Ashish Saran - Director, Investor Relations Hock Tan - President and Chief Executive Officer Tom Krause - Chief Financial Officer

John Pitzer - Credit Suisse Blayne Curtis - Barclays Vivek Arya - Bank of America Chris Danely - Citigroup Amit Daryanani - RBC Capital Markets Craig Hettenbach - Morgan Stanley Ross Seymore - Deutsche Bank Harlan Sur - JPMorgan Toshiya Hari - Goldman Sachs Ambrish Srivastava - BMO Vijay Rakesh - Mizuho Stephen Chin - UBS

Welcome to Broadcom Limited’s Third Quarter Fiscal Year 2016 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, acting Chief Financial Officer of Broadcom Limited. After the market closed today, Broadcom distributed a press release and financial tables describing our financial performance for the third quarter of fiscal year 2016. 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 1 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 third quarter fiscal year 2016 results, background to our fourth quarter fiscal year 2016 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. Well, we did deliver very strong results for our third fiscal quarter 2016, with revenue at $3.8 billion, up 7% sequentially and above the midpoint of guidance. Earnings per share of $2.89 grew by more impressive 14% sequentially as we benefited from the leverage inherent in our business model. I am rather pleased with our execution on integrating classic Broadcom businesses and divesting several of its non-core businesses we had identified as assets held for sale. We have also made rapid progress in driving towards our target business model within the first two quarters after closing the acquisition, but we are not yet done with the full realization of expected acquisition-related cost synergies. Let me now turn to a discussion of our third quarter segment results starting with wired. In the third quarter, wired revenue came in at $2.07 billion and the wired segment represented 54% of total revenues. Revenue for this segment was flat sequentially as the strong demand we had seen for wired products in the prior quarter continued to sustain into the third quarter. This was slightly weaker than we have expected due to lower than expected set-top box product shipments because of supply constraints. However, the reduction in set-top box revenue was offset by growth in our ASICs, particularly in Ethernet switching and fiber optic shipments into the fiber-to-the-home applications. We also benefited from strong demand for fiber-to-the-home products in our broadband access business, switching and routing ASSPs sustained as datacenter operators continue to upgrade their infrastructure. Our Jericho routing product family, which is enabling a whole new set of switching and routing platforms for our core customers had a strong ramp in this quarter. As we look into the fourth quarter for our wired segment, similar to the prior quarter, we expect wired to sustain and continue to come in flat sequentially. We continue to resolve supply constraints in this segment as we progress through the fourth quarter. Moving on to wireless, in the third quarter, wireless revenue came in at about $1 billion, and this segment represented 27% of total revenues. Revenue for this segment was up 27% sequentially somewhat stronger than expectations. Growth was primarily driven by the expected start of a ramp from a large North American smartphone customer as they transition to their next generation platform further enhanced by a substantial increase in Broadcom’s content in the new handset. We also benefited from continued demand increases from our large Asian handset customer. Looking towards the fourth quarter fiscal 2016, we expect strong growth to continue in our wireless segment and we are projecting revenue growth over 30% sequentially here. We expect this growth to result from the full ramp of the new phone model and our North American smartphone customer partially offset by the annual product cycle rollover in our large Asian customer. Let me now turn to enterprise storage. In the third quarter, enterprise storage revenue came in at $527 million, and this segment represented 14% of total revenue. Segment revenue came in flat sequentially compared to the large seasonal decline in the prior quarter. We had expected revenue in this segment to decline sequentially, but instead we delivered better results as some stability returned to both the hard disk drive and server storage SaaS connectivity businesses in the third quarter. Looking into the fourth quarter, we expect positive end market seasonality to drive enterprise storage revenue growth in the low single-digits sequentially. Finally, to our last segment, industrial, as I mentioned previously, this segment also includes our IP, intellectual property licensing business. In the third quarter, industrial segment revenue came in at $202 million, up 11% sequentially much better than expectations. Industrial segment represented 5% of our total revenue. In IP licensing, as expected, after a strong and lumpy second quarter, revenue dropped in the third quarter in IP licensing. In contrast, industrial product resales, there is our distributors selling to our end customers grew by a healthy 15% sequentially, with strong demand from all geographies. As a result, industrial product revenue also increased sequentially and significantly as we replenish depleted channel inventory during the third quarter. And accordingly, as we look into the fourth quarter and take into account the strong inventory replenishment in the third quarter, we plan on reducing shipments into the channel as we head towards the seasonally weaker end of the calendar year. Therefore, even as we focus resales to continue to be firm and trend up mid single-digits, we expect an approximate 20% sequential decline in fourth quarter industrial revenue. In summary, therefore, I would like to say it’s visibility to near-term projected demand remains very solid and we anticipate continued momentum into the fourth quarter. We expect the ramp in our wireless segment to drive consolidated revenue growth of 8% sequentially. We expect our