Avago Technologies Limited Management Discusses Q2 2013 Results - Earnings Call Transcript

|
 |  About: Broadcom Limited (AVGO)
by: SA Transcripts

Avago Technologies Limited (NASDAQ:AVGO)

Q2 2013 Earnings Call

May 29, 2013 5:00 pm ET

Executives

Thomas Krause - Vice President of Corporate Development

Hock E. Tan - Chief Executive Officer, President and Executive Director

Anthony Maslowski - Interim Chief Financial Officer, Vice President and Corporate Controller

Analysts

Ross Seymore - Deutsche Bank AG, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Blayne Curtis - Barclays Capital, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

Steven Chin - UBS Investment Bank, Research Division

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Operator

Welcome to the Avago Technologies Limited Second Quarter Fiscal Year 2013 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Tom Krause, Vice President of Corporate Development. Please go ahead, sir.

Thomas Krause

Thank you, operator, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO; and Tony Maslowski, Interim Chief Financial Officer of Avago Technologies.

After the market closed today, Avago distributed a press release and financial tables describing our financial performance for the second quarter fiscal year 2013. If you did not receive a copy, you may obtain the information from the Investors section of Avago's website at avagotech.com.

This conference call is being webcast live and a recording will be available via telephone playback for 1 week. It will also be archived in the Investors section of our website at avagotech.com. During the prepared comments section of this call, Hock and Tony will be providing details of our second quarter results, background to our Q3 2013 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, Avago reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call.

At this time, I would like to turn the call over to Hock. Hock?

Hock E. Tan

Thank you, Tom. Good afternoon, everyone. We're going to start today by reviewing recent end market business highlights, and then Tony will provide a summary of the second quarter fiscal 2013 financial results.

Now revenue for our Q2 fiscal year was $562 million, which was at the upper end of our guidance. This represented a decline of 2% from last quarter and a decrease of 3% from the same quarter a year ago. Here, wireless revenue declined 9% sequentially, in line with our guidance, as we expected the negative revenue impact from a major U.S. smartphone product transition, was partially offset by new platform launches at certain other OEM customers. Wire revenue was up as we expected. Surprisingly, industrial was also up slightly and above expectations, thanks to slow, but steady improvement in the industrial end market demand.

Let me now provide more color on each of our target markets starting with wireless. Revenue from wireless was essentially in line with our expectations, declining 9% sequentially during Q2. Wireless represented 50% of total revenues. A significant product transition at our largest North American smartphone OEM was the primary reason for the Q2 sequential decline. However, this revenue headwind was partially offset by the launch of the Samsung Galaxy S4 platform, as well as certain other OEMs that ramped 4G/LTE smartphones during the quarter. We have significant FBAR content in these devices and we do see increased opportunity to expand FBAR content in next-generation smartphones.

Let me elaborate on this further, if I could. As many of you know, LTE is proliferating and LTE operates in bands that are pushing traditional SAW filters to technical limits. We also now are seeing envelope tracking being adopted in some new smartphone designs. The benefit of envelope tracking or ET, as it is known, is better power amplifier efficiency. However, ET creates a noisier RF environment. As a result, we generally believe that FBAR provides isolation, which will improve the performance of the future ET-enabled phones.

Finally, service providers are also starting to adopt a technique known as carrier aggregation led by the combined different bands to achieve much higher data rates. We see the use of FBAR multiplexers that efficiently combine multiple signals as the preferred approach for smartphone OEMs to successfully implement carrier aggregation. Given these trends, we expect FBAR filtering will continue to be the key driver of our wireless business whether it be discreet FBAR duplexes or higher ASP front-end modules integrating FBAR with power amplifiers and other RF content.

Now consistent, as you may know, with our earnings higher gross margin with our FBAR products, I would also highlight that a mix of wireless has gone up from low 40s, as a percent of revenue a year ago, to 50% this last quarter. But yet our corporate gross margin has remained basically unchanged at around 51% on a non-GAAP basis.

Now looking towards Q3. We see the start of a very strong ramp from our North American smartphone OEM customer as they transition to the next-generation platform. Demand outside of this large customer is also expected to continue. As a result, we anticipate Q3 overall wireless revenue to grow in the high-single-digits on a percentage basis.

