Broadcom Inc (AVGO) — Q4 2016 Earnings Call Transcript

Thank you, Operator, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO; and Tom Krause, Chief Financial Officer of Broadcom Limited. After market close today, Broadcom distributed a press release describing our financial performance for the fourth quarter and fiscal year 2016. Global Newswire inadvertently published our earnings release today without the financial tables that typically accompany the release. Global Newswire is in the process of re-publishing the complete document. However, these tables are available for you to review in the copy of the earnings release we furnished to the SEC earlier today. Once updated by Global Newswire, you will also be able to obtain this information from the Investor section of Broadcom’s website at www.broadcom.com. This conference call is being webcast live and a recording will be available via telephone playback for one week. It will also be archived in the Investor section of our website at broadcom.com. During the prepared comments section of this call, Hock and Tom will be providing details of our fourth quarter and fiscal year 2016 results, background to our first quarter fiscal year 2017 outlook and some commentary regarding the business environment. We will take questions after the end of our prepared comments. In addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today’s press release. Comments made during today’s call that primarily referred to are non-GAAP financial results. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. At this time, I would like to turn the call over to Hock Tan. Hock?

Thank you, Ashish. Good afternoon, everyone. Fiscal 2016 was a very transformational year for our company as we completed the acquisition of Broadcom Corporation. This acquisition and integration significantly increased our scale, added seven businesses to Avago’s existing portfolio of 12 businesses and roughly doubled revenue. Since closing the acquisition at the start of our second fiscal quarter, we have made great strides in integrating classic Broadcom. As you may recall, going into the Broadcom acquisition, we had introduced an operating model targeting 60% gross margin and 40% operating margin that we planned to progress over the long-term. I’m very pleased that we were able to make good progress towards this target in fiscal 2016, and in fact, since closing the acquisition on February 1, 2016, we have driven significant improvement in product margin and spending, exiting the fiscal year exceeding this long-term target. More recently also, on November 28th, we made good progress on another major milestone with the integration of Avago’s and Broadcom’s Financial Reporting Systems. Looking at 2017 and beyond, we expect our business to be sustainable and in fact to become much more profitable. We are raising our long-term operating margin target to 45%, a significant increase from our prior model. We expect to drive to this long-term target through a combination of the full realization of material cost synergies and operating leverage on a larger scale. Reflecting expected improvement in profitability, we announced earlier today a doubling of our dividends. We are comfortable that our projected free cash flow generation will support this significantly higher return to shareholders, while still preserving flexibility on our balance sheet for future M&A opportunities. If and when these new M&A opportunities materialize, they will enable us to further increase capital returns to shareholders. Let me now turn to a discussion of what happened in the fourth quarter. We delivered strong results for our fourth fiscal quarter of 2016 with revenue at $4.15 billion, up 9% sequentially. This result was at the top end of our guidance primarily due to better seasonality from our Wireless and Enterprise Storage segments. Earnings per share of $3.47 grew by 20% sequentially. Talking about Wired, our largest segment, in the fourth quarter, revenue came in at $2.08 billion, meeting expectations totally, and the Wired segment represented 50% of our total revenue. Revenue for this segment during the quarter was up slightly on a sequential basis. We benefited from increased demand for networking ASICs into data centers as well as strong fiber-optic shipments into access and metro networks. Our recently launched Jericho standard