operating leverage to drive earnings per share growth of 16% sequentially twice our projected revenue growth. With that, let me now turn the call over to Tom for a more detailed review of our third quarter 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. We continue to focus on our core businesses or franchises as we call them, to drive a financial model that delivers sustainable mid single-digit annual revenue growth at greater than 60% gross margin and greater than 40% operating margin. To that end, in the third quarter, we took another very positive step towards our target model. We achieved healthy top line growth with gross margin over 60% and operating margin at just over 39%. As our integration plans progress, we see a very clear line of sight to achieving our target model in fiscal year 2017. We were also able to improve our capital structure in the quarter. We completed both previously announced divestitures collecting over $600 million in cash and paid down $1.3 billion of our long-term debt. Finally, just after the quarter close, we took advantage of favorable credit markets to refinance our outstanding term loans at substantially lower rates. I will touch on the details of the refinancing later in my prepared remarks. Now let me turn to a summary of our results for the third quarter. Revenue for the third quarter came in at $3.8 billion, growing 6.7% sequentially. Foxconn was greater than 10% direct customer in the third fiscal quarter. Our third quarter gross margin from continuing operations was 60.4%, about 40 basis points above the midpoint of guidance, primarily due to better than expected operational efficiency. Turning to operating expenses, R&D expenses were $667 million and SG&A expenses were $141 million. This resulted in total operating expenses for the third quarter of $808 million, in line with guidance. Operating expenses were flat sequentially as the benefits from the ongoing realization of acquisition related cost synergies were offset by higher bonus accruals due to higher profitability. Our fourth quarter guidance for operating expenses anticipates a similar outcome. We expect our IT platform integration, which is scheduled to be completed in early fiscal year 2017, to continue to drive operating expense reductions next year as we work towards the full realization of projected acquisition related cost synergies. On a percentage basis for the third quarter, total operating expenses were 21.3% of revenue. As a percentage of sales, R&D was 17.6%, and SG&A was 3.7%. Operating income from continuing operations for the quarter was $1.5 billion approximately and represented 39.2% of net revenue. Taxes came in at $61 million, slightly above our guidance. This was primarily due to higher than expected net income. Third quarter net income was $1.3 billion approximately and earnings per diluted share was $2.89. Third quarter interest expense was $139 million and other income net was $4 million. As I mentioned in the opening remarks on August 2 right after the quarter closed the second day of the fourth fiscal quarter, in fact we completed the refinancing of outstanding term loans by upsizing our term loan A and reducing our term loan B by an equivalent amount and simultaneously re-pricing the remainder of the term loan B at a lower interest rate. The net effect is a reduction of our blended cost of debt based on current LIBOR from 3.5% to 2.9%. This refinancing significantly lowers our projected ongoing interest expenses starting with the fourth fiscal quarter of 2016. Keep in mind our indebtedness is 100% floating rate and is therefore subject to movement in short-term interest rates. Our share based compensation expense in the third quarter was $213 million, which included the full impact from new grants issued to classic Broadcom employees after the close of the acquisition in the second quarter. In the fourth quarter of fiscal 2016, we anticipate share based compensation expense will also be approximately $213 million. Just as a reminder, our definition of GAAP net income excludes share based compensation expense. Moving on to the balance sheet, our days sales outstanding were 52 days, an increase of 4 days from the prior quarter due to the timing of the seasonal ramp in our wireless revenues. Our inventory ended at $1.3 billion, down from $1.47 billion in the prior quarter. This was primarily due to the completion of wireless filter inventory we have built up in prior quarters to support the strong second half production ramp, which started as expected in the third quarter. We generated $963 million in operational cash flow, which reflected the impact of approximately $96 million of cash expended on restructuring activities. We ended the quarter with a cash balance of approximately $2 billion. In the third quarter, we spent $232 million on capital expenditures. For the fourth quarter, we expect CapEx to be approximately $325 million. As I had mentioned previously, we expect CapEx to run at an elevated level over the next several quarters, driven by campus construction, primarily at our Irvine and San Jose locations, integration related operations and IT investments and the ongoing RF filter fab capacity expansion we discussed in the past. A total of $211 million in cash was spent on company dividend partnership distribution payments in the third quarter. And as I think you have seen already, our Board just recently declared a dividend of $0.51 per share to be paid later in this fourth fiscal quarter. Now let me turn to our non-GAAP guidance for the fourth quarter of fiscal year 2016. 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 $4.1 billion, plus or minus $75 million. Gross margin is expected to be 60.5% plus or minus one percentage points. Operating expenses are estimated to be approximately $108 million. Taxes are forecasted to be approximately $71 million. Net interest expense and other is expected to be approximately $104 million, and the diluted share count forecast is for 448 million shares. Now that concludes my prepared remarks. Operator, if you could please open up the call for questions.