Next, wired infrastructure. Wired revenues grew 7% sequentially and represented 27% of total revenue. During the quarter, we saw an early recovery in enterprise spending, mainly though from data center applications and build-outs. While the traditional, more traditional enterprise networking market remained virtually flat. As you may now, many data center customers are today moving to the next-generation 40-gigabit per second switching platforms. We believe our design win momentum and many key OEMs is allowing us to gain share in this important growth area. We believe we have strong growth opportunities for our ASIC SerDes business on 40G data center switching platforms, in particular with our largest networking OEM. On the other hand, I would also note demand from carrier routing is still weak.

Looking forward to Q3, however, we expect data center spending will continue to improve, creating a tailwind to our SerDes business. We also expect an uptick in 40G parallel optic interconnects, which will follow this equipment installations, driven by this new data center platforms. These 2 demand drivers, we believe, will allow our wired infrastructure revenues to grow mid- to high-single digits sequentially in Q3.

Finally, let me discuss our industrial target market. You may recall last quarter, we guided low-single digit decline, actually, in industrial. It turned out, we were somewhat conservative. Revenue grew 4% sequentially and accounted for 23% of the total revenue. During Q2, industrial orders actually improved, but at a gradual pace, driven primarily by slow but very steady demand -- increase in distribution resales in the industrial market. In fact, industrial resales for us grew 3% -- over 3% sequentially, in line with our initial revenue growth.

In all geographical regions, except Japan, resales, in fact, grew quarter-on-quarter. Looking at Q3, we continue to see an improvement in end market demand across all regions, driven through multiple applications. We therefore, anticipate revenue in industrial will continue to grow mid-single digits when compared to Q2.

In summary, Q3, we expect broad-based improvements in all 3 target markets. Similar to Q2, wired and industrial should continue to trend up, but at a somewhat higher pace. The big swing factor for us is from wireless with the ramp of the product transition at our major North American smartphone OEM. With that in mind, we expect consolidated revenue for Avago to grow between 6% to 9% over that of Q2.

Okay. With that, let me now turn this call over to Tony for a more detailed review of our second quarter 2013 financials. Tony?

Anthony Maslowski

Thank you, Hock, and good afternoon, everyone. Before reviewing the second quarter fiscal 2013 financial results, I want to remind you that my comments today will focus primarily on our non-GAAP results. A reconciliation of our GAAP and non-GAAP data is included with the earnings release issued today and is also available on our website at www.avagotech.com.

Revenue of $562 million in Q2 represents a decrease of 2% from last quarter and a decrease of 3% from the same quarter a year ago. The sequential result was at the upper end of our guidance for the quarter. Q2 results were helped by improvement in demand from our industrial end market, where as you know, we sell primarily through distributors. These results compared to wired revenue that came in slightly lower than our guidance. Revenue from our wireless target market was in line with our expectations. Both Foxconn and Samsung, were greater than 10% customers in the quarter.

Our Q2 gross margin was 51.2%, approximately 50 basis points above the midpoint of our guidance. This was driven by stronger revenue in the industrial target market and better gross margin performance in our wired market. Q2 gross margin increased 50 basis points from last quarter for similar reasons.

Turning to operating expenses. R&D expenses for Q2 increased by $2 million to $88 million as a result of higher R&D investment. However, SG&A decreased by $2 million to $42 million resulting in flat operating expenses of $130 million compared to Q1. These expenses were in line with our guidance. As a percentage of sales, R&D increased to 16% and SG&A decreased to 7% of net revenue. Income from operations for the quarter decreased by $4 million sequentially to $158 million and represented 28% of net revenue. Compared to the $171 million for Q2 of last year, income from operations decreased by $13 million. Interest expense for the quarter was $1 million, which was offset by a $1 million gain from other income.

Taxes came in at $5 million for Q2. Q2 net income of $153 million decreased 6% from the prior quarter. And Q2 earnings per diluted share of $0.61 was $0.04 lower than Q1. The sequential decrease in Q2 earnings is primarily attributable to lower revenue and higher taxes.

Compared to Q2 of last year, net income was $15 million lower and earnings per diluted share was $0.05 lower. This was a result of lower revenue and higher spending. Our share-based compensation in Q2 was $17 million. The breakdown of the expense for Q2 includes $2 million in cost of goods sold, $7 million in R&D and $8 million in SG&A.

In Q3, we anticipate share-based compensation will be approximately $20 million. And just as a reminder, the company's definition of non-GAAP net income excludes share-based compensation expense.

