Broadcom Inc (AVGO) — Q2 2017 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 and financial tables describing our financial performance for the second quarter of fiscal year 2017. If you did not receive a copy, you may obtain the 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 made 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 second quarter year 2017 results, background to our third 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 will primarily refer to our 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. I'm actually quite pleased with our performance for the second fiscal quarter with solid contributions from a broad number of our franchises. We delivered strong financial results with revenue, gross margin, and earnings per share, all above the top end of our guidance. Second quarter revenue of $4.2 billion grew 1% sequentially and 18% year-on-year. The seasonal sequential decline in our Wireless segment was less than expected and more than offset by contributions from all other segments. All segments, even Wireless, delivered year-on-year revenue growth. On the income front, earnings per share were $3.69, growing by 2% sequentially and 46% year-on-year. Let me now turn the discussion of our results by segment. Starting with Wired, our largest segment. In the second quarter, Wired revenue was very stable at $2.1 billion, growing 1% sequentially and 3% year-on-year. The Wired segment represented 50% of our total revenue. Wired continued to remain a very consistent end market and performed in line with expectations. As you may recall, in the preceding quarter, Wired revenue included approximately $16 million of revenue related to the assignment of certain manufacturers' rights to a customer. This did not repeat in the second quarter; however, we were able to more than make up for this amount with growth from enterprise networking and the start of a seasonal increase in demand for our broadband access and set-top box products. Turning to the third fiscal quarter, though we expect seasonal strength in broadband and sustained cloud data center spending, consistent with this outlook, we expect Wired revenue growth to accelerate into mid-single digits sequentially. Moving onto Wireless. In the second quarter, Wireless revenue was $1.15 billion, declining by 2% sequentially, but growing 45% year-on-year. The Wireless segment represented 28% of our total revenue. The low-single-digit sequential decline in revenue was better than expected due to stronger than anticipated end-market demand. The sequential decline was driven by the bottom of the annual product cycle transition at our major North American customer, offset by the ramp of the next generation phone at our large Korean smartphone customer. Generation to generation, we also benefited from a significant increase in Broadcom cellular and WiFi connectivity content. Moving on now to the third quarter. We expect to see the beginning of the second half seasonal growth in our Wireless segment revenue. We expect this growth to be driven by the start of a ramp from a large North American smartphone customer as they transition to their next generation platform. On top of this, we are also expecting a substantial increase in our total dollar content from the eight Broadcom products we will be supplying into this new platform. The national ramp of this next generation platform, however, appears slower this year compared to prior years. But we believe this will likely accelerate in our fourth quarter. Our third fiscal quarter outlook reflects this expectation and notwithstanding the 40% content growth. We project sequential growth in our Wireless revenue to only approach double digits on a percentage basis. This outlook also reflects an expected decline in shipments to our last Korean smartphone customer. Let me now turn to Enterprise Storage. In the second quarter, Enterprise Storage revenue was $712 million, growing 1% sequentially and 36% year-on-year. The Storage segment represented 17% of our total revenue. Surprisingly, this segment continued to hold up and perform as expected. Hard disk drive and custom SSD shipments grew, while SaaS and RAID sustained, offset by a seasonal decline in Fibre Channel shipments. During our previous earnings call, we expressed a cautionary tone around enterprise storage for the third quarter; however, we continued to see stability in most of our bookings. We expect storage revenue to grow in the low-single digits sequentially into the third quarter. And finally, our last segment, Industrial. In the second quarter, the Industrial segment revenue was $223 million, growing by 24% sequentially, much better than expected primarily due to higher intellectual property licensing revenue from a large deal we closed in the quarter. Industrial revenue grew 23% year-on-year and represented 5% of our total revenue. Resales of our industrial products continued to trend up very firmly in the second quarter, and we expect this to continue to be strong into the next quarter. As we look to the third quarter, we expect Industrial revenue to grow in the mid-single digits sequentially. So in summary, demand in the second quarter, historically our weakest seasonal quarter, was stronger than expected. For the third fiscal quarter, end markets in Wired, Enterprise Storage, and Industrial continue to be strong, while Wireless turned out to start a slower than usual seasonal second half ramp, although we do expect it to accelerate dramatically in the fourth quarter. This leads to our projection of consolidated revenue growth of around 6% sequentially for the third quarter. With that, let me turn the call over to Tom for a more detailed review of our second quarter financials and third quarter outlook.