[Operator Instructions] Our first question comes from the line of John Pitzer with Credit Suisse. Your line is now open.

Yes. Hock and Tom, thanks for letting me ask the question. Hock my first question is just on the wired business, you talked about supply constraints in the set-top box area, was that all the miss in the July quarter. And then when you look at the non-set-top box portion of wired through both July and October, I am just kind of curious you could qualify how that business is trending, especially because some companies have been talking about de-acceleration in data center spending in the back half of the year, I would think that you guys would probably be an early leading indicator for that because you really don’t want to buy CPUs if you don’t have kind of your [indiscernible] so any kind of color on that would be helpful?

Okay. Well, with regard to data center spending, yes we do see strength. And in fact, we saw the strength as early as Q2, our fiscal Q2, not calendar but our fiscal Q2. And that strength has continued into this current – into Q3 and even as we sit here right now.

And then Hock, as my follow-up on the wireless business, you are guiding sequential growth higher in the October quarter than July quarter, which is consistent with what you said on the last conference call, I am just kind of curious if you can help us understand what’s unit driven versus content driven and now that we are sort of a quarter into some new builds of new cell phones, can you talk a little bit about your content growth expectation on both the FBAR and the connectivity side for some of those new phones?

Well, one thing I have to press is, this is a – what we are seeing in this quarter Q3 fiscal quarter and Q4, most of Q4 fiscal quarter is all over that ends in October. That represents a period when it’s still a ramp, okay. So its how one constructs the ramp and orders required of our key customers and not necessarily representatives of volumes that would eventually be sold through the various channels into end customers. So with that preface, what we are always saying is with the build year-on-year be compared back to a year ago, the build in unit terms has not significantly changed. It’s largely all about content change – changes.

Perfect. Thanks, guys. Appreciate it.

Okay.

Our next question comes from the line of Blayne Curtis with Barclays. Your line is now open.

Hey, guys. Nice results. Just two questions on wireless, if you could just talk about, obviously, you have one customer doing the big ramp you mentioned one baseline now, can you talk about the China market and what you are seeing there and then on the connectivity side, could you just talk about the roadmap there for Thompson increase, I know you are getting little GPS this go around, but just for WiFi combo chip, what’s the roadmap and what’s the opportunity to gain more content over the next couple of generations?

