Broadcom Inc.

Hello, and welcome to Broadcom's Inc. Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. At this time, for opening remarks and introductions, I will turn the call over to G.U., Director of Investor Relations of Broadcom Inc. You may begin.

Thank you, Operator, and good afternoon, everyone. Joining me on today's call are Hawk Tan, President and CEO, Kirsten Spears, Chief Financial Officer, Tom Krause, President, Broadcom Software Group, and Charlie Kawas, Chief Operating Officer. Broadcom also distributed press release and financial tables after the market closed, describing our financial performance for the fourth quarter and fiscal year 2021. If you did not receive a copy, you can find 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 comments, Hawk and Kirsten will be providing details of our fourth quarter and fiscal year 2021 results, guidance for our first quarter, as well as commentary regarding the business environment. We'll 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. I'll now turn the call over to Hawk.

Thank you, G. And thank you, everyone, for joining us today. So in the environment we have today, enterprise demand rebounded sharply over 30% year on year. HyperCloud and service provider demand continue to be strong. and strong wireless growth in Q4 was driven by the seasonal launch of next-generation smartphones by our North American OEM. Meanwhile, our core software business continues to be steady with a focus on strategic customers. On the supply side, our lead times remain extended and stable. Inventory in our channels and at our customers remains very lean. Accordingly, in Q4, semiconductor solutions revenue grew 17% year on year to $5.6 billion, with infrastructure software revenue growing 8% year on year to $1.8 billion. Consolidated net revenue was a record $7.4 billion, up 15% year on year. Let me now provide more color by end markets. Let's start with networking. Networking revenue of $1.9 billion was up 13% year on year in line with our forecast for low double-digit growth and represented 34% of our semiconductor revenue. Double-digit year on year growth was primarily by strong demand from campus switching, both from our merchant, Silicon, as well as ASIC solutions through OEMs like Cisco and HP. We also experienced similar double-digit growth with the deployment of Jericho routers within large-scale AI networks in the cloud, as well as Qumran in 5G infrastructure, and DCI. Our unique capability here to deliver ultra-low latency Ethernet networks enables large-scale deployment of AI compute for the cloud. Meanwhile, in the core of these large data centers, we have begun to ramp Trident 4 and Tomahawk 4, the world's first first 25.6 terabit per second switch to several hyperscale cloud customers as they address their ever-growing need for bandwidth demand in scaling out their massive data centers. Now, within hyperscale cloud, we continue to lead in delivering ASIC silicon for multiple compute offload accelerators, which has manifested into being 20% of our networking revenue. We expect continued growth in the next fiscal year here to over $2 billion. The key to our success here lies with our robust design methodology which integrates our broad and substantial silicon IP and rapidly delivers world-class customized silicon SOCs to enable AI, virtualization, orchestration, video transcoding, and security. We have now extended our footprint here beyond TPUs and multiple cloud customers. In Q1, networking is firing on all cylinders, and we expect networking revenue growth to accelerate to close to 30% year on year. Next, our server storage connectivity revenue was $815 million, up 21% year on year, in sharp contrast to the first half of 2021, and represented 15% of semiconductor revenue. The better than expected results were driven by robust demand for storage controllers and host bus adapters from renewed spend by enterprises upgrading their compute and storage infrastructure. Additionally, hypercloud storage, we saw accelerated migration to 80 terabytes and the start of 20 terabyte hard disk drives, which drove our near-line storage revenue. To put things in perspective, today our near-line storage business is close to a billion dollars on an annualized basis. We continue to gain share in server storage connectivity as we expand our leadership in next-generation SAS 4, PCI Express Gen 5, and NVMe. Spending for enterprise continues to recover, and we expect this will accelerate growth in our service storage connectivity revenue in Q1 to approximately 30% year-on-year growth. Moving on to broadband, revenue of $872 million grew 29% year-on-year and represented 16% of semiconductor revenue. This was driven by the continued strong growth in deployment by service providers globally of next generation PON with Wi-Fi 6 and 6E access gateways. We continue to lead the industry with a