Broadcom Inc.
Q4 2013 Earnings Call Transcript

Published: 5 Dec 2013

[Operator:]

Welcome to the Avago Technologies Limited Fourth Quarter and Fiscal Year 2013 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. 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, 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 fourth 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 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 fourth quarter and full year fiscal 2013 results, background to our 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'd like to turn the call over to Hock Tan. Hock?

[Hock E. Tan:]

Thank you, Tom. Good afternoon, everyone. We're going to start today by reviewing our market business highlights, and then Tony will provide a summary of fourth quarter and fiscal 2013 financial results. Revenue from our fourth quarter fiscal year was $738 million, represented an increase of 15% from last quarter and an increase of 19% from the same quarter a year ago. Sequential increase was at the upper end of our guidance, which was 12% to 15% growth. To perhaps provide you with some further comparability to last quarter in which CyOptics only contributed about 5 weeks of revenues, our total non-CyOptics revenue grew 8% from last quarter. During Q4, wireless was very strong, driven by major product ramps and our large smartphone OEM customers. Wired infrastructure was up 22% sequentially, primarily due to a full quarter of revenue contribution from CyOptics. These more than offset the weaker-than-expected industrial revenue, which ended up with a sequential decline of 4%. Let me now provide more color in each of our target markets, starting with wireless. Revenue from wireless came in above expectation, growing 19% sequentially and represented 47% of our total revenues. Sequential strength was driven primarily by strong product ramps, as I mentioned earlier, and our 2 largest OEM customers. As you may have seen from the independent third-party teardowns, our content in both of these platforms improved substantially compared to prior generations. As a result of the proliferation of LTE today and the challenges in RF designs, our proprietary FBAR filter and integrated front-end module have proliferated in many smartphones. We see this trend continuing to drive our wireless business over the next few generations. Now looking into Q1 of fiscal 2014. We expect strong demand from our 2 major smartphone OEM customers to sustain and be only partially offset by the seasonal weakness at other OEMs. As a result, we expect overall wireless revenue to be flat, perhaps maybe even slightly down in Q1. Moving on to wired infrastructures. Wired revenue, as I mentioned, grew 22% sequentially, represented 33% of overall revenues. Our non-CyOptics wired revenue was up single digits after a pronounced 18% sequential growth in Q3. Data center-related demand continues to be strong, particularly for our 40-gigabit-per-second fiber optical products. However, our ASIC service business paused temporarily after a record high during Q3 due primarily from inventory adjustment with major OEMs. Meanwhile, demand for CyOptics Indium Phosphide based optical components was strong due to an uptick in 100G coherent telecom networks and 40G single-mode long reach interconnects in large data centers. Looking forward to Q1, however, we expect that sustained strength in data center spending in 40G will be partially offset by a pause in carrier routing spending in China. In this Q1 also, we begin to convert the low margin module revenue in China to relate to the high-margin component sales as part of our transformation of the CyOptics business model out of the telecoms in our module infrastructure. Accordingly, we anticipate wired infrastructure revenue to decline mid-single digits on a percentage basis compared with Q4. Switching gears to industrial, during Q4, worldwide industrial resales were down mid-single digits, driven particularly by softness in China and Japan. Europe and North America, however, remained relatively flat. The decline in China resales reflect that, I should say, restocking by Chinese OEMs during the preceding quarter and showed very much a characteristic volatility of Chinese OEM customers. No surprise, therefore, our industrial sales declined 4% in Q4 and represented about 20% of our overall revenues. Looking forward into Q1, we expect seasonal weakness globally. We will continue to reduce inventory into our distribution channels as we have done so last quarter. Accordingly, we anticipate revenue from industrial to decline mid-single digits too on a percentage basis compared to the preceding quarter. With this, in summary, I would -- let me recap. Q4 was strong, product ramps in wireless and strong fiber demand in data center buildout and telecoms infrastructure. Q4 -- in Q1 that we're in, we expect demand in wireless to sustain, but year-end seasonal weakness in enterprise spending, as well as industrial, will drive 3% to 6% sequential revenue decline. However, on a year-over-year basis, we expect the trend in our business -- in our major businesses, to remain solid, with a projected high-single digit year-on-year growth for Q1, even without the benefit -- even without the accretion of CyOptics. With that, let me now turn the call over to Tony for a more detailed review of our fourth quarter and full year 2013 financials.

