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

Blayne Curtis - Barclays Vivek Arya - Bank of America Merrill Lynch Ross Seymore - Deutsche Bank Amit Daryanani - RBC Capital Markets Toshiya Hari - Goldman Sachs Harlan Sur - JP Morgan John Pitzer - Credit Suisse Stacy Rasgon - Bernstein Research Ambrish Shrivastava - BMO Srini Pajjuri - Macquarie Securities Steven Chen - UBS.

Welcome to Braodcom Limited Second Quarter Fiscal Year 2017 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ashish Saran, Director of Investor Relations. Please go ahead, sir..

Thank you, operator, and good afternoon everyone. Joining me today are Hock Tan, President and CEO; and Tom Krause, Chief Financial Officer of Broadcom Limited. After market close today, Broadcom distributed a press release and financial tables describing our financial performance for the second quarter of fiscal year 2017.

If you did not receive a cope, you may obtain the information from the Investor section of Broadcom’s website at www.broadcom.com. This conference call is being webcast live and a recording will be made 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 section of this call, Hock and Tom will be providing details of our second quarter year 2017 results, background to our third quarter fiscal year 2017 outlook, and some commentary regarding the business environment. We will take questions after the end of our prepared comments. In addition to U.S.

GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today’s press release. Comments made during today’s call will primarily refer to are non-GAAP financial results.

Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. At this time, I would like to turn the call over the Hock Tan.

Hock?.

Thank you, Ashish, good afternoon everyone. I'm actually quite pleased with our performance for the second fiscal quarter with solid contributions from a broad number of our franchises. We delivered strong financial results with revenue, gross margin, and earnings per share, all above the top line -- top end of our guidance.

Second quarter revenue of $4.2 billion, grew 1% sequentially and 18% year-on-year. The seasonal sequential decline in our Wireless segment was less than expected and more than offset by contributions from all other segments. All segments, even wireless delivered year-on-year revenue growth.

On the income front, earnings per share were $3.69, growing by 2% sequentially and 46% year-on-year. Let me now turn the discussion of our results by segment. Starting with Wired, our largest segment. In the second quarter, Wired revenue was very stable at $2.1 billion, growing 1% sequentially and 3% year-on-year.

The Wired segment represented 50% of our total revenue. Wired continued to remain a very consistent end market and performed in line with expectations. As you may recall, in the preceding quarter, Wired revenue included approximately $16 million of revenue related to the assignment of certain manufacturers right to a customer.

This did not repeat in the second quarter; however, we were able to more than make up for this amount with growth- from enterprise networking and start of a seasonal increase in demand for our broadband access and set-top box products.

Turning to the third fiscal quarter, though we expect seasonal strength in broadband and sustain cloud data center spend, and consistent with this outlook, we expect Wired revenue growth to accelerate into mid-single digits sequentially. Moving onto Wireless.

Second quarter, Wireless revenue was $1.15 billion, declining by 2% sequentially, but growing 45% year-on-year. The Wireless segment represented 28% of our total revenue. The low-single-digit sequential decline in revenue was better than expected due to stronger than anticipated end-market demand.

The sequential decline was driven by the bottom of the annual product cycle transition at our major North American customer, offset by the ramp of the next generation phone at our large Korean smartphone customer. Generation to generation, we also benefited from significant increase in Broadcom cellular and WiFi connectivity content.

Moving on now to the third quarter. We expect to see the beginning of the second half seasonal growth in our Wireless segment revenue. We expect this growth to be driven by the start of a ramp from a large North American smartphone customer as they transition to their next generation platform.

On top of this, we are also expecting a substantial increase in our total dollar content from the eight Broadcom products we will be supplying into this new platform. The national ramp of this next generation platform; however, appears slower this year, compared to prior years. But we believe, this will likely accelerate in our fourth quarter.

Our third fiscal quarter outlook reflects this expectation and notwithstanding the 40% content growth. We project sequential growth in our Wireless revenue to only approach double digits on a percentage basis. This outlook also reflects an expected decline in shipments to our last Korean smartphone customers. Let me now turn to Enterprise Storage.