Moving on to the balance sheet. Our days sales outstanding came in at 44 days. This was down 2 days from the prior quarter due to our efforts in the collections area. Our inventory ended at 229 million, an increase of 21 million from the last quarter. Days on hand were 76 days. We continue to build wireless inventory in anticipation of various product launches with our smartphone OEM customers. We ended the quarter with a cash balance of $1.22 billion and we generated $191 million in operational cash flow. We spent $47 million on capital expenditures. We spent approximately $37 million on an acquisition in the quarter. For Q3, we expect CapEx to be approximately $67 million as we continue to spend on our fab capacity expansion in Fort Collins, Colorado.

During the quarter, we repurchased approximately 318,000 shares, which consumed $11 million of cash. On April 4, 2013, we paid a quarterly cash dividend of $0.19 per ordinary share, which consumed $47 million of cash. This dividend was raised by $0.02 from the prior quarter, and I point out that since the inception of our dividend program in Q2 2011, we've continued to increase our dividend each quarter.

I'd like to make a comment about our capital allocation strategy going forward. Supported by a healthy balance sheet and strong quarterly free cash flows, our focus will be to continue to maximize the return to our shareholders. Our board will continue to consider increasing our quarterly dividend in line with what we have done in the past. We also plan to be -- to more consistently repurchase shares to limit dilution from employee-related stock issuances. In addition, we will continue to evaluate potential strategic investments and acquisition as another way of deploying cash to maximize return to shareholders.

Now let me turn to our non-GAAP guidance for the third quarter of fiscal 2013. This guidance reflects our current assessment of business conditions and we do not intend to update this guidance.

As we stated in the press release, the guidance does not include the acquisition of CyOptics business. However, we do plan to provide additional guidance for the acquired business after the transaction closes. So first, revenue is expected to grow by 6% to 9% from Q2. We see broad-based strength across all 3 end markets. Gross margin is expected to be approximately 51%, plus or minus 1 percentage point. Operating expenses are estimated to be approximately $133 million, interest and other is projected to be a gain of $1 million, taxes are forecasted to be approximately $6 million. And finally, the diluted share count forecast is 253 million shares.

That concludes my prepared remarks. Operator, please open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

Hock, just a question following up, first of all, on the wireless business, you mentioned that you're going to have an initial product launch that's helping in your July quarter. How should we think about seasonality in your wireless businesses? Last year, it seemed like all that goodness fell in one single quarter. Is it going to be a bit more spread out this quarter? Or any color you can give us would be helpful.

Hock E. Tan

Well, I think the question -- you have multiple points in this question, so let me try to address of them one by one. Seasonality in the smartphones business, I believe, still exists. Though, very much muted these days. [indiscernible] A few years back, frankly. It's more driven by product launches, major product launches, of large smartphone OEMs more than anything else. And what we were referring to, in our guidance for this July quarter, is the fact that we will be experiencing -- or we are experiencing, I should say, we are in the midst of it, the initial -- just the initial ramp of this large smart -- North American smartphone OEM in this quarter, but it is just the initial ramp. We expect the bulk of that ramp to actually occur in the following quarter.

Ross Seymore - Deutsche Bank AG, Research Division

Great. And then as my follow-up, switching gears over onto the wired side of the business. You gave a lot of good color on the SerDes side. The parallel optics side and specifically, the core router side, can you just give us some color about when you think that can rebound and how much of a headwind year-over-year that still represents?

Hock E. Tan

Well, if you look at it year-over-year, as I say, time starts to smoke things up, we do expect service provider spending to be back half-loaded this year, especially this fiscal -- even for our fiscal year. We -- what we see is a stream of smaller orders these days. But especially in Q2, things kind of look -- still look weak compared to Q1. And we expect Q3 right now in our guidance to be not much different. We could be pleasantly surprised. But we certainly expect, as we move beyond June, July, for service providers in China and even North America to start putting in place core routing backhaul infrastructure, which will then drive a stronger demand for our parallel optics. And that's great. That will -- and that will be a very positive development, but we do not see that so -- as much this quarter, as perhaps, subsequent quarters.

Operator

Your next question comes from the line of Jim Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I was wondering if you could talk a little bit more about the industrial business. What kind of booking trends do you see as you progress through the quarter? And are there any specific geographies or sub-verticals where you think you're doing better than others right now?