Okay. Well, let’s touch about WiFi, which is wireless connectivity with Bluetooth combo included in it. It’s – what we are seeing now today is by the way, we are largely in the high-end phones, where we have – where we are driving 802.11ac generation. And in that regard, we are not seeing that much content increase say from a year ago. We expect to see that content increase as we move into next year as more functionality, higher performance, multi-bands start to come into play, which includes not just 2.5 gigahertz, but 5 gigahertz. We also expect to see beyond that 802.11ac moving into AX, which would be a big step up for the – in content gain. And in many ways, this is all about increasing capacity throughput of bandwidth of data transfers through these WiFi connections. Apparel situation to our LTE wireless situation was increasing bands. First, LTE and then they are increasing the number of bands in LTE interconnectivity leading to increasing content. Very, very similar, may not match it to other as we move one generation to the other, but their overall trend upward is extremely light.

Thanks. Can you just talk about on the cellular side, what you are seeing in China? Thanks.

Well, our visibility in China is not that good in the sense that we sell to OEMs and they sell to all over the world and our focus largely on very high-end premium phones be they premium phones from Chinese makers or U.S. makers or Korean makers. So, it’s not really a good representation of true end demand as others may see it in China.

Okay, thank you.

Our next question comes from the line of Vivek Arya with Bank of America. Your line is now open.

Thanks for letting me ask a question. For my first one, Hock, you mentioned supply constraints in your set-top box business, which I believe is around $500 million, $550 million a quarter or so. Can you quantify how much sales you are missing? Is it a 5% impact? Is it a 10% impact? And is there going to be a quarter in the future when you catch up with all these sales that you are missing right now?

Well, first of all, it’s very hard for us to quantify, because customer comes in and place their request and we obviously modulated with what we can shift and so there will be push and pull. And by the time it’s all done, I will be honest I don’t have a good idea what it is. And even I do, I probably wouldn’t disclose it in this public forum, but that aside, we are very aware that we could ship more not for our supply constraints and we have been improving them over the course of the last several months actually and we expect to be largely out of this by the end of this fiscal quarter Q4.

Got it. And then as a follow-up, I wanted to ask about the leverage in the model, you mentioned you will already be at your target operating margins by Q4 and I am curious how much more room is there on the gross margin side. Is it possible to get to, say, 61 or 62? And then on the OpEx side, I believe, Tom, you said that you will have the full realization of synergies in OpEx next year. And since you are sort of around $808 million, what does full realization of synergies mean in terms of either an absolute number or as a percentage of sales by next year? Thank you.

Well, let me try to answer the question on both sides very simply. We have said announced publicly, disclosed early on when we closed the deal in early February, February 1 that we target to exit fiscal ‘16 which is this current quarter Q4 at 40% operating margin. As guidance is showing, we are going to achieve that goal. Now, is that our targeted and state operating margin? Obviously, you hit it right. No, that’s not our targeted operating margin necessary at all, because we do see that all operating spending and the current level is about 800 plus, 808, to take a step down especially, particularly after we integrate our two ERP systems. As you know, classic Avago runs Oracle, classic Broadcom runs SAP after the end of November, which is our day 2, what we call day 2 where we integrate two systems into one, one database, one ERP system. We expect to run only one system that will be a step down in terms of our headcount requirements, in terms of our support costs and obviously, an improvement in our operating cost structure significantly. And that will come through obviously in fiscal ‘17 and which will then gives our operating margin a further lift up. Without your consideration to further expansion of our gross margin which as you have seen over the last two or three quarters is likely to continue.

Yes, thank you.

Our next question comes from Chris Danely with Citigroup. Your line is now open.

Hey, thanks guys. Hock, just a quick clarification on the previous question, so you said that the GMs, there should be a little bit of lift, they should be able to keep going up, was that kind of what you were saying to the last question and then I will get started?

Yes.