In the second quarter, Enterprise Storage revenue was $712 million, growing 1% sequentially and 36% year-on-year. Storage segment represented 17% of our total revenue. Surprisingly, this segment continued to hold up and perform as expected.

Hard disk drive and custom SSD shipments grew while SaaS and RAID sustained, offset by a seasonal decline in Fiber Channel shipments. During our previous earnings call, we express a cautionary tone around enterprise storage for the third quarter; however, we continued to see stability in most of all sustain bookings.

We expect storage revenue to grow in the low-single digit sequentially into the third quarter. And finally, our last segment Industrial.

In the second quarter, the Industrial segment revenue was $223 million, growing by 24% sequentially, much better than expected primarily due to higher IP, intellectual properties that is licensing revenue from a large deal we closed in the quarter. Industrial revenue grew 23% year-on-year and represented 5% of our total revenue.

Re-sales of our industrial products continued to trend up very firmly in the second quarter, and we expect this to continue to be strong into the next quarter. As we look to the third quarter, we expect Industrial revenue to grow in the mid-single digits sequentially.

So in summary, demand in the second quarter, historically our weakest seasonal quarter, was stronger than expected.

For the third fiscal quarter, end markets in Wired, Enterprise, Storage, and Industrial continues to be strong, while wireless turns out and starts a slower than usual seasonal second half ramp , although, we do expect it to accelerate dramatically in the fourth quarter.

This leads to up projection of consolidated revenue growth of around 6% sequentially for the third quarter. With that, let me turn the call over to Tom for more detailed review of our second quarter financials and third quarter outlook..

Thank you, Hock, and good afternoon everyone. My comments today will focus primarily on our non-GAAP results from continuing operations unless otherwise specifically noted. A reconciliation of our GAAP and non-GAAP days is included in the earnings release issued today and is also available on our website at broacom.com.

For the second quarter, starting with the revenue of $4.2 billion, which grew by 1% sequentially. Year-on-year, growth for the second quarter revenue was 18%, which I would notice continues to be well ahead of our long-term growth rate targets of mid-single digits. Foxconn was only the greater than 10% direct customer in the second fiscal quarter.

Our second quarter gross margins from continuing operations were 63.1%, 70 basis points higher than our prior quarter and 110 basis points above the midpoint of guidance. The improvement in gross margins is primarily due to higher revenue and better than expected IP licensing revenue within our industrial and other segment.

I would note, we do expect to be able to sustain these gross margins going forward. Turning to operating expenses, R&D expenses were 677 million and SG&A expenses were $122 million, totaling 799 million or 19% of net revenue for the second quarter.

This was slightly higher than guidance as we accrued for a larger projected annual bonus compensation expense, driven by better than expected operating income. As I mentioned last quarter, we are comfortable at this relative level of operating expense given our current portfolio of businesses.

Operating income from continuing operations for the quarter was $1.85 billion and represented 44.1% of net revenue. We now have line of sight to achieving our long-term operating margin target of 45%. Provisions for taxes came in at $78 million slightly above our guidance. This is primarily due to higher than expected net income.

Second quarter interest expense was a 112 million and other income net was 3 million. Second quarter net income was 1.67 billion and earnings per diluted share was $3.69. Our share based compensation expense in the second quarter was 216 million.

Moving onto the balance sheet, our day sales outstanding were 45 days, an increase of two days from the prior quarter due to a reduction in linearity of revenue in the quarter. Our inventory ended at 1.31 billion, a decrease of 25 million from the beginning of the quarter.

We generated 1.58 billion in operational cash flow, which does include the impact of an increase in working capital. Expenditures on classic Broadcom restructuring integration activities continues to decline as expected, as we expanded approximately $50 million in cash on these activities in the second quarter.

Free cash flow in the second quarter was 1.33 billion or 32% of net revenue. I would note, we are making very good progress towards our long-term target of 35%. Capital expenditure in the second quarter was 256 million or 6.1% of net revenue. As a reminder, we do expect our long-term CapEx to decline to about 3% of net revenue.

