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Avago Technologies Limited (AVGO)

F1Q2014 Earnings Conference Call

February 25, 2014, 17:00 PM ET

Executives

Bin Jiang - Director of IR

Hock E. Tan - President and CEO

Anthony Maslowski - VP and CFO

Analysts

James Schneider - Goldman Sachs Group Inc.

Craig Hettenbach - Morgan Stanley

Vivek Arya - Bank of America Merrill Lynch

Chris Hemmelgarn - Barclays Capital

Sanjay Chaurasia - Nomura Securities

JoAnne Feeney - ABR Investment Strategy

Doug Freedman - RBC Capital Markets

Vijay Rakesh - Sterne Agee

Steven Smigie - Raymond James

Operator

Welcome to the Avago Technologies Limited First Quarter Fiscal Year 2014 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Bin Jiang, Director of Investor Relations. Please go ahead, sir.

Bin Jiang

Thank you, operator, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO; and Tony Maslowski, 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 first quarter fiscal year 2014. If you did not receive a copy, you can 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 one week. It will also be archived in the Investors section of our website.

During the prepared comments section of this call, Hock and Tony will be providing details of our first fiscal quarter results, background to our Q2 2014 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 Tan. Hock?

Hock E. Tan

Thank you, Bin. Good afternoon, everyone. We are going to start today by reviewing recent market business highlights in our end markets, then Tony will provide a summary of the first quarter fiscal 2014 financial results.

Revenue from our first quarter was $709 million and represented a decrease of 4% from last quarter and an increase of 23% from the same quarter a year ago. Now Q1 revenue came in slightly better than the midpoint of our initial guidance.

Sequentially, seasonal downtrends provided some headwind in our wired and industrial business even as strong demand from a major smartphone OEM sustained our record wireless revenue through this quarter, and bumped the historical norm of a revenue decline in wireless in Q1.

Having said all that, the key message I want to impart this quarter is simply that we have significant year-on-year revenue growth in wireless at 13% year-on-year and wired infrastructure at 59% year-on-year, and have seen a clear recovery in industrial and demand from a year ago.

Let me now provide more color on each of our end markets. Starting with wireless; revenue from wireless came in slightly above our expectation growing 1% sequentially and represented 49% of our total revenues. On a year-on-year basis, as I mentioned in revenue, wireless revenue grew 13%. And as mentioned earlier, normally our fiscal Q1 is a seasonally weak quarter for wireless; however, sustained demand from a large OEM customer during the quarter helped us achieve a second consecutive quarter of record wireless revenue.

At this period, I would also like to highlight an exciting development and it should come as no surprise that the push into LTE among carriers in China has enabled us to mount design in meaningful content in the mass market China smartphones for the first time. This trend was significant enough to substantially grow our mix of FBAR revenue and expand wireless gross margin during the quarter.

Looking towards Q2 of fiscal 2014, similar to last year, the annual product transaction at the same large OEM I referred to earlier will now be a significant headwind. However, we expect this maybe partially offset by initial product ramp and another large OEM customer where we have one significant RF content. Moreover, we've seen in this quarter the proliferation by multiple white-box OEMs of LTE-enable handsets in China which would accelerate demand for FBAR filters.

The expected search of FBAR sales will in addition to expanding our wireless gross margin by over 200 basis points further partially cushion our decline in Q2 revenue from wireless to no more than mid teens sequentially. Of course, year-on-year, we still project continued growth in our wireless business.

Moving on to wired infrastructure, wired revenue declined 7% sequentially and represented 32% of overall revenues. Year-on-year, this grew 59% but closer to 20% without adding in CyOptics. Data center-related demand continued to be strong particularly for our new generation for the gigabit per second fiber optics. However, due to sluggish enterprise demand and soft carrier routing, coupled with known inventory adjustment at our major networking OEM customer, both our ASIC and CyOptics business declined sequentially compared to the preceding quarter.

Now into this mix we have also aggressively transformed the CyOptics business model from low margin module revenue in China to high margin component sales. Despite this, strong demand by service providers particularly for optical 100G coherent transponder solution had enabled us to sustain the CyOptics revenue level. Looking forward to Q2, we believe strength in data spending will continue, in fact we expect to see the initial ramp of our proprietary bidirectional optical transceivers for simultaneous 10G and 40G transmission, which have been adopted by a major networking customer in the new generation data center platforms.