Hock E. Tan

Okay. Jim, industrial, as you know, is -- up to 2 quarters of -- of not very great movement in trends, we started to see last quarter, actually, a reversal in resell. And I'm referring to resell globally. And as I mentioned, industrial actually grew 3% recently last quarter sequentially. We expect -- and what we're seeing in order patterns is we feel we very much expect the same to happen this quarter. The important fact for geographies, North America was strongly recovering. North America sequentially was growing high-single digits last quarter and momentum continues today. Euro and Asia-Pac was also growing at least mid-single digits in industrial. The only market that was down last quarter was Japan, and it's because of the yen. Now that the yen have kind of stabilized at a fairly weak level, we actually seeing industrial turn around this quarter, in fact, for Japan. So industrial looks like an improvement, but the way we see it, it's a very gradual but steady improvement.

James Schneider - Goldman Sachs Group Inc., Research Division

Great, that's helpful. And then as a follow-up, on the networking side, you talked about several of the product cycle drivers like 40 gig that are benefiting you in the July quarter, can you talk about how much of the benefit for the July quarter is product cycle versus end demand-driven and whether you think you can sustain momentum in that segment into the October quarter as well?

Hock E. Tan

Well, it's -- I'll tell you what we see, it's almost like the -- and maybe they are really not 2 markets, but we almost see like 2 segments to this enterprise networking market. There's this new or mega center build-out -- data center build-out by people providing like cloud computing, social network -- basically, social network stuff like that. And then there is the more traditional corporate enterprise of what we corporate enterprise site. That site, the latter, is still pretty flat. We find companies are still not spending that strongly, but holding -- sustaining. But on the data center side, we still -- we see a lot of build-outs. We're seeing increasing level of build-outs and that's showing -- and that's giving a lot of growth to the business we are in because these guys are adopting, for a large part, of these new-generation products in 40G and where we have a lot of market share. And I think we're benefiting from -- so the best answer is a combination of both.

Operator

Your next question comes from the line of Terence Whalen with Citi.

Terence R. Whalen - Citigroup Inc, Research Division

If I could add, like to just take a little bit of a step-back regarding the FBAR business, in particular, you provided a slide at your Analyst Day that showed collective or cumulative unit shipments of FBAR. And what that showed is periodically over the past 2 or 3 years, you shipped about 1 billion or between 1 billion and 1.2 billion pieces. My question is, is that an accurate understanding of that slide presentation? And can you help me understand that within context of your plans to quadruple capacity between '11 and '13, because that would then imply that your unit output would go from about 1 billion per year to several billion per year. I just want to understand if this is an accurate understanding, if you could help me refine that.

Hock E. Tan

Okay. I guess, the point of what you're trying to say is the volume -- our volume shipments of FBAR is that increasing pretty strongly or dramatically. And answer is, yes. It has been and especially with more and more LTE rollouts in more and more countries beyond North America, definitely, yes. And so also with the coming into place of technics, as I mentioned, by envelope tracking and -- down the road, next year probably -- next year, carrier aggregation and adoption of carrier aggregation by handset OEMs to enable that, even more so. So yes, that's a good reason why we're increasing our capacity. Now to be fair, we should also say that penetration of FBAR 3 years ago was at a much lower level than penetration of FBAR today. So it's -- our volume increase that you are kind of highlighting and is kind of a demonstrated with our capacity increase that we just put in place is also a factor, not just of end markets growing, as I indicated here, but also the fact that the -- and the fact that number of smartphones are increasing, is also a reflection of the fact that the content of FBAR in each smartphone is also increasing.

Terence R. Whalen - Citigroup Inc, Research Division

And then if I could ask a follow-up related to that. So if I do the math then, it's clear that pricing on FBAR is coming down because obviously, the volume growth of quadruple is so far ahead of the revenue growth of FBAR. So I guess my question is, as pricing is coming down, it seems like you're able to maintain margins. So I guess my question is, as we go forward, looking even outside of the top 2 customers, what's your perspective on the growth potential outside of top 2? Is it potentially greater? And also, what's the implication for margins for business overall, given the pricing dynamics going lower on really sort of extraordinary volume growth here?