A total of 437 million in cash was spent on company dividend and partnership distribution payments in the second quarter. We ended the second quarter with cash and short-term investment balance of 4.45 billion.

Our cash balance is running at elevated levels, which we expect will continue through the third quarter anticipation of close and depending acquisition of Brocade. Now, let me turn to our non-GAAP guidance for the third quarter of fiscal year 2017.

This guidance reflects our current assessment of business conditions and we do not intend to update this guidance. This guidance is for results from continuing operations only. Net revenue is expected to be 4.45 billion plus or minus 75 million. Gross margin is expected to be 63%, plus or minus 1 percentage point.

Operating expenses are estimated to be approximately 787 million. Our tax provision is forecasted to be approximately 86 million. The net interest expense and other is expected to be approximately 100 million.

Note, this reflects anticipated interest expense on our long-term debt of 112 million offset, largely by other income including interest earned on our cash balance. The diluted share count forecast is for 456 million shares. Share-based compensation expense will be approximately 255 million. Capital expenditure will be approximately 240 million.

As you have seen, our Board has declared a dividend of $1.02 per share to be paid later in this fiscal -- third fiscal quarter. We’re looking forward to completing the acquisition of Brocade, which is proceeding as planned and subject to the satisfaction off the remaining closing conditions.

We presently expect to close this transaction on or about July 31, 2017. That concludes my prepared remarks. Operator, please open up the call for questions..

[Operator Instructions] And our first question comes from the line of Blayne Curtis with Barclays. Your line is now open..

Just want to follow up on the Wireless side you said it’s slow ramp.

I was just kind of curious, is this the timing or magnitude? I think you have meant that it’s going to be more in Q4, but if maybe you could just wrap some color around that?.

It’s timing. I think, it is timing; last year, the similar ramp was earlier -- was stronger in Q3 probably because it was earlier. And here the initial volume in our fiscal Q2 was smaller, made up with content on our side, but definitely Q4 is forecasted to be larger..

And then, you mentioned this from the Storage side, you had some conservatism on the second half and you're seeing growth. Maybe if you can just talk about, what you're seeing on the Storage side that is growing? And then, what are you seeing.

I think the hard drives where you're most concerned, what’s making you feel better about that market?.

Well, it's growing -- it’s growing as we mentioned pretty much single digit, low-single digit. I would say it's at a high elevated level and kind of staying there for now in Q3. Q4 of course as we expressed in a cautionary manner is a whole new game. Visibility is -- obviously, we are not booking everything in Q4 here, but we pretty booked Q3..

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

Thanks for taking my question and great job on consistent execution. So my first question Hock, can you please address these recent media reports about the potentially large bit for Toshiba's assets? I realized the details are not public, but there is a very large amount of money involved.

And I think investors are keen to know how you're thinking about it conceptually and whether you are still committed to being disciplined around maintaining your free cash flow returns and not taking big technology risks when you consider M&A..

We are very committed to our business model of only having franchises, very much though. And as I mentioned, all 18 of our product lines are product franchises in connectivity solutions. We are also very committed to not only those franchises but generating lots and lots of free cash flow which we top of -- which we will return to shareholder.

All that up on model, no change. Bottom line, don't believe everything you read out there, please..

I see. And then secondly on the Wireless business, I think you gave some good color for Q3. Just one question on Q4 and then maybe longer term, Q4 when I look in the last 5 years, the median sort of sequential growth has been close to 30%.

So, is that the kind of level that you're thinking about this year or maybe even better given the delayed shipments of those phones and a higher content you've suggested? And then longer term on that same Wireless theme, I think one of your competitors, Qorvo recently outlined some plans to perhaps take some share at your large customer with the High Band PAD.

And I wanted to see, how secure you think your competitive position is on next year's phone models? Thank you..

There is a lot of questions and content. I’ll start with the serious one. We don't forecast beyond one quarter you know, bad practice frankly because we could be very sadly wrong.