product line that targets aggregation and edge routing applications continued its reign during this quarter. We were also able to address the supply chain constraints we experienced in a prior quarter, allowing us to catch up to customer demand in our set-top box business. As we look to the first quarter for our Wired segment, despite expected seasonal declines in broadband carrier access and set-top box businesses, we anticipate continuing growth in fiber optics and strong increased demand from several cloud data center operators, which will keep our Wired revenue in total at least flat sequentially. Moving on to Wireless, in the fourth quarter, Wireless revenue came in at about $1.35 billion and the Wireless segment represented 32% of total revenue. Revenue for this segment was up 34% sequentially, a bit stronger than expectations. Growth was primarily driven by the full ramp of the new phone generation at our North American smartphone customer, further enhanced by an increase in Broadcom’s cellular RF content and Wireless connectivity content in this new generation of phones. We’ve made great progress in relieving FBAR filter capacity constraints we experienced in late 2015. Over the course of 2016 fiscal year, we were able to increase FBAR filter capacity in our Fort Collins plant by approximately 50%. This increase was enabled by our new 8-inch wafer manufacturing process that came online with very good yields. As we look forward, we intend to add more capacity by continuing to convert existing 6-inch lines to 8-inch lines. This very capital-efficient conversion approach will allow us to theoretically add another 70% of capacity over our existing 6-inch footprint within the Fort Collins fab over the next few years. Because of this, we no longer need to keep the idle facility we had purchased in 2005 in Eugene, Oregon as a backstop pending the outcome of this 6 to 8-inch capacity expansion. Turning now to our projection for the first quarter fiscal 2017, similar to last year, we expect a seasonal decline in demand and expect our Wireless revenue to sequentially decline in the mid-teens on a percentage basis at least. Turning to Enterprise Storage, which is going through something of a resurgence that we expect will continue into the first quarter fiscal 2017. In the fourth quarter, Enterprise Storage revenue came in at $561 million and this segment represented 14% of our total revenue. Segment revenue grew 6% sequentially and came in better than expectations. We benefited from the strengthening demand both for our HDD and RAIDCore’s box adaptive products. Looking into the first quarter, we expect the strength in the storage end market to continue to show momentum and drive Enterprise Storage revenue growth to 20% on a sequential basis. We are expecting growth from all our enterprise storage products. In particular, we’re expecting a strong ramp in shipments of our custom flash controllers for the SAS enterprise solid-state drives that are increasingly being used in place of high-performance hard disk drives in data centers. Finally, let’s move on to our last segment, Industrial. In the fourth quarter, Industrial segment revenue came in at $162 million, down 20% sequentially. This segment represented 4% of our total revenue as expected, with reduced shipments sharply into our channel as we headed towards this seasonally weaker end of the calendar year. Industrial product resales did decline, but only in the mid-single digits sequentially, resulting in a sharp reduction in our channel inventory. Accordingly, as we look in the first quarter, we plan on rebuilding depleted channel inventory and anticipate increasing shipments to our distributors. As a result, we expect revenue in the first quarter from our Industrial segment to increase sequentially in the mid-single digits. In summary, after a strong close to our fiscal year 2016, we expect a solid start to fiscal 2017 as the demand environment for our entire portfolio of products continues to be very firm. In fact, we expect in the first quarter to largely offset the seasonal decline in Wireless revenue through sustained strength from Wired products benefiting from growth in Cloud, broad strength in Enterprise Storage, and a recovery in Industrial. With that, let me now turn the call over to Tom for a more detailed review of fourth quarter and fiscal 2016 financials.