[Anthony Maslowski:]

Thank you, Hock, and good afternoon, everyone. Before reviewing the fourth quarter and 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 $738 million in Q4 represents an increase of 15% from last quarter and an increase of 19% compared to the same quarter a year ago. The better-than-expected sequential growth was a result of stronger demand from both wireless and wired infrastructure target markets. Revenue from our industrial target market was below our prior expectation, primarily due to weaker-than-expected distribution resales. In the quarter, Foxconn continued to be a greater than 10% customer. Our Q4 gross margin was 50.5%, 50 basis points above the midpoint of our guidance. Gross margins improved in specific product categories, offsetting total unfavorable product mix. Turning to operating expenses, OpEx for Q4 came in at $144 million, in line with our guidance. R&D expenses increased by $8 million to $99 million, primarily due to full quarter R&D spending for CyOptics. SG&A decreased by $1 million to $45 million. As a percentage of sales, R&D decreased to 13% from 14% in the prior quarter. And similarly, SG&A decreased to 6% from 7% of net revenue. Income from operations for the quarter increased by $38 million sequentially to $229 million and represented 31% of net revenue. Compared to $199 million for Q4 of last year, income from operations increased by $30 million. We recorded a net gain of $11 million in other income, primarily due to a gain in fair value of marketable securities representing minority investments. Taxes came in at $13 million for Q4, slightly above our guidance. Q4 net income of $227 million increased 21% from the prior quarter. In Q4, earnings per diluted share of $0.89 was $0.15 higher than Q3. The sequential increase in Q4 earnings is attributable primarily to the full quarter earnings contribution from CyOptics, as well as higher revenue from non-CyOptic businesses. Compared to Q4 of last year, net income was $33 million higher, and earnings per diluted share was 12% higher for similar reasons. I'd like to point out that Q4 2013 marked the record highs for revenue, operating income, as well as net income. Our share-based compensation in Q4 was $22 million. The breakdown of expense for Q4 includes $3 million in cost of goods sold, $8 million in R&D and $11 million in SG&A. In Q1 2014, we anticipate share-based compensation will be approximately $24 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 day sales outstanding came in flat at 52 days compared to the prior quarter. Timing of shipments in the quarter and unfavorable impact of CyOptics DSO continued to weigh on Avago's total DSO. Our inventory ended at $285 million, a slight increase of $1 million from last quarter. Our wireless inventory remained at the elevated level in anticipation of continued strength from one of our large smartphone OEM customers. Days on hand were 71 days, which decreased 11 days from Q3, given the much higher revenue during the quarter. We also took the opportunity in Q4, given the favorable credit market, to resize our revolving credit facility. As you have seen, we've entered into a new credit agreement providing for a revolving credit facility with an aggregate principal of up to $575 million with an ability to increase it to $675 million compared to our previous $300 million facility. We ended the quarter with a cash balance of $985 million, and we generated $212 million in operational cash flow. Just to foreshadow Q1 a bit for you, Q1 is a generally weaker quarter for cash generation due to the payment of our annual employee bonuses relating to the prior fiscal year. We spent $57 million on capital expenditures, this was below our guidance for the quarter, mainly because of the timing of equipment delivery. For Q1, we expect CapEx to be approximately $63 million. During the quarter, we repurchased 852,000 shares, which consumed $33 million of cash. On September 30, 2013, we paid a quarterly cash dividend of $0.23 per ordinary share, which consumed $57 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, we have continued to increase our dividend each quarter. Now let me briefly recap our fiscal 2013 full year results. Revenue increased by 7% to $2.52 billion, mainly driven by the strength in our wireless business. Avago's overall gross margin decreased by nearly 20 basis points to 50.8% as compared to 51% for fiscal 2012. Net income for fiscal 2013 increased to $731 million, or $2.89 per diluted share, as compared to $700 million, or $2.77 per diluted share, in fiscal 2012. Now let me turn to our non-GAAP guidance for the first 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 Q4. Gross margin is expected to be 50.5% plus or minus 1 percentage point. Operating expenses are estimated to be approximately $145 million. Taxes are forecasted to be approximately $10 million. And finally, the diluted share count forecast is for 257 million shares. That concludes my prepared remarks. Operator, please open up the call for questions.

