Broadcom Inc.

Good day, ladies and gentlemen. Welcome to Broadcom, Inc.' 's first quarter fiscal year 2019 financial results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Beatrice Rosado, Director of Investor Relations of Broadcom, Inc. Please go ahead, ma'am.

Thank you, Operator, and good afternoon, everyone. Joining me today are Hop Tan, President and CEO, and Tom Krause, Chief Financial Officer of Broadcom. After the market closed today, Broadcom distributed a press release and financial tables describing our financial performance for the first quarter of fiscal year 2019. If you did not receive a copy, you may obtain the information from the investor section of Broadcom's website at broadcom.com. This conference call is being webcast live and the recording will be available via telephone playback for one week. It will also be archived in the investor section of our website at broadcom.com. During the prepared comment section of this call, Hawk and Tom will be providing details of our first quarter fiscal year 2019 results, guidance for fiscal year 2019, and commentary regarding the business environment. We will take questions after the end of our prepared comments. 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. 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. So with that, I'll turn the call over to Hock.

Thank you, Bea, and thank you, everyone, for joining us today. So we had a good start to fiscal 2019, growing 9% in our first fiscal quarter compared to the same period a year ago. The strength of our business model delivered another quarter of sustained revenues strong earnings, and an extremely strong free cash flow. Our semiconductor business held up relatively well. Not surprisingly, our wireless business was down sharply, and our storage business underperformed somewhat. However, these challenges were mitigated, more than mitigated by our networking business which grew double digits year over year. In addition, we were very pleased to see that the broadband business has started to recover and stabilize in the quarter. In fact, putting it all together, the semiconductor segment was actually up year over year in the first quarter if you exclude the expected sharp decline in wireless. Turning to infrastructure, this business, which includes SAN switching, mainframe and enterprise software, delivered solid top line results, benefiting from a very robust enterprise spending environment. The integration of CA onto the Broadcom platform is very well underway. and we are confident that we can meet, if not exceed the long-term revenue and profitability target that we laid out for CA to you last year. In fact, renewals in our CA business have been strong this past quarter, and we believe the dollar commitments from our core customers will continue to grow. Many of our peers have commented that they are seeing a softening demand environment, especially out of China. While we are experiencing the same demand dynamics, we have factored in much of this macroeconomic backdrop when we provided fiscal 2019 guidance last quarter. As a result, after a solid start to the year, we are reaffirming our fiscal 2019 revenue guidance of $24.5 billion. Having said that, we expect our semiconductor business to bottom in the second fiscal quarter, driven almost entirely by the seasonal drop in wireless. But looking to the second half, we are confident the semiconductor business will resume very meaningful growth. This will be driven by strong product cycles in both wireless and networking, coupled with a recovery in broadband. Infrastructure software, on the other hand, is expected to sustain throughout the year. So in summary, our diversification strategy is working. and we are effectively managing the decline in wireless as well as the broader semiconductor industry headwinds. Now, let me turn over to Tom to provide you with more color on Q1.