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 in the earnings release issued today and is also available on our website at broadcom.com. For the second quarter, starting with the revenue of $4.2 billion, which grew by 1% sequentially. Year-on-year, growth for the second quarter revenue was 18%, which I would notice continues to be well ahead of our long-term growth rate targets of mid-single digits. Foxconn was the only greater than 10% direct customer in the second fiscal quarter. Our second quarter gross margins from continuing operations were 63.1%, 70 basis points higher than our prior quarter and 110 basis points above the midpoint of guidance. The improvement in gross margins is primarily due to higher revenue and better than expected IP licensing revenue within our industrial and other segment. I would note, we do expect to be able to sustain these gross margins going forward. Turning to operating expenses, R&D expenses were $677 million and SG&A expenses were $122 million, totaling $799 million or 19% of net revenue for the second quarter. This was slightly higher than guidance as we accrued for a larger projected annual bonus compensation expense, driven by better than expected operating income. As I mentioned last quarter, we are comfortable at this relative level of operating expense given our current portfolio of businesses. Operating income from continuing operations for the quarter was $1.85 billion and represented 44.1% of net revenue. We now have line of sight to achieving our long-term operating margin target of 45%. Provisions for taxes came in at $78 million slightly above our guidance. This is primarily due to higher than expected net income. Second quarter interest expense was $112 million and other income net was $3 million. Second quarter net income was $1.67 billion and earnings per diluted share was $3.69. Our share-based compensation expense in the second quarter was $216 million. Moving onto the balance sheet, our day sales outstanding were 45 days, an increase of two days from the prior quarter due to a reduction in linearity of revenue in the quarter. Our inventory ended at $1.31 billion, a decrease of $25 million from the beginning of the quarter. We generated $1.58 billion in operational cash flow, which does include the impact of an increase in working capital. Expenditures on classic Broadcom restructuring integration activities continue to decline as expected, as we expanded approximately $50 million in cash on these activities in the second quarter. Free cash flow in the second quarter was $1.33 billion or 32% of net revenue. I would note, we are making very good progress towards our long-term target of 35%. Capital expenditure in the second quarter was $256 million or 6.1% of net revenue. As a reminder, we do expect our long-term CapEx to decline to about 3% of net revenue. A total of $437 million in cash was spent on company dividend and partnership distribution payments in the second quarter. We ended the second quarter with cash and short-term investment balance of $4.45 billion. Our cash balance is running at elevated levels, which we expect will continue through the third quarter in anticipation of closing the acquisition of Brocade. Now, let me turn to our non-GAAP guidance for the third 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 $4.45 billion plus or minus $75 million. Gross margin is expected to be 63% plus or minus 1 percentage point. Operating expenses are estimated to be approximately $787 million. Our tax provision is forecasted to be approximately $86 million. The net interest expense and other is expected to be approximately $100 million. Note, this reflects anticipated interest expense on our long-term debt of $112 million offset, largely by other income including interest earned on our cash balance. The diluted share count forecast is for 456 million shares. Share-based compensation expense will be approximately $255 million. Capital expenditure will be approximately $240 million. As you have seen, our Board has declared a dividend of $1.02 per share to be paid later in this fiscal third quarter. We’re looking forward to completing the acquisition of Brocade, which is proceeding as planned and subject to the satisfaction of the remaining closing conditions. We presently expect to close this transaction on or about July 31, 2017. That concludes my prepared remarks. Operator, please open up the call for questions.

