Ashish Saran - Director, IR Hock Tan - President and CEO Tom Krause - CFO

Ross Seymore - Deutsche Bank Craig Hettenbach - Morgan Stanley Gabriel Ho - BMO Capital Markets Blayne Curtis - Barclays Amit Daryanani - RBC Capital Markets John Pitzer - Credit Suisse Stacy Rasgon - Bernstein Research Vivek Arya - Bank of America Merrill Lynch Harlan Sur - JP Morgan

Welcome to Broadcom Limited’s Second Quarter Fiscal Year 2018 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ashish Saran, Director of Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO; and Tom Krause, Chief Financial Officer of Broadcom. After market closed today, Broadcom distributed a press release and financial tables describing our financial performance for the second quarter of fiscal year 2018. If you did not receive a copy, you may obtain the information from the Investors 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 Investors 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 fiscal year 2018 results, guidance for our third quarter of fiscal year 2018, 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, and good afternoon, everyone. I am very pleased with our execution in the second quarter of fiscal 2018. We drove gross margin to 66.6%, EBITDA to 52.3% and free cash flow to 42.3% of revenue. All record achievements for us and a continued demonstration of our robust business model. We were also quite active in executing on our recently announced stock repurchase program. Since announcement over a six-week period through June 1, 2018, we have returned approximately $1.5 billion to stockholders by repurchasing more than 6.4 million shares. And we do intend to continue to be active. Consolidated net revenue for the second quarter was $5.02 billion, just above the midpoint of guidance with strong wired and enterprise storage results offsetting weaker wireless revenue. As a reminder, before I go and give you more color into this quarter, the second quarter of fiscal 2018 was a 13-week quarter, while the prior quarter, Q1 was a 14-week quarter. Segment revenue comparisons reflect this as I discuss performance by segment. Starting with wired. In the second quarter, wired revenue was $2.3 billion, growing 9% year-on-year, 22% sequentially. The wired segment represented 46% of our total revenue. Second quarter wired results reflected strong sequential increase in demand from cloud data centers and a seasonal recovery in broadband access. Solid year-on-year growth was driven by robust increase in networking and compute offloading in cloud data centers and strong growth spending by enterprise IT. We also benefited from an increase in spending on broadband capacity expansion by service providers. In contrast, however, spending on video access and in the China optical markets remained sluggish. Turning to the third quarter fiscal ‘18, we expect growth in wired revenue side to continue, notwithstanding the ban on shipments to ZTE. We expect demand to remain healthy from cloud data centers and enterprise IT, while broadband access remains robust. Moving on to wireless. In the second quarter, wireless revenue was 1.29 billion, growing 13% year-on-year but declining 41% sequentially. The wireless segment represented 26% of our total revenue. Second quarter sequential decline wireless revenue was deeper than usual as shipments to our North American smartphone customers reduced sharply from typically exaggerated first quarter. We did partially offset this decline from increase in our product shipments to a large Korean smartphone customer as they supported their new product launch. Looking ahead to third quarter, we expect to see the beginning of seasonal second half ramp in demand from our large North American smartphone customer as they start to transition to their next generation platform. However, we expect this strength recovery -- I mean to say, this recovery to be offset by a decline in shipments to a large Korean customer. As a result, we are expecting our overall wireless revenue to be flat, maybe even slightly declining on a sequential basis for the third quarter. Let me now turn to enterprise storage. Second quarter 2018 enterprise storage revenue was $1.16 billion and represented 23% of our total revenue. This of course included a full quarter of contributions of over $400 million from the recently acquired Brocade Fiber Channel switch business. As you may recall, we have completed acquisition of this business early in our first quarter of fiscal 2018. And as reported, enterprise storage segment revenue grew 63% year-on-year and 17% sequentially. But if we exclude Brocade contribution, second quarter enterprise storage revenue would have shown stable year-on-year performance with strong growth from enterprise server and storage markets, partially offset by softer demand from the hard disk drive market. For the second quarter, the overall sequential revenue growth was driven by broad strength from the enterprise IT sector. Looking ahead to third quarter fiscal 2018, we expect continued spend in enterprise IT to drive sequential growth in enterprise storage, and growth in cloud storage capacity will lead to a recovery in hard disk drive demand. Finally, our last segment, industrial. In the second quarter, industrial segment