Thank you, Hawk. Consolidated net revenue for the first quarter was $5.8 billion, a 9% increase from a year ago, and EPS came in at $5.55, an 8% increase from a year ago off of a $441 million weighted average fully diluted share count. In addition, free cash flow was $2.03 billion or 35% of revenue. I would highlight free cash flow grew 39% year over year. The Semiconker Solutions segment revenue was $4.4 billion and represented 76% of our total revenue this quarter. This was down 12% year on year on a comparable basis. But as Hawk explained, the simulator segment was actually up slightly year over year in the first quarter, excluding wireless. Let me now turn to our infrastructure software segment. Revenue was $1.4 billion and represented 24% of revenue. SAN switching continues to perform extremely well. And as Hawk mentioned, mainframe enterprise software is also a good start. Let me now provide additional detail on our financial performance. Operating expenses were $1.08 billion. Operating income from continuing operations was $3.05 billion and represented 52.7% of net revenue. Adjusted EBITDA was $3.24 billion and represented 55.9% of net revenue. This figure excludes $143 million in depreciation. Inventory decreased $50 million from the prior quarter. Similarly, semiconductor receivables were actually down, which is typical for Q1, even though receivables increased $352 million overall due to the CA acquisition. Total current liabilities excluding debt increased $2.5 billion due to CA. excluding CA, total current liabilities, excluding debt, decreased meaningfully more than receivables, primarily due to the payment of our annual performance bonus in Q1. In addition, we spent $99 million on capital expenditures. As a result, we had record Q1 free cash flow from operations at $2.03 billion, or 35% of revenue. This represents 39% growth in free cash flow from operations compared to Q1 of 2018. I would note a couple of things. One, fiscal Q1 is typically our seasonally weakest cash flow quarter due to the annual performance bonus payment we make to our employees in the quarter that we accrue for throughout the prior fiscal year. In Q1, we paid approximately $530,000 million in APB cash bonuses to our employees. And second, I would also note that we accrued $723 million of restructuring and integration expenses, of which that includes $363 million of cash payments in the quarter. In Q1, we returned $4.6 billion to stockholders, consisting of $1.1 billion in the form of cash dividends and $3.5 billion for the repurchase and elimination of 14.2 million AVGO shares. We ended the quarter with $5.1 billion of cash, $37.6 billion of total debt, 396 million outstanding shares, and 451 million fully diluted shares outstanding. Turning to our fiscal year 2019 guidance. As Hawk discussed, we are reaffirming our full-year revenue guidance of approximately $24.5 billion, including approximately $19.5 billion from semiconductor solutions and approximately $5 billion from infrastructure software. IP licensing is not expected to generate a material amount of revenue. On a non-GAAP basis, operating margins are expected to be approximately 51%, net interest expense and others expected to be approximately $1.25 billion, We do not contemplate any debt pay down in fiscal year 2019. The tax rate is forecasted to be approximately 11%. Depreciation is expected to be approximately $600 million. CapEx is expected to be approximately $550 million. And as a result, free cash flow from continuing operations is expected to be approximately $10 billion. And finally, stock-based compensation expense is expected to be approximately $2 billion. As we outlined last quarter, we granted approximately $31 million of restricted and performance stock units as part of the multi-year grant that we'll vest over the next seven years. As a result, for modeling purposes, we would expect the fully diluted share count in the second quarter to be approximately $450 million. This excludes any stock repurchases. Similarly, for modeling purposes, we would expect stock-based compensation expense to be approximately $530 million in Q2 Looking forward beyond Q2, we would expect the share count excluding stock repurchases and eliminations to remain relatively unchanged and the quarterly stock-based compensation in the second half of 2019 to start to decrease slightly each quarter. We would expect stock-based compensation to level out at approximately $1.5 billion in 2021. Now on to capital allocation. Our capital allocation strategy remains the same. We plan to maintain the current quarterly dividend payout of $2.65 per share throughout the year, subject to quarterly board approval, which means we plan to pay out over $4 billion in cash dividends in fiscal 2019. In addition, we remain committed to buying back and eliminating a total of $8 billion of stock in fiscal 2019. That concludes my prepared remarks. During the Q&A portion of today's call, please limit yourselves to one question each so we can accommodate as many analysts as possible. Operator, please open up the call for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then one key on your touchtone telephone. Again, we ask that you limit yourself to one question. Our first question comes from Harlan Sir with J.P. Morgan.

Good afternoon and congratulations on the solid quarterly execution. Hawk, on the strong double digits year-over-year momentum in your data center networking and compute acceleration segment, you know, you've been shipping your new Tomahawk 3 switching platform now since the second half of last year. I think Google's using it for 200 gig. We hear Amazon's going to transition to 400. We're hearing good things from Baidu, Tencent, and all of the cloud guys. Additionally, you're ramping compute acceleration ASICs into some of the big cloud guys as well. Question is, do you anticipate continued double-digit year-over-year growth for the full year here for the networking business as the pipeline here appears fairly strong?

