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Avago Technologies Limited (NASDAQ:AVGO)

Q3 2014 Earnings Conference Call

August 28, 2014 05:00 PM ET

Executives

Hock Tan - President, CEO, Director

Tony Maslowski - CFO

Ashish Saran - Investor Relations

Analysts

John Pitzer - Credit Suisse

Vivek Arya - Bank of America Merrill Lynch

Ross Seymore - Deutsche Bank

Matt Diamond - Deutsche Bank

Blayne Curtis - Barclays Capital

James Covello - Goldman Sachs Inc.

Craig Hettenbach - Morgan Stanley

Joanne Feeney - ABR Investment Strategy

Ian Ing - MKM Partners

Operator

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

Ashish Saran

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 table describing our financial performance for the third quarter fiscal year 2014. If you did not receive a copy, you may obtain the information from the Investors section of Avago's Web site at www.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 Web site at avagotech.com.

During the prepared comments section of this call, Hock and Tony will be providing details of our third fiscal quarter results, background to our fourth quarter 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’d like to turn the call over to Hock Tan. Hock?

Hock Tan

Thank you, Ashish. Good afternoon, everyone. We are going to start today by reviewing recent business highlights in our end markets and give you an update on progress of our integration and then Tony will provide a summary of our third quarter fiscal 2014 financial results.

So during our first quarter, as a combined Company, we’ve made great progress in integrating the Avago and LSI businesses. As you all are aware, in early May this year, as part of our cost reduction program associated with the acquisition of LSI, we announced our intend to eliminate approximately 1,100 positions from our work force, and which would generate most of the forecasted annual cost synergies of $200 million. This is still in progress very much and we believe we’re well on our way to achieving these before the end of fiscal ’15.

On top of integrating the two companies and their workforce, we’ve also taken decisive steps to reshape our business to make our product portfolio more consistent with our business model. As you know because of this, we’ve agreed to sell two non-core businesses the LSI flash and Axxia businesses.

Now revenue associated with this two businesses was a little over $100 million in Q3 fiscal ’14 while the NOIs operating expenses for this two businesses exceeded $200 million. So reflecting this, this two businesses will be reported as discontinued operations with revenues and cost taken out of P&L going forward.

However, please note that the guidance we’ve provided for the third quarter still include expected contribution from both the flash and Axxia businesses. And relative to this revenue guidance range of $1.3 billion to $1.4 billion we provided in May, our Q3 revenues reported were $1,394 million, which is at the high-end of guidance reflecting strong demand for ASIC networking products and seasonal uptick in hard disk drives.

We found revenue contribution from the flash and Axxia businesses, Q3 revenues from continuing operations would be $1.287 billion. So starting with Q3, our reported consolidated financial results will be shown in this manner.

So turning now to a discussion of end markets. As I mentioned in prior quarters earnings call, with a combination of LSI, our mix of revenue now includes revenues from a new end market enterprise storage in addition to the previously defined wireless, wired infrastructure, and industrial.

Starting with wireless, which as you know is pretty much classic Avago not impacted by the LSI acquisition. For fiscal Q3, revenue from our wireless end market met expectation moderately growing by 5% sequentially.

Wireless represented 28% of our total revenue from continuing operations and on a year-to-year basis, wireless revenue grew 28 -- 26%. Within the quarter, we observed continuing demand increases for our FBAR and FBAR related products and seen increased content from Chinese LTE smartphones offset partially by softer demand from Korea.

However, looking at Q4 fiscal 2014, we expect quite a different picture. We anticipate very strong sequential wireless revenue growth in excess of 16%. We expect this growth to largely result from the ramp of a new phone model and a North American smartphone customer. Compounding this ramp is a significant increase in content driven by the increasing proliferation of wireless bands within LTE smartphones.

Moving on to wired, our wired infrastructure end-market includes our ASIC business and our Fiber Optics business which is a combination in fiber optics of optical interconnects, modules that is and components. For fiscal Q3, our wired end market performance expected wired revenue represented 27% of our total revenues, our ASIC business experience significant strength from the prior quarter driven by strong demand from enterprise networking features as well as service provider routers.

