currently, the existing tariffs do affect us, but as long as things remain unchanged, we will continue our operations. We have thought through different potential scenarios, but for now, it's largely speculative. Regarding Alveo, we expect this fiscal year to yield modest revenue, with more significant contributions anticipated next fiscal year, particularly in the second half, since we launched it in October and began shipping in November. Initial interest has been strong, and we are pleased with the current status. We've engaged with Dell and are in discussions with other OEMs and partners, building out our infrastructure and participating in several proofs of concept. We anticipate a greater transition to production next fiscal year and are satisfied with the current progress, even if the initial revenue is small. We do not expect it to impact our margins significantly as we believe we are providing substantial value through our silicon, board, and accompanying software infrastructure. Our pricing will remain competitive, and we feel confident that we are adding a lot of value, which helps mitigate any margin exposure.

Thank you for taking my question. I would like to echo the congratulations. You mentioned that in Data Center TME, TME showed an increase, and I’m curious about how much of that is related to 5G. Additionally, you mentioned that Data Center had a couple of outstanding quarters, so could you provide an update on that? Is there any variability, or is it just less significant and you didn’t mention it? Thank you.

Yeah. On the TME side, there is some related to 5G specialty testers, high-end testers. But actually there is also a good amount of strength in the emulation and prototyping side of the world where our product strength is really quite unmatched. I think I mentioned before where we might see some degree of softening is more on say, the pure semiconductor test and some of the other areas. But as a whole, TME was strong and not just because of 5G. So that's maybe we think about it that way. With respect to the core Data Center, again, it is still relatively small and we said we had double-digit growth on a quarter-to-quarter basis and our year-on-year basis from small numbers it nearly doubled. But it's still relatively modest today, right? Again, we see all of that growing more materially next fiscal year. But we're quite happy about what we're seeing. In terms of lumpiness, I mean, I think because things are emerging, yes, there is a degree of lumpiness. But I don't think we're anywhere close to seeing what steady state is. So I don't think intrinsically, I have no reason to believe intrinsically this will become a diverse kind of market.

And I think some of the aggregate lumpiness that you might have, might be reflected in the business results have been more attributed to the cryptocurrency. As we've said, that declined in the quarter.

Hi. This is Charles Kazarian on behalf of John Pitzer. Thanks for letting me ask the question and congrats on the strong results. You have previously painted a picture of a less steep, but longer rev ramp for 5G. But with year-on-year comps rev up about 40% year-on-year, it looks like this ramp is perhaps a bit steeper than the prior cycle and December rev only about 5% lower than the 2014 peak. I was hoping you could elaborate a bit on, one, how this ramp is played out relative to expectations, say, 12 months ago? And then, two, just the content growth you are seeing has already brought you close to the 2014 peak levels just given we're still relatively early innings in this build-out? Thank you.

We didn't expect the ramp to start as early as it did, and it's happening faster than we anticipated. The initial momentum is quite strong. I mentioned that we are shipping in both baseband and radio in some cases, which is contributing to this strength. This highlights one of our advantages with ASICs. Our key value proposition across various markets is that we aren't as constrained by the typical tape-out cycles. Once we develop products, new capabilities can be introduced quickly. However, I would caution that there will still be challenges in this market, unlike what we previously mentioned about the Data Center. I don't believe 5G will follow a steady upward trend. This is still early in the deployment phase, but we are confident that there will be more strength and growth in 2020 and beyond. While this initial performance exceeds our expectations, we believe even more growth is on the horizon. Does that clarify things?

Hi. Thanks for taking my question. I just had a follow-up question for you on 5G, Victor. When you look at RFSoCs, right, you've benefited from the discrete integration of some of these analog components that historically whether your analog peers have played into. They have also introduced integrated products as well and everybody seems to be talking about gaining share on 5G here. I'm wondering if you could just comment, are we talking about just on expanding TAM and everybody is benefiting or are there potential kind of relative losers and winners here? I was wondering if you could just provide your perspective on that?

There is a growing total addressable market because I believe that over time, 5G will become a much larger deployment. The performance improvements are significant, which will lead to market expansion. I also think that we will increase our market share as others try to enter the space. However, as of now, there aren't any credible comparable products that are focused on advanced integration, which differs from full monolithic integration. We already have plans for future products in both 16-nanometer and 7-nanometer technologies. This is fundamentally an integration effort, as companies are rethinking the radio architecture and the different components involved at various levels, including those in the cloud. There is also disruption happening in the overall architecture, and we provide solutions that will be more effective than many traditional options.