[Operator:]

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

[Ross Seymore:]

Hock, can you talk a little bit about what you see in the industrial business being down a little bit more than you expected? I know you said it was resales, but any more color you can give on that, not only in the quarter but in the guide would be helpful.

[Hock E. Tan:]

It's pretty much what I tried to articulate out here, which is -- surely, based on Europe and U.S. industrial geography, it's basically fairly stable. Now, of course, we are heading in our Q1 numbers into a Christmas quarter, so there will be some holidays in which we'll expect that seasonal downturn, as it happens every year, when we hit our fiscal Q1 because of the Christmas holidays and all that. But otherwise, on a run-rate basis, weekly, it's pretty stable in North America and Europe industrial. China, however, which is a big engine on driving industrial -- among the global industrial OEMs worldwide, as well as not just China purchasers, it's a very volatile industrial market. It's up one quarter, down the next, and up again, and that's probably because of the buying characteristics of Chinese OEMs. We tend to behave like this is a PC market almost. So they buy one quarter, we stock up, and then the next quarter it disappears. And if they see the demand coming in, everybody rushes to buy. So you get very volatile demand in China quarter-on-quarter, and we are seeing that. And Japan, it's part [ph] a lot to China, and they get dragged along by China. And so what we've seen over the last quarter and this quarter, too, is China is not -- is relatively down, slightly down, and Japan with it. So overall, because of that seasonality on one side and characteristic buying behavior in China, industrial is kind of down. And the best way to describe is probably down mid-single digits.

[Ross Seymore:]

Great. And I guess as my one follow-up, switching gears over to the wired side of things. I know you said you're going to start doing the -- moving away from the module side, so I guess a couple-part question. What are you seeing outside of the CyOptics part of the business? And how should we think about how long that transition out of modules will last and what sort of impact it'll have to the roughly 50 million to 55 million a quarter that CyOptics operates on?

[Hock E. Tan:]

Wow, that's a tough question. Let's start with the easier one, which is the non-CyOptics business, which is largely now -- a lot of it is component sales to the telecoms industry -- infrastructure industry, that is. But let's talk about what we are -- what is Avago's fiber business largely before CyOptics, which is enterprise. Here, the big driver is data centers, large data center build-outs, less so on traditional enterprise networking. In traditional enterprise networking, you won't see a lot of buyout from some of our large OEM customers, recent earnings announcements and commentary. It's kind of flat, very flat. Data center build-outs are one -- big data center build-outs seems to be what drives it, and seems to be what drives a big part of the -- of our growth to the extent that there is growth in some of these areas. And that's 40G. As the business starts -- things start to move from 10G, which is getting mature now, 10G, to 40G, which is exciting fun, one -- the guys who are leading the charge here are data center build-outs. And that is still very good. Meanwhile, traditional enterprise is, at best, flattish, and that's what we see there, in fiber optics, and we translate that into the ASIC SerDes that we supply to several major OEMs in enterprise networking. We see that happening, which is what I mentioned about pause until 40G catches on. Coming back to your second question on CyOptics, no surprise as we indicated to you when we bought this company, is they have a combination of module or subsystem business, especially in China Fiber to the Home, as well as the do component sales into -- especially the new coherent 40 and 100G networks. That business is very exciting, and we're definitely continuing to push on it. As far as the subsystem business, the module business in China, especially as it relates to telecoms infrastructure, as well as Fiber to the Home, those are businesses that are extremely competitive. Our competitive edge are the laser components, chips, as well as lasers and receivers that we sell. That makes us unique and the technology unique. So we are basically transitioning, starting this quarter, as we mentioned, from selling subsystems to selling components to the same customers, to the same end customers and application, I would add. The impact will be a reduction in revenue, which will happen, and -- but an increase in gross margin percentage. And keeping to what we're good at is, as I said, a key part of our business model to be unique, differentiated suppliers. Impact on revenues, basically, what it will likely do is over the next -- over the course of fiscal '14, is probably keep our revenues relatively unchanged, flat over the next 4 quarters.