Driven by similar trends, our fiber optics business experienced a moderate recovery from the prior quarter, in particular, we saw a strong sequential increase in [ph] [BIDI] fiber shipments used for 40G. We also saw a sustained demand for optical components from fiber to the home deployments in China, but we were capacity constrained within the quarter.

Looking forward to Q4, we expect low single-digit sequential growth -- revenue growth from this end-market. We expect growth in our ASIC business from sustained demand in enterprise switching and routing.

Our leading IP in particular in high speed service with 25G and 50G offerings, continues to position us extremely well and many customers. And in Q4 we expect several design wins in high performance computing platforms and software defined networking switches.

For fiber, however, we expect that to be flattish in Q4. We expect growth in our [ph] [BIDI] products. We expect continued growth I should say in the [ph] [BIDI] products offset however by slow down in 4G LTE wireless backhaul applications.

Moving on to enterprise storage, and as I mentioned this was the new end market for Avago in Q3 addressed by LSI’s hard disk drives and servers, storage connectivity product lines. Starting in Q4, this end market will also include contributions from the recent PLX acquisition.

For fiscal Q3, enterprise storage revenue came in also as expected, brand represented 32% of our total revenues, hard disk drive were strong as we benefited from seasonal strength in this end market as well as certain design wins for custom solid state drive controllers within the quarter.

Our Read Channel in hard drives grew both in near line as well as enterprise platforms, and we saw strength in 3.5 inch desktops. Demand also for PreAmp products was strong as customers build into expected seasonal strength in the quarter. Our server storage connectivity business, which included -- which include our SaaS, rate on the silicon, adapter and software solutions continue to be very stable in Q3.

Looking forward to Q4, our enterprise storage end market expects mid single-digit sequential revenue growth for the core business without contribution from the PLX business. Including PLX contribution, we expect sequential revenue growth for this end market to be a little higher than 10%.

In Q4, we expect server and storage connectivity to grow significantly as our server OEM customers start launching new grandly based platforms using our 12G SaaS solutions. And we expect our HDD business, hard disk drive business, to grow moderately reflecting usual seasonality in the second half of the year.

Finally, moving on to our industrial and our smallest end market, this does also include LSI’s IP licensing business. And in fiscal Q3, this end market saw strength compared to the prior quarter and represented 13% of our total revenues.

Industrial re-sales, in particular, were even stronger especially in Asia and Japan. And overall, distributor inventory continued to decline within the quarter. Looking into Q4, we expect our industrial to continue to grow with mid single-digit sequential growth rate. However, after such a strong Q3, we expect industrial re-sales to moderate and we’re closely watching Europe for weaker demand trends. However, we continue to see strength in Japan and China.

So in summary, for Q4, we expect revenue to grow -- consolidated revenue to grow sequentially in all our end markets. Very strong 16% plus in wireless, low single-digit sequential growth in wired, a little higher than 10% growth in enterprise storage and mid single-digit growth in industrial.

This leads to our overall expectation that revenue from continuing operations for fourth quarter fiscal 2014 to sequentially increase around 20%.Similar to what we experienced last year, we currently expect a increase in wireless demand to sustain into the first quarter of our fiscal 2015.

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

Tony Maslowski

Thank you, Hock, and good afternoon everyone. As we previously announced, we’ve a definitively agreed to sell our flash and Axxia Networking businesses and we currently expect both of these transactions to close in Q4 fiscal 2014. Accordingly, the financial results and tables included in our third quarter fiscal year 2014 earnings press release classify these businesses as discontinued operations. As a reminder, we acquired both of these businesses in the LSI transaction.

Before reviewing the third quarter fiscal 2014 financial results, I want to remind you that 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 data is included with the earnings release issued today and is also available on our Web site at www.avagotech.com.

Since the guidance we provided for the third quarter, included expected contributions from both flash and Axxia businesses, I will provide Q3 revenues on a basis comparable to guidance, followed by detailed financial results for continuing operations only.

Please also note that Q3 results include contributions from continuing operations of acquired LSI businesses, while prior period mentioned do not. As the LSI acquisition was completed at the beginning of Q3 2014. In addition, the Q3 financial results did not include any contributions from PLX, which closed in Q4.

Now on to our Q3 results. Relative to the guidance we provided in May, our Q3 non-GAAP revenues including contributions from flash and Axxia businesses, now classified as discontinued operations were $1,394 million coming in at the high-end of our guidance.