portfolio of end-to-end integrated solutions across multiple access protocols, PON, cable modem, and DSL. All SOC controllers, each with integrated Wi-Fi managed through our software stacks to reliably deliver more bandwidth, faster data speeds from the call service provider networks to the homes. And a critical element in our broadband platform, I might add, is leading edge Wi-Fi. Wi-Fi 6 and 6E today and Wi-Fi 7 tomorrow. Having leading-edge wireless is important for service provider customers to reach digital homes from their networks. By the same token, in-campus switching in enterprises is also critical that our OEMs can connect enterprise data centers through campus switches to the access points with leading-edge Wi-Fi. In both markets, our platforms, which encompass wired and wireless, silicon and software, uniquely differentiate Broadcom and sustain our market leadership. So in Q1, we expect this double-digit percent year-on-year growth rate in broadband to continue as we have seen for the last few months. Moving on to wireless, consistent with the launch of our customers' next generation phone during the quarter, Q4 revenue of $1.8 billion represented 32% of semiconductor revenue and was up 21% against a softer Q4 quarter a year ago. Nevertheless, We expect continuing strong demand into Q1 which will drive wireless revenue to be up sequentially single digit and be flat to up low single digit percentage year on year from the peak of a year ago. Finally, industrial revenue of $197 million represented approximately 3% of our Q4 semiconductor solutions revenue. Having said this, resales of industrial of $232 million grew 36% year-over-year in Q4, driven by strong demand from OEMs for electric vehicles, robotics, factory automation, and healthcare. As a result, our inventory in the channel declined further. to below a month. And turning to Q1, we expect resales to continue to be strong at the levels we saw in Q4. In summary, Q4 semiconductor solutions revenue was up 17% year on year, and in Q1, we expect the momentum to continue and revenue growth to be up double digits again year on year. This implies that Q1 semiconductor revenue will be up low single digits sequentially. Turning to software Q4, infrastructure software revenue of $1.8 billion grew 8% year-on-year, represented 24% of total revenue. Within this, Brocade showed strong growth of 19% year-on-year revenue. consistent with strong enterprise recovery during the quarter, and deployment of our next generation, Generation 7 fiber channel sand products. Now, excluding Brocade, our core software revenue grew 6% year-on-year. In dollar terms, consolidated renewal rates averaged 116% over expiring contracts, while within our strategic accounts, we actually average 127% consistent with prior quarters. Over 90% of the return value represented recurring subscription and maintenance. Stepping back and following the Software Investor Day last month, let me provide an update on the entire fiscal 21 for core software. Total backlog at the end of the year, total $14.9 billion, up 15% from a year ago, with average duration of contracts extending from 2.6 to 2.9 years. This backlog translates into an ARR, or annual recurring revenue, of 5.2 billion, which was up 5% from a year ago. 74% of this ARR comes from our approximately 600 strategic accounts, which in fiscal 21 we renewed at 129%. or $2.4 billion of annualized booking value. $1.9 billion of this represented renewals on expiring contracts, and roughly $500 million represented cross-selling, including PLAs of our portfolio products to these strategic customers. For the year, We booked over 300 contracts generating greater than a million dollars of revenue annually, with over 30 contracts generating over $10 million annually. With such stability in Q1, we expect our infrastructure software revenue to continue to sustain around mid-single-digit percentage growth year over year. So let me summarize. With the continuous strength in our semiconductor segment and steady growth in our software segment, total Q4 net revenue grew 15% year on year. Turning to Q1, semiconductor revenue excluding wireless is expected to be up 28% year on year. Wireless is expected to grow flat to low single digit percentage compared to the peak of a year ago. So semiconductor revenue in total is expected to grow 70% year on year again, and consolidated revenue is expected to grow 14% year on year. Sequentially, this will drive revenue to grow from $7.4 billion in Q4 to $7.6 billion in Q1. We are very well positioned in every one of our franchise markets in fiscal 22 and beyond. We continue to significantly outinvest anyone else across our platforms in switching and routing, offload compute, silicon photonics, and wireless connectivity to accelerate our next-generation roadmaps as we continue to gain market share. With that, let me turn the call over to Kirsten.