Thank you, Hock, and good afternoon, everyone. My comments today will focus primarily on our non-GAAP results from continuing operations unless otherwise specifically noted. A reconciliation of our GAAP and non-GAAP data is included with the earnings release issued today and is also available on our website at broadcom.com. Let me start by providing some comments on our long-term operating model and update on our capital allocation return strategy. As Hock highlighted, the integration of classic Broadcom with Avago is going very well and we have made rapid progress towards achieving our original target operating margin objectives. Looking forward to a fully integrated Broadcom, we recently announced an increase in our long-term target operating margin from 40% to 45%. We expect to make progress towards the new operating margin target through a combination of operating leverage driven by long-term revenue growth, which we continue to target at approximately 5% per year, and the full realization of acquisition-related cost synergies from the Broadcom acquisition, all while maintaining a significant investment in research and development. In addition, we recently announced the acquisition of Brocade, which we expect to complete in the second half of fiscal 2017. We expect Brocade’s Fibre Channel SAN Switching business will generate approximately $900 million in EBITDA by fiscal 2018. Turning to our balance sheet, we currently intend to maintain liquidity from cash on hand of approximately $3 billion to cover expected working capital needs and projected annualized dividends. As we have discussed in the past, we expect to continue to target gross leverage of approximately two times EBITDA as long as the cost of that leverage remains attractive. Given our current EBITDA run rate, we don’t intend to pay down additional debt going forward beyond the amortization obligations in our loan agreements. Finally, long-term, we expect CapEx to run at about 3% of net revenue consistent with our largely fabless business model. However, for fiscal 2017, we expect CapEx to run at an elevated level of approximately $1.2 billion. This includes about $500 million towards campus construction, primarily at our Irvine and San Jose locations, and about $200 million towards purchasing test equipment to consign the contract manufacturers to support classic Broadcom businesses. In summary, as we reflect on all this, we’re confident that we can generate long-term free cash flow margins of better than 35%. Turning to M&A and as Hock highlighted in his opening remarks, as we look at the landscape versus the scale of our projected free cash flow generation, we feel that we have reached the point where it makes the most sense to return a more meaningful portion of our cash flow to shareholders in the form of dividends. The substantial increase in our dividend announced today is the first step. Long-term, we plan to target aggregate dividends of approximately 50% of free cash flow on a trailing 12-month basis. Given our free cash flow generation, we believe that this will also allow us sufficient balance sheet flexibility to pursue opportunistic acquisitions that are consistent with our proven business model. One note on the dividend, our board has decided to set dividend policy and the projected quarterly dividend amount for the full fiscal year rather than on a quarter-by-quarter basis as it did previously. However, the declaration and the payment of any particular quarterly dividend, if any, is subject to the approval of the board at the time of distribution. Now looking below the operating line, I want to pause for a minute to provide you a quick update and some color on our tax situation. As you are aware, we are a Singapore company, and our IP is predominantly located in Singapore pursuant to our agreement with the Singapore government. When we acquired classic Broadcom, we intended to align the acquired operations with classic Avago’s existing processes and structure as that structure has demonstrated long-term sustainability and relatively higher flexibility to deploy cash globally. This integration of IP occurred in the first quarter of fiscal 2017. As a result of acquisition accounting at the time we closed the Broadcom acquisition, we established a deferred tax liability on our balance sheet associated with the potential tax liability from our planned IP integration. This tax liability will only become payable upon the actual distribution of any earnings resulting from integrating the IP and may be partially offset by any qualifying tax credits and deductions available to us at the time of distribution. We expect to distribute these earnings over several years. The payment of these cash taxes will be in addition to the cash taxes that we pay on our regular operations and will over time reduce the deferred tax liability that you see on our balance sheet today. As a result, in fiscal 2017, we expect to pay approximately $400 million in cash taxes, which will include the impact of cash taxes, if any, associated with the IP integration. With that, let me quickly summarize our results for the fourth quarter. Revenue for the fourth quarter came in at $4.15 billion, growing 9% sequentially. Foxconn was a greater than 10% direct customer in the fourth fiscal quarter. Our fourth quarter gross margin from continuing operations was 60.8%, about 30 basis points above the midpoint of guidance, primarily due to better-than-expected operational efficiency. Turning to OpEx, R&D expenses were $666 million and SG&A expenses were $137 million. This resulted in total operating expenses for the fourth quarter of $803 million, slightly below guidance reflecting the benefits from the ongoing realization of acquisition-related cost synergies, offset by higher bonus accruals due to higher profitability. Operating income from continuing operations for the quarter was $1.72 billion and represented 41.5% of net revenue. Provision for taxes came in at $73 million, slightly above our guidance. This was primarily due to higher than expected net income. Fourth quarter interest expense was $106 million and other income net was $9 million. Fourth quarter net income was $1.55 billion and earnings per diluted share were $3.47. Our share-based compensation expense in the fourth quarter was $208 million. Moving on to the balance sheet, our days sales outstanding were 48 days, a decrease of four days from the prior quarter due to better linearity of revenue in the quarter. Our inventory ended at $1.4 billion, an increase of $92 million from the beginning of the quarter. I would note that the starting inventory for the quarter included the impact of $86 million of step-up charges to reflect the impact of purchase accounting. However, our non-GAAP results exclude the impact of these step-up charges. Therefore, non-GAAP inventory days on hand reflected an aggregate change in inventory of $178 million in the quarter, an increase from 74 days to 78 days. We increased inventory for some of our classic Broadcom products to improve operational flexibility to better meet customer demand. We generated $1.35 billion in operational cash flow, which reflected the impact of approximately $124 million in cash expended primarily on classic Broadcom restructuring and integration activities including discontinued operations. We ended the quarter with a cash balance of approximately $3.1 billion. In the fourth quarter, we spent $193 million on capital expenditures. A total of $213 million in cash was spent on company dividend and partnership distribution payments in the fourth quarter. Now let me turn to our non-GAAP guidance for the first quarter of fiscal year 2017. This guidance reflects our current assessment of business conditions and we do not intend to update this guidance. This guidance is for results from continuing operations only. Net revenue is expected to be $4,075 million plus or minus $75 million. Gross margin is expected to be 61.5%, plus or minus 1 percentage point. Operating expenses are estimated to be approximately $785 million. Tax provision is forecasted to be approximately $73 million. Net interest expense and other is expected to be approximately $101 million. The diluted share count forecast is for 446 million shares. Share-based compensation expense will be approximately $210 million. CapEx will be approximately $330 million. And as a reminder, our first quarter is generally a weaker quarter for operating cash flow due to the payment of our annual employee bonuses relating to the prior fiscal year. That concludes my prepared remarks. Operator, please open up the call for questions.