Now turning to a more detailed discussion on financial results for continuing operations for the third quarter, Q3 revenues were $1,287 million and all our end markets performed as expected.

Foxconn was a greater than 10% customer in fiscal Q3. Our growth -- Q3 growth margin from continuing operations was 57% which is above our guidance range of 54% to 56%. Please remember that our guidance range included expected contributions from flash and Axxia businesses, both of which typically run at a lower average gross margin than the rest of the business.

Flash and Axxia are now classified as discontinued operations and are not included in gross margin for the quarter. This combined with our revenues coming in at the high-end of guidance resulted in gross margin above our original guidance.

Turning to operating expenses, R&D expenses were $219 million and SG&A expenses were $88 million, driving total operating expenses for Q3 to $307 million. As a percentage of sales, R&D was 17%, SG&A was 7% of net revenue.

The guidance we’ve provided in May for Q3 operating expenses was $386 million, which included the flash and Axxia businesses. After adjusting for the impact from discontinued operations, our Q3 operating expenses were approximately $20 million better than our expectations in May, primarily due to progress in our cost reduction program associated with the LSI acquisition.

Income from operations for the quarter was $428 million, and represented 33% of net revenue. Taxes came in at $24 million for Q3, $4 million above our guidance. This was primarily due to higher income than forecast. Q3 net income was $347 million and Q3 earnings per diluted share were $1.26.

Q3 interest expense and other was $57 million, specifically interest expense related to our debt was $55 million. Our share based compensation in Q3 was $50 million. The break down of the expense for Q3 include $6 million in cost of goods sold, $20 million in R&D, $24 million in SG&A.

In Q4 2014, we anticipate share based compensation will be approximately $52 million and this includes the estimated impact of the PLX acquisition. Just as a reminder, our definition of non-GAAP net income excludes share based compensation expense.

Moving to the balance sheet, our day sales outstanding were 39 days, an improvement from the prior quarter’s 42 days. Our inventory ended at $482 million, and days on hand were 79 days, which decreased 7 days from Q2. We ended the quarter with a cash balance of $1,277 million and generated $314 million in operational cash flow.

As a reminder, the PLX acquisition which consumer approximately $310 million in cash close after the quarter ended. We spend $95 million on capital expenditures. For Q4 we expect CapEx to be approximately $220 million, which primarily relates to spending to support our continued build out of FBAR capacity as well as Avago LSI integration activities supporting IT and a campus rationalization.

During the quarter, we did not purchase any shares. We currently expect to use some of the anticipated net proceeds from the sale of the flash and Axxia businesses, less the payment for the PLX acquisition towards paying down a portion of our outstanding term loan before the end of this calendar year.

On June 30, 2014, we paid a quarterly cash dividend of $0.29 per ordinary share, which consumed $73 million of cash. This dividend was raised by $0.02 from the prior quarter. Since the inception of our dividend program in Q2 of 2011 to date, our financial performance has allowed us to increase our dividend each quarter.

As a reminder, our Board reviews and determines our dividend policy on a quarterly basis, based on our financial performance and other factors deemed relevant by our Board.

Now let me turn to our non-GAAP guidance for fourth quarter of fiscal 2014. This guidance reflects our current assessment of business condition, we do not intend to update this guidance. Our Q4 guidance includes the estimated effect of the PLX acquisition, which closed on August 12, about a week and half into our quarter. This guidance is for results from continuing operations only and does not include any contribution from the flash or Axxia businesses.

Net revenue expected to grow in the range of 18% to 22% from Q3. Gross margin is expected to be 56%, plus or minus one percentage point. Operating expenses are estimated be approximately $307 million. Taxes are forecasted to be approximately $38 million. Net interest expense and other expected to be approximately $53 million. And finally the diluted share count forecast is for 279 million shares.

I’m very pleased with the speed of our businesses evolution as in a very short period we’ve significantly transformed Avago increasing our scale considerably with the LSI acquisition, while also selling product lines that do not strategically fit with our long-term business model. This combined with our progress on restructuring cost synergies is driving our non-GAAP operating margins for continuing operations over 30%.

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

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) And our first question comes from John Pitzer from Credit Suisse.