revenue was $263 million, growing 17% year-on-year, 5% sequentially. The industrial segment represented 5% of our total revenue. Resales continued to remain very strong with 20% year-on-year growth. And we expect this momentum to continue into the third quarter. Notwithstanding the strength today, we expect annual industrial revenue growth however to be in the mid single digit range on a long-term basis. So, in summary, our overall business remains robust and stable. Our third quarter fiscal 2018 outlook reflects this with the consolidated revenue focus of $5.05 billion at the midpoint, as we experience continued strength in wired and enterprise storage, benefitting from a very robust cloud data center and enterprise IT spending environment. Year-on-year, our revenue growth has remained very sustainable. Even without contributions from Brocade, organic revenue growth for the second quarter would have been in the high single digits. And for the third quarter, we foresee this year-on-year organic revenue growth to modulate towards our long-term target of mid single digits. We will continue to keep a consistent focus on improving margins and increasing free cash flow from our business. Our balance sheet continues be strong with over $8 billion in cash at the end of the second quarter. We also have $10.5 billion remaining on our stock repurchase authorization as of June 1st. And reflecting the very strong free cash flow generation, we expect during the balance of fiscal 2018, we plan to continue to aggressively repurchase our shares as long as we believe that we can generate superior returns in doing so. 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. Let me quickly summarize our results for the second quarter of fiscal 2018. Second quarter net revenue was $5.02 billion, in line with guidance. Our second quarter gross margin from continuing operations was 66.6%, 60 basis points above the midpoint of guidance. We did benefit from a more favorable product mix in the quarter, driven by higher than expected revenue from our wired segment and lower than expected revenue from our wireless segment. Operating income from continuing operations for the quarter was $2.46 billion and represented 48.9% of revenue. Adjusted EBITDA for the quarter was $2.63 billion and represented 52.3% of revenue. Our days sales outstanding were 50 days, a 5-day increase from the prior quarter as we saw reduction in linearity of revenue across the quarter. Our inventory at the end of the second quarter was $1.26 billion, a decrease of $56 million from the prior quarter. Days on hand remained flat from the prior quarter at 67 days. We generated $2.31 billion in operational cash flow, which reflected the impact of $117 million of cash expanded on acquisition and restructuring related activities including Qualcomm and Brocade. Please also note that we did not make any interest payments in the second quarter as these are made on a biannual basis in the first and third quarters of our fiscal year. Capital expenditure in the second quarter was $189 million or 3.8% of net revenue. As a housekeeping matter, I would also note that CapEx was $61 million higher than depreciation. Free cash flow, which define as operating cash flow less CapEx, in the second quarter, was $2.12 billion or 42.3% of net revenue and reflects the impact of acquisition and restructuring expenses. On the buyback, just to give you some more clarity. In the second quarter, we spent $347 million on repurchasing 1.5 million shares. These repurchases took place over the last two weeks of the quarter. Over the first four weeks of the third quarter, we have spent an additional $1.16 billion, repurchasing 4.9 million shares. In addition, we returned $766 million in the form of dividends and distributions in the second quarter. Turning to our balance sheet. We increased our cash balance by $1.1 billion through the second quarter and ended the period with $8.2 billion in cash and $17.6 billion in total debt. Now, let me turn to our non-GAAP guidance for the third quarter of fiscal year 2018. 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 $5.05 billion, plus or minus $75 million. Gross margin is expected to be 66.5%, plus or minus 1 percentage point. Operating expenses are estimated to be approximately $882 million. The tax provision is forecasted to be approximately 7%. Net interest expense and other is expected to be approximately $115 million. The diluted share count forecast is for 457 million shares and it does not include the impact from any share repurchases done after June 1, 2018. Stock-based compensation expense will be approximately $320 million. CapEx will be approximately $125 million. As you may recall, in connection with the redomiciling the United States and as a result of the effects of U.S. corporate tax reform, we had initially expected our effective cash tax rate on a steady state basis to be in the range of 9% to 11% per year. Following the redomiciliation, we currently expect our cash tax rate for the balance of fiscal year ‘18 to be approximately 7% and our long-term cash tax rate to remain in a 9% to 11% range. That concludes my prepared remarks. Operator, please open up the call for questions.

[Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.