Just want to follow up on the Wireless side you said it’s slow ramp. I was just kind of curious, is this the timing or magnitude? I think you have meant that it’s going to be more in Q4, but if maybe you could just wrap some color around that?

It's about the timing. Last year, the ramp was earlier and stronger in the third quarter, likely because it happened sooner. In contrast, the initial volume in our fiscal second quarter was smaller, which we compensated for with our content. However, we definitely expect the fourth quarter to be larger.

And then, you mentioned this from the Storage side, you had some conservatism on the second half and you're seeing growth. Maybe if you can just talk about what you're seeing on the Storage side that is growing? And then, what are you seeing. I think the hard drives where you're most concerned, what’s making you feel better about that market?

It's growing at a low single-digit rate. Currently, it remains at a high elevated level in Q3. However, Q4 is quite different, and we are not seeing full visibility as we are not booking everything for that quarter yet, although Q3 is nearly booked.

Thanks for taking my question and great job on consistent execution. So my first question Hock, can you please address these recent media reports about the potentially large bid for Toshiba's assets? I realized the details are not public, but there is a very large amount of money involved. And I think investors are keen to know how you're thinking about it conceptually and whether you are still committed to being disciplined around maintaining your free cash flow returns and not taking big technology risks when you consider M&A.

We are very committed to our business model of operating solely through franchises. All 18 of our product lines are product franchises in connectivity solutions. We are dedicated not only to these franchises but also to generating significant free cash flow, which we plan to return to shareholders. Our model remains unchanged. In summary, please don't believe everything you read out there.

I see. And then secondly on the Wireless business, I think you gave some good color for Q3. Just one question on Q4 and then maybe longer term, Q4 when I look in the last 5 years, the median sort of sequential growth has been close to 30%. So, is that the kind of level that you're thinking about this year or maybe even better given the delayed shipments of those phones and a higher content you've suggested? And then longer term on that same Wireless theme, I think one of your competitors, Qorvo recently outlined some plans to perhaps take some share at your large customer with the High Band PAD. And I wanted to see, how secure you think your competitive position is on next year's phone models? Thank you.

There are many questions and topics to cover, so I'll begin with the serious one. We don't make forecasts beyond one quarter, as it's generally not advisable because we could be significantly off. However, from the limited visibility we have, we are observing a ramp starting in our fiscal Q3, which, as you know, occurs a month earlier than the calendar quarter in July. We believe we've captured a portion of that ramp, though it's likely a small fraction, and we expect to capture a larger share in Q4. It’s important to remember that when making year-on-year comparisons, the content levels differ significantly from last year, which may affect the numbers. Therefore, Q3 may not reflect the same level of ramp as in the previous year for the reasons I mentioned. We anticipate that Q4 will ramp up even more significantly since if Q3 is slower, it's likely that Q4 will show a stronger performance compared to Q3 for any ramping product. That being said, I am not in a position to share specifics, as we don't look that far ahead. Regarding any negative comments you've heard, I'd prefer not to comment on that.

Thanks. I have just a follow-up on Wireless on the content side. Can you give maybe a little bit of context, if you split kind of the legacy of Viago and RF relative to the Broadcom kind of connectivity and maybe touch piece?

I am already stretching a lot to say there is a certain North American customer. We have very good content to customer we daily value. I prefer not to give you any more details other than that. Thank you.

Okay. I’ll try another one on the networking side. Can you talk about just the trajectory in the merchant silicon business and any new kind of customer adoptions or ramps to think about there?

We are very pleased with our merchant silicon in switching and routing, specifically the DNX series and Jericho products, which we have successfully launched. These technologies not only serve as routers but are also used for aggregation switching in the spine. Our merchant silicon provides a solid and comprehensive solution, even at the high-performance, competitive end of top-of-rack switching, covering a wide range of requirements effectively. This is expected to perform very well, especially in cloud environments where adoption among hyperscale cloud providers is exceptionally strong and well-utilized. Additionally, we are seeing some penetration in the enterprise market, and our fixed switches and routers are performing very well through our OEM partners.