Thank you, Hawk. Let me now provide additional detail on our financial performance. Revenue was $7.4 billion for the quarter, up 15% from a year ago. Gross margins were 75% of revenue in the quarter and up approximately 105 basis points year on year. Operating expenses were $1.1 billion, up 3% year on year driven by investment in R&D. Operating income for the quarter was $4.4 billion and was up 20% from a year ago. Operating margin was 59% of revenue, up approximately 286 basis points year on year. Adjusted EBITDA was 4.5 billion or 61%. This figure excludes 134 million of depreciation. Now a review of the P&L for our two segments. Revenue for our semiconductor solution segment was 5.6 billion and represented 76% of total revenue in the quarter. This was up 17% year on year. Gross margins for our semiconductor solution segment were approximately 70%, up 170 basis points year-on-year, driven by favorable product mix and content growth in next-generation products across our extensive product portfolio. Note that we have been able to continue to expand our semiconductor gross margin despite higher wireless revenue mix. Operating expenses were $790 million in Q4, up 3% year-on-year. R&D was $701 million in the quarter, up 6% year-on-year. As a side note for fiscal 22, we are planning to increase R&D spend and semiconductors by mid- to high-single-digit percent year-on-year. As Hock indicated in his remarks, we are committed to investing heavily in our next-generation products to maintain and even increase our leadership across all our franchises. Q4 operating margins increased to 56%, of 350 basis points year-on-year. So while semiconductor revenue was up 17%, operating profit grew 24%. Moving to the P&L for our infrastructure software sector, revenue for infrastructure software was $1.8 billion and represented 24% of revenue. This was up 8% year-on-year. Gross margins for infrastructure software were 90% in the quarter, up 19 basis points year over year. Operating expenses were $353 million in the quarter, up 1% year over year. R&D spending at $220 million is up 9% year over year, and SG&A of $133 million is down 10% year over year. Operating margin was 70% in Q4, up 166 basis points year over year, and operating profit grew 11%. Moving to cash flow. Free cash flow in the quarter was $3.5 billion, representing 47% of revenue. We spent $88 million on capital expenditures. Day sales outstanding were 25 days in the fourth quarter, compared to 32 days a year ago. We ended the fourth quarter with inventory of $1.3 billion, an increase of $137 million, or 12%, from the end of the prior quarter in preparation to meet customer demand in Q1. We ended the fourth quarter with $12.2 billion of cash and $39.7 billion of total debt, of which $290 million is short-term. Turning to capital allocation. In the quarter, we paid stockholders $1.8 billion of cash dividends. We also paid $266 million in withholding taxes due on vesting of employee equity, resulting in the elimination of 525,000 AVGO shares. We ended the quarter with 413 million outstanding common shares and 448 million diluted shares. Based on current business trends and conditions, our guidance for the first quarter of fiscal 2022 is for consolidated revenues of $7.6 billion. and adjusted EBITDA of approximately 61.5% of projected revenue. Let me recap our financial performance for fiscal year 2021. Our revenue hit a new record of $27.5 billion, growing 15% year on year. Semiconductor Solutions revenue was $20.4 billion, up 18% year over year. Infrastructure software revenue was $7.1 billion, up 7% year on year. Gross margin for the year was 75%, up 100 basis points from a year ago. Operating expenses were $4.5 billion, down 2% year on year as we completed the integration of Symantec. Operating income from continuing operations was $15.9 billion, up 23% year over year, and represented 58% of net revenue. Adjusted EBITDA was $16.6 million, up 21% year over year, and represented 60% of net revenue. This figure excludes $539 million of depreciation. We spent $443 million on capital expenditures, and free cash flow represented 49% of revenue, or $13.3 billion. Free cash flow grew 15% year over year. For the year, we returned $7.5 billion to our stockholders, consisting of $6.2 billion in the form of cash dividends and $1.3 billion for the elimination of 2.8 million ABGO shares. We have extended our weighted average debt maturity to approximately 10.6 years with a weighted average interest rate of approximately 3.6%. Looking ahead to fiscal 2022, we remain committed to returning approximately 50% of our prior year free cash flow to stockholders in the form of cash dividends. Consistent with that, we are increasing our quarterly common stock cash dividend in Q1 fiscal 22 to $4.10 per share, an increase of 14% from the prior quarter. We intend to maintain this target quarterly dividend throughout this year, subject to quarterly board approval. Today, as part of our commitment to return capital to shareholders, we announced that the company's board of directors has authorized the repurchase of $10 billion of our common stock under Broadcom's new share repurchase program. The authorization is effective until December 31, 2022. This new share repurchase program reflects our confidence in the company's ability to generate strong and sustainable cash flow. Note that we expect the diluted share count to be $448 million in Q1. This excludes the potential impact of any share repurchase. That concludes my prepared remarks. Operator, please open up the call for questions.