[Operator:]

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

[James Schneider:]

Hock, I was wondering if you could comment on the wireless business and maybe comment specifically on the typical seasonality you see in the January and April quarters and what you think might be better or worse about that seasonality as we head into this next couple -- this next year?

[Hock E. Tan:]

Okay. Well, used to be, few years back, and it still is to some extent, depending on how you look at it, I guess, is seasonality in handsets simply because, I guess, usually before Christmas, now Chinese New Year as well, but usually before Christmas, year end, promotions happen and handset growth is very strong, especially October, November. December, things roll over and generally is a bloody disaster in demand, and that's typically how handset business grows. As however, the business, especially what matters a lot, the smartphone business, consolidates into 2 very big guys. The timing of product launches, the key product launches of those 2 guys, takes over a lot of the seasonality. Now it happens that those launches, especially on one of the big guys, coincides with year end. So we still see that sharp, very sharp year-end seasonality. For us, we see that particular strength in our fiscal Q4 and our fiscal Q1, the current quarter. Then after that, fiscal Q2, the following fiscal Q2 and Q3 would dip rather precipitously as we go through transition to the next product generation. And then up it goes again, the roller coaster ride again, in Q4 and the following Q1. And that's the new seasonality we are seeing. Not that much different, perhaps, from the old seasonality, except because of consolidation and concentration of customers, it's now become more pronounced.

[James Schneider:]

And then as a follow-up, one of your competitors last week, I believe, discussed some potential negative seasonality, even more than normal, into the January quarter because of where Chinese New Year falls. So can you comment on whether you see anything different than you typically would around Chinese New Year? And specifically, on Chinese distributors, are they taking down their inventory precipitously at this point? Or are they pretty much ordering it in consumption levels?

[Hock E. Tan:]

Well, we don't see this -- well, I guess, probably, we are different from that competitor you are referring to in more than one ways. One is, of course, our Q1, as we call it, fiscal Q1, ends in January. And Chinese New Year this time around is at the end of our fiscal Q1. If anything else, before Chinese New Year starts, as you know, it's not demand that determines, it's supply. The factories in China wants to pull in as much as they can before customs and all that -- logistics shutdown in China as Chinese New Year comes on. So for us, our Q1 might see a pull-in, some -- a little bit of pull-in because of that. Not much, we like to think, but there probably will be some. But that's our Q1. Then other competitor might be talking about Q1 from a traditional calendar March quarter. And as it refers to the Chinese guys, see, it's probably -- depending on which customers they have and who they are referring to versus what we have and what we are referring to, for us, obviously, it's very much tied to 2 large OEM, smartphone OEMs. From the Chinese market point of view, we have obviously substantial revenues there, but it's more -- it's certainly not to the level as we see in our 2 largest OEMs, and we definitely do not participate broadly in the sense of substantial share in the Chinese white-box OEMs at this point, except specialized FBAR filters that are needed in -- as new China LTE bands coming. We don't have that broad overview that perhaps another one of our peer group competitor might have. So I can't really comment on that and nor would I say that what we see is similar to what they might see on their business.

[Operator:]

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

[Craig Hettenbach:]

Hock, speaking of China and LTE, there are some rumblings in terms of what bands may or may not ultimately be supported. Any sense in terms of what you're seeing from customers on the opportunity in China into 2014?

[Hock E. Tan:]

Well, we haven't changed our story all along here, which is that TD-LTE will come in. We are covered on the few bands that will encompass TD-LTE. We are pretty well presented. And by the way, more than just LTE bands in China, especially Wi-Fi, WiMAX related to that, it's a big part of phone bands in China. And again, we are pretty well represented there. So nothing much has changed. But they are that few several bands, and they -- there are talks of moving it around. But at the end of the day, all those bands are running around in the range of 2.4 to 2.6 gigahertz frequency band. And there, you do see the need for a lot of FBAR filter requirements.