I just had a couple of questions on your Wired segment. One of the larger customers in their guide recently and although weaker than expected for their June quarter and talked about some weakness on the service provider side, so other than by product type, can you talk about customer types? Are you seeing any change in the customer behavior that undercover is within that mid-single-digit growth that you’re talking about?

No, we don’t. In this third quarter, we observe strong data center spending. When you refer to service providers, I assume you mean the cloud providers. These cloud providers are heavily focused on utilizing merchant silicon for their switching and routing solutions. We are witnessing significant spending, which is partly why we are increasing our sequential growth forecast for Q3 from Q2 in Wired to mid-single digits. This growth is also supported by the seasonal increase we are seeing in broadband access and set-top boxes, which is part of CPE. This seasonality contributes to our numbers, but it is also driven by switching developments in data centers.

And as a follow-up still within that same segment on the broadband segment that you just talked about. Talk a little bit about DOCSIS 3.1 can mean for you. With that rolling out, is there a chance that things can be a little better than seasonal in your broadband business as we go ahead to the second half of the calendar year or are there offsets that needed to appreciate?

I never try to be too optimistic. At this time of the year, we see always the typical seasonality and by we seeing it now and bookings out Q3 and the beginning of Q4, very strong booking, but I'd like to consider that seasonality rather than unusual seasonality this is normal.

Couple of questions from me as well, I guess to start off with, as you look at your operating margin target around 45%. You guys are 44.1 right now and I think Brocade loan ones closes get you north of that. So, how should we think about margins as you go forward? Is there a desire to keep ticking margins higher? Or do you think this price lasting for this market where you perhaps keep margins the way they are drive revenue grow faster?

Well, you asked a very complicated strategic question.

We try to be specific.

I know you do, very impressive question, but you won't get as impressive an answer through I have to say that because all we are doing is, we sell based on where you added we provide our very key customers especially what it is. And we believe we deserve and get the value added we provide in our products to the solutions of our customers. And we think it will drive us to 45% as a fairly, fairly decent way to get there.

Amit, I get this point. We're not updating our financial model. We're not updating our operating margin targets. We're very comfortable at 45%.

Fair enough. If I may follow up on your gross margin guidance for the upcoming quarter. You are expecting a 6% increase in sales, but you indicate that the gross margin will remain flat. I believe that the lower performance in Wireless should actually help. Additionally, the gross margin increased by 40 to 50 basis points in July. Why can’t we anticipate similar leverage this July compared to last July, especially since the mix might be more favorable?

Well, we kind of give you what we see. We have focus guys as you probably know, so we kind of give you something that we feel comfortable with and we are very comfortable at the midpoint of 63%, which you're right, we achieved last quarter.

And Amit, I think we're going to be able to sustain in around that number. I think you're right, there is some wireless mix with slightly headwind. We've also worked through a lot of the Broadcom synergies and the benefits we receive there, but I think we planned to sustain that going forward.

I had a question on the long-term revenue growth target. Obviously, you guys are committed to the mid-single-digit target that you put out a couple of quarters ago, but as you pointed out, you grew 18% in the quarter. If we take the mid-point of your July quarter guide, I think you guys have, with the quarter growing about 17%. I realize the growth rate and enterprise for example it’s not necessarily sustainable, but what prevents you from raising the target to say high-single-digits on a long-term basis?

