Edited Transcript of Broadcom Pte Ltd earnings conference call or presentation 2-Jun-16 9:00pm GMT

Let me now become ought a discussion of our second belt part results. Let's begin with wired. at addition ought classic AVGO's manners networking ASIC and fiber optic products, the mixture of classic Broadcom has added ethernet switching and routing ASSPs, physical layer, copper and optical products. And at addition at this segment, it also includes now, classic Broadcom's broadband traffic solutions during set-top box, cable modem, and carrier access.

In the second quarter, wired revenue came at on $2.06 billion, and this represented 58% of our entire revenue. This is now obviously our largest segment, and it performed better than we had expected at the second quarter. We saw crowd over different manufacture lines. We experienced well appeal at switching and routing criterion products, including equal healthful traction during our new Tomahawk switching and Jericho routing platforms, specially from the cloud and service provider customers. at fact, during some of you can know, a key visitor today announced a new lead, a mutual direct switch and routing platform during next generation information centers, which is based above the Jericho manufacture platform.

We also saw healthful appeal during our broadband products from set-top box refreshes driven by the begin of adoption of 4K video. Service providers last ought invest at broadband access infrastructure, including ongoing fiber-to-the-home build-outs at China, too during DSL and cable modem build-out at Europe. during we appear into the third belt during wired segment, we hope the healthful appeal ought uphold from the foregoing quarter, and plot wired part revenues ought exist up at the low single-digits sequentially. We're also working above resolving a little latent furnish constraints at this especial segment.

Moving above ought wireless segment. at addition ought AVGO's FBAR filters and energy amplifiers, our wireless part now also includes classic Broadcom's wireless connectivity and manners analog handset solutions. at this second quarter, wireless revenue came at on $792 million, and the wireless part represented 22% of our entire revenue.

As expected, we did visit a reject at appeal from a big North American smartphone customer, including the anticipated shock of their seasonal manufacture life cycle related reduction at shipments. This was partially offset by an amplify at shipments ought a big Asian handset OEM. during we possess said before, this second belt was the trough during this part during the cease of this fiscal year.

Moving above ought the third quarter, we expecting a equal different cinema during our wireless segment, and hope healthful sequential revenue growth at the mid 20% range. The expected growth is driven by the begin of a ramp from a big North American smartphone customer, during they transition ought their next generation platform, enhanced by a substantial amplify at classic AVGO's RF content at this new handset. Classic Broadcom's wireless connectivity content will also amplify at this new handset. We hope our wireless connectivity commerce ought last ought drive important innovation during mobile Wi-Fi and Bluetooth applications, and hope this manufacture rank ought exist a equal key long-term contributor ought our wireless segment.

Let me now become ought enterprise storage. at the second quarter, enterprise storage revenue came at on $525 million, down 23% sequentially. Enterprise storage represented 15% of entire revenues. This part experienced a sequential reject at revenue, driven by big descend at difficult disk drive unit TAM, and seasonal weakness at the enterprise server storage connectivity market.

Looking ought the third quarter, mainly because of farther difficult disk drive unit TAM declines, we hope enterprise storage revenue ought reject at the low single-digits sequentially. We currently plot the third belt ought exist the trough during enterprise storage revenue this fiscal year. Regardless of fluctuations at unit TAM, we also hope ought last ought employ piece at our difficult disk drive business.

And go me now influence ought the persist segment, industrial. during I mentioned previously, this part does embrace our IP licensing business. cottage at the second quarter, industrial part revenues came at on $182 million, up 30% sequentially, and represented 5% of our entire revenues. Industrial resales grew sequentially mid single-digits. And our revenue here increased during well, and by the equal level, during we replenish channel inventory ought possess up with the seasonal increase.

Looking at the third quarter, we hope the trend ought uphold from the foregoing quarter, and hope mid single-digits sequential growth industrial manufacture revenues, driven by continuing high resale projections. However, at IP sales after a healthful and lumpy second quarter, we hope revenue ought descend at the third quarter. And during a result, we hope revenue at industrial part ought reject mid single-digits sequentially, after a 30% amplify at Q2.

In outline therefore, what we hope during the third belt is sustained regulation from networking and broadband, a trough at enterprise storage, cottage a healthful seasonal ramp at wireless, driving sequential growth at consolidated revenue of at 5%. We hope allowance ought become even faster, and we are projecting allowance per piece ought become sequentially at approximately double the appraise of revenue growth, driven by lower operating and favour expend during a percent of net revenue. This at a nutshell is the leverage and energy of our commerce model.

With that, go me now become the summon at ought Tom during a more detailed magazine of our second belt financials. Tom?

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Tom Krause, Broadcom Limited - Acting CFO [4]

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Thank you, Hock, and good afternoon, everyone. ago I start, my comments today will concentrate mainly above our non-GAAP results from continuing operations, unless otherwise specifically noted. A reconciliation of our GAAP and our non-GAAP information is included with the allowance liberate issued today, and is also available above our website at Broadcom.com.