[Craig Hettenbach:]

And then just a follow-up for Tony. If I look at gross margin coming in just a bit above expectations, your longer-term target is 50% to 53%. How are you feeling about gross margin in 2014?

[Anthony Maslowski:]

Well, again, I think what we've always said is the long-term business model is at 50 to 53%. We have to get over the -- somewhat of a CyOptics overhang because they're dilutive to us, and it's through the combination of improving their business plan, as well as their operation contribution. So I think we're still pretty confident that a slight uptrend in gross margin over multiple years is -- we stick with that long-term business model.

[Operator:]

Your next question comes from the line of John Pitzer from Credit Suisse.

[Ryan Carver:]

This is Ryan Carver in for John Pitzer. Hey, quick question on the gross margin guide. You guys talked about a sort of negative mix drawing margins down, but that you were having some company-specific -- or some product-specific drivers that were helping boost it. Could you maybe go in a bit more detail about that? Is that something that's happening specifically in the wireless group? Or are you guys seeing some intra [indiscernible] mixes in other categories that helping that margin profile out?

[Anthony Maslowski:]

Well, again, I think one of the things we continue to be impressed by is how quickly things are improving on our CyOptics business that we purchased. So if you remember, way back to when we first purchased CyOptics, we talked about bringing it over at the low 30s and then making the first digit of 4 some time in this coming year. The pace of change there is a very much on track. We're very happy with what we're seeing there, and then we still see some potential. We're not going to change anything outwardly to you guys, and we'll probably stop talking about CyOptics individually because as the quarters come forward, CyOptics is really a part of what we call our fiber optics components business. So it's more integrated with some of the things we're doing with some of our other products and so forth. But we're very happy there, and then there is a couple other product categories that we won't get into detail on, but improved within the quarter that made a difference to gross margin overall.

[Ryan Carver:]

And as my follow-up, you guys talked about some of the -- in the wired business, some of the business in China perhaps being a bit weaker than expected on the carrier side. Can you talk a little bit about what you guys are seeing in terms of the carrier build-outs -- our expectations, I think, are for sort of the 200K base station build-outs to happen or be completed come sometime in the middle of '14? Have you guys sort of seen the buy up ahead of those builds? Or I guess any color you could provide there would be helpful.

[Hock E. Tan:]

Well, that's a very interesting question, which has been subject to very immense speculation. That magical -- basically, 200,000 base stations, which is part of what you're saying, the TD-LTE -- the 4G or TD-LTE rollout in China. As far as I'm aware, no contracts have been officially given because no licenses on 4G has been given out in China yet to the carriers. So I guess we're all waiting officially.

[Operator:]

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

[Vivek Arya:]

First question, Hock, in the last 2 years, when I look at the April quarter, I think your wireless business was down about 9% sequentially this year and -- but was sort of flat sequentially last year. I think earlier on the call, you mentioned that demand can be very volatile in that quarter, depending on flagship launches. Do you think that volatility is perhaps similar to the ranges we have seen before? Or could it be different this time? And more importantly, are you confident that the wireless business can just conceptually grow at a mid-teens pace next year?

[Hock E. Tan:]

Well, let's take the first part first, the basic cycle within any fiscal year. I think it changes. I don't -- I think the last thing we can assume is that the next year repeats what the previous year goes through in the cycle. But all indications are that -- and the part of it is related to now more than pure seasonality, as I said -- answered in an earlier question. We all calendar seasonality of Christmas and all that is really overriding it. It's the timing of major product launches of a couple of very large OEMs, as you all know. And right -- and one of those OEM launches fairly consistently, at least so far we have seen. The other OEM doesn't behave that same way. So in my -- adjust that profile of that revenue from one, and it probably will. And this coming year, in '14, probably we'll have some level adjustment. But I could be wrong that everything, all things considered, things will work out evenly, like what's happening this quarter. Right? Q1. If you asked me 4 years ago, going back that way, Q1, fiscal Q1, is usually the weakest quarter for our wireless business. Today, it's right up there as the strongest quarter for our wireless business so far in Q1. In fact, as I mentioned, it sustains from the very high Q4 level. The only reason Q1 is maybe down, as I pointed out, is because other than the 2 major OEMs, all -- most other OEMs are actually experiencing the traditional seasonality in their case. So that will be a headwind against the sustaining strength of our 2 largest OEM customers. And that's what we are seeing now. By the next Q4, Q1, say, will the same thing happen? Don't know. Very hard to predict in this business. What we will be sure is we'll go to product transitions to a new generation of smartphones with all those OEMs, particularly the 2 major OEM customers.