One network switching remains muted. We expect demand from EDGE routing as well as high performance computing would drive sequential revenue growth for ASIC and as a result, we anticipate wide infrastructure revenue to grow mid single digits on a percentage basis compared with Q1. Importantly, year-on-year, we expect to sustain our revenue growth trajectory in this end market.

Finally, moving on to industrial; industrial sales declined 11% sequentially, below our expectation at the beginning of the quarter but nonetheless showed a steady recovery of 6% from the relative bottom of a year ago. Industrial sales represented 19% of our overall revenues. This weaker than expected sales were caused largely by our ongoing actions to contract inventory in the channels, which exacerbated this single digit seasonal decline in distribution resales in this end market.

But not all regional geographies behaved the same way. As is normal this quarter, we experienced low single digit declines in North America and Europe. However, Japan continued its industrial recovery based on domestic demand and strong export performance, while Asia remained virtually stable supported largely by China's spending.

Looking to Q2 we expect industrial resales will rebound by a mid single digit on a percentage basis. We also plan to shift more into distribute channels in anticipation of this improvement in industrial demand. Accordingly, revenue for industrial end market is forecast to grow high single digits on a percentage basis compared to Q1. By the same token year-on-year we anticipate industrial sales will also expand high single digits.

To sum up, in second fiscal quarter, we expect product transition at a major OEM in wireless which will drive consolidated sales down, despite sequential growth in both wired infrastructure and industrial. Accordingly, we're getting overall revenue to decline between 3% to 6% from that of Q1. Notwithstanding, we expect that that favorable growth trend year-on-year experienced in our three end markets during Q1 will persist into Q2.

With that, let me now turn the call over to Tony for a more detailed review of our first quarter fiscal 2014 financials. Tony?

Anthony Maslowski

Thank you, Hock. Good afternoon, everyone. Before reviewing the first quarter fiscal 2014 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 at our website at www.avagotech.com.

Revenue of 709 million in Q1 represents a decrease of 4% from last quarter and an increase of 23% compared to the same quarter a year ago. The sequential decrease was in line with our guidance for the quarter. Revenue from our wireless target market came in slightly better than our expectation, though it was offset by weaker than expected revenue from our industrial target market. Revenue from our wired infrastructure target market was roughly in line with our expectation.

Foxconn continued to be a greater than 10% customer. Our Q1 gross margin was 52%, which was above our guidance for the quarter and also higher than the prior quarter. Gross margins improved in some of our product categories, offsetting unfavorable product mix.

I would like to highlight that during the quarter, we successfully improved the gross margin of the CyOptics business to our targeted level of approximately mid 40s on a percentage basis, three quarters ahead of our original plan. We believe CyOptics gross margin has reached the level to support our overall corporate target and therefore we will stop commenting on it separately from this point forward.

Turning to operating expenses, R&D expenses decreased by 2 million to 98 million and SG&A decreased by 1 million to 44 million, driving total operating expenses for Q1 to 142 million, 3 million below our guidance. The lower than expected operating expenses were primarily due to a curtailment and settlement gain from a change to our U.S. retiree medical plan benefit in the quarter. As a percentage of sales, R&D remained unchanged at 14% and SG&A remained unchanged at 6% of net revenue.

Income from operations for the quarter decreased by 5 million sequentially to 224 million and represented 32% of net revenue. Compared to the 152 million for Q1 of last year, income from operations increased by 52 million helped primarily by higher revenue. Taxes came in at 7 million for Q1, 3 million below our guidance. This was due to a change in the jurisdictional mix of income and expense.

Q1 net income of 217 million decreased by 10 million from the prior quarter and Q1 earnings per diluted share of $0.84 was $0.05 lower than Q4. Q4 '13 net income was higher primarily because of an $11 million increase in other income resulting from a gain on marketable securities. Compared to Q1 of last year, net income was 54 million higher and earnings per diluted share were $0.19 higher.

Our share-based compensation in Q1 was 24 million. The breakdown of this expense for Q1 includes 3 million in cost of goods sold, 8 million in R&D and 13 million in SG&A. In Q2 2014 we anticipate share-based compensation will be approximately 30 million. And just 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 dropped to 42 days from 52 days in the prior quarter. The decrease was due primarily to the linearity of revenue throughout the quarter, timing of shipments around the holiday season and our collection efforts. Our inventory ended at 286 million, a slight increase of 1 million from last quarter. Our wireless inventory remained at an elevated level in anticipation of continued strong demand throughout the year, particularly of our FBAR filter products.