Yes. Thank you. Hock, question on networking, and you mentioned some strength in ASICs. I know over a number of years you guys have done well in terms of taking share. Can you talk about where you are in that and just kind of maybe the legs of that share gain story on the ASIC side?

Well, over the years, you're correct, we have been gaining share, and as we talk generally about those shares, generally these ASIC have a long product lifecycle and gaining share tends to take a while— a few years before it shows up in revenues. And I guess, what we're seeing now is the outcome—the revenue outcome of share we had gained in previous years, and we continue to gain share, especially on very, very high-speed, high-performance networking switches, routers, even vector processing machines.

Got it. And then as a follow up on the Wireless front, you mentioned kind of getting caught up on capacity, and the 8-inch transition is going well. Up until this point, you’ve been mostly servicing at the two high-end smartphone OEMs. Any thoughts in terms of the approach going forward on the China smartphone OEM market in terms of is it sizable enough for you guys to engage more on that front?

It is sizable. It’s just that, see, our strength, our basic strategy in Wireless, be it RF cellular, analog or Wireless connectivity, WiFi that is Bluetooth combo, is about the features and the engineering advances that innovation we provide with those solutions. Those tend to be very relatively expensive products, but they offer very unique differentiated features to our customers. So, that’s—it's usually only a very high-end segment of the market that takes this on, and you’re right, it would include the Chinese to the extent that the very high-end flagship status bring in status phones. But it’s a much smaller percentage than our core business, which is largely the flagship phones from our North American customer and our big Korean customer.

Hey, guys. Great results. Maybe just following up on the last question, on the Wireless segment, you’re guiding basically what you did last year. I’m just curious if the moving pieces within that are about the same, if you can just give any comments on what you’re seeing in January versus last year.

Pretty much the same, Blayne. You hit it right on. Our Wireless business is very, very predictable. There’s a product roadmap, every generation we come up with — every generation of phone, which is virtually every year, we come up with a new set of products, a new set of features, capabilities that our solution provides for our flagship phone customers that typically come with more content as we call it, because there are more bands or there are more features or channels that Wireless connectivity needs in delivering high-performance data signals that phones are rapidly becoming. So, like it is, other than that, the fact that it keeps innovating, it keeps becoming a much more engineered product, but it’s very much the same kind of business we had.

Great. Then on just the guidance for storage, it's up quite strongly. You mentioned the ASICs presence. Just wondering within that guidance how much of that was contributing, just broad strokes and what else if you had to rank the drivers getting that 20% growth?

No. It’s no surprise to you guys, right? Right now, I suspect the— not suspect, but there’s strong seasonality in consumer PCs, and hard disk drives are running very strong. It’s also partly because enterprises and Cloud are buying a lot of hard disk drives because of enterprise great name shortages too, and we benefit a lot on the storage side. But also we’re seeing a lot of Cloud spending on the storage side of the business, which is where our MegaRAID, our SAS storage connectivity or our server storage connectivity side of the business is also showing renewed strength, even at this late stage of the Grantley generation, temporarily it’s coming next when we expect a big lift, but it’s interesting to see this lift also happening at this time. So we’re seeing across, as I mentioned, pretty much all sectors in our Enterprise Storage portfolio.

Hi, guys. Thanks for letting me ask a question. I guess the first one on the cash return policy. Congrats on doubling the dividend. I’m just wondering if you could give a little color on how the 50% of free cash flow target was given. And, Hock, does that have any implications about your view on the appetite and/or availability of good M&A targets in that you’re getting more equally balanced return of cash to shareholders and M&A?