[Vivek Arya:]

Got it. And then just as a follow-up to that, from what you can see with all the design wins in the pipeline, and I think you are keeping CapEx at fairly robust levels, so I assume FBAR demand is staying fairly robust, do you think the wireless business can conceptually grow at a similar sort of mid-teens pace as you managed to grow it over the last 2 years? Is that a reasonable assumption to make?

[Hock E. Tan:]

Before I answer that question, let me correct you on the first part. Our robust CapEx, as you put it, is not just on wireless. Having said that, you're right. The last couple of years, a big part of it has been on wireless as we build out capacity in FBAR to meet increasing demand, which drives our increasing revenue growth. But that aside, a substantial part of that CapEx is also related to our wired infrastructure business. We are also building out specific capacity, especially in front end, Indium Phosphide fabs or basically our LED laser fabs in Singapore, especially. We're investing in building out capacity there and improving processes there. We're investing in test equipment for proprietary fiber optics. We've also been taping out a whole bunch of ASICs, which we can -- which we treat for accounting purposes as CapEx as well. So our wired infrastructure business is getting a substantial portion of that CapEx spending. As you all know, I correct you on that. And that also indicates our outlook on those businesses as well. And then finally, coming back to your question on wireless, yes. To be fair, it's hard to sustain the level of growth we have been seeing over the last 3 years in wireless. Purely scale of large numbers, nothing else. Having said that, is it still growing as evidenced by the fact we're continuing putting investment in the fabs. But will it grow as fast as the last few years? I tell you this

[Operator:]

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

[Romit J. Shah:]

Cisco's business is down a lot this quarter. It looks like your wired business is holding up better. Hock, is that mainly due to fiber?

[Hock E. Tan:]

Yes. As I indicated, fiber has been doing quite well. That helped a lot. And to be precise, 40G. 40 gigahertz.

[Romit J. Shah:]

Okay. Specifically, in switching, Cisco, on the last call, they talked about basically replacing their Nexus 7000 product line with the 9000, and this is a product that's got to go through some qualification. And it'll launch later in the year, but the -- in the interim, Cisco seems to be facing a bit of an air pocket. And I was hoping you could just maybe talk about the wired business as it relates to some of these new product launches? And how should we think about the trajectory of wired as we go through the year?

[Hock E. Tan:]

Romit, this is a tough question because that will require me to talk about a very beloved customer. So if you don't mind, don't take me -- don't take offense. I prefer not to comment on that as it relates to any customers. Just put it that -- as I mentioned in my earlier comments, 10G is transitioning to 40G, and a lot of 40G right now is in the early stage of it. It's all largely been adopted by the guys who are building hyper data centers who are adopting it. And many of these guys are very untraditional in their ways of adopting architectures in both fiber optics, as well as switching and routing. So that's probably the level of innovation you're seeing in the marketplace and, I guess, changes in the trends, which is why I'm very careful to point out traditional enterprise is still chugging along but relatively flat. The growth is coming from these hyper data center guys who seem to be headed off in very -- pushing the envelope technologies where it relates to switching and fiber interconnects. And we see benefit in that area. On traditional enterprise, things are not very exciting.

[Romit J. Shah:]

I guess, Hock, maybe just asking it a different way, as you look at this next fiscal year, how would you rank order your 3 major product lines or business segments in terms of revenue growth? Would you rank wired, 1; wireless, 2; and industrial, 3? Or differently?

[Hock E. Tan:]

Oh, that's a tough question you're asking now. I will tell you, wired and wireless will be neck to neck. How's that sound?