Very good question, Harlan. And now that I'm listening to you, you really got me going. Yes. in networking, and it's broader than just data centers, but let's start with data centers. You know, TAMOC3, which is the 12.8 terabit top of the RAC switch, has just barely started production shipments. In fact, we do expect, we are fully expecting the RAM of TAMOC3 as part of the broader data center scale-out with 400 gig pipes in the connect, so to speak, to really start just about right now. In fact, our Q2, fiscal Q2, and progressing up to the rest of the end of the year as more and more of the names you mentioned in HyperCloud jumps in and expand and upgrade, I would say, their data centers. Simply because, as you know, expanding the capacity of data centers and pipes is the simplest way to decongest, to minimize or mitigate congestion control in these huge data centers in this large cloud case. So that's a broad refreshing and upgrading of data centers among these cloud guys. One area is mentioned from our trees, shipping, which is just starting this quarter in significant volumes. What's also not so perhaps obvious, but is very real for us, is the fact that in order to run 400 gigabit per second throughput pipes, you need interconnects, fiber optic interconnects that are built and dedicated in that area. That's a very high-tech product which we are very deeply engaged in. And that brings the content by a multiple factor in this data center RAM. And then as you expand the top of the REC switch, I can't resist saying, you need to connect data center to data center, what is called DCI. And the approach that is being taken, which we are also very engaged in with multiple OEMs who are supporting the cloud guys, is obviously coherent. Coherent fiber optic connection at 400 gig. And we believe we are very much in the lead on that area as well. So these are product cycles we are seeing. that are continuing the impetus of double-digit growth in networking. And it extends more than that in routing. We are going to be launching and renting our new generation router, Jericho 2, probably in Q3 of our fiscal year. And that's going into edge routing, core routing, among the service providers, especially the telecom guys. And we're starting to see the preparation in that happening. So, yeah, we feel very good about networking and the ability to sustain the level of growth we have been seeing.

Thank you, Hop.

Thank you. Our next question comes from Ross Seymour with Deutsche Bank.

Hi, guys. I wanted to echo my congratulations. Sticking on the formerly called wired category, Hawk, you mentioned that the – I think you said the broadband space had stabilized and recovered. Can you talk a little bit about the product cycles that will be driving demand in that segment? And any geographic color, product cycle color would be helpful.

Sure. Sure, Ross. Yeah, in broadband, happy to say finally, oh, the thing recovered. And a big part of it, of driving the recovery, is cable modem, video delivery, DOCSIS, as they call it, 3.1. We've seen implementations across multiple carriers, service providers, of DOCSIS 3.1. So that's very good. What we're also seeing, of course, is in gateway access, which is a big part of broadband, among many carriers too, is the new generation of DSL, digital subscriber line, as they need to expand capacity and throughput and go to what they call the next generation G.FES or 35B, and we've seen a lot of that in Europe, some in North American carriers too. But what's also equally interesting is as they go to the last mile into households, What we're also seeing is adoption of wireless connectivity or what we all call Wi-Fi. And what we're seeing now is, as we see these wide gateways, whether it's cable modem, DOCSIS 3.1, or digital subscriber line, we're seeing, especially in the back half of the year, enterprises and more and more service providers, telecoms, start to attach the next generation Wi-Fi, Wi-Fi 6, onto those gateways. And in Wi-Fi 6, I'm very, very pleased to note that we are very much in the lead in having developed and productized a whole suite of products that are perfectly addressed towards those enterprise and service providers. But most of that will be only shipping, we believe, in the second half of the year, but fiscal and both calendar. And we're looking forward to seeing that happen, but it's a very nice product cycle that will basically push the recovery of our broadband business. Thank you.