Hi, guys. Thanks a lot, and I have few questions. I want to start off on the wired side, last quarter there was a lot of debate about why the year-over-year growth slowed so much and you guided for confident sequential growth that you just delivered. Talk a little bit about the visibility going forward. What’s driving the slight growth that you’re guiding to in the fiscal third quarter? And can you still hit the mid single digit growth for the fiscal year in that wired segment?

The wired segment for us, especially the networking part of it that we have very good visibility right now and it’s largely driven, as I indicated in my prepared remarks, from the cloud data center guys, the big cloud data center guys. What we also see, and that’s probably less visible, is very strong spending patterns at enterprise. I call that enterprise IT environment, the more traditional enterprise. That’s -- those guys have also been spending. So, when you combine the two together, that portion of our wired infrastructure because as it relates to networking broadly as we describe it, is very strong. And of course, as an aside, a separate segment, we call it enterprise storage, benefits get dropped along with that. So that’s why we see very strong business in what storage, I call near line or what I call data center storage business, very, very strong, both of them. And that’s very visible in many, many -- in many of the situations because the cloud data center guys tend to spend in fairly lumpy manner -- in a lumpy manner. And so, you get that visibility as opposed to a more secular or trended manner as the enterprise IT guys are doing. So, to answer your question, bottom-line, that will drive our wired business to hit to our goal of mid single digit year-on-year for this year.

Perfect. Then, I guess, as my follow-up, switching gears on to the wireless side of things. It’s good to see that your big North American business is starting to turn up and that the business as a whole has stabilized. Can you just talk about whether via content or the unit side, how you think about seasonality in the back half of the year, given that there are so many different moving parts of content per SKU and what different customers are doing?

There are a lot of moving parts. It’s easier to look at it on whole -- on a total basis and whole [ph] basis and also there’s unusual factors which we all thought would happen in that. As we move from iPhone 8 to iPhone 9 generation coming out that there is some caution in the level of builds, and there is, we believe there is. But having said that, we are also seeing orders coming in what I call in a normal seasonal pattern of strength. And we do see that very clearly now, and we do see bookings that extend all the way to close to the end of this calendar year from these North American customers. So, we see that -- what you said exactly, back to -- trend of the normal patterns. The difference is, what’s the mix of the new generation phones versus legacy phones. And that’s what -- might lead to some uncertainty of how much content changes or increases that might be. And very frankly, visibility is not as clear. Because it’s hard to predict what level -- what will the mix of new generation phones versus legacy generation phones would be.

Thank you. And our next question comes from Craig Hettenbach with Morgan Stanley. Your line is now open.

Yes. Thank you. Hock, just more of a strategic question of how you view the business. So, some of the pushback on the company is that you’ve been so acquisitive that feeling that there is a need to do more M&A. So, just few things on that. Number one, with the current make up of the business, can you talk about the long-term growth profile as you see it? And then the second part would be, now that you’re buying back stock, your view of the opportunities to do M&A versus return cash through buybacks?

Very interesting question. In terms of long-term growth of this Company and the various franchise businesses that comprise our entire business and Company, we have always said and there are no reasons to change that at all to say that long-term -- that we will achieve on a long-term basis, as you look over a period of -- extended period of time an average compounded growth rate, average compounded growth rate of mid-single digits. No reason for us to change. The business model continues to be to demonstrate it. And we do not see anything that makes us think otherwise. Year-to-year, as we’re seeing, you may see variations from that mid-single digit. We saw that 2017 as it compared to 2016. We saw strong organic growth taking -- stripping out the acquisition, there are contributions from acquisitions. We saw close to mid double digit mid-teens year-on-year growth in ‘17. We’re in ‘18 and I don’t expect that mid-teen rate of growth to continue. Because as I said, it’s one year, but it’s still above in ‘18 mid single digits, definitely. We expect it to be moderate, down to perhaps high single digit conservatively. And expect that, but that’s to be expected. You cannot expect the kind of breadth of our business in connectivity solutions largely and our major positions -- market position within connectivity solutions, especially in those markets where franchise products prevail. To keep growing higher than the rate of growth of the entire semiconductor industry, not counting memories. There is always, it has to modulate down, as I said before to a level, which is closer to the growth of the industry. We have to follow that. And the only variation to that whole thing as we think through this is simply that like all technology business, every new generation -- every time a new generation pops up and it varies in product life cycle from handsets, which is 18 months to storage, which may be 5, 6 years,. to industrial which maybe even longer that each new generation brings an increased contest. So, we have a pica above GDP growth rate, I want [ph] to say that. Hence, we end up with mid single digits on a worldwide -- on a global basis. And we will see that long-term. Even as in the short-term, we see variations and we saw in it in ‘17, we’re seeing in the ‘18. But it will inevitably -- we measure it over long enough period, get down to that mid single digit.