[Romit J. Shah:]

Sounds good. That sounds good. All right.

[Operator:]

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

[Doug Freedman:]

If I could focus in a little bit on your spending plan for next year, guidance for the January quarter on OpEx, pretty in line with normal seasonality. You traditionally get a bump up in the April quarter. I think it's due to the FICA tax adjustments. Are there any offsets to that this year? And if you could just give us an update on where you'd like to hold your spending levels.

[Anthony Maslowski:]

Well, again, I think for the full year, as I mentioned on some of the earlier calls, is that last quarter and this quarter, because of some of the adjustments we had to our bonus, are slightly different than previous years. So I think we can potentially hold this spending level throughout the year. Again, there are some challenges in there. There's some opportunity spending that we'll take advantage of here and there. So I think it's -- again, from last year to this year, I think it's, again, not giving multi-quarter forecasts. But I think it could potentially be a peak expense quarter for us. So...

[Doug Freedman:]

If you could, Hock, maybe give us a little bit of insight into what you're seeing on the optical market. A few of your competitors have talked about pricing pressure. I don't know if it's actually in the segments that you're playing or if it's tangential markets there.

[Hock E. Tan:]

Well, it's -- many of you who follow this company knows in our fiber optics business, there is this standard -- we got -- I think the term is MSA standard fiber optic in transceivers or interconnects, which are more [indiscernible] set by [indiscernible] standards and other standards for communication. And then on our other side, we try to promote proprietary standards. On the standard side, yes, I think price competition has always been there and continues to be there, which is what drove us into the proprietary fiber optics business in the first place. We still sell into standard, which we do -- obviously we do, and it's an important part of our business. But it's never been a nice place to be in because prices keeps dropping. You're first to markets, you won't stay there for long because of standard. And sooner or later, price will plunge. And we continue to see that price degradation even now in 10-Gig. Meanwhile -- not yet in 40 but in 10 gig. Meanwhile, on a proprietary site that we do, prices are more orderly and more manageable. And obviously, we kind of -- somewhat immune from the price frenzy that we see on the standard fiber side.

[Doug Freedman:]

And for my last question, one of your partners or competitors may soon become more of a competitor, that being Qualcomm with the introduction of their RF360. There is talk that, that's going to ramp into a volume production in the first half of the year. Can you give us some insights into how you think that might impact you and how you might be partnering with them?

[Hock E. Tan:]

RF360 involves transporting [ph] power amplifiers into the base band and transceiver, and the transceiver obviously which Qualcomm has a plentiful [ph] of. They still do not integrate in filters. So depending on the bands that this chip -- this RF360 gets applied in, in one handset it goes into and what service provider or carrier, you still may or may not need FBAR filters or SAW filters. And that will never go away. That RF360 doesn't incorporate in their roadmap current or future filters.

[Operator:]

Your next question comes from the line of Ian Ing from MKM Partners.

[Ian Ing:]

Could you talk more about this SerDes ASIC pause and inventory adjustments at major OEMs? I thought your exposure there was in things like data center servers, things like UCS, which I thought was strong. Or is it more switching and routing?

[Hock E. Tan:]

Well, it may be part of that, but it could be part of the fact that -- see it's also the buying patterns on my customers. And I will not just specifically take it as literally as the translated to mean that there's a slowdown in demand. But we've all seen there is not a strong demand across the board on traditional -- in very much in traditional enterprise. In data center build, yes, depending on who you -- who are the winners and losers. You may see strength or you may not -- or you may see flatness. But we also get the sense that for some of our OEMs, there's been over-aggressive -- over-enthusiastic purchasing in the previous quarter, which kind of lead them to pause, especially with the launch of the next -- a new generation of switches and routers. And I suspect a part of that pause is what we are seeing here. But the other side for it is, I think for some of our OEM customers, the market they are seeing is flat.

[Ian Ing:]

Okay. And then my follow-up on the wireless side, could you talk about looking at the smartphone sockets that you're targeting next year, do you have a sense of the adoption rates of these features like carrier aggregation and envelope tracking? I know you've talked about FBAR benefiting from those features?