Hock E. Tan

Let me try to answer that as simply as possible. The drive to more and more FBAR usage in handsets is largely driven by requirements, it's driven by changes in the -- technology changes in the industry, now architectural changes in the industry for making smartphones, less so specific OEMs. Though certain specific OEMs may show preference for FBAR versus SAW filter because of performance. It tends more -- from our perspective, to be driven more by the fact that LTE, as a global thing, is happening and to replace 3G, or carrier aggregation, as I mentioned, is happening as in by -- and when it happens, it will take -- it will do something that most service providers, carriers will adopt as envelope tracking because it saves power on handsets. So that -- on that -- all those issues are driving just like we mentioned in the last conference call, certain bands like in Europe, the European band, LTE band, drives at 100% into FBAR. Like coexistence problems between TD-LTE and the WiFi and WiMAX band in China also drives it into FBAR. Those are technological trends, not unique to any specific OEM. So to answer you, the fact that 2 large OEMs may use it now, it does -- it's just a reflection of the fact that the entire industry will be trending towards it.

Operator

Your next question comes from the line of Vivek Arya with Bank of America.

Vivek Arya - BofA Merrill Lynch, Research Division

Hock, I think you mentioned Samsung was a 10%-plus customer. If I'm not mistaken, it's for the first time, or at least it's been very infrequent, that they have been a 10%-plus customer. The question is, do you see them adopting more FBAR across their portfolio as they are much larger than Apple, but they have not used FBAR as much because of their product mix. But the question really is do you just see them adopting more FBAR in future products?

Hock E. Tan

To answer the 2 parts, the first part, I didn't say it, but only the -- and but it's still true. Yes, they -- last quarter, Q2, they became a 10% customer. And number two, and then by the way, it doesn't mean they'll stay there forever, and by the way, it's the first time they showed up for us. And now to the answer to your bigger part of question, I cannot really respond to it, not because it is proprietary to our customer, which it is, as much as the fact that it's the architectures will be what they choose to adopt. Having said that, they, obviously, they do adopt what industry technology architectures will drive them to do, but it's not for me to say whether they are going to use more FBAR or not. Frankly, I'm -- this thing might change over time. But it's more a function of where the industry trends, technological trends, tend to drive them more than anything else.

Vivek Arya - BofA Merrill Lynch, Research Division

Got it. And as my follow-up, one more on your analog industrial business. As I look over the last few quarters, I think your reported sales have either been much stronger or much weaker compared to the original guidance. And I'm curious, what causes that disparity? Is that purely macro, is it a function of just that you have to go through a distribution channel? Is it anything in the forecasting process or -- but the question really is, do you think you have enough scale and breadth of product in that business to be successful longer-term?

Anthony Maslowski

Again, I'll answer this question. This is Tony. Is that, yes, we've seen probably more of the follow through with resales. So again, some of the predictability is a little tougher for that and then also, again, we wanted to see kind of steady trends from our distributors as well, so that's what caused that.

Vivek Arya - BofA Merrill Lynch, Research Division

I see. And in terms of just the breadth and scale in that business? Do you feel comfortable with that? Or do you think more inorganic drivers will be needed for that?

Anthony Maslowski

Well, I think, again, the business is solid, but also we're looking at opportunity.

Operator

Your next question comes from the line of Romit Shah with Nomura Securities.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Hock, can you talk a little bit about your acquisition of Javelin Semiconductor, why you did it and how this strengthens your position in wireless?

Hock E. Tan

Well, it's really is about a technology acquisition. It's we acquiring 15 very, very good, very experienced, very solid RF CMOS designers. And that's really the main reason we're acquiring it.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

And what are the RF CMOS designers do in terms of expanding your opportunity on wireless?

Hock E. Tan

Well, yes -- good point. And well, as you may have seen in some of the architectures, your roadmap to architectures, there are more than just power amplifiers and duplexers in the RF, what people call the RF front-end between antenna and the baseband on a transceiver baseband. There are a lot of other components. And as you put in more and more bands, operating within each circuit in any handsets, you start to need things, among other things, things like switching, tuning, various other things that will be very helpful and also interfaces. As you know, to operate envelope tracking, you need a certain kind of interface. In fact, people call it MIPI interface. That requires pretty tricky CMOS designs. And those kinds of CMOS designs are pretty tricky because a lot of it is done in not your normal traditional CMOS process, but RF CMOS process, which is slightly different and obviously, requires some expertise and experience in it. We figure, we do not have enough expertise in-house and this is a good way to acquire those pool of talent at a fairly inexpensive price.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

I got you. I guess, rightly or wrongly, I think of FBAR is the answer for high-end phones. Having said that, your -- there's been a lot of reports that would suggest your largest customers are trying to broaden their flagship models into the mid-tier segment of the handset market. And I was just wondering if you could talk about how you're positioned for those opportunities down the road?