And then, just as a second part of that question around how you’re evaluating kind of M&A opportunities versus the aggressive steps you’re taking on the buyback?

We could do both, as we do basically based on return on investment as we generate cash. One of the things we are seeing is our cash flow generation, as Tom indicated in his remarks and especially last quarter -- and this last quarter is not an unusual quarter. As we focus going forward, our cash flow generation is very, very strong. Our free cash flow was north of $2 billion last quarter. And a big part of it relates to the fact that CapEx, which has been a big consumption of our cash flow over the last two years, at least, between building up capacity and building up campuses in couple of allocations worldwide, which involves big amount of money, for cost reduction -- cost reduction, operating cost reduction purposes, but nonetheless [indiscernible] CapEx dramatically dropped as we finished those programs. And as Tom said, we are looking towards CapEx level much lower than we are seeing in prior years, in prior quarters. So, that’s enabling our cash generation to be fairly substantial on a quarterly basis, probably north of $2 billion free cash flow. So that’s allowing us a lot more flexibility, which allows us to still look at M&A, as we do, and still be able to invest that very strong stream of cash generation in a very good return generating asset, our own shares, which is fairly -- think about shares producing -- generating over $8 billion in a company, our market talking about 8% cash on cash return, strong balance and its own shares. So of course, we will keep doing that especially with the flexibility of generating a lot of cash. But that doesn’t mean we stop doing M&A. We are continuing to look and we go by the criteria we have on cash and cash return. And as we see opportunities as we still do, we will act on those M&A opportunities.

And our next question comes from Ambrish Shrivastava from BMO Capital Markets. Your line is now open.

This is Gabriel Ho calling in for Ambrish. Thanks for taking my question. I think, this question is for Hock. On the wireless, the guidance seems to be implying a flattish on a year-over-year basis in terms of growth for the fiscal third quarter. So, my understanding is, last year, the phone -- at your large smartphone OEM customer was later than normal. So, why is wireless revenue not growing and is it due to the content or more of the units?

It’s hard to measure it quarter-on-quarter for various reasons. In my remarks, I was very clear. At this time last year third quarter, we had both the North American smartphone maker and the Korean high-end phone maker going in the same direction. We’re not -- while we are still very positive on the North American phone maker, we are not seeing strength in the Korean phone maker. That’s -- as I said in my prepared remarks, that’s the reason we are seeing that difference, the major reason we’re seeing that difference.

Thanks. As a follow-up. On the revenue side, you talk about operating leverage, talk about revenue growth moderating towards mid single digit, and how should we think about OpEx front as well as your gross margin, longer term?

So, if I understood your question correctly, you’re talking operating leverage and the model going forward. I think, if you look at the operating expenses, they’ve effectively flattened out here at these levels. We might see them come down a bit, especially as we look into ‘19, but to fair level, we don’t see -- expect this increasing from here much. We obviously think we still have a lot of leverage from a gross margin standpoint. We continue to see gross margins expand; that’s the trend you’ve seen over the last several years. We don’t see that stopping any time soon. So, when you put that together, we believe that we’ve got a lot of capacity to continue to improve our operating margins. And as Hock talked about, CapEx is coming down. I mean, this is largely a fabulous company, a CapEx-light company when you look at the fundamentals. And so, we’re driving CapEx spend to more like $100 million a quarter, which suggests you are going to be running much closer to 2% as a percentage of revenue. And so, free cash flow margins, which we have a target of 40%, we think that can continue to improve and likely improve obviously north of 40% if you do that math.

Thank you. And our next question comes from Blayne Curtis with Barclays. Your line is now open.