Ross, let me hit that first and then if Hock wants to add something more he should. At the end of the day, it’s a balance, right? We looked at the scale of the free cash flow. We looked at the M&A landscape relative to that scale and we wanted to maintain flexibility on the balance sheet and remain in and around our target of two times EBITDA in terms of leverage. And so when we put that together and in light of the fact that we’re very focused on the dividend relative to any buybacks, 50% made sense.

Yeah. What is implied here, Ross, the other side to it is, our appetite for acquisition hasn’t changed at all. There are interesting businesses out there that are actionable; we will consider and we will act prudently and appropriately. What is about, one, I’ll just say in terms of our new capital allocation policy is we’re basically taking the view that we are taking on a significant amount of our debt as effectively like long-term capital, as part of our long-term capital. And we feel comfortable in continuing to support that, which then basically opens us up for the opportunity to really create a lot of flexibility on our balance sheet and our ability to translate a lot of our operating cash flow into cash return for our shareholders, while not at all diminishing our ability to act on transactions that make plenty of sense.

Great. I guess my one follow-up, it’s very helpful to have the updated target of 45% on the operating margin. I pulled that together with the last couple of quarters where you have nicely beaten the gross margin side of the equation. Gross margin wasn’t mentioned in the levers you’re going to use to get to that 45% operating margin, so I just wanted your thoughts in the at least the direction of gross margin going forward?

No, no. I didn’t mention it. I didn’t mention it. And what—a key part of our realization of a benefit to all this, and particularly in gross margin, is our gross margin continues to expand. You have seen that since February 1st this year, quarter-after-quarter, and we continue to expand, even as we guide Q1 fiscal 2017, Q4 fiscal 2016 was 60.8% gross margin. We’re guiding it up to 61.5%, and if you look at it closely by stepping up, we are not trying to tell you that’s a long-term trend. We have been stepping it up about 50 basis points every quarter sequentially, and the benefit and the reason why that’s coming from is simply because we are getting synergies from material costs. Some talk about investing CapEx into tests—a lot of tests of our silicon-based products. These are very expensive tests, and we’re talking about investing $200 million on a lot of tests because we believe we have a more efficient way of doing it. We do our testing through consignment of test equipment, which we are adopting. It’s a good idea, and the whole thing through all of that is, we are getting a lot of synergies on material costs, not just on our SG&A line.

Thanks for taking my question and congratulations on the consistently good execution and for doubling the dividend. I have one question on Wired and one on Wireless. So how come the Wired one, just on an apples-to-apples basis how do you think your Wired business has done relative to what you thought when you acquired classic Broadcom? I know there is a perception that you have stood firm on pricing. Do you think this has distracted from growth in any way, just how do you think your networking and the cable sides have done in your Wired business over the past year?

Okay. Our Wired business has done very, very well. In fact, to be direct about it, just before we closed the transaction, that means in the final due diligence stage and all that, looking from that point, starting point over the last nine months, it’s done much better than we had expected. We had seen this product has been very, very sustainable with our customers, been very strategic to a lot of our OEM customers, and continuing to be that way. We continue to invest a lot in those areas that we particularly find them to be very, very core and sustainable, and we haven’t spent on that investment there, and we are seeing that pay back a lot. By the way, when I say investment, it’s not just hardware, we’re investing a lot in firmware, software, and support. So that business has done much better than we had originally thought we could get out of it.

Okay. And my follow-up, looking forward, on your Wireless business, usually April is the seasonally tough quarter for your largest customer, but there is often some positive offset from your Korean customer. Can you give us some color on how you’re thinking about how April might shape up this time around?

To be honest, we have no clue. For this one—part of it is how resale is doing, especially through this holiday season. That’s when we start to know about it in the January timeframe. December is a bit too early to figure it out, but you’re right. Typically at that – in spring, we have the other large customer, OEM customer in Korea has a nice counterbalance and that helps. But overall, for Wireless we expect Q2 as always to be the bottom of the seasonality. What’s very nice for us right now is the strength that I purposely indicated to you guys in my remarks in opening remarks, in our Wired and a strong recovery now as on early recovery in bookings on our broadband set-top box and carrier access in bookings recovery would actually then—would actually help cushion that seasonality we expect in that March, April timeframe, which is our Q2. But that’s looking very far ahead, of course, which we, as always, never try to venture much of an opinion on.