Days on hand were 76 days which increased five days from Q4 given the lower revenues during the quarter. We ended the quarter with a cash balance of 1.11 billion and we generated 229 million in operational cash flow. We spent 52 million on capital expenditures. This was below our guidance for the year, mainly because of the timing of equipment delivery.

For Q2 we expect CapEx to be approximately 70 million, primarily to support our continued build out of FBAR capacity. During the quarter, we repurchased approximately 270,000 shares which consumed 12 million of cash. The buyback was lower than the prior quarter due to the timing of our negotiation to acquire LSI.

On December 31, 2013, we paid a quarterly cash dividend of $0.25 per ordinary share, which consumed 62 million of cash. This dividend was raised by $0.02 from the prior quarter. Since the inception of our dividend program in Q2 2011 to-date, we have continued to increase our dividend each quarter.

Now let me turn to our non-GAAP guidance for the second quarter of fiscal 2014. This guidance reflects our current assessment of business conditions and we do not intend to update this guidance. Total revenue is expected to be down in the range of 3% to 6% from Q1. Gross margin is expected to be 52.5% plus or minus 1 percentage point. Operating expenses are estimated to be approximately 147 million. Taxes are forecasted to be approximately 7 million and finally, the diluted share count forecast is for 261 million shares.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Jim Schneider from Goldman Sachs. Please proceed, sir.

James Schneider - Goldman Sachs Group Inc.

Yes. Thanks for taking my question. A very good performance on the gross margin side. You mentioned a couple of mix improvements within wireless and also within the wired business from CyOptics. Can you maybe talk a little bit about how much of the relative and improvement was from each of those two buckets and were kind of now at a level where that mix, at least in the wireless, is expected to kind of sustain itself in the current place?

Anthony Maslowski

Yes, so I think the mix – we see improvement in the wireless side is sustainable. It's definitely things that you can get that, it's the FBAR mix and so forth. And then obviously as Hock mentioned very directly at CyOptics, we've moved several steps away from the subassembly business into a more of a components business which is helpful for the bottom line as well.

James Schneider - Goldman Sachs Group Inc.

Okay, thanks. And then as a follow-up, regarding your comments, Hock, around the inventory levels to distributors, it sounds like there was a little bit more of a bleed-off in inventories kind of across the board in the January quarter that you're expecting to refill that a little bit in April. Is that refill happening pretty much across the board geographically or there are things going on differently in the different regions?

Hock E. Tan

Jim, there are in different regions, absolutely. And if we talk industrial, as I assumed you're referring to in this question, we are seeing refill a lot in Japan where there's a fairly strong industrial recovery. We are also seeing that in Europe where after the seasonal or the holiday season last quarter, things are picking up and resale is showing those strong signs. Those are two specific areas we are talking about. Industrial, as I mentioned, in China continues to be stable, slightly up but nothing dramatic but very stable at a significant level. Having said that for channel inventory in general, we are seeing very strong resales and because of that refilling too in China, particularly with respect not so much industrial in China as much as wireless products for the white-box makers in China.

James Schneider - Goldman Sachs Group Inc.

That's helpful. Thank you very much.

Bin Jiang

Operator?

Operator

Your next question comes from the line of Craig Hettenbach with Morgan Stanley. Please proceed.

Craig Hettenbach - Morgan Stanley

Yes. Thank you. You guys have seen some uplifts for FBAR in terms of margin mix and wireless. Outside of that, could you share any thoughts in terms of what we're seeing just yesterday in terms of industry consolidation and what that might mean for pricing and margins in the broader business within RF?

Hock E. Tan

Well, we have quite a few plays in our business as you well know and I assume you're referring to the announcement of RFMD and TriQuint and we know both rather well, good guys, good managers and – very strong managers. So I think the consolidation would be positive for the industry as a whole. It certainly puts more – possibly more stronger competition, but we always welcome competition as I said because we compete largely on a basis of technology more than anything else.

Craig Hettenbach - Morgan Stanley

Got it. And then as a follow-up, any incremental thoughts you could share on LSI specifically just conference levels in terms of achieving the cost synergies you first laid out?