Okay, great. The first one is can you just touch on the connectivity business? Was that up sequentially and maybe talk about the margins there and the progression and how you feel about how the business is progressing what the margin goals are?

In terms of wireless connectivity you are talking about the WiFi Combo Chip and all that?

Yes, the classic Broadcom connectivity?

Broadcom connectivity, that’s progressing very, very well. It addresses the same end markets as our FBAR business has the same characteristics, has the same stickiness and driving towards the same margin goals.

Was that revenue up sequentially as well?

Yes, it was.

Great. And then for my follow-up, I guess, just to take a step back, Hock, how do you feel about the overall semiconductor environment today versus a quarter or two quarters ago, better, the same, maybe talk about where you feel better, where you are more nervous if any?

It’s not much. Well, that’s broadly, it’s growing macroscopically. It’s sustaining. It’s holding up. That’s why it is holding up sustaining? Is it booming? Not really, but just sustaining. Now, obviously you see seasonal effects versus secular effects, which I assume your question is addressed. Secular is holding up. Seasonally, you have seen the RAM on the smartphone business. And as we always do end of the year and we are experiencing that RAM, but there is a seasonal effect as opposed to the secular and secular, which is as I say just holding up.

Great. Thanks, guys.

Sure.

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

Thanks. Good afternoon guys. I guess two questions for me as well Hock, when you look at your operating model today and I guess I am looking at October ‘15 quarter, pre the Broadcom deal, you did 62% gross, 43.8 op margins, structurally do you think there is anything different in Avago plus Broadcom that prevents you from getting there over the next several quarters?

No, nothing prevents us from getting there nor exceeding it.

Perfect. And I guess any update on Tony and the CFO position as you go forward from here, I think the expectation was four months after you guys announced that there will be some updates?

No. We don’t have any particular updates at this point, but we will be sure to let you guys know as soon as we have it.

Perfect. Thanks and congrats on the quarter guys.

Thank you.

Our next question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is now open.

Yes. Thank you. I had a question on the RF dollar content story Hock, can you just give an update in terms of particularly what you are seeing from carrier aggregation and then locations there for growth as you move forward?

Continuous – and when you say that, I assume you would – wireless RF content, you are referring particularly to cellular RF content, which is largely our FBAR and the front end modules associated with that FBAR. And that story has not changed. The continued increase in the number of bands continue – continue to grow and carrier aggregation is another phenomenon in parallel that increases FBAR content in those handsets, in those high end handsets, be they in China or in the U.S. So you are right and that content increase continues to steadily progress generation after generation. And we have seen that last 3 years and I see that in the next 2 years.

Got it, great. And then if I follow-up on the supply constraints just to clarify, you mentioned set-top boxes but on the Tomahawk or switching side, have those constraints eased at this point?

Those constraints, after much vigorous supply chain action, have eased quite and have eased quite significantly. And by the end of this quarter, we would certainly be out of the woods there.

Got it. Thanks for the color.

Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.

Hi Hock, just a question on your wireless business in the past, your seasonality has changed substantially in the January quarter, I realize you are only guiding to the October quarter, but could you just walk us through the puts and takes of what normal seasonality is from what you see now that you include classic Broadcom with classic Avago?

You are right. Our seasonal – the sharper seasonality of the past when it was just classic Avago would probably have reduced, simply [indiscernible] because wireless used to be north of 40% of classic Avago’s revenues. Today, wireless which is highly seasonal part of our business even as it’s grown bigger in absolute dollars represents closer to 30% of our total revenues and it is the bigger portion of it, the 70% representing networking, enterprise storage and industrial as you well know of extremely stable, almost like to say predictable businesses. So it’s certainly a modulated down very well volatility of our revenue seasonally. And so Q1, we don’t give forecast, but we fully expect it to be not as volatile as perhaps it might have been 2 years ago.