[Hock E. Tan:]

Envelope tracking is definitely happening in many -- with many, many OEMs, handset OEMs across the board, OEMs across the board in globally. It's already started, as you know, earlier this a -- a few months ago with the launch of the first one, which is the Note 3. Thereafter, I think we are seeing a few other programs coming along with several OEMs. Most of them coming out probably in early part of next year and continuing on to right up to the end of the year. So we see that rollout happening by envelope tracking. Carrier aggregation is somewhat slower. That will even use a lot more FBAR but it's also more slower to get implemented. I think spikes are still being worked out and I probably would guess that you do not really see in any significant amount before end of the year, if not 2015 for carrier aggregation.

[Operator:]

Your last question comes from the line of JoAnne Feeney from ABR Investment Strategy.

[JoAnne Feeney:]

Been a lot of concern about where the growth of smartphones is going to occur at the high-end versus the low end, with most people thinking mid- to low-end. And so I guess a lot of us are wondering how Avago is being positioned to serve mid-range or low-end smartphones, not just with your current large customers but with others. Can you describe for us perhaps how you're diversifying into the lower end or if you are, and what you see for unit growth this year for the customers you're serving?

[Hock E. Tan:]

Okay. We work on a very simple premise in this wireless side. Okay? Our gift to this end market is our FBAR technology, filter technology. Okay? Where they need to be used. And where they need to be used depends on bands, the certain bands. Certain bands require FBAR filters to work. Other bands that are easier, their modulation schemes are easier, do not. They get away with SAW filters. If they can get away with SAW filters, typically, they will get -- will use SAW filters. Then there are some bands in the middle where -- with some phone makers where there are issue of coexistence, interference, and then they use FBAR. And all we are really interested in on this simple basic model is find all the sockets that needs good filtering and sticking FBAR filters. And the world moves -- depending on how the world -- depending which part of the world moves in one direction, you -- we see -- we have been seeing an increase in utilization of FBAR. And example, China. China is not about high-end smartphones as you know, not very much. But if TD-LTE shows up and if -- now, TD-LTE only shows up in maybe high-end smartphones, JoAnne. But eventually, like everything else, TD-LTE becomes mainstream. In every phone in China, say, in most ones in China, TD-LTE runs in the frequency based on the bands right overlapping Wi-Fi. You can't run one without the other in that -- in space. So you need FBAR. Even in low-end phones in China, eventually when it goes mainstream. So it's not about high-end, low-end. Having said all that, what has been driving us over the last few years, generations, it's just -- and it's tied to proliferation of LTE bands, too, by the way, is the fact that phones, particularly smartphones -- but any phone if you want to look at it -- is increasing in content. Because any phone that runs LTE has to be backward compatible to CDMA -- to 3G and CDMA and 2G. So cross-cross. So more and more content goes in a phone. As content increases in the phone, which means number of bands each for -- any phone supports increases, the chances of more filters using FBAR in any one phone increases. And I point on my earlier remarks, it's largely -- what we've been seeing the last couple of years is -- 3 years in fact, is content increase in the phone we sell to, less so the number of unit phones that have been sold out there. It's not about number of increase -- number of phones that is driving our growth now. It's the content those phones that we fell into have of our products.

[JoAnne Feeney:]

And then just a quick follow-up. For this quarter coming, you have talked about the wireless revenue looking roughly flat. But clearly, there's going to be a wide range of behavior of your customers. Can you give us a sense of that range? Perhaps, your best customer up certain amount quarter-to-quarter versus the weakest customer down a certain amount? Can you give us a sense of that range or perhaps size for us your 2 largest customers versus the rest of the group?

[Hock E. Tan:]

Not in the least, JoAnne. I have no clue. Anything I give you will be mere speculation, which of course I won't do. So no, I don't really have a good idea.

[Thomas Krause:]

Thanks everybody. Before we close, I want to remind you that we will be presenting at the JPMorgan Tech Forum in the new year, January 7, in Las Vegas, as well as meeting with investors on the 7th and the 8th at CES. I want to thank everybody for participating in today's call. We look forward to talking with you again when we report first quarter of fiscal year '14 results in February. Thank you.

[Operator:]

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