Got it. And then my follow-up is just a question on kind of the Chinese risk components. Obviously, there's different perspectives on those, but do you think some of the strength that you are seeing in comps is potential pull-ins by Chinese OEMs ahead of a potential export ban on US components there?

So, look, we're very sensitive to that situation. So we definitely triangulate from multiple perspective and also we work on various business things to sort of filter that out. So we don't believe what's going on is just pure pull-ins or any sort of double bookings. I would also add that, our strength in wireless is not just in China. I mean all our Tier 1s across all the geographies we're seeing strength. So, yes, China is an important region, but it's certainly not only China. So that's an important point. And as Victor said, we try to triangulate the business we see through what we're learning about the deployments and trying to map as best we can that our demand matches, but we think deployment demand is because we're cognizant of that kind of risk. So, yeah, we don't see that any significant degree, if at all.

Hi. Just a quick follow-up on the prior question. So specifically to Huawei given the geopolitical climate, do you see some impact on the revenue to that customer and this may be outside of China? And does that have any impact on the timing of the ramp that you see for 5G in which so far you seem to see is ahead of what you previously expected?

This is quite a complex situation affecting not just us but the entire industry, so we are monitoring it closely. As a board member of the FIA, I participate in various activities to keep a close watch on the situation. So far, we are not observing any significant impact on our business with Huawei, but we remain vigilant. Regarding the accelerated ramp-up, I want to emphasize that the strength is primarily coming from the South Korea deployment, while the developments in China are still in the early stages. There have been some initial licenses issued for spectrum, but it's still very early for China. Overall, we are observing strong performance in South Korea regarding production deployment.

Okay. I have a quick follow-up regarding ADAS. It seems that there are primary level two opportunities in the industry. Does the potential delay in achieving higher levels of autonomous driving affect the ramp-up of your Zynq products in the automotive sector? And are your Zynq products aimed at level four type opportunities?

I think we have a lot of activity in both store ADAS and autonomous driving, as well as in other features like occupant monitoring systems that enhance the customer experience. Some features could relate to safety, such as browsing detection, while others focus on convenience and improving experiences. We are involved in a variety of applications, and as I mentioned earlier, those that focus on autonomous driving, whether at level four or otherwise, represent more mid-term to long-term opportunities. Currently, our revenue is mostly from ADAS and other technologies like heads-up displays that enhance passenger and driver experiences. Therefore, I don't believe our success is heavily reliant on the timeline for the deployment of higher levels of autonomous driving.

Thank you for taking my questions. First, could you quantify the impact of crypto? At Analyst Day, you mentioned it as a growth opportunity while working with OEMs or companies building mining farms in that sector. Should we consider that revenue is nearly zero and that it won't be discussed much further, or do you still see it as a potential business and growth opportunity?

I don't think we communicated that we see a significant opportunity. We conveyed an opportunistic outlook and noticed some increased usage at that time. We raised this during the earnings call because it is volatile, and we want to be clear about that. We've consistently said that the revenue from this area is in the low tens of millions on a quarterly basis, and on an annual basis, it's low single-digit. It's opportunistic, so we will serve those customers, but it's not a focus for us. It's non-strategic. Also, like any solution, when the currency is depressed, the revenue declines, and when it rises, it may benefit us. Additionally, changes to algorithms or calculations can sometimes work in our favor. We do see potential long-term opportunities, but we haven't quantified them yet. This is related to blockchain technology in general, not specifically to crypto. I hope this clarifies our perspective on the matter.

Helps a little bit. One other question if I can squeeze it in. On your sort of mid-range growth opportunity, we're seeing your year-over-year revenue growth accelerating in the quarter and the guide over 20%. Now despite some shortfalls in crypto and industrial and wireline not doing great just because everyone else is seeing growth, decline pretty precipitously in some cases going negative, when you're doing sort of mid-range plan and not a quarter or two out, but let's say four, five, six quarters. Do you believe that you have an opportunity to continue this rate of growth or maybe even accelerate it when the problem spots to go away or do you think this is really a pretty unique and special time in the company's history and we revert to something more, let's say, normal for relative to your history and relative to the industry?