Thank you. Our next question comes from Timothy Akiri with UBS.

Thank you. Hawk, I'm wondering how you handicap Huawei, and I believe that they're kind of a mid-single-digit customer right now. We're hearing a lot of evidence that they may be ordering ahead of some possible sanctions, so I'm kind of wondering how you think about that and how you handicap that for your guidance. Thank you.

I probably know as much as you do, seriously, in terms of what's available, publicly available, and the concerns and the issues overhanging broadly. Chinese exporters, China, and specific high-tech companies like Huawei from China, they are a good customer, and they buy products which obviously helps their products be competitive in the global export market and I hope they continue to do so. But certainly the overhang of that is something that we are closely monitoring and are very concerned about. But as far as specific things you are mentioning, I'm not able to basically comment on it simply because I don't know.

Okay, thanks so much.

Thank you. Our next question comes from Vivek Arya with Bank of America.

Thanks, Laura, for taking my question. Actually, a quick clarification on a question. I believe, Hawk, you mentioned software could sustain throughout the year. That suggests annualized closer to $6 billion rather than the $5 billion I think you had before. And if that is the case, shouldn't profit margins be higher than what you had? And then the question, Hawk, you know, there has been some more consolidation in semis and video acquiring Mellanox. We're just curious how you think, if at all, there is an impact on Broadcom, and even if there isn't, how you just think about the M&A environment in semis. Thank you.

Okay. You've got two questions here.

Very clever.

Let me try to answer. Let's start with the second one. It's easier. I mean, as I say, we have done quite a bit of acquisitions in very strong assets. There's an echo. in the semiconductor space. And it's obviously something we continue to look at because obviously semiconductor is a core area for us. But you also know we're not necessarily limiting ourselves to that. We look towards a broader area of technology, software, and appliances. as brocade would be considered. But we continue to be interested in the semiconductor space, and there are still targets, and we'll continue to be very thoughtful and timely in terms of how we approach those acquisitions. And we have observed our behavior over the last several years. We tend to do it on a very measured pace, simply because it's important, in fact, it's critical on any acquisition we make that we can integrate it very, very well. And that's what we're doing with CA right now, and we're right in the thick of it, as you notice in the numbers we're going through as we drive down to generate the kind of business model we expect to get out of CA. Turning on to the next question you have, which leads to software. Yeah, it's turning out to be a very, very nice deal for us. We actually are seeing for core customers, and as you recall, we have differentiated customers of CA between very core large customers who consume both mainframes and enterprise distributed software. as opposed to much smaller long tail of non-core customers. If we look at those core customers we are focusing on, after about at least one quarter now today, more than one quarter of going through selling, renewal and adoption of our software, we feel that the business model has been extremely, our business model has been extremely successful. I mean the growth as we see of dollars that we get through renewals and expansion of use footprint in those core customers is pretty – is surpassing our expectations. It's gone double digits. But that's only three months. So we're still early stage and we'll continue to push that. But as we have also made certain announcements on at least one or maybe two deals we have done on our new PLA model of both mainframe and enterprise-based software. And this has been very well received in the marketplace by our core customers, and we are hopeful it's something that makes so much sense that we'll expand. We expect to see more and more of this significant transactions occurring as we move forward through the rest of the year. All right?

Thank you. Our next question comes from John Pitzer with Credit Suisse.

Yeah, good afternoon, guys. Thanks for letting me ask the question. I'll echo my congratulations on the results. Hawk, relative to the full year guide, it does imply, like many of your SEMI peers, some pretty meaningfully above seasonal growth half on half on the SEMI solutions business. And I think you did a good job on some of the prior questions specific to data center and broadband access of some of the bottoms-up product cycles that are driving that. I'd be curious or it would be helpful if I could get your sort of views on wireless and how that progresses throughout the year and how you're thinking or how we should be thinking about your content this year versus dependency on units this year within the wireless space.