But obviously, what we are also seeing is from the limited visibility we see, we see the ramp beginning in our fiscal Q3 which as you know is an off calendar ramp by one month, July. So, we captured a part of that ramp, we believe it is a small part, and we expect to capture the substantial part of that ramp in Q4.

But keep in mind always when you compare year-on-year, we have different content levels from a year ago substantial as I pointed out. So, that my kind of confused the numbers somewhat.

But suffice to say, Q3 as we outlined since the beginning of the ramp may not be the same level of ramp if you compare to a year ago for the couple of reasons I mentioned.

But we also see Q4 to even ramp up, even more substantially obviously because if Q3 is slower, it’s more than likely Q4 in any product ramp would just show a stronger quarter compared to Q3. So, that said, but other -- the specifics really, I am not really at liberty to disclose it because we just don’t go look that far out.

As far as the trash talk you hear out there, seriously, we don’t prefer to -- I prefer not to comment on that..

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

Thanks. I have just follow-up on Wireless on the content side.

Can you give maybe a little bit of context, if you split kind of the legacy of Viago and RF relative to the Broadcom kind of connectivity and maybe touch piece?.

I am already stretching a lot to say, there is a certain North American customer. We have very good content to customer we daily value. I prefer not to give you any more details other than that. Thank you..

Okay. I’ll try another one on the networking side.

Can you talk about just the trajectory in the merchant silicon business and any new kind of customer adoptions or ramps to think about there?.

Well, we feel very good about our merchant silicon in switching and now routing as we call it, which is the DNX series and the Jericho, Jericho plus all the -- and we have launched that. And their use not just -- its routers, they use as aggregation switching in the spine.

And so, it’s a very good aggregation, solidly much cover in our merchant silicon even at the high performance, high competitive top of the rack switching. We pretty much cover a full range of requirements. And so that’s going to alone very well. In fact, as of penetration especially in the cloud guys is very, very good.

Adoption among the hyper-scale cloud guys is extremely strong, extremely well used. And well, all this is going on, some penetration and enterprise is happening. But here in enterprise tradition enterprise our fixed switch and routers continue to run very, very well through our OEM partners..

And our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open..

I just had a couple of questions on your Wired segment.

One of the larger customers in their guided recently and although weaker than expected for their June quarter and talk about some weakness on the service provider side, so other than by product type, can you talk about customer types? Are you seeing any change in the customer behavior that undercover is within that mid-single-digit growth that you’re talking about?.

No, we don’t. We see in this third quarter, very good data center spending. And I said this, a lot of this -- I assume when you say service provider, you mean the cloud guys. And the cloud guys are very much focused on using merchant silicon on the switching and routing connectivity solutions.

So -- and we see very strong spent, which is part of the reason why we are raising our sequential growth in Q3 from Q2 in Wired to be mid -- to up to mid-single digits. Off course, it also helped by the seasonal uptrend we’re seeing in broadband access and set-top box, which is CPE.

And that's because of the seasonality, but in some entirely that is also a switching and developing in datacenters. .

And as a follow-up still within that same segment on the broadband segment that you just talked about. Talk a little bit about DOCSIS 3.1 can mean for you.

With that rolling out, is there a chance the things can be a little better than seasonal in your broadband business as we go ahead to the second half of the calendar year or are there offset that needed to appreciate?.

I never try to be too optimistic. At this time of the year -- at this time of the year, we see always the typical seasonality and by we seeing it now and bookings out Q3 and the beginning of Q4, very strong booking, but I'd like to consider that seasonality rather than unusual seasonality this is normal..

Thank you. And our next question comes from the line of Amit Daryanani with RBC Capital Markets. Your line is now open..

Couple of questions from me as well, I guess to start off with, as you look at your operating margin target around 45%. You guys are 44.1 right now and I think Brocade loan ones closes get you north of that.

So, how should we think about margins as you go forward? Is there a desire to keep ticking margins higher? Or do you think this price lasting for this market where you perhaps keep margins the way they are drive revenue grow faster?.