Thank you. Ladies and gentlemen, to ask a question, you will need to press star then 1 on your telephone. We ask that you limit yourself to one question and one follow-up, and you may rejoin the queue if you'd like to ask other questions. Again, let's start one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Toshiya Hari with Goldman Sachs. The line is open.

Hi. Thank you so much for taking the question, and congrats on the very solid results. I know you guys don't guide for the full year, but I was hoping you could – kind of walk us through how you're thinking about fiscal year 22 on the semiconductor side. You know, obviously bookings have been strong, continue to be strong across most of your buckets or end markets within semis. But if you can talk about, you know, bookings trends in the quarter, what you're seeing there, that would be super helpful. And then as you sort of answer the fiscal 22 question, if you can touch on supply and to what extent supply could be a gaining factor over the next 12 months, that would be helpful. Thank you.

Well, that's a hell of a question I may ask. So let me try to address in its various component parts. What we continue to see with the recovery, and I made a point of saying that we're now in the midst of a very strong spending recovery in enterprise, particularly. So we're continuing to see... strong demand bookings in the semiconductor side. But a big part of that demand, an increasing part of that demand, is now coming from enterprise spending, which translates to end markets, tends to drive a lot of our broadband, continuing to drive the broadband, which has been strong in most of 21, continuing to drive the enterprise part of our networking business, And, of course, server storage and industrial is just very, very strong. Having said that, on the hypercloud spending side, a lot of it resides in, obviously, in our networking business. Things are still very elevated. The demand continues to be strong. And so... When you combine all this together, we continue to see booking rates being at a fairly, continue to be a very elevated level week after week so far. And as of right now, we're pretty much poked all the way through 22 and even beyond 22 into 23. If you think about 15-week lead time, no surprise it goes to late 22, but we've gone even, in many cases now, gone beyond 22 into 23, and that's partly because, one, timing of our customers planning very far ahead, and two, as I said, our continuing disciplined approach to ensuring that we deliver products at the right time to the right place. And we see that going on. And I hate to disappoint you, we're still not ready or prepared to give you guidance on a whole fiscal year.

Thank you.

Thank you. Our next question comes from the line of Stacey Rasgon with Bernstein Research. Your line is open.

Hi, guys. Thanks for taking my question. Hawk, I wanted to follow up on those lead times and order times. So you said, obviously, on the industrial space, your channel's lean. It sounds like your bookings overall is very strong. At the same time, we know you've been taking efforts to limit, like, worries around stockpiling and overshipping, whether it's parsing orders, expediting. I was wondering if you could just talk a little bit about what you are doing in that space. How are you feeling right now in terms of your shipments versus where end demand is? And how meaningful those long 50-plus week lead times actually are? Do they actually represent demand, even if it's that far out? If you could just talk about your efforts there, that'd be helpful.

Yeah. Well, we've been doing this 50 weeks now since the beginning of 21. And we've been delivering very much, as much as we can, to those lead times. So in some ways, I like to believe it's giving some method to this booking madness, I guess is what I would call it, in terms of our ability and in terms of how we are shipping the products. But by keeping lead times very stable and predictable, as we are doing now, we're also clearly communicating to our end users the way they should be planning their business. And I like to think all this is working out in terms of allowing us to, making sure we don't overship and build up buffer inventory through our ecosystem out there. That means distributors, channels, and customers. And all that is being done purposefully, the truth be told, that the day will come when things have to land, and we like to make sure it lands very gently and softly. And we like to think that is working very well. So what we are reporting in some sectors now, what we're guiding in some sectors and reporting where you see growth of some 20, 30%, I know, even from our perspective, it seems very hot, excessively hot. And in those areas in particular, we take strong particular attempt to make those attempts to ensure these products we ship are for programs that get deployed, rather than sit on the shelves for a future need. And so I like to believe that certain areas that grow in networking, Broadband service storage lately of some 20 to 30% year-on-year railed through end demand.