During the last Investor Analyst Day in May, we expressed our belief that we could achieve growth of over 10 percent on a sustained basis, which marks a shift from our past performance. This commitment remains unchanged. We are not providing updates on fiscal year 2020 or future guidance at this time; further details will be shared at the next Investor Conference. However, we are actively implementing strategies to achieve that 10 percent growth. Currently, we are exceeding that expectation, but we ask for patience until more information is available. This goal represents a significant change from our historical performance. As I mentioned at the recent XTF conference, we are no longer just an FPGA company; we are now positioned as a platform company. We are delivering high-performance analog solutions, and our Versal ACAP technology is set to transform the market over time. This shift underpins our confidence in maintaining double-digit growth.

We have greatly expanded the markets we serve and are increasing our market share. As Victor mentioned, we are fundamentally different now, and our outlook reflects that.

I had a question on OpEx. You've been growing OpEx sort of in line are consistent with revenue growth over the past couple of quarters. I think you're guiding to a pretty big number for the March quarter as well. As we look forward into fiscal year 2020, how should we think about the rate of OpEx growth relative to revenue growth? I think, Victor, in the past you've talked about big opportunities facing the company therefore you need to be aggressive. At the same time, I think, you've talked about being a little bit more selective or a little more disciplined with OpEx. So if you can sort of comment on that that would be helpful?

My response may sound somewhat repetitive, but there is no change in our perspective. We aim to sustain this growth as we see significant strategic opportunities ahead. However, this will require investment. We recently introduced our 7-nanometer product, which contains 36 billion transistors, highlighting its complexity and power. This was the first product we announced at the XTF six subfamily launch. We will continue investing in 7-nanometer technology while also maintaining our 16-nanometer efforts due to its strong demand and additional interest. Our goal is to drive growth while also balancing earnings expansion and continued investment to sustain this momentum.

The quarter-to-quarter increase was precisely in line with our annual guidance. It falls within the parameters we previously discussed, all based on the strategies articulated by Victor. We are not providing guidance for FY'20 in this call. However, the strategy remains consistent, as referenced in the earlier question regarding our approach to driving future revenue growth.

Hello. This is Wayne Loeb for Chris Danely. Thank you for taking my question. Can I ask what percentage of your revenue is specifically coming from China and what is the year-on-year growth in China? Also how big are sales from ZTE and Huawei right now?

So, I'll deal with this kind of in the reverse order. We are not disclosing any customer-specific revenue information. We don't have any 10% customers. So we'll keep it at that. Last year in our K you'd see that our China revenue was $664 million, which is about a quarter of our overall revenue. I would think it's year-to-date slightly above that, but it's trending along with the business.

Okay. Thanks. And as a follow-up, are you seeing any extension in lead times given all the revenue growth?

There have been some challenges with certain components, and I apologize for misunderstanding your question about our lead time. We've been receiving very positive customer feedback regarding our lead time. In a few critical components related to 5G, which has been performing strongly, we've managed to deliver successfully, but it does require effort. Overall, we are not extending lead times significantly.

We have extended lead times on some of our newer products. We work very carefully with our customers to meet their needs, so these are point issues, not systematic.

Yeah. And I think in general we are compared to peers, we are still doing very well in terms of delivery and lead times.

Hey, guys. Congrats on a super quarter. Victor, I know you've talked about Intel perhaps pushing density for 10-nanometer a little too far here. And I know there's been a lot of discussions about architecture here. But can you talk to us about your view on getting the node first? This used to be the big battle between you and Altera. If you were to get there first, what does a six-month lead mean for your general business in your opinion?

I would say that certain programs in specific markets still rely heavily on this, particularly with pure FPGAs, where there is a stronger correlation to performance. However, as we have evolved beyond just pure FPGAs, I believe architecture has become increasingly important. It's not merely about logic sales capacity, as we provide significantly more value than that. This focus has shifted to encompass not only silicon but also the tools, IP, and higher levels of the software stack we are now offering. We should view ourselves as more of a platform company that is adding value and building barriers. We continue to perform well compared to Intel PSG on the silicon front, but the competitive barrier is even greater because they are not innovating at the same pace we are when it comes to architecture, technology integration, and the complete software stack. That said, we remain vigilant and hold respect for Intel; it's important to avoid arrogance. However, we feel confident about our direction and have been leading the way for some time, so we intend to keep pushing forward.