Hock E. Tan

Really it's too early at this point. I mean we're still awaiting all regulatory approvals and not to mention the shareholder approval of LSI which will happen sometime in April. So we really do not expect the deal to close before early May, probably maybe even later. And so at this stage, it would definitely be too early for us to understand and know where the assumptions in driving this deal still hold true at all.

Craig Hettenbach - Morgan Stanley

Okay. Thank you.

Operator

The next question comes from the line of Vivek Arya with Bank of America. Please proceed.

Vivek Arya - Bank of America Merrill Lynch

Thank you for taking my question. Hock, the question is on the wireless business. Obviously it has performed very well in the last two years but when I look at the guidance you're giving for the April quarter, it suggests sort of mid single digit or so year-on-year growth. Now I understand the transition at your largest customer, but how is it that if the need for FBAR is going up yet you are seeing this deceleration in sales? Is this just sort of temporary pause when the growth driver is really your largest customer and has a mix shift towards more to China and other customers or are you still comfortable with the long-term sort of double digit growth trajectory if possible in this business?

Hock E. Tan

To get right to the number of your question, yes, we're still very comfortable with double digit year-on-year growth, as I was very careful particularly in each case. Year-on-year, we still show which is on a quarter-on-quarter basis, year-on-year, we still show double digit growth. The interesting thing we are experiencing and I mentioned it a lot in the last earnings call is simply that as the OEM industry consolidates, revenues within each year as we go one quarter to the other within each year, goes through sharp movements because of product transitions of those larger OEMs now in smartphones in the marketplace. By the way our content keeps increasing in both OEMs which I said today even further. Now what we do see is fairly sharp changes in revenues quarter-on-quarter during a year. But if you trend it from one year to the other, you will see very clearly that we are able to sustain double digit year-on-year growth, which is really what matters because within any year you will see that a handset OEM launched a product at different times. And because of that we go to fairly sharp uptakes as well as fairly sharp declines as we move from one quarter as we did from Q1 to Q2 in this current year, and we will probably see another cycle of movement as we move to Q3 and Q4 this year when the large OEM launches its new generation of phones.

Vivek Arya - Bank of America Merrill Lynch

Got it. That's really helpful, Hock. As a follow-up, I think you mentioned that you're starting to see the surge in your China FBAR adoption. Is there a way to quantify how much that is? So outside of your top or Tier 1 customers, is there a way to size how much that white-box China market is demanding FBAR or is it too early to provide that quantification?

Hock E. Tan

You've seen it (indiscernible) so to say, it's a search. And because it's not just one OEM in China that's launching LTE-enabled smartphones, it's multiple OEMs at the same time rushing into this market. And as you all know out there, China 4G or LTE is just a big thing this year – beginning of this year. And it's not just handsets that's happening, it's wireless infrastructure that's been build out, rolling out in China on phone time [ph], LTE and it shouldn't surprise us all that because of that, smartphones are coming out LTE enabled which are low costs even by China standards, but they're not LTE-enabled. And it really proves a point that we have been saying all the time in our FBAR thesis which is FBAR is used based on technology requirement not based on whether they are high end or low end. It's really based on technology requirements and some bands, particularly in China that do require very much so FBAR in order to achieve its performance. And because of that we are seeing those results. And quite a considerable amount of those designs which are driving quite a bit of our FBAR revenue from that angle. Having said that, a more traditional market of the large branded smartphone OEMs continue to adopt for the same reason the Chinese white-box OEM. They're adopting more and more these lines that uses FBAR, so a lot of them relate to frontend modules that encompasses both the FBAR filters as well as the associated power amplifiers for not just one band, for multiple bands within the phones.

Vivek Arya - Bank of America Merrill Lynch

All right. Just one last one. High CapEx could be a good news or a bad news story. The question is it's with about 8% of sales for you in the last four quarters. Is it a point at which it starts to taper off or just that the demand for FBAR is there, so CapEx could stay at sort of these levels? Thank you.

Anthony Maslowski

Again, Vivek, we talked about CapEx being somewhat of a challenge this year but again we're only investing with line of sight capacity that we need for either – as Hock mentioned either large OEMs or some of this other surge we're having. So we're going to be in very selective. We get a great return on the CapEx in the FBAR fab and these surges in some ways you can have as an indication of our confidence in the future.