Hock E. Tan

Well, people use FBAR in handsets or smartphones whether they be high-end, mid-range, handset -- smartphones, even low-end smartphones, a lot of times, very often because from a technical perspective, has limited choice. If it doesn't work, you don't get a signal, you won't get a signal and the phone may cost of $1,000 or $200, it just won't work. And in many -- as I mentioned in an answer to an early questions, a lot of the drivers towards increased use of FBAR over SAWs over the last few years, especially, has been driven by technical considerations, not just PR preference in performance, as much as technical considerations. Because if you can make it work in Band 7, if you can make duplexing work well in Band 7, LTE in Europe except with FBAR, you have no choice. You've got to put an FBAR in. And the same applies when you try to run TD-LTE in China with WiFi. You're going to have a lot of interference, has no getting out of it. And in fact, it's pretty recognized in the industry today, which is exactly why you need an FBAR filter just to be able to address that, what we call that issue of coexistence of 2 spectrum. So it's mainly driven technically, less by economic considerations.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Okay, that's good to hear. Just lastly for me, can you give us an update on how the CFO search is progressing? And do you think you're close to making a decision on a permanent CFO?

Hock E. Tan

We're still moving along. This has only been 2 months -- 3, maybe. Still, we're in the thick of it. But thank you for asking.

Operator

Your next question comes from line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

Just a question, I think you answered this but you're clearly seeing the strong demand for FBAR. Do you the mix to move further to FBAR? And then, Hock, if you can just talk about if you've seen any indications, there's a lot of talk about other competition versus yourself and TriQuint. Have you seen any of those products in the market?

Hock E. Tan

Oh, we do. On FBAR on your latter question, I guess, well, with -- SAW is our biggest competitor, frankly. SAW filters, by the way. I mean, FBAR today in a total environment of handsets market, of which they are like over 1.3 billion, 1.4 billion units per year. By far, the vast majority of handsets uses SAW filters. So in my guess, our approximate guess for FBAR penetration, is probably only about barely 20% at this point. But it's hard because in the same phone, you're going to have -- with multiple bands, you can have both in the same phones, SAW filters and FBAR, which makes it even more tricky to estimate it. But the fact of the matter is, SAW guys and there are people like Virata, TAIYO YUDEN, OpCos. They're all largely SAW guys. They're still here in this area. We do see some FBAR on -- entrants, as we mentioned correctly. We have license TriQuint to do it, and we are probably best -- 1 or 2 other guys who tried to do it. But do keep in mind, obviously, 2 things: one is we have lots of IP around it, huge thickets of IP on FBAR, but more importantly, in my view, we've been doing this thing now for 15 years. We are now in our eighth generation of FBAR process. We like to believe we will outrun, outcompete anybody in this market in the straight marketplace. But just in case it doesn't work, we will -- we have pretty strong IP to fall back on.

Blayne Curtis - Barclays Capital, Research Division

And then regarding -- I was surprised to see European LTE band which had FBAR on a U.S. phone, seemed a little early for LTE roaming. I was just curious you thought that was one-off for you, that you would see more LTE roaming in European bands and more global phones?

Hock E. Tan

Well, we are -- we do see LTE -- the European Band 7 been used increasingly and that's much more than Europe.

Operator

Okay. Our next question comes from the line of Doug Freedman with RBC Capital Markets.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Hock, if you could talk a little bit, you mentioned your TD-LTE. We're looking and waiting for China Mobile, the world's largest carrier to roll this out. What is your exposure both to the base station side of the business and to the handset needs that they'll have when they move to TD-LTE they over there? Any update you can offer us as far as timing and expectations would be fabulous.

Hock E. Tan

Well, I think I know as much as you do, really. And everyone of us now do -- in regard to that, I think we are pretty sure that there is a big, large installations happening, that it will be -- that will be, as we put it, as they call it, term it, trials. And these are very large volume that they're putting -- installing for trials currently and it's interesting how they're building it up. But they definitely are. We think -- our exposure to it comes in 3 ways, interesting enough. We sell components something from -- our multi-RF multi-market components, our low-noise amplifiers, maxes, even small-single amplifiers occasionally into those base stations that are being installed. So something like 200,000 is a war that's going on for trials. That's still going on. We are -- that's fought and won. We also see, and related to that structure, that once those base stations are in and things are starting to operate and the license are in, they have to do backhauling of those signals. And that's where a lot of our core routing would have an opportunity to participate in. And finally, of course, with TD-LTE, handset needs TD-LTE handsets operating in those bands, those spectrum tend to have very strong coexistence issues with WiFi, which is also a very prevalent spectrum and very common spectrum in China, among other things. So great opportunity of coexistence for FBAR. So we're going to get in 3 ways. Right now, when we think it will happen? I don't know. My guess, actually my guess one effort, as you many of you have heard is probably later part of this year.