On a long-term basis, that's not feasible. We need to remember that the characteristics of our product guidance impact all 18 events, and eventually the 19th. They are very sustainable, which is the most important aspect of our product franchises. They provide added value and evolve with new generations. While they aren’t designed for rapid growth like our company, they tend to grow in line with GDP. Each generation brings additional value, allowing us to command a slight premium, but not significantly. Therefore, we expect mid-single-digit growth, which aligns with GDP growth at a slight premium. This is sustainable in the long term due to the nature of our products and our business model. What we’re currently experiencing is a short-term event, resulting in an 18% year-on-year growth in Q2 compared to last year. This is influenced by two factors. First, Q2 last year was particularly weak for certain reasons, and this year’s Q2 is much stronger, partially supported by a successful launch with our Korean customer. This quarter's performance has exceeded our expectations. A significant portion of the double-digit growth is driven by wireless revenue, which constitutes about 30% of our total revenues and has shown substantial growth. The second factor contributing to this growth is our wired, industrial, and enterprise storage infrastructure, which is particularly strong this year. The demand has increased, leading to this double-digit growth, although such strength in infrastructure is not typical. The combination of growth in wireless and infrastructure has led to the 18% increase. However, I want to clarify that this level of growth is not something we anticipate sustaining over the next five years. What we believe we can maintain in that timeframe is what we’ve communicated before: mid-single-digit growth on average, year after year, over the next 5 to 10 years.

Okay. Got it. Thank you. And then my follow-up, I just want to ask some follow-up question on M&A. And I realize the topic can be a little bit sensitive here. But Hock, you’ve told us to not believe anything we read in the papers. Is it okay for us to walk away thinking that you're not making the bids for that specific asset? Or and again I think ask the gentleman.

Let me reiterate, please do not believe anything you read and we do not comment on any rumors and pure speculation in the headline, but we continue to focus on our franchise stable business model. We have a lot of free cash flow.

Congratulations on the solid results and outlook and just great execution by the team. On the topic of free cash flow, you guys generated 32% free cash flow margins. If I normalize to your target of 3% CapEx, you guys actually did 35% free cash flow margins which is your target model. But I'm wondering despite the great cash generation, do you guys still have some restructuring acquisition related cash charges which would imply that the normalized free cash flow even now is better than what you printed and maybe to see if that's to quantify some of those cash restructuring charges?

No, you're right you're doing your math absolutely right. The Company take into account the elevated CapEx for mostly the campus investments we're making that you're aware of and some incremental restructuring charges and frankly some working capital headwinds as the business continues to grow. You're quickly get to 35% in which is where we want to be and obviously we'll continue to put up those numbers going forward, but based on where we see revenues and gross margins and operating expenses that we outlined for you, we think that's achievable.

Great. And then so my follow-up question within Enterprise Storage, you guys have got a leadership position and server rate and SaaS controller solutions, and typically these products tend to track server shipments. So given Intel's Skylake server CPU launch and you've got AMD’s Apex server CPU launch, both I think which are ramping now. Is this contributing to the growth during the July quarter and maybe through the second half of this calendar year?

Not in the quarter we just entered Q2, and not necessarily march in the July quarter Q3, but certainly we expect probably which is the generation and you're talking about for Intel launching Skylake. The early generation and storage will start to ramp up. You're right back half of this calendar year, really back half of this calendar year.

Hock, I want to talk a little bit about the Wired results just for the April quarter. There is a lot of different businesses inside of Wired, but the 3% year-over-year growth rate I think is kind of the slowest growth rate that we've seen since the financial crisis. And so, I'm just kind of curious if you could give us a little bit of color as to what actually happened to the April quarter where there were strength and where there might have been some relative weakness? And then as you think about sort of the reacceleration into July maybe some color around segments within wired would be helpful as well?