Hock E. Tan

In other words, we like our investment behind demand, and it's always a challenge therefore for us to meet that demand, to be honest, which also relates to why as Tony pointed out in his remarks on inventory with run-off that's very full [ph].

Vivek Arya - Bank of America Merrill Lynch

Thank you. I appreciate it.

Operator

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

Chris Hemmelgarn - Barclays Capital

Thanks very much for taking the question. This is Chris Hemmelgarn on for Blayne. Just a quick question first on your wireless expectations, just kind of what you're baking in – what your Q2 guidance bakes in there in terms of – how steep of a decline are you really seeing at the one wireless customer you highlighted? What are the puts and takes there versus what you wireless in for business?

Hock E. Tan

I'll tell you the right plans. We don't make any specific remarks on anything particular customer, Chris. I'm sorry about that, so I prefer not to answer that. We generally don't comment on any particular customer. We love them that much.

Chris Hemmelgarn - Barclays Capital

Not a problem, had to try. Moving on from that, there were a couple of announcements out of some BAW competitors out of Japan. I'm just kind of interested in whether you guys still really see that as predominately just you and TriQuint competing for the sockets or are you really seeing any progress from the rest of the competition that's largely trailed to you guys to this point?

Hock E. Tan

Well, I mean it's not new information as you know that there are SAW makers who put in temperature condensation to try to improve the performance and try to achieve closer to what BAW or FBAR performance achieves and we constantly see that and they constantly improve as we try to improve. So it's a typical technological race to improve, we try to improve more and we are already ahead of the game in making our improvement much better, but there is still a gap. And in terms of other players and just ourselves and TriQuint trying to get into the BAW business, yes that has happened. It's not the first time and that continues to happen, it's nothing new we have now seen for the last few years. But a big part of where we are today is not just the technology in terms of evolution of FBAR or BAW as we put it generically. We are, as I mentioned, on our current eighth generation moving to our ninth generation. Nobody stands even close at this point as long as we keep making the investments we are making, we not only are continuing to be ahead of game technologically on our FBAR but in terms of capacity to address a very fast expanding market where we are also I believe quite way ahead of anybody else.

Chris Hemmelgarn - Barclays Capital

Thank you very, very much.

Operator

We have a question from the line of Romit Shah with Nomura. Please proceed.

Sanjay Chaurasia - Nomura Securities

Hi, guys. This is Sanjay for Romit Shah. Hock, one question on TD-LTE ramp, I just wanted to get a sense of what the content is and what are the bands FBAR 15 use across the OEMs? Do you see this usage fairly similar across the OEMs or do you see there are differences in terms of band coverage and content?

Hock E. Tan

It depends on the country, but if you're referring to China, there are multiple and not the same OEMs will apply the same band. It depends on how they architect the phones, particularly, but it's the whole spectrum in a range of 2.3, 2.4 gigahertz all the way to 2.8, 2.7 gigahertz in that range. And within as you know, band 38, 40, 41, WiFi, WiMax and these are all in the combination of BAW totally.

Sanjay Chaurasia - Nomura Securities

Okay. And then to follow-up, you mentioned increasing competition from the merger of TriQuint and RF Micro. I'm just wondering – you mentioned that you're technologically much ahead moving from eight to nine generations. What are some of the dimensions you could see competition from these guys if not from a technology point of view?

Hock E. Tan

Let me rephrase what I said earlier and I apologize if I misinformed it. We already have growth from healthy competition from RF and TriQuint as we do from Skyworks and a few others, so it is still there. And if two of our competitors chose to merge to perhaps present a more united front, more power to them frankly and we will continue to see that competition and I don't think there will be any abatement of that competition with their merger. I think it will keep on going and as I said, what we do is – as I said, we compete on a kind of different dimension from many of our competitors. We compete purely on products that we believe we can do much, much better than they can and we do not compete on products that come on with us. And that strategy on our side still will not change.

Sanjay Chaurasia - Nomura Securities

Okay. Thanks so much.

Operator

The next question comes from the line of JoAnne Feeney with ABR Investment Strategy. Please proceed.

JoAnne Feeney - ABR Investment Strategy

Thanks. Congrats on the nice gross margins. A question for you on the competition and your response to your strategy, so TriQuint and RF Micro combined, Skyworks, Qualcomm have all now announced integrated end-to-end RF solutions. And so I guess I'm wondering what do you plan to release something along those lines or whether you feel like rather that strategy is not to go that route and to stick with products that are more FBAR focused and take advantage to having some discrete FBAR opportunities that the other competitors simply cannot satisfy?