Yeah. Good afternoon, guys. Thanks for letting me ask the question. Congratulations on the strong results. I guess guys, my first question is just around CapEx. Tom, you gave a lot of detail for the fiscal year coming up, but it looks like you guys underspent in the calendar fourth quarter by quite a bit relative to guidance. What drove that, and as you answer that question, I’m just curious, Hock, I want to make sure I completely understand your commentary around the Oregon fab. Is it that the 6-inch to 8-inch transition for wafer has gone so well that you don’t need to build out capacity in Oregon to the extent you thought? If you can just help me understand that, that would be helpful.

Okay. Let me hit the first one quickly, John, then I’ll pass it to Hock. The answer is timing of payments. We had a lot of obligations that we had placed orders and ended up making the payments rolling in the Q1 as opposed to banking payments in Q4.

Yeah. Tom’s right. It’s just timing slippages or payments from Q4 to Q1 basically. But back to the Oregon fab, yeah, I know that a lot of concern, comments or chatter out there, at least I hear from Ashish, about where we selling of these idle potential facilities in Eugene, Oregon. As I said in my remarks, and you hit it right on, John is, and I say that right at the get-go when we bought this fab. It’s an insurance policy. That’s the way to describe it. It’s an insurance policy because we were in the midst of increasing our capacity in Fort Collins by taking all our 6-inch lines, which is an entire line a year plus ago, two years ago, and bringing, converting them into 8-inch in phases. By the time we converted all 6-inch, we’ll get a 72% increase in capacity without any further expansions of the footprint, which is pretty cool. We will be pretty much what we need over the next two years, a 72% increase. And our initial couple of phases of conversion, which has happened over the last year or two, year and a half, has gone very, very well. Yields are up to normal. Everything is running very well. So we feel very comfortable and in my usual way of making sure we don’t overspend money, we don’t want to hold onto an idle facility that we paid some operating expenses on an ongoing basis. In other words, I don’t need an insurance policy anymore.

That’s help. And as my follow-up, just to follow on to Blayne’s question earlier. I’m just kind of curious within Enterprise Storage, how large is the SSD business now and can you help us kind of understand how big that business should get? Is this going to be a similar size market to HDD controllers over time? Are the dynamics of the market the same, or how are you thinking about this over a longer period of time?

Well, I— to be honest with you, first and foremost, I don’t have the data in front of me. And if I do, as a policy, we generally don’t try to break it down because then you would be torturing me every earnings call about what’s the number gone down to now. But broadly, it’s not the size of HDD channel at this point. And do we hope to cushion some of the long-term gradual decline in HDD? Yes, we do. That’s why we go into this because that has similar capabilities and designs that we transfer engineers from our – of our – transfer engineers from our SoC to this area, very nicely. We are seeing two strings of revenue in our storage drive business right now, and it’s just that in this season where flash seems to be— enterprise Flash seems to be in short supply, we are seeing enormous demand from a couple of OEM customers for flash controllers. We do customize flash controllers, I should say, for these OEMs that are used for SAS-based Enterprise Drives, which are the high-performance enterprise drives. So it’s very interesting, and it is significant enough to be rather meaningful in overall mix.

Good afternoon. Solid results and great to see the strong dividend rates here. On the data center routing side, strong results, we’re still early in the ramp with Jericho and Cameron here. Port deployments, I think, by your Cloud customers are still trending about less than 10%, from a silicon port shipment perspective though I think that the penetration numbers are obviously higher. So I guess the question is where do you think we are in terms of silicon port shipment penetration for Jericho and Cameron? And then on the routing side, just sticking with that, is the team also benefiting from the data center routing port build-out via some of your ASIC engagements as well?