Well, you asked very complicated strategic question..

We try to be specific..

I know you do, very impressive question, but you won't get as impressive answer through I have to say that because all we are doing is, we sell based on the where you added we provide our very key customers specially what it is. And we believe, we deserve and get the value added we provide in our products to the solutions of our customers.

And we think, it will drive us to 45% as a fairly, fairly decent way to get there..

Amit, I get this point. We're not updating our financial model. We're not updating our operating margin targets. We're very comfortable at 45%..

Fair enough. I guess, if I just follow up -- as I think of your gross margin guide for the upcoming quarter. You have a nice 6% uptick in sales but you’re talking the gross margin being flat even though I think the headwind from Wireless not being up as much, should be a benefit.

And lastly I think the gross margin up like 40 to 50 basis points in July.

Why can’t we see the same level of leverage given mix might be better this July versus last July?.

Well, we kind of give you what we see. We hit to meet focus guys as you probably know. So, we kind a give you something that we feeling very comfortable with and we are very comfortable at the midpoint of 63% which you're right, we achieved it last quarter. .

And Amit, I think we're going to be able to sustain in around that number. I think you're right, there is some wireless mix with slightly headwind. We've also work through a lot of the Broadcom synergies and the benefits we receive there, but I think we planned to sustain that going forward..

Thank you. And our next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is now open..

I had a question on the long-term revenue growth target. Obviously, you guys are committed to the mid-single-digit target that you put out a couple of quarters ago, but as you pointed out, you grew 18% in the quarter. If we take the mid-point of your July quarter guides, I think you guys have, with the quarter growing about 17%.

I realize the growth rate and enterprise for example it’s not necessarily sustainable, but what prevents to you from raising the target to say high-single-digits on a long-term basis?.

On a long-term basis, no, because don’t forget -- the characters of our product guidance all 18 events even the 19 eventually locate. They are very sustainable, that’s a single most important product like sustainable franchisees. I mean the deliver value added and you give delivering new generation of the generation.

They’re not there to grow like we, they’re not. But it grows like GDP pretty much economic growth. We’ve added for the fact that each generation provide further value added, which entitled us to have slight premium, but not much. And hence it’s mid-single-digit, which is GDP but like premium.

No more in debt and that is long-term sustainable basis because it’s a nature of the products we invest in, nature of our business model. What is seen now? I think is a short-term event, which is driven 18%, 17%, 18% as you mentioned year-on-year in Q2 from last year. It is driven by two part is my view on this matter.

One is while the Q2 of a year ago, it’s on because the Q2 this year is strong as much as a Q2 and there is only wireless was unusually weak for good reasons menu, which are not going to, but you all know that. And this quarter is more of a normal Q2, perhaps somewhat buttress by a strong launch of our Korean customer.

But it’s kind of stronger than we expect that as I mentioned. So, there is a – a big part of that double digit growth is wireless growth driving in and that’s a 30% of our total revenues approximately. So, it grows a lot, it has that impact. And the second part of it is on infrastructure, our business in Wired, Industrial and Enterprise Storage.

This year 17, business is just strong. The pipe just rose and I think that the other part that drove this double-digit growth. But you don’t see that every year. And I think this is fairly unusually strong for infrastructure, but from wireless infrastructure -- so that combination is what created 18% growth.

I would not for a second like you guys to cling believe that this is something we will sustain for the next five years. What we feel comfortable, we can sustain for the next five years is what we have said before, and we’ll continue to deliver, hopefully over the next 5 to 10 years, which is mid-single-digit growth on average year-after-year..

Okay. Got it. Thank you. And then my follow-up, I just want to ask some follow-up question on M&A. And I realize the topic can be a little bit sensitive here. But Hock, you’ve told us to not believe anything we read in the papers.

Is it okay for us to walk away thinking that you're not making the bids for that specific asset? Or and again I think ask the gentlemen. .

Let me reiterate, please do not believe anything you read and we do not comment on any rumors and pure speculations in the headline, but we continue to focus on our franchise stable business model. We have a lot of free cash flow..