Hock E. Tan

Well, our strategy is probably not that distinctly different. We, JoAnne, in the sense that yes, we always see FBAR as our real differentiator sustainably, we're not wrong there really and that's why we put in huge amounts of investment. We also put in investment in the power amplifier because that's what it takes to sell FBAR many times. And it changes depending on the generation, it changes depending on the architecture. So it's not one single particular architecture in RF that is pretty much acting concrete. It varies. So many times we sell discrete FBAR and we love to do that, but if we have to we sell those so-called end-to-end solutions that we pull, we call it frontend modules. We just don't the transceivers, I guess. But on a RF basis, we do cover the full (indiscernible) between the antenna to the base station [ph] transceiver. But if you're talking about things like SkyOne or RF360 by Qualcomm, we don't specifically go into that end. It doesn't mean we will never, we keep an open mind, as I said, and we are very opportunistic based on the fact that our simple strategy is we do products that can differentiate our sales and performance distinctly, and if we can't in any socket, we probably won't even participate in that socket.

JoAnne Feeney - ABR Investment Strategy

Okay, that's really helpful. Thanks. As a follow-up, you mentioned you're growing $0.06 with the mid range and low end smartphone makers, specifically in China. I'm wondering in that context, number one, you could describe for us where you think your second half growth is coming from in terms of say increase in dollar content, higher units in these mid range phones and perhaps if you have any sense of what percentage of your wireless revenue you think might shift towards these mid range phones and away from the high end where you've done so well?

Hock E. Tan

Thanks, JoAnne. You are really reading too much. Maybe it's my mistake. I will say we're doing a very unprofessional victory lap about the fact that finally we got into low end phones in China and that's because of FBAR, because as you know we have not participated much in those low end phones in China because of price and because of – and absolutely need to differentiate. Finally we say and it's because of FBAR which we've been talking about for years about the fact that its technology that drives its usage more than the price point of smartphones that is proven. That's all I'd say. And unfortunately things will be leading you to a fact that there's – now tell me how much is it going to drive your business? Well, a bit too early to tell, to be honest, JoAnne, because it depends on how successful those LTE-enabled white-box phones are going to be in China and I can't really tell (indiscernible) is just happening. It could be a one quarter wonder for all – I know I don't really know, I hope it isn't and if it can sustain it would be great for us. But what drives our business on a consistent basis I think also those large OEMs out there that we continue to be very, very well positioned and we see that continuing over the foreseeable future.

JoAnne Feeney - ABR Investment Strategy

Okay, fair enough. So that means that double digit growth you're anticipating, year-over-year double digit growth for wireless, the majority of that then is being driven by content gains as opposed to the yield curve?

Hock E. Tan

JoAnne, it's been content and year-on-year with the same large OEMs that we deal with, because of increasing band – number of bands and increasing complexity of architecture and bands like carrier aggregation coming in and as we mentioned a few other things before, content is still increasing and we are able to grow our content year-on-year in those generation phones.

JoAnne Feeney - ABR Investment Strategy

Okay. Thank you very much.

Operator

Your next question comes from the line of Doug Freedman with RBC Capital Markets. Please proceed.

Doug Freedman - RBC Capital Markets

Great. Thanks for taking my question, Hock, Tony and Bin. If you could focus a little bit on a segment you haven't talked much about and that would be the investor segment. I'm a little surprised to hear about your bullishness given – we keep hearing that the China end market seems soften and PMI results to get, I believe you're still fairly exposed to the China market on the industrial side. Can you talk to us a little bit about why you're feeling as confident about that market coming back?