Great. And then, Victor, perhaps, your expectation for AI core is the idea here kind of to cede the market with Alveo to kind of prime the pump for AI core? Is that where you guys are expecting kind of Data Center inflection for the inference market or do you expect AI core to be kind of that next step in the evolution?

No. It's not evolutionary. It is definitely more revolutionary like we are going to get significant factors of improvement. In the AI core from the inference market I want to expand to make sure that the inference market we may not just in the Data Center, but we see that again on edge computing, as well as really endpoints. Versal including the AI Core will be using the automotive. We have a lot of strong interest in automotive. We certainly have interest in the Data Center and it's multi-market, right? So we really do see that is going to expand quite a bit. I think, Alveo, I wouldn't say, it as strongly correlates to AI core per se, but I think this whole thing of delivering a platform, right, not just the physical board piece, but the software stack that lets you just in this case a very standard base infrastructure and Data Center piece that new cards in the future other types of Data Center cards. In selective areas you're going to see us do more platform kind of things, right.

Victor, just a question on the SmartNIC market. I think you mentioned a couple of design wins in there. Could you put that into perspective as to how big that market is and when do you think that ramps will start and how that might impact your revenue growth?

We've consistently discussed the compute segment, storage, and network in relation to SmartNICs. I would say SmartNICs are probably the second most important of the three, with compute likely being the largest in the long run. However, SmartNICs, unlike compute, are less critical for us in terms of needing to operate at high-level design abstractions without extensive knowledge of the hardware. The customers we are engaging with for SmartNICs are generally more technical, which is advantageous. There’s no critical dependency on that aspect, and since we aren’t trying to support a wide array of integrated circuits, it's not an ecosystem element. From that standpoint, it's very appealing. Additionally, we’re seeing demand from customers rather than just pushing from our side, which highlights its importance for us. It's clear that others are recognizing the value in the architecture for offloading tasks while enhancing bandwidth in data centers and addressing security concerns, indicating a strong market. I hesitate to call it a self-inflation point, but we are securing significant design wins across various customers, regions, and applications, which is positive. Unfortunately, I can't publicly share details, but we are very encouraged by the momentum in design wins.

Great. And then, just as a follow-up. I think in your comments about 5G baseband, I think, you kind of said, you won't be able to hang on to some of the early designs wins in the preproduction baseband. I just want to understand that comment a bit more. I mean, if you can please elaborate on that. What do you mean by you won't be able to hang on? I mean, are you just seeing kind of an ASIC transition that we normally see here or are you seeing something else? Just want to understand a little better. Thank you.

Sure. And I guess, this is always this thing that I'm trying to do of being very candid, at the same time, not trying to get to the thing that we don't have a very good opportunity here, right? So what I mean is, so 5G is not just a single point in time. There really clearly are going to be generations of 5G, because 5G is really umbrella of standards, as well as technology. And the very early deployments that we're seeing now it doesn't have the full features and capabilities. So you're going to see waves of 5G technologies, as well as, of course, deployment. We are participating in baseband which traditionally we haven't. And that's part of the growth, right? I think in this first generation, certainly in certain areas we do think that when ASICs catch up, because again they tend to lag that we'll lose some of that baseband. Hopefully, we're still holding on to some of it. What I was saying is that, with our similar Versal, because that is still more powerful in some of the engagement that we're seeing that we believe we have a much stronger shot of maintaining baseband and of course continue to expand on our strength in radio and so forth, right? And by the way in 5G there's going to be more radio, so it's not like our success hangs on the baseband, but of course, we would like to capture those value as we can. So I hope that helps a little bit more in my comment.

Okay. Well thanks everyone for joining us today. We'll have a playback of this call beginning at 5:00 PM Pacific 8:00 PM Eastern Time. For a copy of our earnings release, please visit us on our Investor Relations website. Our next earnings release date for the fourth quarter of fiscal year 2019 will be on Wednesday, April 24th after the market close. We will be attending the following conferences this quarter. So Goldman Sachs Internet Technology Conference in San Francisco on February 12, as well as the Morgan Stanley TMT Conference also in San Francisco on February 26. And then, additionally, we'll be hosting our Investor and Analyst Day in New York City on May 14th. So please save the date. We look forward to seeing you there and more details to follow. This completes our call and thank you very much for your participation.