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

Congratulations on the solid results and outlook and just great execution by the team. On the topic of free cash flow, you guys generated 32% free cash flow margins. If I normalize to your target of 3% CapEx, you guys actually did 35% free cash flow margins which is your target model.

But I'm wondering despite the great cash generation, do you guys still have some restructuring acquisition related cash charges which would imply that the normalized free cash flow even now is better than what you printed and maybe to see if that's to quantify some of those cash restructuring charges?.

No, you're right you're doing your math absolutely right. The Company take into account the elevated CapEx for mostly the campus investments we're making that you're aware of and some incremental restructuring charges and frankly some working capital headwinds as the business continues to grow.

You're quickly get to 35% in which is where we want to be and obviously when we it continue to put up those numbers going forward, but based on where we see revenues and gross margins and operating expenses that we outlined for you, we think that's achievable..

Great. And then so my follow-up question within Enterprise Storage, you guys have got a leadership position and server rate and SaaS controller solutions, and typically these products tend to track server shipments. So given Intel's Skylake server CPU launch and you've got AMD’s Apex server CPU launch, both I think which are ramping now.

Is this contributing to the growth during the July quarter and maybe through the second half of this calendar year?.

Not in the quarter we just entered Q2, and no necessarily march in the July quarter Q3, but certainly we expect probably which is the generation and you're talking about for Intel launching Skylake. The early generation and storage will start to ramp up. You're right back half of this calendar year, really back half of this calendar year. .

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

Hock, I want to talk a little bit about the Wired results just for the April quarter. There is a lot of different businesses inside of Wired, but the 3% year-over-year growth rate I think is kind of the slowest growth rate that we've seen since the financial crisis.

And so, I'm just kind a curious if you could give us a little bit of color as to what actually happened to the April quarter where there were strength and where there might have been some relative weakness? And then as you think about sort of the reacceleration into July maybe some color around segments within wired would be helpful as well?.

Wow, that's interesting and very confusing question. But let me try somewhat, and for the rest, I have to take it offline another time because there are a lot of moving parts. And you're correct, in our Wired segments we represent 60% of revenue we throw in the kitchen sink, no really, all related to Wired.

That is actually a couple of chunks on broadband, which is broadband access, carrier access, as well as CPE set-top box. And in Q2, totally not that strong obviously, it starts ramping up seasonally Q3, Q4.

So, there is that effect there is not that strong and year-on-year a year ago, a year ago result that was a Summer Olympics, so we’re comparing against the Summer Olympics, which will make is touch. And in Q3, Q4, that’s all Summer Olympics of last year should begin to look very good, which is what accelerate this in the second half.

In switching and routing, no, we continue to feel very, very good whether it’s in ASIC or merchant silicon, off-take delivery shipment continue to hit all-time high in those two segments.

I hope that gives you enough -- and then third thing that messes with up is, we’re building block products by fines, retirements, which are more unique to the designs that’s been used as well as fiber optic which has gone through very interesting direction and cycles, that means mess of the number.

But the two broadest area, broadband compared with a year ago is on compared, because the Summer Olympics. But switching and routing, the SMA continues to be a very, very strong franchise whether it’s in form of an ASIC or in the form of merchant silicon. Even though there are both selling into very end market and users..

That’s helpful. And Hock, maybe from my follow-up on the ASIC side, I sort of a different question. You’ve always had a strong switching routing into business. It’s my understanding there are also be a basic of things my guess is the controllers and perhaps the things like in trends deep learning.

Just kind of curious, how do you think about the ASIC IP, the Broadcom has? Would you consider that franchise and is it leverageable into areas beyond just switching and routing?.

Yes. You hit it right on. We do did launch ASICs that need to customize, deep learning chips for specific customers. We do that because we have all the IP in the hardware.

I mean that’s keep in mind, I believe deep learning is very much as much a software play such more than the hardware play, but we are happy to enable therefore specific large customers in ASICs with customize hardware, which we use even right now and be training or in terms but we do that.