Wow, that's an interesting and very confusing question. But let me try somewhat, and for the rest, I have to take it offline another time because there are a lot of moving parts. And you're correct, in our Wired segments we represent 60% of revenue we throw in the kitchen sink, no really, all related to Wired. That is actually a couple of chunks on broadband, which is broadband access, carrier access, as well as CPE set-top box. And in Q2, totally not that strong obviously, it starts ramping up seasonally Q3, Q4. So, there is that effect there is not that strong and year-on-year a year ago, a year ago result that was the Summer Olympics, so we’re comparing against the Summer Olympics, which will make it touch. And in Q3, Q4, that’s all Summer Olympics of last year should begin to look very good, which is what accelerates this in the second half. In switching and routing, no, we continue to feel very, very good whether it’s in ASIC or merchant silicon, off-take delivery shipment continue to hit all-time high in those two segments. I hope that gives you enough and then third thing that messes with up is, we’re building block products by fines, retirements, which are more unique to the designs that’s been used as well as fiber optic which has gone through very interesting direction and cycles, that means mess of the number. But the two broadest area, broadband compared with a year ago is on compared, because the Summer Olympics. But switching and routing, the SMA continues to be a very, very strong franchise whether it’s in the form of an ASIC or in the form of merchant silicon. Even though they are both selling into very end market and users.

That’s helpful. And Hock, maybe from my follow-up on the ASIC side, I sort of a different question. You’ve always had a strong switching routing into business. It’s my understanding there will also be a basic of things my guess is the controllers and perhaps the things like in trends deep learning. Just kind of curious, how do you think about the ASIC IP, the Broadcom has? Would you consider that franchise and is it leverageable into areas beyond just switching and routing?

Yes. You hit it right on. We do launch ASICs that need to customize, deep learning chips for specific customers. We do that because we have all the IP in the hardware. I mean that keeps in mind, I believe deep learning is very much as much a software play such more than the hardware play, but we are happy to enable therefore specific large customers in ASICs with customized hardware, which we use even right now and be training or in terms but we do that. Then on SSD controllers, yes, we do a huge amount of SSD controller relatively speaking across our follow, basically for enterprises only, not really enterprises, but all part and enterprise storage business. They are not part of our wide basis. That difference is being very well as you probably can get it to date.

First, I wanted to ask about the cash flow. So again, we can see the margins are pumping up, if you normalize close for 35%. What about the payout ratio? So the payout ratio still running around 5%, we’re not close to 50. What's stopping you from bringing it closer to 50 earlier? What’s your trajectory or which you’ll be thinking about the payout ratio?

Yes. Stacy, I think we've reiterated a couple of quarters that going to put in place the financial policy that we're going to evaluate that once a year at the end of our fiscal year so that will be in October November timeframe. We're going to look back over our last fiscal year, look at that cash flow generation, look at the sustainability of the businesses that we're focused on and then make an assessment obviously with the board's approval around a recommendation. But what I want to reiterate is you're right as we continue to perform if we maintain that we could plan to do our 50% payout then that's going to lead to obviously an increased potentially increase in the dividend in the end of the year.

So my follow-up, I want to pick the dead horse but refresh us on your definition of a franchise. What are the characteristics of a business that meets that definition? And frankly, would it possible for a NAND Flash business to qualify as a franchise under your definition?

Let me explain our definition of a franchise, which is quite broad. Essentially, a franchise involves semiconductor components. These components operate in niche markets rather than mass markets, and most of the time, they are indeed niche. This is how markets have developed and are expected to continue developing in the future. We need to have established end markets that are sustainable, and within those niches, we must be the market leader. Our position as market leader is not just about size; it’s because we are technology leaders. We need to possess the necessary technology and capabilities to maintain our leadership in that specific market. Furthermore, there is a financial aspect related to these criteria. Each of our 18 product lines meets these criteria, and it's up to you to determine if NAND meets that standard.

I wanted to go back to your Wired franchise, Hock. You have talked about and this is a follow-up to John Pitzer's question. With regard to newer areas and all within the umbrella of the 5% that you've articulated for quite well over the last couple of years. Is this something that this is a one-off that you've done or do you see this as a broader volume with multiple customers as you go through the year and next year?

It's a learning product that we are providing for several customers, and these are all customized hardware solutions, not software-based. It falls within our ASIC category, and we possess extensive intellectual property focused on hardware, including SerDes and various other components that support training and inference in deep learning chips. We have all the necessary IP, but we are solely focused on hardware. We are not trying to present this as a complete solution. Thus, this ASIC solution serves multiple customers and is likely to cover many future generations. Ultimately, it is simply an ASIC solution.