Great. Thanks. A follow-up one for Tom, on the OpEx side of things, I believe that in addition to the margin guidance that you had given exiting this year 40%, etcetera, you also said exiting this year, you would have about half of the OpEx dollar savings that you expected to achieve, is that still on target. And I guess, if we just made the word simple and said you had the other half left remaining from the 8.08 that you are guiding to, where we are getting that other half bring OpEx down to on a dollar basis? Thanks.

You are really pushing it.

You want to answer that?

Yes. I will answer that. You would probably get it down like some $30 million.

A quarter.

A quarter. Sorry.

And to answer the question Ross, yes we are just about half way there.

Great. So 70, 80 is kind of the base you are talking about?

That’s first part of the year. Second half of ‘17, we will remain to tell it.

Perfect. Thanks guys.

Our next question comes from Harlan Sur with JPMorgan. Your line is now open.

Good afternoon. Thanks for taking my question. Looking at data center switching and routing ASSP product families that would be Jericho, Qumran, Tomahawk [indiscernible] demand continues to be pretty solid as mentioned cloud data center spending in the second half looks to be strong, Hock I am just wondering how far are you into the Tomahawk and Jericho 25 gig adoption, are we 15% of the way through 30% of the way through, just wanted to get a sense on how much growth potential lies ahead of the company?

Well, the Jericho ramp, as I indicated in some of our remarks, while maybe not that clear is just started. And by the Qumran and Jericho similar in some ways, different specific applications, but the Jericho ramp is just – has just started. Tomahawk was about six months earlier, three months to six months earlier. But again, many of these products have fairly been wire could have more expanded life cycles. So I will say definitely, even Tomahawk is less than 40% of the way, maybe no more than one-third of the way. And Jericho, which is the aggregation switch or I will call it a router too if you want to, it’s probably maybe 20% even there at all the way.

Great. Thanks for the answer. And then there is a portion of the wireless business that gets sort of less visibility, these are the analog ASIC 2, some of your large smartphone customers, we have heard that the design pipeline there is quite good, how do you see this sub-segment adding to the content growth story in wireless this year and over the next 2 years?

That one, I am not at liberty to disclose to you. Sorry, simply because of the nature of what you characterize as an ASIC.

Got it, okay. And maybe just a follow-up question then, on the supply constraint in the set-top box business Q3, Q4, where was the mismatch in terms of supply and demand, is there just more demand for some of the high end set-top boxes, like some of these new 4K UHD speed boxes or was the mismatch more around some of the low end boxes, any color would be helpful?

Well, our sense – our I guess, perception is the mismatch between demand – the mismatch between demand and supply is because of very strong demand much more than normal and it’s probably driven, we guess by two factors. One, you hit it right on is perhaps the RAM, the rollout of those 4K systems, the Ultra HD as you call it. And that coupled with the late summer Olympics where there were some operators like Comcast, which had a very strong promotion on cable for the Olympics. So that drove I suspect, a one-time pushup – one-time upside and couple that with the rollout of 4K systems.

Thanks, Hock.

Our next question comes from Toshiya Hari with Goldman Sachs. Your line is now open.

Hi. Thanks for taking my questions. My first one is on CapEx, you are guiding for another step-up in CapEx in your fiscal fourth quarter, can you maybe remind us how much capacity you are adding in that business this year and what your preliminary plans are going into 2017?

Yes. You are right, we will continue to make conversions from 6 inch to 8 inch and that’s ongoing. And it depends on what frame of reference we are using in terms of how much we are adding, but it’s approximately 50% at this point. I will keep in mind though as we have talked about CapEx more broadly, the main reason at this point for the uptick is in a campus expansion strategy. We are moving from leasing buildings to buying and owning buildings, which drops our overall cost of inhabiting those campuses. So, that’s a key driver. The second key driver is we are also moving to consign testers. We are no longer leasing testers. We are actually spending money to own our testers and consigning to our CMs. So, those are the two big drivers of the uptick in CapEx.

Great, thank you. And as my follow-up, I had one on gross margins. Hock, you talked about your comfort level, when you think about gross margins going forward, but when we kind of zoom into the fiscal fourth quarter, you are guiding gross margins pretty much flat sequentially despite any percent increase in revenue. Can you discuss what the puts and takes are here?