That's helpful. Just a quick follow-up along those lines on enterprise. You gave some numbers for year-over-year growth for things like networking and storage. Those year-over-year numbers, does that imply a sequential decline, especially for networking and storage? I'm not sure if my year-ago numbers are tied in or not, but Do you expect those businesses to decline sequentially within the context of the guidance?

In May, depending then, we're talking mathematical numbers now and how we ship, because some of the shipments are lumpy, and you may see that from quarter to quarter when you talk about sequential quarter, you may sometimes see that, and what I'm trying to say, and we may also choose to deploy, supply, to one market versus another as you go quarter by quarter. So looking at it sequentially in specific verticals might sometimes, for our case, from our point of view, be rather misleading. Unintentionally, I may add, simply because we may choose to deploy our ship more to, for instance, sometimes to server storage because there is a hotter need there versus the networking. And you may see then, because of that networking, see some sequential weakness in one particular quarter, which is why we report as much as we can on a year-on-year basis, where then you take out the effects of this short-term lumpiness and short-term discontinuities.

That's helpful. Thank you so much.

Thank you. Our next question comes from the line of Harlan Sir with J.P. Morgan. Your line is open.

Good afternoon, and congratulations on the strong results and execution. Hock, you know, in your networking business, you've been somewhat conservative on your view on the sustainability of the strong cloud and hyperscale growth, but yet in cloud, I mean, you guys are ramping 7 nanometer Tomahawk 4 and Trident 4 up. They're in the early innings of the ramp. Demand is strong. You talked about Jericho and Qumran being strong in routing. Your cloud ASIC customer is ramping their 7-nanometer TPU, and you have more programs firing next year, as you mentioned. And then on the enterprise side, your large enterprise OEM customers are benefiting from the strong recovery. So you're starting off the fiscal year in networking with strong double-digits growth, but do you see your networking business continuing to drive double-digits year-over-year growth for the full year, and will the growth be driven by all three of your end markets, cloud, enterprise, and service provider?

Harlan, that's a hell of a question, and the only way I can answer that is if this is a way of training for me to ask me to guide you on networking for the year, ain't working. I'm not doing that. But you're right, though. There are a lot of levers. And I articulate quite a few of them. And maybe I over-say it in some cases. And they seem to be, as I use the expression, as we sit here today and going into 22, firing on all cylinders. And by that, I mean more than just forecasting. We've actually seen the backlog. We have the backlog, and they keep building up. And you're right, hyper-cloud, guys, like you would have asked me six months ago, I would not believe the level of spending that I'm embarking on right now in 2022. But they appear to be. So you're right, enterprise has been strong, and you've seen the rate of growth of enterprise year-on-year of 30% broadly And cloud has, at their current elevated levels we are seeing in networking, has not softened, has not weakened. It's still sustaining. Now it's not recovering obviously year on year basis as fast as enterprise is showing, simply because enterprise starting from a lower point. But cloud is still growing. We are seeing hyper cloud growing and is growing from not just switching and routing, that's our traditional strength, is growing now for us on, for want of a better expression, collectively called offload computing applications. From virtualization orchestration and more and more AI, beyond just the single lead customer we have in TPUs today. So we're seeing multiple, as I said, multiple levers all moving in the right direction for fiscal 22. And good possibility what we think today in Q1 would run for a large part of fiscal 22.

Great. Thank you for the insight talk.

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

Thank you for taking my question, and congratulations on the strong results and the guidance. So, Hawk, I find two things interesting. One is you didn't use the word metaverse in your commentary, but that's not my question. The question is on the buyback announcement. What changed your view? You know, because for some time you were not as favorable towards buybacks So the $10 billion announcement, is that more a statement about business trend? Is it lack of M&A targets? Are you going to be more consistent in buybacks? So that's part A of the question. And part B is that if I take that $6 or $7 billion in dividends that you will pay next year and add the $10 billion in buybacks and apply the free cash flow range that you have, it suggests sales of somewhere in the low to mid-30s billion. using that math. And I know you're not giving a guidance, but does that math make sense? Thank you.

Hey, you're very good at these numbers. I shall just bow to those better judgment and wisdom here. Thank you. Next question.