Hock E. Tan

Okay. Well, I guess it's not just open night [ph]. As I mentioned, if you look at our Q1 last quarter that is and you look over the trend over the last several quarters, we have seen – having said that I am qualified, it's a gradual but very uptrend of demand resale in industrial in China but also even places like Europe where after the meltdown in the Europe over a year ago, people had given up as a lost cause. It has recovered. And in Japan, it is the other data point that gives me a lot of encouragement especially with a fairly low ended base, finally we are starting to see that the Japanese industrial OEMs, the big powerhouses that we sell many of our products too are also picking up steam. And the reason it began to steam over the last six months or nine months, six months in particular is not just strong domestic demand but they are able to export in China and emerging countries, of course, China helped by their currency. And even the Europeans are able to hold their own. So what that tells us is that there is an improvement in industrial demand. It may not be as strong or as clear as the way it was most, but it is more steady and it's definitely a trend. And that's part of the reason why I'm feeling more bullish about everybody than it is. Having said that, from a year ago we have grown 6% industrial; it's no great shape, but mid single digit for industrial year-on-year isn't too bad, at least it's not going down of late.

Doug Freedman - RBC Capital Markets

Okay, great. If you could also talk a little bit maybe about the (indiscernible) business, some book to bill trends, maybe what you've seen recently in the market and what are customers are willing to lay in a little bit more backlog, how would you describe your visibility overall?

Hock E. Tan

Well, you are right in asking that question. Book to bill unfortunately for us it's not a very clear indicator because many of our larger OEMs and they comprise a big part of my revenues, we are on VMI, as I call it which are vendor managed inventories. Basically they fully direct from half, so there's almost no book to bill ratio as it applies to a big chunk of our revenues. The ballot [ph] applies at a smaller chunk and the small chunk and I hate to tell you even as you do data might not reflect what the total business sales is. So January bookings and February bookings so far has been pretty okay.

Doug Freedman - RBC Capital Markets

Great, thanks so much and congrats on the strong results.

Hock E. Tan

Thank you.

Operator

Next question comes from the line of Vijay Rakesh with Sterne Agee. Please proceed.

Vijay Rakesh - Sterne Agee

Thanks. Nice job on the quarter and guide. Just a housekeeping question on the FBAR [ph] side. I know here you had dragged from one customer, but as the timing of all the transitions, as you look at the second half, do you feel comfortable with how the wireless side is working and especially I would think in China with the very high frequencies, 2.3, 2.6, you continue to drive FBAR versus (indiscernible) options out there?

Hock E. Tan

I understand your question and yes, we – it's pretty hard to provide any real forecast if that's what you mean but the way it happens – the way we are seeing things happening now, it's not different from what we've seen in the previous year or two except hopefully we now have larger content in those large OEM phones which we are feeling very good about. So, I think things are as we kind of expect them to be for this year.

Vijay Rakesh - Sterne Agee

All right, you answered my question. As a follow-up, when you look at the LSI side, I probably missed this, can you update us on the progress on the approval side and what – can you frame us – as you look at the markets there, what are the ASIC markets that you'll be focusing on as you go through that business?

Hock E. Tan

I'll try to answer the second question first. As far as we're concerned, as I mentioned earlier, we have not really taken over this company yet. I mean we have announced that in this country, but we can see but we don't touch. So at this point we're not touching and I'll be direct and say no position to know enough yet to be able to clearly articulate to you what our strategy on our ASIC business is at this point. All we will say is that whatever they have been doing we like and we like them to keep going on and doing what they've been doing. But as far as any specific strategy that we might have formulated, it's too early to tell seriously, Vijay. And on the second part, we're still going through regulatory approvals and the various worldwide approval of a regulatory body that need their approvals on and we haven't gotten all of them yet, and we're still working on ways to assist them. We also need shareholder approval from LSI which I believe will happen sometime in April. So we are hoping or we are planning, as you say rather than hoping, to see closing of this deal sometime in May. But again, it's an estimate at this point nothing guaranteed.

Vijay Rakesh - Sterne Agee

Got it, thanks a lot.

Bin Jiang

Operator, we have time for one more question.

Operator

The final question comes from the line of Steve Smigie from Raymond James. Please proceed.

Steven Smigie - Raymond James

Great. Thanks a lot. I was hoping you guys could talk a little bit about the optical transceiver business maybe in terms of what you see as potential growth opportunity for the market this year? And then how you think you might perform relative to that market?