I just want to ask on the guidance. I wanted to make sure -- it sounded like all the segments would be up but then you said not to mention ZTE. So, I was just curious how much of an impact that would be. And then secondly on just wireless, I just wanted to understand, obviously it’s harder to triangulate content, average content; legacy is one portion but there’s also the share portion. I just wondered if you can comment on your visibility of your share at that customer, the North American customer? Thanks.

We don’t want to -- like to talk about share on that because in the overall scheme of things, Blayne, it makes no difference to us. It might make a big difference to somebody else, which I won’t mention, but in overall scheme of things, we look our business as 20 product divisions, four different segments, some segments are up, some segments are down quarter-to-quarter but overall, very, very stable and sustainable, I mean broadly answer. So, I really don’t have that much to comment on in terms of share, and we really don’t want to -- don’t like to comment on share. But, in regard to your first part about ZTE, again, this is -- we’re trying to be looking at it from a very high level. And until we have the ability to ship out, clearly ship out to ZTE, we really prefer that -- again as we said, not to comment on it. Where we stand now is products are not shipping. And that’s our opposition at this point.

Thank you. Our next question comes from Amit Daryanani with RBC Capital Markets. Your line is now open.

Yes. Thanks for taking my questions. I just have two as well. First, just on capital allocation. Now, that buybacks are part of your broader capital allocation, does the bar for M&A for deals essentially become higher because plan B would be assuming to buy your own stock, buy something at a 8% a cash yield with no integration issues. So, I’m curious does the bar for deals become higher, or how do you look at the cash on cash targets today now that you have option to do buybacks?

I think Hock said it well, I’ll just reiterate it, maybe a little bit more color. But basically, it’s a returns driven phenomenon. You can see our views on the returns of buying back our own stock based on our execution to buy back over the last month plus. So, I think that’s self evident. Going forward, as Hock said, we always look to drive double-digit returns from an M&A standpoint. Obviously, we think we know how to do integration. And so, we’ll take a risk-adjusted view of it. But as long as we think we can find opportunities that are well in excess that we can buy our own stock at, we’ll obviously take a very close look at that. But, without that in mind, obviously the stock over the last month plus is what we try to do based on the stock that we brought back and we continue to do so, as Hock said given the returns.

Got it. And then, if I could just follow up on the wireless segment, and I understand some of the near-term discussions you’ve been having on this. But, as you think about the next couple of quarters in fiscal ‘19 on a broader level, do you think you’re positioned to grow your wireless revenues in aggregate in fiscal ‘19 at this point or are the compares going to be such that it’s going to be hard to show growth next year in that business, if you are assuming flat with your two largest customers there?

We don’t give outlook even beyond one quarter, much less the year. And frankly, we’re not about to really change that practice or policy. Because then we’ll be doing nothing but a lot of this in every earnings call. We’ll give you a strategic view of the whole thing and that hasn’t changed. Again, we’ve got franchises in those -- in every segment including especially wireless. And largely for one year look, we don’t comment on that.

Our next question comes from John Pitzer with Credit Suisse. Your line is now open.

Yes. Good afternoon, guys. Tom, congratulations on the strong quarter. Thanks for letting me ask the question. Hock, just maybe I’ll ask the wireless question a little bit different. I understand the impact that mix might have as far as your revenue growth in the back half of the year. But as you think sort of flagship to flagship at your North American customer, how should we think about content growth this time around? And perhaps differentiate between RF and other applications. And I guess, with the RF stack, we’ll start to see some initial 5G modems coming out at the end of this year, just wondering what kind of visibility you have for continued growth of FR [ph] as the world transitions from 4G to 5G?

I mean, strategically, if you go to add 5G and you go deeper and deeper in the 5G, which runs what I call the ultra high band frequency or maybe, it’s not so, ultra high. But nonetheless, well, you talk about anything, 3 gigahertz and beyond. You tend to push towards more and more advance [ph] that’s given, that’s very well proven, that’s very well known. Now, when would 5G really come in and what fashion they will come in, because the initial phones will likely be claimed to be 5G, but not truly 5G. So, the specifications don’t have to be as rigorous for performance. People will try to -- phone makers may use, especially on the lower end, not higher end, use softer alternatives, and soft filters and get away with EBITDA performance doesn’t matter, just soft. [Ph] But when you really get deeper and deeper into 5G, you need advance filters to make it work, given. So, think of it, long-term content will step up, no question, not only more frequencies but frequencies that demand the need for above. Beyond that, who knows. Go ahead.