Thank you.

You have another follow-through? Yes, thank you.

Yeah, so... Wireless, you know, is your most seasonal business. Is there a way you're thinking about wireless? So you said it could be up somewhat, right, in the January quarter. How are you thinking about seasonality for that business going into the April quarter?

Oh, April quarter is hard to forecast. I mean, this is consumer, right? So it's very hard. I can't even begin to forecast, much less... I think my customer will be better at it, and even then I suspect they are very challenged. But what we do see, interestingly enough, is demand for our components for the January quarter is good. And hence you see the fact that even as we measure year on year to an all-time peak a year ago, we're still flattish to slightly up And sequentially from Q4, which in this current round, you're correct in this regard, Q4 is supposed to be back to normality in seasonality, has been the peak quarter. Our Q1 will exceed our Q4 shipments as we forecast today. So, yeah, it sounds like even that part is doing quite well. It's just that year-on-year compare in percentage terms may not be as exciting as the rest of the semiconductor verticals that we're in, but it's still holding up very nicely. Thank you.

Thank you. Our next question comes from the line of Ross Seymour with Deutsche Bank. Your line is open.

Thanks for letting me ask a question. I guess I'll ask the two questions, and then I'll listen to the answers for both the question and the follow-up. So first, Hawk, I want to revisit kind of the quality of demand and maybe ask it a different way. You've talked about undershipping what the actual demand or what your bookings are because you believe you can ship to actual demand. So that delta between what you're shipping and what is being booked, is that changing? Is it shrinking, growing, increasing? basically trying to get at any change in customer behavior. And then the second question will be separate and one for Kirsten. You mentioned about the OPEX and the semiconductor side rising going forward. Any more color about the linearity of OPEX as we go throughout the year, and any color on kind of the areas that would be focuses of that investment?

On the first, Ross, that's a very, very clever question, I might add. Has anything changed between what we're booking versus what we're shipping. I'm trying to answer not because, I'm not trying to answer it, it's because the demand by verticals have rotated somewhat. And you can probably understand it. So what I'm saying is, one clear example is what I'm saying now. Enterprise is actually waking up big time, And they are asking for products. They're asking for products in a very, very urgent manner. And so we're seeing a lot more shipments to OEMs who support those enterprises. And by verticals, we are seeing strength in basically in server storage in particular, and also the enterprise portion of networking, hence the strength in, as I mentioned, campus switching and Wi-Fi in many ways, because enterprise, you know, campus switching now for enterprise switching needs a wireless strategy component, and so we're seeing our Wi-Fi business for access gateways in enterprise really take off now. Having said that, our classification of cloud includes telcos, service providers. They've been steady. It's interesting, cloud and telcos have been steady, but they've been steady in different manner. The cloud guys are now pushing more and more into compute overload. I mean, the programs you're working on starting to manifest as deployment. So we're seeing that. And that is really driving some more growth than just normal switching and routing that we have seen super strong in 2021. We've seen areas like in some of their very massive scale out of machine learning or AI networks. Here you need a different kind of performance of those networks. So we've seen a different kind of products going into that areas. And I may highlight in my remarks about Jericho being going into many of those AI networks in the hypercloud. And of course, 5G continues to be, goes through cycles and happened to be a cycle 5G deployment and backhaul is strong and we ship a lot of Qumrans. So it varies, but if you take it from a macro point of view, hasn't changed from six months ago, Ross, which is the undershipment from the level of bookings we're seeing.

The OPEX part, Kirsten?

Sure. Hi, Ross. So what I would expect, the way I look at OPEX, I'll comment on a consolidated view for the company. You're going to see a step up in Q1, definitely. And then remember in Q2, we have the the payroll taxes that we pay in Q2. So we have another step up in Q2, and then for the rest of the year, I'd look at that continuing out. That's how I would model that.

Great. Thank you.

Thank you. Our next question comes from the line of John Pitzer with Credit Suisse. Your line is open.