Then on SSD controllers, yes, we do a huge amount of SSD controller relatively speaking across our follow, basically for enterprises only, not really enterprises, but all part and enterprise storage business. They are not part in our wide basis. That difference is being very well as you probably can get it to date..

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

First, I wanted to ask about the cash flow. So again, we can see the margins are pumping up, if you normalize close for 35%. What about the payout ratio? So the payout ratio still running around 5%, we’re not close to 50.

What stopping you from bringing it closer to 50 earlier? What’s your trajectory or which you’ll be thinking about the payout ratio?.

Yes. Stacy, I think, we reiterated a couple of quarters that going put in place the financial policy that we're going to evaluate that once a year at the end of our fiscal year so that will be in October November timeframe.

We're going to look back over our last fiscal year look at that cash flow generation, look at the sustainability of the businesses that we're focused on and then make an assessment obviously with the board's approval around a recommendation.

But what I want to reiterate is you're right as we continue to perform if we maintain that we could plan to do our 50% payout then that's going to lead to obviously an increased potentially increase in the dividend in the end of the year. .

So my follow-up, I want to pick the dead horse but, refresh us on your definition of a franchise.

What are the characteristics of a business that meets that definition? And frankly, would it possible for a NAND Flash business to qualify as a franchise under your definition?.

Good try, okay, let me give you our definition of franchise which is very open and try to ask, give me try to repeat the mantra. No, a franchise basically is a - we grew only components, semiconductor components. And it's just components broadly simply that it operates -- the product lines operate in the niche.

Doesn't have to be mess market, most time it's a niche. And so niche where is the way that markets have been established and will likely continue to be established for the foreseeable future. So, we must have established end markets that are sustainable, one. And in that niche, in that market we are the market leader.

And more than a market leader especially because we are -- the reason for us to be the market leader, we are the technology leader. We have to have the IT. We have to have the technology and the capability to continue to lead in that particular market. And the third, there is something financials about it.

The financial is a fallout, a corollary fallout from those key criteria. And each of our 18 product lines meet those criteria, you made your own call whether NAND meets that criteria..

Thank you. And our next question comes from the line of Ambrish Shrivastava with BMO. Your line is now open..

I wanted to go back to your Wired franchise, Hock. You have talked about and this is a follow-up to John Pitzer's question. With regard to newer areas and all within the umbrella of the 5% that you've articulated for the, quite well over the last couple of years.

Is this something that this is a one off that you've done or do you see this as a broader volume with multiple customers as you go through the year and next year?.

Would you repeat that Pal. I might have missed some part of your question.

Would you repeat that?.

Okay, the deep learning ASIC that you’re rolling out.

Is it a one-off for one customer or do you see this expanding to multiple customers?.

It’s an -- that is learning product, we're doing for multiple customers today are all customized solutions, hardware solutions on outside. They’re not software-based solutions. We are -- it falls into our ASIC category.

And we have all-time intellectual property all luckily hardware-based like SerDes, much more than SerDes memories, you name it all kind of stuff that goes into training and inferences on a deep learning chip. We have all that IP, but only doing hardware. We make no pretensions we’re trying to make it our full solution.

So within ASIC solution and covers multiple customers and it probably covers multiple generations going forward. But it’s really simply an ASIC solution..

And our next question comes from the line of Srini Pajjuri with Macquarie Securities. Your line is now open..

Thank you. Hock, I just want to ask clarifying question to the previous answer. Some of your peers are putting this market opportunity and close to $30 billion.

I just want to hear your thoughts of how big the ASIC opportunity for deep learning in European it is like to take maybe a three-year view on this?.

I have no clue to be honest. Seriously, no -- it is -- our franchise here is the intellectual property, capability, we have of implementing silicon solutions that does deep learning. We produce as well have the IP implemented to do high performance computing or as we do now a lot of switching and routing. This we do in deep learning.

And for us, deep learning is not seen necessarily as a franchise. It’s our ASIC capability that is a franchise..