And then, specifically as we think flagship to flagship this year from your North American customer, how do we think about your RF content growth and/or potential growth elsewhere, things like connectivity or touch?

Well, if things are -- as we are seeing moving a lot, we all like to think about is how soon will normalcy in flagship phones recover, comeback to what you call normalcy. We don’t know. And how do you know what is content versus unit volume, especially when normalcy -- I’m not trying to doubt your question. I’m saying is, you can’t tell, because right now, shipments are not really normal even as we see bookings coming and strongly and hopefully we like to see normal. But then we don’t see the North Korean customer be not strong as it should be.

And our next question comes from Stacy Rasgon with Bernstein Research. Your line is now open.

Let me ask that question in a different way. So I know, last year around this time, you gave us a number of content, you said at your North American customer was up 40%. Obviously that may have changed a bit, given the mix and it sounds like you’re suggesting mix going forward of new phones versus legacy is an unknown. But if the mix, I guess in the 2019 was the same as what we saw this year, what do you think your content at your North American customer would be? That should be a math problem you ought to be able to do.

Yes. But even I tell you, how we’re going to check it against revenues, which is most important. Because our legacy phone will vary. The mix of legacy phones customers increasing dramatically, you will reflect on the different set of content. What you are asking is, what the content -- it’s not really what’s the content. What’s the revenue over the next few quarters? What it’s going to look like. And based on -- trying to do simple math on content, I’d say you have an unknown equation which says the legacy phones may increase in percentage, which then dilutes any increase in content. And then the revenue won’t reflect what you are looking for. I am basically trying to answer your question for you by saying that if you are looking for what else -- simple correlation between content increase and revenue change, I am saying that other factors that are coming in that might dilute that whole equation. And so, answering that question that you asked in simple terms, doesn’t answer the underlying interest that you have. I would say in broad scope, content direction and trend hasn’t changed at all. But the mix of legacy, the mix of phone SKUs, and in some situations if you look beyond North American OEM and look at other high-end smartphone makers which we sell to and their varying performance, all are superior numbers.

Let me ask you a question…

I mean your math request is easy, and I am telling the math request is that the trend in content increase has not changed. [Multiple Speakers]

Okay. But, I mean your old -- kind of long term kind of normalized outlook was for kind of end market units to be relatively flat, given call it premium phones aren’t growing very much. But, you have mid double digit - kind of over the long-term mid double digit content increase. You are not changing that long-term point of view. And that was -- by the way, that had nothing to do mix, that was a portfolio point of view as I understand. Are you still holding that long-term portfolio due for content increase?

Yes. That would be long-term content increase still and will still be long-term content increase. I am interested to know that there’s a mix change and there’s a unit change, now that we’ve all seen.

Let me ask about storage really quickly. So, obviously that’s growing well right now. And I think in conjunction with the networking portion of enterprise, you got similar of the drivers. I think storage historically has tended to be quite a bit more lumpier than the wired business and it just rose 17% sequentially and it looks on a mostly organic kind of quarter. I guess, how should we think about the drivers of that and I guess the lumpiness that may continue with that going forward? I think historically you’ve given -- again, a longer term kind of view of that business overall was roughly flattish, plus or minus, like how should we be thinking about the near-term drivers of that and how those may play out over the rest of the year?

Let me correct some misperceptions and maybe I did not articulate it clearly enough. If you strip out Brocade, I was trying to say - if you do a year-on-year comparison you have to strip out from current year fiscal ‘18 results. Our revenue in enterprise storage year-on-year is single digits growth as you expect enterprise storage to typically happen. And this is stable kind of business. It doesn’t do cut wheels [ph] and stuff like that, but it’s very stable and extremely sticky and profitable. That’s storage. And even in fiscal ‘18, we’ve seen super strength especially with near line data -- data center buying more high capacity drives -- hard drives. We will still grow maybe closer to high single digits year-on-year which is unusual for enterprise storage. What has perhaps confused mix is we now at year-on-year comparison Brocade. And that leads to that 17%. Otherwise year-on-year, please don’t expect double digit growth on storage, at best flattish to single digits.

So, wasn’t the 17% a sequential number or am I remembering that wrong?