Hock E. Tan

Okay, that's a very good question and that's a very interesting question for me and I'll try to put in some comments. I'll tell you what we're seeing right now. I don't know what is going to happen the rest of the year, to be honest. It's hard to figure it out but in enterprise, the transceiver business overall is kind of – the optical transceiver business is being flattish. And no surprise, some of the OEMs out there has been saying that there may be winners or losers among the lot, but broadly I think the market is flattish. And the way we try to play in this market now is what we've always been trying to do which is pick up opportunities that we can produce fairly proprietary products and right on the core sales of those customers who adopt our proprietary design and use that to push their overall systems. And as I pointed out earlier, we started last year with 40G and that's more of a standard product but we were about the guy to do it at that time and do it for (indiscernible) with longer instances to be applied in data centers and we have been selling it very well and we continue to sell it very well. That's one of our drivers. The other thing that is also happening now is we just launched and are ramping another proprietary fiber optic that is bidirectional. What that really does is applicable particularly for data centers where we can reap [ph] our transceivers, our customers or their customers who are OEM can run using the same infrastructure or fiber OM3 fiber optic cable that have already been laid out in an existing legacy data center, just change the transceiver and suddenly transform the transceiver from running 10 gigabit to 40 gigabit by just putting new transceivers and boxes. That's one of the new product we launched and that's one I mentioned earlier in my remarks about transceivers that can simultaneously do 10 gigabit as well as 40 gigabit. That's the bidirectional product we have launched. We're depending on those kind of proprietary systems to give us an edge and gain us share to grow. But as far as the broader market is concerned what we're seeing now is fairly flat and sluggish, be it switching or routing market.

Steven Smigie - Raymond James

Okay, great. And then sort of on the (indiscernible) side then can you talk about the growth opportunity you're seeing for the year at this point? And in terms of what you're – when you're going for your design competitions, what innovations are you bringing that are allowing you to win this? Thanks.

Hock E. Tan

Well, our big thing in ASIC is our service. We have definitely very, very good ASIC, very proven ASIC and there are not too many people out there who can do those kind of ASIC and run it all the way through 28 gigabit per second which is what we are now covering generation of products out there and designs are doing now. And that's really our edge, our differentiation in a lot of opportunities we go against. Of course the other side to it is we are very tested and we have very good skills in integrating not just the service but the IP calls into one complex digital chip that we do for ASIC for our customers and we're very good at doing that. So we've continued to drive in that and frankly on our ASIC business, we're very linked to the customers we deal with and we deal with only a handful of large OEM customers. And as they succeed, so do we. If they don't grow as much, we don't grow as much either. But that's pretty much where we stand right now. And so in terms of – and we're very much focused on the enterprise networking business though we do some of it in high-performance computing. And what we're seeing now is high-performance computing is doing very good currently. So that's providing the engine of growth for us. As far as ASIC as an enterprise networking largely in the switches and all that, growth here is okay. Over the last few years we've been growing at 20% a year. We expect close to that this year as well. But it's not something that ramps up fairly rapidly.

Steven Smigie - Raymond James

Okay, great. If I could take one last one here on FBAR. Obviously as the bands proliferate up because of LTE, a number of them are in certain higher frequency ranges. What I'm trying to understand is how many of them might be sort of on the border there between SAW and TC-SAW can do or low end ballplayers [ph]? So how many of the bands that are going up there are really sort of right along the border where it might be more competitive versus high end where you guys with your eighth to ninth generation can really differentiate and be sure to capture share?

Hock E. Tan

It's a hard question to answer because yes, I'm sure there are bands that are on the edge that's put in, but some of these bands are on the edge because of how they are architected in any phone system. For instance, they are stuck next to certain other bands and certain other functions that may interfere with their performance. Certainly the band that is on the margin may become not on the margin any longer. Equally the other direction even if you put a band that is not so on the margin but in a very clean environment and that doesn't happen too often, you might get away with temperature (indiscernible). It doesn't happen too often though. But it's hard. If it's – this return is not – is very undetermined depending on the system and the architecture of each of the handsets. The broader picture is it is evolving. As you put in all bands and this holds carrier (indiscernible) bands and some of these bands are harder and harder and even if all bands are on the margin and you put a bunch of them together, they all become non-marginal, they become (indiscernible). And as more of that happens, the trend toward (indiscernible) will continue to move up.

Bin Jiang

Thank you, operator. Before we close, I would like to remind everyone that Avago will be presenting at Morgan Stanley TMT Conference in San Francisco on March 5, 2014. Thank you for participating in today's earnings call. We look forward to talking with you again when we report our second quarter results fiscal year 2014 financial results in May 2014.

Operator

That concludes Avago's conference call for today. You may now disconnect.

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