First, ago I acquire into the second belt results, I used to although ought accept a little minutes ought magazine progress we're making towards our long-term econmic model, during we trade over completing the integration of classic Broadcom. Fundamentally, neutral ought magazine the econmic model, is the output of the commerce xerox that Hock is driving. The most significant component of our xerox is the sustainability of the franchises we invest at on the long-term.

When we quit ought employ Broadcom, we recognized their collection of well-established businesses, with leadership positions. Built above the hind of proprietary and highly defensible technologies, we ponder that these franchises were sharp ought enabling rapidly evolving wireline and wireless ecosystems. cottage we only possess one belt beneath our belt, we deem that this essay is equal much intact.

Another key component is discipline. We are actively managing the portfolio ought remain focused above investing at the middle franchises, cottage monetizing businesses that conduct no possess clear, long-term sustainability. This is an ongoing process, ought last ought go us ought maximize returns above our R&D investments.

Finally, we possess things stupid and focused above sharp commerce processes. Given our now larger economies of scale, we can exist even more effective over our global furnish bind and sales platforms, too during our natural and administrative functions.

This takes us ought the three key elements at our econmic model, starting with revenue. cottage we don't hope the broader semiconductor industry ought become much at the long-term, we conduct ponder that our franchise will employ from some equal certain trends, including what seems ought exist an ever-increasing appeal during mobility, bandwidth, and storage. We ponder that we possess the accurate lay of technologies ought uphold these needs, which gives us faith at our long-term annual revenue growth appraise goal of about 5%.

On the total border front, given the neutral shortage during our technology, and the leadership positions we have, coupled with ongoing expend reductions at our furnish chain, we visit latent opportunities at time ought advance total margins beyond the 60% we already delivered this quarter.

Turning ought operating expenses. We ponder the completion of integration activities and our concentrate above answer above investment will go us ought drive R&D expenses ought 16% of net revenue within the next little quarters. Looking at the goal portfolio and the lay of middle projects we expect ought support, we feel 16% is currently the suitable long-term goal during R&D expenses. And eventually above SG&A, we clearly visit latent opportunities ought drive these expenses beneath 4% of net revenue.

In summary, during we appear at the second half of FY16, we hope ought visit firm revenue growth from the second quarter, which we ponder will help drive operating margins ought 40% during we exit the year. during we trade toward completing integration and the total achievement of expend synergies at FY17, we deem we can drive operating margins north of 40%, and uphold those margins longer term.

Let me become ought our major allocation tactic moving forward. during many of you know, at the persist little years, we possess focused above M&As, and the returns possess allowed us ought drive important appraise during shareholders. Going forward, we ponder acquisition opportunities will last ought recent themselves, that beneath our commerce xerox will drive returns that distant outweigh the preference uses during our capital.

As a result, we currently intend ought bounds the allowance down of our remarkable word loans until our total debt is about 2 epoch EBITDA, at which time we intend ought begin pooling excess money during the purposes of M&A, too during magazine our major structure generally, including our long-term debt alternatives. during part of our major allocation strategy, we plot ought remain committed ought our dividend program, and are currently targeting an approximate 10% per year increase.

However, during a reminder, our Board reviews and determines our dividend policy above a quarterly basis, based above our econmic regulation and conditions, the contractual food relating ought our remarkable indebtedness, and other factors deemed relevant by our Board.

Now go me become ought a quick magazine of our results during the second quarter. revenue during the second belt came at on $3.56 billion, which we ponder will exist the trough during the cease of this fiscal year. Foxconn was a greater than 10% control visitor at the second fiscal quarter. Our second belt total border from continuing operations was 60%, which is at the upper goal of our guidance range, mainly because of better revenue mix, with a stronger than expected wired segment, and higher fab utilization during we pre-built filters ought uphold the expected second half ramp at wireless revenues.

Turning ought operating expenses, R&D expenses were $663 million and SG&A expenses were $146 million. This resulted at entire operating expenses during the second belt of $809 million, $23 million beneath guidance. This was mainly because of faster than expected realization of acquisition-related expend synergies.

On a percent basis, during the second belt entire operating expenses were 23% of revenue. during a percent of sales R&D was 19%, and SG&A was 4% of net revenue. Operating earnings from continuing operations during the belt was $1.3 billion, and represented 37% of net revenue.

Taxes came at on $53 million, slightly above our guidance. This was mainly because of higher than expected net income. Second belt net earnings was $1.1 billion, and allowance per diluted piece were $2.53. Second belt favour expend was $150 million, and other expend net was $6 million.

Our share-based compensation expend at the second belt was $186 million, which included the shock from new grants issued ought classic Broadcom employees about halfway over the quarter. at the third belt of FY16, we hope share-based compensation expend will exist about $221 million, and this anticipates the total shock of the new grants during the quarter. neutral during a reminder, our explanation of non-GAAP net earnings excludes share-based compensation expense.