Yeah, good afternoon, guys. Thanks for letting me ask the question, and congratulations on the strong results. Hawk, maybe just a follow-on to Ross's question about the R&D commentary that Kirsten had in the prepared comments. You know, with the growth that you're expecting in the semi-R&D, do you think that that will outstrip the semiconductor revenue growth for the year or not? And not having had the time yet to go back and look, is this an unusual spend year? And if so, what's driving it? Is it concern about increased competition? Is it the opportunity set? getting a lot bigger, and kind of what areas are you focused on? And then I have a follow-up.

Oh, I think we have continued to have been spending on R&D in the silicon site on a fairly consistent basis. And so we have. But in some other areas, and it's not so much about worry about competition as See, the underlying part of our business model across our various franchises is simply that we always out-invest, out-engineer anybody else in the verticals, in those franchise verticals we are in. And so from our point of view, hey, now is a great, you know, during COVID-19 in 20 and in part of 21, things were not moving as fast as perhaps we believe a normal cadence of product cycle turnovers should be, product life cycle. So we are now jumping in 22 to basically bring it back up to where it should be in terms of a normal product cycle cadences. And in that sense, you're right. It's not because of competition. It's because we believe we need to deliver this new generation of products with better features, better bandwidth, low latency to our customers who are now ready and willing to take it on. And having said that, we invest now. You don't see the impact of that probably until 23, 24. But we feel that There's some hiatus of new technology being absorbed in 2021. So now is the time to really accelerate new technology, new generation of products for its absorption as much as we could in 22 and definitely in 23. So it's logical that spending would go up, and we are stepping up for that.

And, Hock, is the message that R&D could grow faster than semi-revenue growth this year, or you're not ready to make that statement yet?

Oh, I don't think so. We never tend to do that. We're very well-behaved and very disciplined.

That's helpful. And that's my follow-up, Hock. You guys have set up a really consistent track record around the dividend, but buybacks have been a little bit more episodic, especially given the M&A strategy. Just with the authorization today, is the intent to do all of that within the next 12 months? Why not an ASR component around that authorization today just to give investors confidence that you will follow through on the buyback?

Good point. But we intend to do this $10 billion. And the reason we're doing it, as you guys can gather, is We haven't done a deal in, we did not do a deal in 20, did not do a deal in 21, and got tons of cash, we have piled up a ton of cash, and debt has actually somewhat, the growth debt has actually declined somewhat while our cash position is building up. And while we may still do a deal in 22, it's just that we will still be generating a lot more cash in 22. So when you add up this whole thing, It's just a very logical conclusion for us to not just sit on the cash, hoard it in some ways you might call it, but just return it to you guys as we continue to accumulate cash. And keep in mind, we still have a lot of debt and grow expanding debt capacity as our EBITDA expands. And still be within investment grade, of course.

And this is Kirsten. We have consistently said that we would return capital to shareholders if we didn't announce an M&A by December. And so this is in line with what we've been saying, and we plan to follow through on it. The $10 billion authorization will be executed pursuant to a trading plan, and it will be thoughtful and in line with what we said we'd do. Perfect. Thanks, Kirsten. Great color.

Thank you. Our next question comes from the line of Surini Pajuri with SMBC MECO. Your line is open.

Surini Pajuri Thank you, and let me also echo my congrats on the solid numbers. Harki, you called out your ASIC business. I think you said it's roughly 20% of the networking business and also said it's going to be about $2 billion. I'm just curious if you could maybe provide us some additional color as to what's going on with that business. You've been a leader in this market historically, and are you seeing more interest given what's going on with the hyperscale customers and their interest in developing in-house silicon, or is this a continuation of a trend, or any additional color you could provide? I think that would be helpful.