Interesting – yeah, but one thing you did say is very correct. The two are running almost in—well, not run—the two will be running in parallel down the road. You’re right. Most of this routing program – routing call or edge routing and aggregation to some— to a larger extent data centers now are using, are used to be using a lot of ASICs, which is great for my ASIC business. What we are also seeing is some of these cloud guys, they’re moving to merchant silicon, which is Jericho, Cameron as you put it. And that’s early stage compared to the ASIC side. So we are very well positioned on the ASIC side and we are well positioned now as we ramp up Jericho in edge and certain parts of aggregation especially. To answer your question, it’s very early. That Cameron, Jericho side is barely—you say 10%, I’m surprised. I think it’s a bit more than that at this point. But then it could be data we may be looking at different parts of different sets of data. But it’s definitely not one-third yet. It’s in the range of I would call it 20% to 35% of those parts available, because there’s still a lot of ASIC being used. But that push, that trend over the long term we are seeing is towards standard open merchant silicon, you’re right. And we are seeing that, especially not just only in the cloud – hyper cloud Tier 1 guys, we’re seeing that among the operators, who are pushing for standard silicon, standard SAS for their networks and data centers. And that’s also putting a lot of pressure in push – in driving up use of Jericho especially, but it’s also interesting in the sense that many OEMs are now coming—working with us on both sets in parallel, which is why I say there will be coexistence of the two approaches, ASIC silicon for routing and together with merchant silicon.

Okay. Thanks for the insights there. And then on the broadband-connected home, it seems like the pay-TV service providers in developed countries are getting ready to make a more aggressive push out of 4K UHD services, which I think should result in a set-top box upgrade cycle. So given your leadership in satellite, cable, IP set-tops, is this going to be a start to be a growth tailwind for the team in 2017?

I’m inclined to believe that, one replaces the other, though, but you’re right. For once they can’t just use software to upgrade it. They actually need a relatively new chip, which is good for us. But we are seeing it, but it’s a gradual trend. It’s not a one—it’s not an avalanche. It will be a gradual trend, and we are in the midst of it or the beginning, the early part of the uptrend on 4K.

Great. Thanks. Let me add my congratulations on the excellent results. My question relates to carrier aggregation. You’ve cited this in the past as one of the future drivers of your RF content, and I’m wondering if you can update us to better understand where we are in the growth of that phenomenon driving that part of your business?

We’re in the midst of carrier aggregation as you know now. It’s happening a lot in the U.S., it’s happening in China, in spades, which is, by the way, a good way for us to sell our chips even to the low-cost sensitive Chinese phone makers. Base station carrier aggregation in China, those are very difficult chips to do, and we have the best performing chips, so we got a very good share in that even in China, but even cost sensitive. In other words, they have chip stop everywhere except the carrier aggregation chip, which is interesting. But in terms of the big flagship phone makers that I mentioned earlier, they have it all in spades. This is usually downlink carrier aggregation. In another year or two, we will see uplink carrier aggregation in addition—all towards saving infrastructure costs, base station costs, and that will be another lift. That’s why I say year-by-year as I look over the next several years, that RF cellular permits that we develop and sell to those flagship phone makers continue to get more and more complex, and more and more contact. I think we are seeing all these major developments and trends pointing in the direction of our long-term model, and at the same time, providing us the flexibility to drive cash flow generation and returns to our shareholders.

Great. Thanks. Let me add my congratulations on the excellent results. My question relates to carrier aggregation. You’ve cited this in the past as one of the future drivers of your RF content, and I’m wondering if you can update us to better understand where we are in the growth of that phenomenon driving that part of your business?

We’re in the midst of carrier aggregation as you know now. It’s happening a lot in the U.S., it’s happening in China, in spades, which is, by the way, a good way for us to sell our chips even to the low-cost sensitive Chinese phone makers. Base station carrier aggregation in China, those are very difficult chips to do, and we have the best performing chips, so we got a very good share in that even in China, but even cost-sensitive. In other words, they have chip stop everywhere except the carrier aggregation chip, which is interesting. But in terms of the big flagship phone makers that I mentioned earlier, they have it all in spades. This is usually downlink carrier aggregation. In another year or two, we will see uplink carrier aggregation in addition—all towards saving infrastructure costs, base station costs, and that will be another lift. That’s why I say year-by-year as I look over the next several years, that RF cellular permits that we develop and sell to those flagship phone makers continue to get more and more complex, and more and more contact.

In the coming years, we will see advancements such as uplink carrier aggregation, which will help reduce infrastructure and base station costs. This ongoing development in RF cellular technology for flagship phone manufacturers is becoming increasingly intricate and substantial.