Well, if you look – maybe I should take you to looking back over the last three quarters where we have been stepping up gross margin on a fairly steady and hopefully more predictable basis. And each time we guide from what we have actually seen. We try not to guide from what we have not seen simply because gross margin as you put it a lot of puts and takes. But as some touch on earlier highlighted in respect of CapEx, we are actually – we have initiatives on hand to actually improve our gross margin, not just because of product mix, but also the sheer fact that, for instance, in wireless moving to 6 to 8-inch increasing CapEx, reduces our cost of sales quite dramatically in our wireless business. Going from leasing testers and we use a whole lot of them for our semiconductor ICs to owning the testers on a fairly substantial basis is also driving our cost of material – cost of purchase material significantly down. And all these actions are ongoing and all these actions are continuing to proactively reduce our cost of sales and expand our gross margin. And you will see that. And rather than forecasting what it will be, we are basically using the current reference point and telling you when it’s likely to move to the next quarter.

Very helpful. Thank you so much.

Our next question comes from the line of Ambrish Srivastava with BMO. Your line is now open.

Hi, thank you. I had a couple of longer term questions. The first one, Tom, just following up on the capacity expansion, you have given us the 50% expansion for fiscal ‘16, but what is the thinking beyond that? And what I am trying to get to is that with the content gain that you have laid out longer term, would you have capacity and the ability to supply other than the two big customers that you are supplying? And then I had a follow-up after that.

Yes. We don’t have any specific update on that other than to say any capacity expansion we have talked about will be based on line-of-sight demand. We have always built to capacity levels where we know we have demand in hand and we will continue to do that.

Okay, makes sense. And then Hock, on the question longer term ASICs, you guys have built a great business there and to us it seems competition has been weakening, but then couple of weeks ago, at the Intel Developer Forum, Intel was very vocal about their aim and the goal to go after the communications infrastructure and we all know what happened last time, you went after it, but what is the right way? Help us – just provide us your perspective on how easy or how hard it is to go after that business. And we all know that not just having SerDes is not the only answer. So, please help us understand that little bit better? Thanks.

You mean – could you repeat that – I didn’t quite catch it. What was Intel indicating in IDF about going after the communication chip business you mean?

No, in the foundry business, the other area besides the client handset business where they announced partnership at ARM, the other area that they were talking about is the infrastructure networking and there were other customers that were also there at the forum that we are talking to Intel’s foray into the business, essentially going after Cisco’s business?

Well, to be honest, we don’t know much about that – didn’t hear much about that. But as you probably may know, the ASIC business, especially the high-end ASIC business where your customer is requiring technology – is pushing the limits of technology be they SerDes bandwidth, be they IP and embedded processing that has very low power, very high performance and features, IP features like that. It’s not a business one gets into on an overnight basis. And your question is correct it’s a long-term basis, simply because, first, you have to have the strength of the IP portfolio capabilities, which we have in plentiful supply, if you don’t mind by saying that. Number one, that’s only a necessary condition. It’s not even sufficient. The sufficient one is that you are able to execute on silicon implementation and you are talking about leading edge not related to foundries that have proven ability to deliver on those leading edge nodes and been able to execute your design well. And that comes – the proof comes with the Ethernet, which means you got to have the confidence of your customers that you are able to do what they want you to do, because if you don’t, they are screwed literally simply because their roadmap depends on it. So, they are not about to rush into any new opportunity even on a price even on whatever nice stuff it is just because on say so that might happen. It takes a long time. It’s almost a Catch 22. You want to get into this business, be it leading edge not as a foundry or leading edge SerDes, our intellectual property in silicon, you have to convince your customer you can deliver and your customer is putting their future at least in [indiscernible] in your hands. Which customer in their right mind would easily do that? They won’t”. They want you to prove it, but you can’t prove it unless they try it. So, it’s a Catch 22. So, it’s hard. All I am trying to say it’s very hard. It’s a long process. We have fortunately – we are fortunate to be in a position that we have proven ourselves and so competition will come. It always does and we will deal with it as we always have.