John Pitzer - Credit Suisse

Yes, good afternoon guys. Thanks for letting me ask the question. Hock, Tony, congratulations on the strong quarter. Hock, my first question just on the wireless business, wondering in the October guidance, if you can help us better understand, up 60% sequentially, how much of that is unit versus content? And in addition to that if you think about the content trends in the LTE market in China where are we today and where can you expect that to go over time?

Hock Tan

Wow! that’s a lot of questions, but let me take the broader question which is what is content versus unit. I’d say probably one per unit to the content. It’s probably roughly what our overall wireless revenue represents. It’s hard to really measure because it’s more than just content -- it’s a mix of products that also starts to shift through it all. But for purposes we’re addressing it in a fairly simple direct manner probably one-third due to unit growth and two-thirds due to content is what’s driving the overall expansion of the revenues.

And to answer your question, yes, it’s all LTE phones. As you know LTE phones have not only to factor in more and more LTE bands roaming bands in multiple continents through multiple carriers, it’s also related to the fact that it has to be backward compatible with a bunch of 3Gs and 2Gs including CDMAs. So the number of bands in every LTE smartphone increases more than linearly. I hate to use the word exponentially, but it almost feels that way. And really the more bands that use in LTE the more chances there are that FBAR and FBAR related content is required.

Not every LTE band needs an FBAR, but the more bands they’re the more coexistence issues exist especially like in China, China mobile where Wi-Fi exists and LT, TD LTE band are 39, 40, 41 has issues operating with Wi-Fi that tends to bring in increased instances of usage of FBAR. So our content in China has -- content wise has gone up quite significantly as I indicated in my remarks and the trend my view is there to stay. Now that is also going on the possibility that there is cleverer ways to do it where you find ways to reduce the band by keeping the phone usage within narrower regions and so that does eliminate -- there is a countertrend to reducing some of this ones that at the expansion of content, but if we look at it broadways, longer term trend it is a trend towards increasing content.

John Pitzer - Credit Suisse

Hog, that’s really helpful. And then as my follow-up, I believe in your prepared comments you said there were some capacity constraints in your wired business. I wonder if you can just talk more specifically exactly what those constraints were, how much that it limit revenue in the just reported quarter and does the guidance for October assume those capacity constrains have gone away?

Hock Tan

Well, it’s really related to our fab for on edge-emitting lasers. A lot of edge-emitting lasers that came with our CyOptics acquisition year and half ago, and a large part of it goes into the same fab, the same product -- process line, goes into the -- goes into what I call metro networks, single mode fiber optics as well as that same production line goes to produce lasers, components for fiber to the home deployments, and as both strengthened in the last six months, our capacity just jump. As I mentioned, 4G LTE backhaul seem to have slow down somewhat, so that enables us to push more into fiber to home deployments, which is very helpful, but with still capacity constrained even as we expand our capacity gradually this quarter Q4 with still capacity constrained. That’s why how much revenues, I don’t want to be speculative. We don’t sell it, we don’t tell it.

John Pitzer - Credit Suisse

Great. Thanks. Congratulations again.

Hock Tan

Thank you.

Operator

Our next question comes from Vivek Arya from Bank of America Merrill Lynch.

Vivek Arya - Bank of America Merrill Lynch

Thank you for taking my question. Hock, maybe another one on wireless. When I look at the last few years, you’ve always had very strong seasonal Q4s and then we have seen some modest seasonal declines in Q1 flat to down 2%, 3% or so. Now given the very sharp 60% plus growth that you’re expecting in Q4, how should we think about the potential seasonal correction in Q1 or do you think that there is a possibility that growth in China could perhaps correct for any moderation at your North American customer?

Hock Tan

Well, Vivek if I could correct that image -- that picture perception slightly, you’re right. Historically Q3, Q4 were our seasonally up quarters and Q1 rollover. But then what happened in the last couple of years was that has changed. The seasonally strong quarter is Q4 and Q1 maintain before it rolls over in Q2. And given that more recent trends and given what was -- what were behind the reasons behind those recent trends, compounded with continuing strength in China LTE phones, I will say, I would expect as I made in my opening remarks that our wireless strength through this Q4 will likely sustain in Q1 before rolling over in Q2.