Somehow I knew this was going to come up somewhere, someplace. And sure enough, you did that. Yes, I know. I should note that because that product cycle in wireless is, in all our views, this is mine, very predictable. And we will see that happen in our Q3, fiscal Q3, Q4 of this fiscal 19. It will. We're already starting production. in our wafer feds, which has longer product cycles on FBAR and some of our products. And we will see, for want of a better word, because it's so seasonal and it's very mean and significant, a sharp bounce back, which adds to our confidence that our full year guidance to something that's going to happen. Very simple. And that in the second half, we see that meaningful, you correctly pointed out, somewhat double-digit growth in the semiconductor segment of our business. As I mentioned in answer to earlier questions, data center, especially networking with a whole slew of new product cycles will generate a big part of that double-digit growth, so will, in our view, wireless, as it has happened in the past. And in this particular year, perhaps the difference between this coming year, 19 versus 18, is simply two things. One is we're probably going to get better share. I've mentioned that before. And secondly, content increase. It always happens. Year after year, as I mentioned. As an example, in Wi-Fi, you'll see Wi-Fi 6. Wi-Fi 6 is not just in enterprise and access gateways in service providers. We are seeing Wi-Fi 6, the new generation 802.11ax, in handsets. And that drives, I call it, strong content increase, as The increased amount of bands in FBAR that we constantly see as basically wireless continue to proliferate in various areas of the world, continue to expand the amount of bands content in this next generation phone. So all that is going to drive a bounce back with perhaps that we've increased content for our products. As far as volume is concerned, yeah, like you, I'll probably be as uncertain as you are how much the volume would be. But regardless, there's a lot of mitigating factors, and the biggest part of it is pure content increase.

That's helpful. Thanks, Hock.

Thank you. Our next question comes from Stacy Raskon with Bernstein Research.

Hi, guys. Thanks for taking my question. So understanding the confidence on the semi-ramp, your guidance also implies the infrastructure software business has to decelerate pretty materially as you go through the year. And, I mean, it seems like right now in Q1, the CA business must have already been hitting pretty close to the $3.5 billion kind of annualized run rate that you were talking about that was a few years out. So I guess, like, what drove the strength of CA and Q1, and why does that business decelerate, have to decelerate so markedly as we go through the rest of the year in order to fit into the guidance that you've provided?

Hey, Stacey, it's Tom. I think, you know, one element is, you know, we don't want to get into the details between CA and the SANS switching, but, you know, we're taking a conservative approach. It's, you know, just the first quarter out of the gate. We've got three quarters to go. As Hawk mentioned, we are actually pretty publicly surprised with the number of ELA and PLA opportunities that we see in the pipeline. And a lot of our, you know, success in terms of growing the dollars of these accounts is going to be driven by our ability to convert those into wins. But so far, so good. So I think, you know, we're going to take this one quarter at a time. But for now, given that we're only one quarter into the year, you know, we feel very comfortable reaffirming guidance on the top line. And of course, you know, we feel comfortable with the operating profit as well as the cash flow expectations going forward.

But you said CA would sustain through the rest of the year. So does that mean that Brocade has to, like, come down a lot? Or is it just, like, overall conservatism that's in the number?

So, Stacy, what we said is that the software, the infrastructure software segment would continue to sustain throughout the year. That's our expectation. But we are taking a conservative approach relative to the overall outlook for the business.

But if it sustains, wouldn't you be at 5.6 for the year instead of 5?

I'll leave that to you, Stacy, to figure out. Okay.

Thank you, guys.

Thank you. Our next question comes from Toshi Ahari with Goldman Sachs.

Thank you for taking the question. Huck, I had a question on 5G as it relates to your wireless business. Based on preliminary discussions with your customers, what sort of content uplift are you expecting in your wireless business as 5G is inserted? going forward, and from a timing perspective, do you think is it more of a 2020 dynamic when 5G starts to move the needle, or is it 2020 and beyond? Thank you.