Doug Freedman - RBC Capital Markets, LLC, Research Division

All right, if I could change gears and look at your industrial exposure, what do you think we should consider the industrial market growth to look like this year and next? And are there any product cycles or inventory coverage changes that could impact your growth rate in the time period?

Hock E. Tan

Well, that has not been very good to predict, as evidenced by last quarter. We were thinking last quarter continued to be soft -- or relatively flattish to a slight decline, which is what we guided. And lo and behold, we were somewhat wrong, I call it conservative. I mean, we showed a low-single digit 4%, I guess, not that low, increase sequentially in our industrial business. And we're predicting around the same, maybe slightly higher this quarter and it's more a reflection of a sense of conservatism than anything else, I'll be honest, because we could do better. But we could be bigger debt. But what we're seeing, the rate of orders, rate of resale, I should add, that we track through our distributors worldwide, which is where most of our industrial are sold is running around that pace, mid-single digit. Okay?

Operator

Your next question comes from the line of Ian Ing with Lazard Capital Markets.

Ian Ing - Lazard Capital Markets LLC, Research Division

Hock, you mentioned in wireless, improving gross margins to 50%. Is that largely mix, more FBAR, less PAs or there's some structural changes there? And could the mix, going forward, potentially shift back to PAs, given that you sell pads, which is a key building block and also with the CMOS PAs with Javelin?

Hock E. Tan

Wow! You've got 1,000 little points in there. I don't know where to start, but let me start with number one, I didn't say my gross margin has been at 50%. I'm sorry, you may have misheard. What I meant was perhaps whether 50% was used was that -- the mix of our wireless revenues last quarter versus the same quarter a year ago was 50% versus low 40s. And in spite of that mix of wireless, our overall corporate gross margin remained at 51%. That's just to clarify that, but our gross margin in wireless, I didn't not say at all that it was 50%. It doesn't mean it isn't, it's just that we do not disclose separately gross margin by product in segments, if you don't mind. But to answer your question, yes, I think it's definitely improving gross margin in our wireless business as the content of FBAR increases and it is whether it is increase of content through discrete duplex -- FBAR duplexes or filters versus in the form of a pad, it helps. Obviously, we've a pad, as you call it, has been a power amplifier duplexer module, the mix -- it somewhat dilute the overall mix, but the trend is all in the right direction. And what we do see and recognize is and that's a point I was trying to show -- make in my opening remarks earlier is that even as our wireless business as a percent of total revenues do grow, the improving gross margin, we are seeing in our overall wireless business because of a favorable product mix will continue to improve. And that we definitely are seeing -- have been seeing, which basically reestablishes our longer-term model, which is that we will grow as a company long-term and we will, over time, expand our gross margin. Okay, now, will things group revert back to more power amplifiers? That's never say impossible, but all indications are architectures of next-generation smartphones as we foresee, as we have visibility on, is obviously, pushing in a direction that we view as very favorable from our overall product mix in wireless.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. And then for my follow-up on the wireline said, there is a lot of noise around silicon photonics, whether it's from Cisco, Arista or Mellanox. But my specific question is, Arista, it looks like in their latest offerings in SDN, they did went -- they did go with a VCSEL solution. So do you see it basically transitioning to silicon photonics once the technology is ready or other scenarios where they stick with the current incumbent solutions?

Hock E. Tan

By the way, that VCSEL solution you mentioned is my solution. You know that, right?

Ian Ing - Lazard Capital Markets LLC, Research Division

We know, yes.

Hock E. Tan

Thank you by saying that, but -- no, I don't know. We think they may think about that, but silicon photonics while there's a lot of splash on it, is still a very difficult technology to implement and best description is it's still being implemented. I mean, there are products being sold in silicon photonics, I would daresay there are more talk about it, headlines about it, than there are actually lots of products about -- around it. It's -- and it could be very expensive as opposed to a VCSEL solution. Important fact, we believe the VCSEL solution we are providing to Arista in this recent launch is -- which we think is a very, very proprietary and creative solution, is a very low-cost affordable solution, which is the benefit of parallel optics as we implement right now.