Vivek Arya - Bank of America Merrill Lynch

Got it. And then maybe as a follow-up, as I look at the trajectory of operating expenses, obviously very strong performance in controlling OpEx and with all the divestitures that you’ve done, when I look back prior to the LSI acquisition, I think your OpEx to sales was around 20, 21-ish percent and your Q4 guidance suggests that you’re sort of already at those levels. So I’m trying to put the OpEx to sales as you’ve had historically in the context of more room that you have in the $200 million or so that you had outlined in terms of the cost synergies. So the other way of asking the question as how should we think about OpEx trajectory over the next few quarters? Thank you.

Tony Maslowski

So Vivek, obviously we’re very pleased with the progress. But in that first bucket of what we call real savings, we still have a lot to do. There is stuff to do for the next four quarters, those as I mentioned those 1,100 people are identified, they’re rolling off into these next four quarters. So there is room. So I think the other way to look at and we look at the number of the 307 that we guided to that includes approximately 10 million from PLX. So you can see we’re continuing to do things quarter-over-quarter. Now as I’ve always said, for the six quarters of OpEx reduction we’re going to get some quick reductions in the first couple of quarters like you saw, we kind of flatten out here for the next couple of quarters and you can see it reaccelerate into Q3 and Q4. Again, offset against any standard merits or bonus increases we do in the coming year.

Vivek Arya - Bank of America Merrill Lynch

So is it a certain ratio Tony, that we can target or certain absolute levels as we think about lets say the back half of fiscal ’15 and in terms of the OpEx run rate?

Tony Maslowski

No, because again then you have to -- I’ve to make some guesses on revenue out that far. So I can’t really do that. But again, I think you can see that we’re making good progress and I would definitely not make a headline that we’re done somehow. That’s the key point we want to get across.

Vivek Arya - Bank of America Merrill Lynch

Thank you.

Operator

Our next question comes from Ross Seymore from Deutsche Bank.

Ross Seymore - Deutsche Bank

Hi, guys. Congrats on the strong results. Just for the question outside of wireless, specifically in your wired infrastructure as well as your industrial businesses. There’s been a number of companies that have pointed to a little bit of a slowing there, and investors have been a little bit of concern about a peaking in the cycle. So, Hock I guess my question is, what are you seeing as far as the balance between supply and demand in those segments and how are you feeling cyclical?

Hock Tan

Well, they’re both very different markets by the way of course. So, if I address industrial, yes you’re right there is slowing down in the growth of industrial. I would say industrial as I mentioned. Last quarter, Q3 was industrial re-sale. Our revenue shipping which goes to largely in industrial to distributors, but really resale one of our distributor sale out there which we think was high single digits last quarter sequential growth industrial. And I think this quarter it will slow down to probably mid single digit is what I’m indicating. So, there is a slow down. But it depends on the geography that we’re looking at. I see China and Japan continuing to still be okay. But I see Europe as definitely flattening and starting to slow down -- more than flattened, starting to slow down. North American has been flat in the last three quarters and maybe there’s been a slight increase now to sort of make it out, so you have a mix set of circumstances and I suspect so it depends on product one sells. Like we serve two, three industrial end markets. I’ll tell you they behave very differently. In SOHO drives which is one big area in industrial consumption where we sell a lot of our products into, it’s still good. And SOHO drives use remodels and all that, still good. Inverters continues to be weak, factory automation up sometimes, down sometimes mix habits and we continue to see this mixed bag. And part of SOHO being strong is related obviously to the ramp up of capacity for some of this product ramps that we are talking about in China.

Matt Diamond - Deutsche Bank

Okay, great Hock, sorry this is actually Matt Diamond, I’m calling on behalf of Ross who just got disconnected. I want to ask you about the pace of debt repo going forward. Could you shed a little more light on that?

Tony Maslowski

Yes. So, as we mentioned definitely through the sales and also the purchase of PLX we’ll be making some debt pay down and then also from free cash flow going forward. We haven’t really said -- we said it’s going to be kind of in chunks, something in the $0.05 billion range when we do these pay offs and we’re not committing to a quarter-over-quarter type steady pay down. I think you can see what the free cash flow of the company generates, and you can model a modest amount of that going towards the debt pay down over time.

Matt Diamond - Deutsche Bank

Understood. Thanks so much.

Tony Maslowski

All right.

Ashish Saran

Can we have the next question please?