Very good, interesting question. And, you know, you're asking areas of very vast uncertainty here. But my sense of it is, You'll start to see a little bit of it in 2020, but it will be only a small part. I think it's 5G, as it impacts content in components in handsets, high-end smartphones, I might add, will only really impact in a big way, I think, beyond 2020. 2020, we'll see some stuff, but the tax rate, for want of a better word to use, is going to be not that high. But you're right, beyond 2020, as 5G comes in, and you've probably heard and seen that, the amount of content, especially for on our way, the factors on RF analog F-bar, and here in this case, as those F-bar content attaches itself more and more to antenna and various other parts of the phone, will be quite significant, but not so in 2020. Thank you.

Thank you. Our next question comes from Craig Heddenbach with Morgan Stanley.

Yes, thank you. Just a question for Tom. On the back of the strong gross margin upside in the quarter, can you talk about just trends you're seeing in gross margin for the core semiconductor business and then software and just how we think about expectations through the year?

Sure, Craig. Well, you can see the gross margins are, you know, exceptional. They're all over 70% in the quarter. A lot of that is driven by including CA in the business, but you're right. The center of business continues to increase from a gross margin perspective. Mix helps. You know, as wireless comes down, you know, we benefit, as I think you know, from the rest of the portfolio and semis being at or above the corporate average. But I think, you know, looking out longer term, you know, we've talked about this a lot. We continue to see the opportunity to improve gross margins, which directly translates, of course, into our operating margins and our free cash flow conversion. So we see that continuing. Got it. Thanks.

Thank you. Our next question comes from Harsh Kumar with Piper Jaffray. Hi.

Yeah, hey, guys, first of all, congratulations, exceptional execution. I wanted to follow up on the gross margin question, maybe for Tom. They stepped up quite dramatically. On one of the field trips, I think you had mentioned that it really takes an acquisition about a year to hum and really produce results. So the question is, did you capture the vast majority of CA benefits very quickly in one queue, or is the best from CA sort of reserved for the back half and later on?

No, I mean, I think as you might, you know, be able to sort of look through the numbers, we're still not, you know, fully optimized around CA. We're only one quarter in. So you've seen some meaningful improvement in profitability, you know, for the company that includes CA. But when you look specifically, you know, at gross margins, you know, it's a number of elements within the CA business tied to gross margins, primarily services as well as support. And so, you know, we've taken some actions. to improve gross margins and improve the PML in general. One in particular is we announced a deal with HCL and have outsourced a lot of our service activity to HCL going forward for the CA business. But as we continue to work through our model, which is really driving these PLAs we talked about, we see the opportunity to continue to get better returns on our investment, which includes improving our gross margins going forward. So we would expect them to continue to improve, not just this year, but really over the long term.

If I could add to that, on CA, we continue to go through transitions. And you're right, it takes at least a year for us to so-called harm. In the case of software companies, I believe it will take longer because these are contractual commitments, probably closer to two years. But you will get there. The biggest, I think a big part, other than the fact that we're combining software and hardware now, and CA in the infrastructure software side, still transitioning is an improvement. And we, as Tom said, just one quarter, we expect to see more reductions. And these are not just cost of goods sold, but down below the line operating expenses as we go through it better. One, for Q1, is very critical to, is the fact that you know, its product makes. Wireless is down, and the other products are humming along, semiconductor products. And remember, year by year, nature of our product life cycles in those semiconductor products, we always have an opportunity to expand by delivering more value to our customers, expand our gross margin around 50 to 100 basis points on just its natural cadence. That and makes, I think, is adding a lot of tailwind to our improvement in gross margin.

Thank you. Our next question comes from Edward Snyder with Charter Equity Research.