Got it. And then I know you said, you don’t want to comment on your competitors trash talk, but if you could maybe comment on in terms of your BAW performance, I think historically the reason, you have just significant share was you had a significant performance advantage over your competitors.

I’m just trying to understand, if some of your peers are close in the gap or at least narrowing the gap and as we look out the next couple of years.

Just want to understand, how much advantage you still have in BAW?.

Remember, my definition of a sustainable franchise. We don’t talk investments, I mean contrary to myths out there. We are join every time, we quick public product line as our core product line as among the ’18. We invest as much as we have to maintain, it’s not lengthen our need.

No different yet, we don’t say put at the generation of last year, or two years ago, or three years ago, we continue invest the lead that we direct review never closes. And that’s the key fund of our model. We will invest and given that your market leader in that niche, we can’t afford to out invest anyone out there.

We’ve been in R&D for even better and as you know in totality, some of it packed up in cost of sales or product engineering as we bring it to production. The rest of it in R&D, we spend on product development in this company every year $3 billion and that something from CapEx, $3 billion.

And we are very, very conscious of the fact that we have to maintain is not even increase that level of spending where we need to in specific areas to ensure that we are the leader both in technology which leads to market leader. So not that easy to narrow but leads is to in terms of coming to compete with us. .

Thank you. And our last question comes from the line of Steven Chen with UBS. Your line is now open..

Hock, if I could I wanted to follow up your earlier comments on storage, your storage business and the guidance for stable demand again in this fiscal third quarter. I was wondering if you're looking back earlier this year when the storage business was seeing better than NAND because some of the storages in NAND Flash and [indiscernible].

I was wondering, if your customers are providing you a much commentary around whether the current hard drive demand, is in line with broader demand or for total come in that NAND as the shortages that are helping hard drive demand?.

It's a very hard market to predict at this point, because there are a lot of multiple dynamics going on in terms of it's not just about Flash demand being an outreaching very high levels, which is driving everything else probably is but into that was probably late '16 early '17.

Today I guess all this big all this increased prices in memory whether its DRAM flash is not hard drives as part of the DRAM and flash is leading to careful spending by enterprises and operators and cloud guys and datacenter. They're all been very careful. So suddenly you have demand that is there, that is needed but people are not spending.

And you will have this stop and spot going on. So it's all very confusing it's all I'm trying to come to get on. And I'm not sure we have as much and embedded on we have any better visibility even our customers. Our customers have better visibility on their nerves for that manner.

It's just very confusing and all we can see is that demand has strengthened out for our products be the SSDs or be the SSD flash control as I should clarify or be the components -- and -- for hard disk drive. All we see is that a quarter ago we are seeing but we got to be careful about Q3.

Well, Q2 is -- and gone Q2 was good, Q3 continues to look good, but then on doing -- say Q4 in many case we don't, with strong booking Q4 but it may not be a strong and a big part of their uncertainty and lies in fact that they're more than just simply a shortage of flash or DRAM that's creating this uncertainty.

I think it's much more than that, it's also the change in spending pattern even in a short term of datacenter guys, cloud guys and enterprises because of higher memory prices. .

Okay. I appreciate that consideration and I just had a quick follow up for your wireless connectivity business. And then much of Fab revenue is still driven by mobile type applications.

So I was wondering how meaningful is your exposure to enterprise type at this point today and any exposure and like where the hot spots potentially going forward? Thanks..

There are. There are as far as I can potentially describe is broadband carrier exchange are increasingly even set-top-box which includes set-top-box both CPE that is as well as central office are starting to spread Wi-Fi as another means. You have GPON, EPON, you have DSL, VDSL. Now, WiFi into the picture.

So it’s all good and we are very, very well position in all this and going to generation. So, it is giving us more content to be put it this way at every access point which may help the growth. But it’s still not a big by the way as the phone by comparison the volume.

But it’s a decent amount of volume and gives us a very sustainable franchise in this area..

Yes. And even this is just housekeeping but that business, while product line is in our Wireline segment, not in our wireless segment..

Thank you for clarifying. Yes, it sits in Wired, not in Wireless..

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