Operator

Yes. Our next question comes from Blayne Curtis from Barclays.

Blayne Curtis - Barclays Capital

Hi, good afternoon guys and a great quarter. I was wondering if I could just go back to wireless Hock, obviously a large North American ramp, can you just talk about what you’re seeing in the China LTE market? It was strong for you last quarter. Are you seeing that continuing, there has been some indications of some inventory and moderation. What do you think?

Hock Tan

No, we’re continuing to see strength. Maybe our benefit is most of our demand are very, very much in LTE phones and that’s the niche part of the overall China market as you well know, even though it’s a fast growing niche. And that strength, that demand has been holding up very nicely. We have not seen any significant hiccups, and I’d say it’s not just unit’s that’s driving us, its content in those phones that is also helping our volume.

Blayne Curtis - Barclays Capital

Okay, thanks. And then for Tony, on the CapEx; is this build -- is this is a onetime in October and do you go back to that more $100 million a quarter run rate and with that addition how much was FBAR capacity in October?

Tony Maslowski

Yes, I would say that well over half has to do with FBAR, first off. And as we’ve always said, whenever we add FBAR capacity this capacity pays itself up fairly quickly, so you can see that the couple of $100 million quarter-over-quarter in wireless revenue that’s FBAR related. And if you put in any reasonable gross margin, you can see that we’re going to pay for this CapEx pretty quickly. Now whether or not this continues on this trend forever, it’s doubtful. We have to get some of this FBAR capacity in place. We also had a building that we bought that was supposed to happen at the end of Q3 that pushed into Q4, it was a little under $20 million, so I think that had impact as well. But we’re not giving any long-term CapEx as of yet. You’ll see us do it in a smart fashion as soon as we have line of sight for opportunities.

Blayne Curtis - Barclays Capital

Okay. Thanks guys.

Okay. Our next question comes from James Covello from Goldman Sachs.

James Covello - Goldman Sachs Inc.

Hi guys, good afternoon. Thanks so much for taking the question. Terrific results, congratulations. First I guess, high level question, I think immediately after the LSI acquisition you guys had talked about kind of on a go forward basis you’re seeing this being a 6% to 8% long-term growth business if I remember that correctly. Is there any update to that number given the puts and takes the product portfolio since then?

Hock Tan

Good question James. Yes, we did see 6% to 8% because we are doing the math, and that may still be right. But in the short-term as someone said before me long time, all our four cylinders are firing, and one is probably on turbo charge. So, it’s probably the wrong time to ask that question. But we probably still believe it’s a long-term model that is probably maybe high single digits sustainable growth.

James Covello - Goldman Sachs Inc.

Terrific, that’s very helpful perspective. For a follow-up, relative to the commentary on Europe industrial in particular, do you think it’s a situation where customers are just kind of seeing the headlines about slower growth or some issues in some of the European areas and they’re taking a more conservative approach on the inventory side or do you think that there is actual inflections in demand in some of those areas? Thank you.

Hock Tan

Thank you. Well there are multiple reasons. In Europe there is this rush in situation that’s not helping very -- in many ways peculiar to Europe. Then there has been, we’ve noticed that now for a while more recently last couple of quarters is exchange rates. The European -- industrial OEMs come from two locations in the world, Japan, Germany. And the German OEMs operating with the Euros have an issue on exchange rate compared to the Japanese. That’s why we are seeing Japanese demand from an industrial OEM for our products sustaining whereas Europeans are flattening. I suspect both had something to do with it. One is domestic demand for us in Europe, but two is also exports related to competitiveness.

James Covello - Goldman Sachs Inc.

Very helpful. Thank you so much.

Operator

Our next question comes from (indiscernible) from JP Morgan.

Unidentified Analyst

Hi, thank you for taking my question and solid job on the quarterly execution. Following on the prior question on the OpEx reductions; of the $80 million of lower OpEx that you delivered in Q3 relative to your prior guidance, I estimate that about $55 million of that benefit coming from the SSD and networking spend in products businesses which are now lumped into discontinued ops which means that you guys probably captured about $20 million to $25 million of true OpEx synergies, and more importantly implies that you still have another roughly $25 million of synergies to capture per quarter on a go forward basis. Is that kind of how we should think about it?