Right. Thank you for that. And by the way, our ASIC business is actually larger than the $2 billion we indicated. It's only that part of the ASIC business sitting in networking that we highlighted. is actually there are a couple other areas where we do ASIC, and it's done on a platform under a particular franchise business that we run fairly separately as one of the product divisions. But you're right, though, the larger part of it sits in networking. And a big part, and it's half of it, roughly, I would say, maybe growing more than half now, is to the hyper cloud. is to OEMs to still remain very much OEM-related business as well. And you're right, but your point is well taken. This is a steady, stable business and growing over time that we've had for many, many years. And it has, as I said, a long time ago, 20, 15 years ago, 10 years ago, been very much on networking, Merchant Silicon showed up in networking, which is switching and routing, and it has not grown as much in networking. But in its place, having said that, other opportunities show up. A lot of it is what I call collectively offload computing, which is very much tied to hyper cloud. And that has been slowly but steadily growing. But it's slow, and it's not something that shoots up exponentially overnight. Because a lot of the hyper cloud guys, much as they have ambition to do their own designs, I like to make that point very clear, it's a very difficult thing for them to do. Because they can go out and hire silicon architects and designers, it doesn't mean you can define a chip, SOC, system on a chip, that addresses what they're looking for, whether it's transcoding, whether it's in security, or even in virtualization, or even in AI. It's hard when you don't do it on a full-time basis. So we have been working with these hypercloud guys for the last five years, and there's been fits and starts in many, many situations among these hypercloud guys. But the message I want to say is we're never giving up. We continue to work with them. And more slowly, more and more, after many tries, some of them become successful, more and more successful. And you see the trend of growth in our ASIC business for offload computing. I mean, if those of you have followed me consistently for the last three, four, five years, you have heard me talk about it three, four, five years ago. Then two years ago, I just shut up. Because it takes a while to get it going. And it's starting to translate into revenues and ramps now. And it will be a nice driver to growth, I believe, for us over the next year, two years, I would say. So I'm bringing it back up again. But it's always been there.

Got it. And then... Just to follow up on wireless, obviously the current demand looks pretty healthy and supply is very tight. But I guess if you take maybe a couple of your view out there, it looks like there's somewhat of a concern about 5G cycle peaking. So I'm just curious about how you think about wireless, especially in terms of your content opportunities for the next couple of years. Thank you.

Wireless is a great franchise. and it continues to chug along very well, and that's probably, I'm definitely wearing rose-tinted glasses in this environment because demand is good, and it's holding up still very well. Beyond that, I really don't know the answer to what you're saying. I do see content increasing over the next several years because we have various products, multiple products, not just one particular product. We have various products into every one of those very high-end smartphones. And that gives us opportunity to expand and to strengthen and increase our content. And we never really plan for unit increases, actually, in all our plans. plan on some content increase year after year, but never any unit increase. So I guess I don't, I stop thinking and worrying about whether the number of phones is going to decline in 5G in the next one or two years, as much as will the content decline? And we have not really seen it in any fashion that would make us worry.

Thank you, very helpful.

Thank you. Our last question comes from the line of Timothy O'Kerry with UBS. Your line is open.

Thanks a lot, Hawk. I had two. The first is on customer behavior, and I'm wondering if you've seen any change there. So, you know, I guess the question really is around are you seeing any change in the portion of customers that want product inside of lead time and are willing to pay your expedite fees? And I guess does that sort of inform you to the degree to which your shipments or the orders are sort of matching underlying consumption? And then I had a second question, too.

Not really. Because I think we have gone through it now for one year, and I think our customers have, most of them anyway, I can't say all of them, have started to plan their needs accordingly. Now, it doesn't mean they are perfect in their planning, and so occasionally it happens they come running in and ask for all the expedite deliveries within lead times, and we see that, and we work through that. But by and large, our customers are planning better and better because they have practiced at doing that. It doesn't mean it's perfect, and in some cases where we can't do it, they probably will look for if they can find alternatives. And to the extent there are alternatives, my competition gets some benefit on those spot situations. And that will happen. Because I love to be perfect, but we cannot be. And sometimes our customer misses, we miss. And that happens in situations, and because of previous commitments, we cannot obviously pull in their demand. But those are still happening. Is there a change since then? No, not for months. I think, as I said, customers are much better at doing it now, at least when it comes to dealing with us.

Got it, Huck. Thank you. And then I guess the... Last question really is around wireless. And now that you're into December, you should, I think, have a pretty good handle on how much your content is going to grow for fiscal 22. So I was just wondering if you can sort of give us a sense of maybe how much content is growing. Is it growing, say, let's say 10% this year type of thing? Thank you.

About 5%, 10%. Very consistent with what we thought it would be six months ago.

Perfect. Okay. Thank you so much. Thanks.

Thank you. I would now like to turn the call back over to GU for closing remarks.

Thank you, Operator. That will conclude our earnings call today. Thank you all for joining. Operator, you may end the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.