Clear. Thanks, Hock.

Thank you.

Our next question comes from Vijay Rakesh with Mizuho. Your line is now open.

Good quarter and guide year. Just on the wireless side when you look at your 810s FBAR, it looks like on the wireless side you seem to be gaining share, but with this 810s, are you able to get your costs down and compete more effectively with FBAR up and down that chain?

We continue to do that. You noted every new generation, which is almost every year, we change our process. We just not only change our design. And I said that before too in several meetings, several calls of this nature ago. Our advanced process technology grows or evolves on two fronts, on process as well as on the designs. So, that a band 2 FBAR 3 years ago doesn’t look like the band 2 FBAR today. And that band 2 FBAR 3 years from now will be also very different from what it is today and it improves on power, it improves on insertion loss, it improves on performance. And so we continue to invest in that and it’s part of the reason why we go from 6-inch to 8-inch not only to gain more capacity, but to be able to improve the process we put into it. And yes, BAW technology or even SAW technology temperature compensated continues to try to improve. We are very well aware of the development that continues in some of our competitors. And all I have to say is that we continue to maintain at least maintain if not better our technology lead over those guys.

Got it. And I agree on that. But actually looking at 8 inch, as you ramp that, what’s your mix, what do you expect your mix of 8 inch FBAR to be exiting let’s say calendar ‘16 and calendar ‘17? Thanks.

Calendar ’16 is very, very low. As Tom said, we continue to spend money, CapEx. We are barely at the 50% milestone. Our concept at the end of the day is to convert 100% of our 6 inch into 8 inch. That will not happen until 2018. So we are barely 50% and we continue to methodically steadily convert 6 inch to 8 inch, so exiting this fiscal ‘16, very low, ‘17 significantly higher, ‘18 maybe get done.

Alright. Thanks.

And our last question comes from Stephen Chin with UBS. Your line is now open.

Great. Thanks for squeezing me in. Hock if I could, I wanted to get a little more color on some of the demand trends within your switching ASSP business, if I recall correctly, classic Broadcom, the switching demand was roughly one-third driven by cloud data center, enterprise and service providers, I was wondering if you could talk a little more about how enterprise and the service provider verticals are performing in terms of demand in the recent quarter and your visibility into the current quarter?

First and foremost, while we like to say it split up nicely as you put it to be that way, that tends to be very conceptual and a bit theoretical and at any point in time, sometimes we have a tough time knowing where the particular chip we ship ends up in. I mean we ship a lot to OEMs. And as you know many of the OEMs would ship to service providers or enterprise or even to the cloud guys. And that’s a part of it where we are not 100% sure. But to try to answer your question in substance, we think a lot of strength, a lot of demand driven from service providers today as well as from the cloud guys. Enterprise tends to be more stable as opposed to strongly trending now.

Okay. I appreciate the color. And as my follow-up, just within enterprise storage, I appreciate that in the current quarter you guys are seeing some good seasonality there, but I was wondering from a technology upgrade or roadmap perspective, can you talk about any other upcoming technologies that can continue to drive growth in the enterprise storage in terms of the server storage products?

Server storage connectivity products, yes there is, I know some of the trends are very interesting, but I can tell you all of this, but enterprise storage is slow to change, for good reason. People are very, very conservative, very careful in that area. And one of the biggest – I mean there is a cadence they go by and the cadence go by in the CPU cadence. We are now shipping [indiscernible] as you know and next year, we will start shipping against [indiscernible] some of the interconnects expanding capacity though is for enterprise a lot of it is SaaS. And slowly, very slowly perhaps considering a move into PCI Express or NVMe potentially as Flash arrays start coming into the picture, but to answer your question directly, it moves very slowly. Most enterprise today are still driven on SaaS.

Okay, great. Thank you very much.

Sure.

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