Tony Maslowski

Again as we mentioned earlier that you’re correct on the first point. The reshaping of the business, that second bucket we kind of filled up nicely on an annualized basis north of $200 million. On that first one, you got to remember is that the $200 million commitment included both OpEx and some above the line as well. So, you have to take that $50 million per quarter and say some of it goes above the line. So, yes we made great progress in this first quarter. You can see in other, like I said implied progress of another $10 million approximately in Q4, and then we’ll get the rest of it through the next four quarters.

Unidentified Analyst

Got it, great. And then good to see those, the growth in your enterprise storage business. As you think about your HDD segment more from a longer term perspective and given what you’ve observed thus far from the LSI team’s roadmaps and discussions with your HDD customers. What's the opportunity for you guys to actually gain some market share on the HDD controller side just given that your other competitor has close to 70% market share and there’s probably a bias for your customers to drive a more balanced supplier mix?

Tony Maslowski

Its still early in the game, but also one thing I noticed about this business, it’s very, very stable, and no room for hero’s and we’re not into heroics. My best answer to what you said is, no, no I think I see this business as continuing to be single digits growth and very stable its more the operating words. This is more a business of maximizing operating return from a very stable top line.

Unidentified Analyst

Got it. Thank you.

Tony Maslowski

Thank you.

Operator

Okay. Our next question comes from Craig Hettenbach from Morgan Stanley.

Craig Hettenbach - Morgan Stanley

Yes, thank you. Given the strong 60% growth expected in wireless, are you seeing anything in terms of the order environment or visibility in terms of how customers are placing orders?

Hock Tan

In wireless?

Craig Hettenbach - Morgan Stanley

Yes.

Hock Tan

Oh, yes lead times had stretched out, and its -- in our wireless business we pretty much have entire quarters backlog on the books already. So lead time has definitely stretched out and our fab, as we’ve said before and continue to say is running full. So, its -- we have a very well managed environment currently.

Craig Hettenbach - Morgan Stanley

Got it. Okay, thanks for that. And if I could follow up on the margin front Tony, just looking at you printed almost 33% margin this quarter. The model prior to LSI was 29 to 30 and I know you’re kind of on the path to exceeding that. But given the very strong margins here, how are you thinking about over the intermediate to longer term in terms of the potential top margins you can put up?

Tony Maslowski

Well, again I think give us a little more time. We want to get a couple of quarters under our belt of the two significant businesses and we’ll probably do some update to our long-term model both on OpEx, operating margin sometime in the next couple of quarters. But you can see that we accomplished the north of 30, so -- but again we don’t want to give you any implication that we’re done with anything, and there’s a lot left to do here, there’s a lot left to drive out of the cost structure of the combined companies. So again, just you have to be a little patient on the long-term model update.

Craig Hettenbach - Morgan Stanley

Will do. Thanks.

Operator

Okay. Our next question comes from Joanne Feeney from ABR Investment Strategy.

Joanne Feeney - ABR Investment Strategy

Yes, thank you and congrats on the quarter and the outlook. I would like to ask a longer term question on the wireless front. You’re obviously benefiting pretty strongly this year from content gains as well as unit growth. I’m wondering what you see in future years. Is this sort of the last [ph] [hurrah] for significant content gains or do you have visibility towards further gains, and what sort of magnitude do you anticipate. And would those be in flagship models or just really from the spread of 4G to emerging markets?

Hock Tan

Okay, I can address it very, very simply Joanne is -- we have visibility to the next couple of generations somewhat as we are engaged in working through architectures or RF architectures on high-end LTE smartphones. And the number of bands and by extension one for one the number of filters that goes into the next generation in the one and N plus two after that, that increase in bands is exponential. It is even been getting more and more bands into each phone. And our sense of it is, within that kind of horizon that we have some obviously some sense, some visibility of not perfect visibility but definitely some especially in, as it relates to RF architectures for smart LTE handsets, the (indiscernible) 4G, 4.5G and obviously potentially beyond that, there’s just more and more bands. And we see that linear expansion of demand for filters. We also see miniaturization which actually requires then all those bands to be squeezed into tighter and tighter spaces which then promotes the use more and more of creative architectures and that relates to pads, especially pads, also the requirement for not just envelop tracking which we already know is happening, but carrier aggregation which therefore pushes in more bands per phone as carriers seek to multiple bands in the same region that they have. All we’ve seen so far and this is not just sticking a finger in the air and hoping for the best. What we’ve seen in what engagements we’re working with or with phone OEMs is that for future phones, future generation phones are going to require a substantial increase in number of bands per phone and with an increased amount of content. From our perspective as we see this current quarter, this current generation as illustrated by this current generation content is the biggest driver of growth for us and with content as you’re seeing here what Tony said, it drives better and better product margin.