Moving above ought the remains sheet, our engagement sales remarkable were -- sorry, 47 days, reflecting the combined Company. Our inventory ended at $1.47 billion and days above hand were 72 days, which includes the shock of an inventory construct supporting the healthful growth expected at our wireless business. We generated $622 million at operational money flow, which reflected the shock of about $300 million of money expended above restructuring activities.

We ended the belt with a money remains of $2 billion. We ponder that we currently shortage about $1.5 billion ought operate the business.

During the second quarter, we repaid about $565 million of our remarkable word loans. We currently intend ought repay about $1 billion at the third quarter, part of which we hope ought fund using proceeds from the two previously announced divestitures which are expected ought familiar at the third quarter.

In the second quarter, we spent $158 million above major expenditures. during the third quarter, we hope CapEx ought exist about $230 million which includes about $75 million during ongoing capability expansion during our manufacturing RF filters, and $45 million during campus construction activity. We hope CapEx ought flow at an elevated even at the next little quarters, driven by campus construction at our Irvine and San Jose locations, ongoing RF filter fab capability expansion, and integration-related operations and IT investments.

A entire of $204 million at money was spent above corporation dividend and partnership distribution payments at the second quarter. during you will possess seen, our Board has declared a dividend of $0.50 per piece ought exist paid afterward at this third fiscal quarter.

Finally, go me become ought our non-GAAP guidance during the third belt during FY16. This guidance reflects our modern assessment of commerce conditions, and we conduct no intend ought update this guidance. This guidance is during results from continuing operations only.

Net revenue is expected ought exist $3.75 billion, plus or minus $75 million. total border is expected ought exist 60%, plus or minus 1 percent point. Operating expenses are estimated ought exist about $809 million. Taxes are forecasted ought exist about $59 million.

Net favour expend and other is expected ought exist about $141 million. The diluted piece fancy foretell is during 449 million shares.

That concludes my prepared remarks. Operator, interest blank up the summon during questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question during today comes from the rank of John Pitzer from certainty Suisse.

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John Pitzer, certainty Suisse - Analyst [2]

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Yes, good afternoon, guys. Hock, Tom, congratulations above the healthful results, and thanks during letting me appeal a question. Hock, I guess, my first question pertains ought the wireless guidance during the July quarter. I'm queer nearly a join things. conduct both the North American and Korean visitor become sequentially at July, or is it neutral mainly the North American customer? And while you appear at that North American customer, does the July guidance meditate a total quarter's worthy of construct employ of their new high goal phone? Or is it only a partial employ at the July quarter, with truly a total employ coming at the next quarter?

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Hock Tan, Broadcom Limited - principal & CEO [3]

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All right. Boy, are you getting equal sticky and picky (laughter). crude right. cottage ought answer your question, it's mainly from the sure North American visitor that's driving the bulk of the growth. Having said that, the Korean visitor does appear growth too above its own, cottage obviously no ought the extent the North American visitor is doing, although it's a ramp. It's the beginning, I ought employ the word, beginning of the ramp during their next generation phone. And a phase ought that, it's this July quarter, our modern belt Q3, will no appear the total shock of an entire belt of revenue ramp. It's neutral the beginning, and it's equal hind loaded.

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John Pitzer, certainty Suisse - Analyst [4]

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That's equal helpful. Thanks, Hock. And then Tom, during my follow-up, I'm wondering if you can oration a little bit nearly the OpEx guidance during the fiscal third quarter? You are showing sequential revenue growth at the fiscal third quarter. You're guiding OpEx effectively even above a dollar basis. I'm neutral curious, neutral given more of the happen you possess ought cause M&A synergies, why only even and no better than that? What are the offsets?

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Tom Krause, Broadcom Limited - Acting CFO [5]

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Yes, good question, John. It's truly the timing of the realization of the synergies. Obviously, we did better than we sentiment we'd conduct out of the gate at the first quarter, and you saw that at the results. A fate of what's ought go, ought a sure extent is tied ought system integration, and a fate of the hind office activities that's equal much above goal ought exist completed early at the first belt of next year. And so, I'd suggest, we will visit a bit of a relief here this quarter, and possibly a bit of the next. cottage during you appear into the first half of next year, you'll visit the total realization.

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John Pitzer, certainty Suisse - Analyst [6]

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Perfect. Thanks, guys. Congratulations, again.

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Operator [7]

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Thank you. And our next question comes from the rank of Blayne Curtis from Barclays.

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Blayne Curtis, Barclays major - Analyst [8]

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Hey, guys, I'd although ought add congrats during well. neutral at wireless, can you oration nearly the connectivity business, there was some commerce of piece loss, you talked nearly content potentially going up. can you neutral walk through, where you visit opportunities during content ought further up, and neutral the barriers nearly your mobile connectivity business?

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Hock Tan, Broadcom Limited - principal & CEO [9]

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