Thanks a lot. Hark, I'd like to, if we could maybe touch back on wireless. This rebound you're going to see in the second half of the year, I understand you've got a year-over-year issue here because we were kind of weak last year, but this is – Flattening out units, this sounds like it's going to be a much stronger rebound than normal, just on content alone. I mean, correct me if I'm wrong, but you've got three big areas that you're playing with. Just enhancements alone. Of course, your standard ball business, which covers everything but 2.4 gig. You're doing more products in the antenna congestion area now, because I know you're doing antenna flexors, and that problem is getting much more acute over the next year, especially as 5G comes on. But the Wi-Fi, it's 11AX. like you mentioned, not only in enterprise, but we're seeing that in handsets. And isn't it the case that you've got a big lead over your closest competitor, maybe Qualcomm here? So shouldn't we expect, one, to see a big rebound just on content, two, for maybe this to have more legs than we'd otherwise expect to begin next year? I know units are an issue, given Wi-Fi itself is being deployed, and you play stronger to that. It should last longer, shouldn't it?

Ed, we love all your comments, but I want to be Played down very straight down the center simply. We see a rebound. My view, it's a normal rebound. And it's a normal rebound. And while content increases, it's not really over the top by that much either. But don't forget, comparing it against last year, it's relatively an easier compare. So we definitely see a rebound, and it will be a good rebound, but it will not be an extraordinary rebound. Just want to emphasize that. Just your normal rebound. It's not hard to compare year on year against last year versus second half of fiscal 19, the fact that there will be an improvement. Okay, thanks.

Thank you. Our next question comes from Aaron Rakers with Wells Fargo.

Yeah, thanks for taking the question and also congratulations on the quarter. A lot of questions on wired and wireless have been asked, but I wanted to ask about the storage business. The storage business I think you mentioned was up, I don't know if you framed how much in this quarter, but I'm curious on kind of similar questions as prior. What kind of things are we to be focused on in that piece of the business over the next couple of quarters and how do you assume that that can grow through the course of this year. Thank you.

Okay. Very good, interesting question. In storage, we have a mixed bag here. A lot of it, not all of it, but a lot of it relates to hard disk drive. And as you know, hard disk drive, nothing to yell over these days. And we see that no different from the others. Our mitigating factor here is that most of our hard disk drive, In fact, all hard disk drive component sales goes to near line or basically data centers. We don't do, we do relatively less in PC, desktops, or mobile. So we do see the impact of it in WIC, but not as extreme as obviously the industry is saying. So that helps mitigate it, but that's not a growth area. Where we see hopefully better new product cycle coming in is the fact that tied to the storage is, especially on flash SSDs, is PCI Express. Second of the year, we see a strong push in the marketplace on PCI Express Gen 4. We're in the lead on it, and we see a lot of interesting opportunities related to that, be it in storage or even be it in, without saying the amount, in upload computing from a viewpoint of machine learning, GPU to GPU connectivity. But it's also related to storage. And that push on PCI Express Gen 4 is what's quite interesting in storage over the next, well, actually over the rest of this year. especially the second house. All right?

Thank you.

Thank you. Our next question comes from William Stein with SunTrust.

Great. Thanks for taking my question. Huck, if you cut through the end markets and look instead at the business on a geographic basis, I am well aware that when you ship to one region – there may not be consumption in that region. China is a big export economy, certainly. But can you talk to the pace of demand that you're seeing in China as best you can tell it, in particular relative to inventories there? Thank you.

Good question. No surprise. Across the regions, as far as I'm concerned, China is the weakest. And we all see that. We all know that. And I'm talking domestic demand products that are our products shipped to those regions, used in that region indigenously is done. And it's the weakest region. It also has collateral impact we see to some extent on certain sectors in Japan and certain sectors in Europe. Less so in the US, but broadly, so China has an impact beyond just the region itself, China. It also impacts to a couple other regions. But North America continues to be quite decent. And that's what helps us mitigate this overall macroeconomic situation.

Thank you. Ladies and gentlemen, thank you for participating in today's question and answer session as well as today's call. This does conclude the program. You may all disconnect and have a wonderful day.