It’s probably some level of sequential. Now, you’re right. That sequential -- I’m trying discourage if I’m looking at it sequentially. Look at it, year-over-year. Sorry.

Okay. So, you think roughly flattish year-over-year excluding Brocade. Okay. Thank you.

Yes. Roughly flattish year-on-year, excluding Brocade.

Thank you. And our next question comes from Vivek Arya from Bank of America Merrill Lynch. Your line is now open.

Thanks for taking my question. I also had two. So, question on -- I understand, we don’t want to talk about specific content. There does appear to be some more competition in high mid-band bands. Do you think that is just the desire for large customers to just be -- just have supply diversity or do you think competition is catching up in technology? And if it’s the latter, what are you doing to make sure that you’re sort of maintaining your competitive edge in based technologies?

Okay. Good question. In every franchise, product line franchises we have, and we have plenty of them, we are in the lead. That’s the definition of why we call it franchise and that’s our business model that we are the lead. Whether we grow it organically ourselves or acquire and strengthen and sustain those, we’re the number one in each of those segment, no different in wireless. Within wireless, we sell most notably RF frontend as well, in words building to it or WiFi Bluetooth combo chip, as we call it wireless connectivity. Very much we’re the number one ending the lead. And we always having said that, have competition. Word is such you always have competitors. But, we are always in the lead and we always, as our key business model, continue to invest as we need to continue if not extend our lead. And to answer your question, in our RF frontend, which I assume that’s what you’re addressing rather than wireless connectivity on WiFi, Bluetooth whether nobody even within range. In RF frontend, we are very much in the lead. And we have that lead now for many years. And we continue to invest to keep that lead. And it has not changed. Believe me, it has not changed. The lead that we have and been able to understand and design those RF frontend components, which includes -- a lot of it FBAR filters, a key element of strength. And power amplifiers, and the normal switches, and little component that add up to an RF frontend. But especially, when it relate to FBAR, we are in architecture where the benefit -- creating those RF frontend that enable high end phones to deliver the kind of performance and bandwidth that they generate that you see around you. And we continue to make sure we are very much in the lead. So, as far as we’re concerned, that hasn’t changed. The business hasn’t changed. The franchise, to answer your question directly, is not at all in jeopardy. Maybe the clear answer to all you guys out there is we do not see -- and this is not trying to be cavalier or complacent, well far from complacent in any one of our franchise business. We continue to remain the lead -- we ensure we continue to be in the leads as we look forward, one generation, two generations. That hasn’t changed, the franchise is not in jeopardy.

And as my follow-up. Very strong performance on the gross margin side. I think Tom, you were mentioning that you expect perhaps more upside. What’s driving this upside? Is it just mix, is it something else? And is their way to quantify what longer term opportunity is to take gross margins through? Thank you.

Yes. Good question. I mean, obviously, it is mix as well. I mean, if you look at the growth Hock’s been articulating around, cloud and enterprise IT, we’ve added Brocade. These are all very margin accretive activities. As revenue grows as well, we’re seeing our businesses that were lower performing carried with it lower gross margins ones that we acquired from Broadcom in particular continue to improve. As you know, it takes several years to go from actually designing in the product to shipping new products in volume, some of the businesses we've owned for less than a couple of years. And so, all those things as well as the day-to-day normal operating improvement is driving gross margins up. Clearly, we’re focusing on value accretive R&D. So, we’re spending nearly $3 billion in R&D, all of that is focused on delivering greater and greater value of the customer, that’s also very gross margin accretive. So that gives us confidence, so we can continue to improve it from these levels.