Thomas Krause

Okay. Operator, we've got time for 2 more questions.

Operator

Our next question comes from the line of Steven Chin.

Steven Chin - UBS Investment Bank, Research Division

Hock, just a couple on the wireless growth opportunities ahead in terms of some technologies coming down the pipeline. So you mentioned carrier aggregation as an important technology that the service providers may be implementing in the near future. I was wondering if that would provide an opportunity in terms of 3G smartphones that may use the HSPA+ type technologies and includes carrier aggregation. Does that extend the time for FBAR beyond LTE once it's done?

Hock E. Tan

I'm not sure I understand your question. Could you, perhaps, rephrase it? I may have heard some of it, but would you mind, perhaps, rephrasing it to make it clearer?

Steven Chin - UBS Investment Bank, Research Division

Sure. No problem. So I think some of your comments regarding carrier aggregation as a wireless technology that may be included in future phone networks may be a positive for FBAR adoption and I assume that's a primarily -- that you're primarily returning -- referring to LTE 4G. But for 3G technologies, I believe that carrier aggregation may also be included in future revisions of the HSPA+ in newer technologies. Is that something that is also included in your comments about FBAR growth opportunities or is it only 4G that you're referring to?

Hock E. Tan

That's what I thought you heard -- you said. Well, I appreciate it you making it clear. No, when I say that, I include both 3G and 4G.

Steven Chin - UBS Investment Bank, Research Division

And I guess, how soon would you expect there to be some mid- to high-end smartphones that are 3G only that support carrier aggregation to start using FBAR?

Hock E. Tan

Well, see the challenge -- a lot of the challenge -- a lot of the right to put in place carrier aggregation because implementation of carrier aggregation is not a trivial process, is driven by 4G or LTE spectrum because, as we all know, 2G was very easy. All the big, easy chunks of spectrum were given, 3G followed thereafter and a lot of the big chunks were given away. What's left when we -- by the time we reached 4G, was a sliver and chunks, a little bit here and there scattered all over. And that's when the challenge of -- to the carriers shows up. Because for LTE or 4G, you don't have chunks of it, you have little slivers of bandwidth of spectrum scattered all over the spectrum, some of them very far, but none of them quite combined to a fast channel. And that's when carrier aggregation really drive it. So it is -- it's true, if 4G or LTE is what creates the impetus towards looking at carrier aggregation because carriers have multiple slivers that you need to put together and make into one big set pie. In 3G and 2G, there's less necessity to do that.

Thomas Krause

Okay. Operator, we'll take one more question. Thanks, Steven.

Operator

Your last question comes from Vijay Rakesh with Sterne Agee.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Just one question here. If you look at the FBAR side, obviously we're getting -- making some nice strides there. I'm just wondering how do you see your content in smartphones now? I mean, last year versus this year and how do you see that next year as you see envelope tracking, carrier aggregation and all of that come in? And also, if you could comment on CapEx for next year, how that's looking, too?

Hock E. Tan

I'll answer the first part. Tony will take the second part on CapEx. Well, it is increasing, there's no question. The content of smartphones, but it varies from OEM to OEM, how they design, how many bands they want to stick into 1 smartphone, which varies between low-end smartphones and high-end smartphones. But on average, across the spectrum of smartphones, because of more and more bandwidth, special -- more and more bands as LTE comes in and you have to inter-operate with 3G and 2G, CDMA, all that stuff in and coexistence, WiFi and a few other things that comes in television broadcasting, the content will increase and we have been seeing that, which is why I say the penetration of FBAR into smartphones will continue to increase, not just because, obviously, not because of the high-growth of smartphones, but also the content in every widget [ph] and on every smartphone will continue to increase.

Anthony Maslowski

And then regarding CapEx, for this year, we're above $200 million. We're just starting to look at our next expansion plans, which would go into next year for FBAR capacity and that's probably the biggest single swing in it. So we're either going to be slightly below 200 for the coming years and then we'll plateau from there, okay?

Operator

I will now like to turn the call back over to Tom Krause for any closing remarks.

Thomas Krause

Okay. Thank you, operator. Thank everybody for participating in today's earnings call. We look forward to talking with you again when we report our third quarter fiscal 2013 financial results in August. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!