Thank you. Hock, I just want to ask a clarifying question to the previous answer. Some of your peers are putting this market opportunity and close to $30 billion. I just want to hear your thoughts of how big the ASIC opportunity for deep learning in European is like to take maybe a three-year view on this?

I genuinely don’t know. Our strength lies in our intellectual property and our ability to implement silicon solutions that support deep learning. We also have the necessary IP for high-performance computing, and we engage heavily in switching and routing. We focus on deep learning, but we don’t consider it a standalone franchise. Our franchise is really in our ASIC capabilities.

Got it. And then I know you said, you don’t want to comment on your competitors trash talk, but if you could maybe comment on in terms of your BAW performance, I think historically the reason, you have just significant share was you had a significant performance advantage over your competitors. I’m just trying to understand, if some of your peers are close in the gap or at least narrowing the gap and as we look out the next couple of years. Just want to understand, how much advantage you still have in BAW?

Remember, my definition of a sustainable franchise. We don’t talk investments, I mean contrary to myths out there. We are join every time, we quick public product line as our core product line as among the ’18. We invest as much as we have to maintain, it’s not lengthen our need. No different yet, we don’t say put at the generation of last year, or two years ago, or three years ago, we continue to invest to lead that we direct review never closes. And that’s the key fund of our model. We will invest and given that your market leader in that niche, we can’t afford to out-invest anyone out there. We’ve been in R&D for even better and as you know in totality, some of it packed up in cost of sales or product engineering as we bring it to production. The rest of it in R&D, we spend on product development in this company every year $3 billion and that something from CapEx, $3 billion. And we are very, very conscious of the fact that we have to maintain is not even increase that level of spending where we need to in specific areas to ensure that we are the leader both in technology which leads to market leader. So not that easy to narrow but leads is to in terms of coming to compete with us.

Hock, I wanted to follow up on your earlier comments regarding your storage business and the outlook for stable demand in the upcoming fiscal third quarter. I'm curious, reflecting on earlier this year when the storage business was performing better than NAND, whether your customers have shared any insights on whether current hard drive demand aligns with the wider demand or if it's being influenced by NAND shortages that are driving hard drive demand.

It's currently a challenging market to forecast due to various dynamics at play. The exceptionally high levels of Flash demand are certainly influential, particularly since late 2016 and early 2017. Currently, the increased prices in memory, encompassing both DRAM and flash, while not affecting hard drives, are causing enterprises, operators, cloud providers, and data centers to exercise caution in their spending. There is a notable demand that exists and is necessary, but spending has become more restrained. This leads to fluctuations in demand. The situation is quite perplexing, and our visibility into future trends, as well as that of our customers, remains limited. We can confirm that demand for our products, including SSDs and SSD flash controllers, as well as components for hard disk drives, has improved since last quarter. While Q2 was strong and Q3 appears promising, we must be cautious as we look toward Q4. Although we anticipate robust bookings for Q4, the overall uncertainty isn't driven solely by a shortage of flash or DRAM; it also stems from shifts in spending patterns among data centers, cloud providers, and enterprises due to rising memory prices. There are. There are as far as I can potentially describe is broadband carrier exchange are increasingly even set-top box, which includes set-top box both CPE that is as well as central office are starting to spread Wi-Fi as another means. You have GPON, EPON, you have DSL, VDSL. Now, WiFi into the picture. So it’s all good and we are very, very well positioned in all this and going to generation. So, it is giving us more content to be put it this way at every access point which may help the growth. But it’s still not a big by the way as the phone by comparison the volume. But it’s a decent amount of volume and gives us a very sustainable franchise in this area.

Yes. And even this is just housekeeping but that business, while product line is in our Wireline segment, not in our wireless segment.