And now that we have also -- let me expand a bit on what Tom is saying also. Here is the thing, if you look at the strategy of this company and the product and the market characteristics and how we address the market. We pick those franchise products and those products are strategic components typically of the customers in each of the sites, in each of the end markets we address. And as I say, one of the things that’s great about technology business is it constantly evolves. I’m not using the word disrupt, I’m using what evolution, it evolves. It grows on switches, increases in bandwidth. Top-of-rack switch we’re launching now is 12.8 terabits. Features a lot, but this is capacity. The routers, we have same situation. The SerDes we have out there to support our building block products and a few -- a bunch of other products we have has now reached a level of 102 gigabit per second. As we go up high and high, the bar in challenging our products goes up correspondingly. I almost want to say, use the word in many cases, exponentially. You have to spend the money to deliver those kind of very high technology products. And it gets harder and harder as generation progresses in every one of the product. Even a simple thing as PCI Express generation 3, going to generation 4. It’s a huge challenge for most silicon guys out there. We can do it. SerDes is going from 25 gigabit to 56 gigabit to 112 gigabit, as I said earlier. We are finding less and less people out there able to come even close to what we do. And because of that, we’re delivering high content and increased bandwidth which is big part of what we do. Higher bandwidth allows more data transfers, allows us to get better value for those products, and that’s what drives the gross margin. All this is -- spending, it’s mostly in R&D. The spending is not in making the product more -- it’s not in cost of manufacturing going up, it’s more in the R&D spending to design and enable the product to come out. So, it’s normal that the gross margin goes up. It’s also normal that the cost of doing R&D is stepping up. And as Tom said, we are very disciplined on how we make sure we get a good return. But really the cost of manufacturing more and more sophisticated, higher performance product doesn’t change -- doesn’t increase as fast as the value we add to our customers. And that’s why you translate it to high and high gross margin. The same applies in wireless to RF frontend, guys, I’d like to say that. It’s harder and harder, the value goes up, but the cost of manufacturing goes up less. And it’s the explanation for why our gross margin has been trending or creeping up generation-after-generation year-after-year.

Thank you. And our next question comes from Harlan Sur with JP Morgan. Your line is now open.

Good afternoon, guys, and great job on the quarterly execution. Your data center ASIC pipeline is very strong and I assume contributing to the strong year-over-year growth in wired. And our sense is that the pipeline is getting stronger and more diversified in terms of customers and product types, switching, routing, AI, deep learning, Smart NICs and so on. And it does seem like more and more the cloud titans are trying to do their own silicon. So, do you guys think that this is just a transitory phase and merchant silicon will eventually fill this void, or do you get a sense that better silicon optimization via ASICs will be a sustainable trend? And I think, this question also applies to your analog ASIC business as well?

Very interesting question. I’d be direct with you. I don’t know the final outcome and answer either. But we see strength today, and looking forward to the next generation in both merchant silicon and ASIC implementations of the kind of products we do, they are both. And in many situations on large cloud guys who have the scale to ask for unique ASICs, some of those unique ASICs get their platform from our merchant silicon. And so, in many cases it’s almost an equal system play. It’s a whole fabric on network play. It’s not one component by itself. And we’ve seen that. And I would say both, merchant silicon is moving along very strongly as is ASIC or semi ASIC, semi custom development. And this is -- when you say that the cloud guys want to do their own silicon, I will phrase it to say they can only do so much of the silicon. As you know, there is a whole spectrum when you do a silicon from right at the frontend definition, architecture definition, chip definition to RF and design RTL all the way to the backend. And no cloud guy can cut across the entire spectrum, they’ll do only parts of it. There is always room for a silicon supplier like us who are able to do across the entire spectrum and with $20 billion of revenues. Our scale enables us to not only do things better than most other suppliers out there in silicon, but it also gets us to the scale of cost that is hard to match and across a wide diversity of products. In other words, our cost of developing 7-nanometer spread across such a wide spectrum of products is very, very cost effective as the IP, intellectual property we develop to support many of our unique products very low. And you see that in the kind of financial performance Tom articulated.

Thanks for the insight there, Hock. And then question for Tom. You guys have a full quarter of Brocade under your wings. You were targeting $900 million in annualized EBITDA, post synergies, 60% EBITDA margins. Just given the Company’s total margin profile that you’re driving right now, seems like you guys are kind of already there, but wanted to get your view. Can you just help us level set where you are relative to your target and how much more you think you can drive versus prior expectations?

Sure. Good question. I think at this point we feel really good about Brocade. Obviously, revenues are -- as a public company and everyone knows where the top-line on the sand was. So, revenues are strong and a lot of that’s reflected in the storage business and the results there. In terms of margins, obviously, it’s a margin accretive deal. A lot of the costs on the OpEx side have come out; there is a little bit left to go. But, it’s largely done. So, if you do that math, obviously this is a business that’s meeting if not exceeding our expectations. And I don’t want to get any more detailed than that.

Thank you. That concludes Broadcom’s conference call for today. You may now disconnect.