Joanne Feeney - ABR Investment Strategy

Great, that’s really help Hock, thank you. And then, as a follow-up question on the capacity side of FBAR and FBAR related products on your competitors BAR product line you both now are adding capacity for next year. It sounds like you both have fairly constrained to meet demand this year. Have you looked at the total markets? Are you seeing any third party providers of FBAR/BAR type filters that could compress pricing in the future and do you see the current capacity additions as in any way threatening the stability of the pricing environment for those products?

Hock Tan

Filters, and with 4G and coexistent issues and more and more bands per phone in each region, and carrier aggregation driving to the mix, its not being the commodity, not filters, rather they would be [ph] [SAW] filters -- well [ph] [SAW] filters maybe still is, but I can assure you a lot of this FBAR filters, BAW filters are not commodities because it is RF architectures that matter as much, and its whether you put in switching, whether you put in multiplexes, as we call it multiplexes is a components that puts aggregates, I won't use the word integrate but aggregate multiple FBAR filters into one chip. It’s coming into play more and more. And how you architect this whole thing is just as important as the very existence of just FBAR filter fundamental performance. So, no more tricks here now, and those tricks are getting harder and harder. So we’re not unduly concerned though we’re paranoid about the existence of future players into this marketplace because it’s more than just been able to produce an FBAR filter, its also been able to design them together in a phone.

Joanne Feeney - ABR Investment Strategy

Okay, great. Thank you very much. That’s very helpful.

Operator

Okay. And our last question comes from Ian Ing from MKM Partners.

Ian Ing - MKM Partners

Yes, thanks and congrats on the strong execution. First in wired infrastructure, how should we think about Bi-directional optics from here? Are you going to expand beyond more products beyond Nexus 900 at your existing OEM or get into new OEMs and what about the competitive landscape of new entrance possibly?

Hock Tan

Yes, in terms of that question Bi-directional, yes Bi-directional is an exciting thing for us. We put it out in -- it’s not new concept though execution of it, its one of the first. So we’re doing it for 40G and obviously we’re working on doing it for 100G, its just -- well it’s a step up, but it’s the same concept and that’s going on and we’re very excited about that but there are multiple other proprietary solutions too in this market place that we’re also working on. But this is the kind of thing that we love to do in Fiber Optics.

Ian Ing - MKM Partners

Thanks. And then, what are your thoughts on the changing RF landscapes. You’ve got vendors consolidating, there’s more rational pricing possibly with just three players, you have got content increases. Any thoughts on perhaps more meaningfully going after more of the RF there and perhaps more sockets that you other wise wouldn’t go after things like SAW and TCSAW et cetera?

Hock Tan

No, we’re very good in one certain specific areas and as I mentioned many times before the business model of this company is one of being very, very differentiated with technology and basically sticking to what we’re very good at. We’re very good at filtering. We’re very good at combining power amplifier with advance filters and making interesting results out of it be it envelop tracking, carrier aggregation or a combination of both, we’re sticking to that. And I think there is enough opportunities for us especially the point I made earlier, the question from Joanne is that, we see the content for filters just continuing to increase pretty dramatically and unlike power amplifiers where you can integrate multiple bands to be supported by one single multi-mode, multi-band power amplifier, you need one filter for each band. So that increase -- that demand -- that volume increase is going to be very exciting for us over the foreseeable future.

Ian Ing - MKM Partners

Okay, thanks. So ample runway on existing FBAR strategy. Thank you.

Hock Tan

Thanks.

Ashish Saran

Thank you, operator. Thank you for participating in today's earnings call. We look forward to talking to you again when we report our fourth quarter fiscal year 2014 financial results.

Operator

Ladies and gentlemen that concludes Avago’s conference call for today. You may now disconnect and have a great.

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