Broadcom Inc.
Q2 2014 Earnings Call Transcript

Published: 30 May 2014

[Operator:]

Welcome to the Avago Technologies Limited Second 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 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 tables describing our financial performance for the second 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 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 website at avagotech.com. During the prepared comments section of this call, Hock and Tony will be providing details of our second fiscal quarter results, background to our Q3 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 Tan:]

Thank you, Ashish. Good afternoon, everyone. Now, we are going to start today as we always do by reviewing recent business highlights in our end markets and then Tony will provide summary of our second quarter fiscal 2014 fiscal results. Before we do that, a couple of housekeeping items, as you all know, we closed the LSI acquisition on May 6, one day into our fiscal Q3. I am very pleased to welcome LSI's employees, customers and partners to Avago. Since then, we have been hard at work integrating the two companies and accordingly any comments made on fiscal quarter third quarter and beyond will applying to the combined Avago-LSI businesses. Q2 commentary will of course only applying to classic Avago. Also earlier today, Seagate announced they will be acquiring the LSI flash businesses, which includes the standard flash controller and PCI express flash adaptor product line, $450 million in cash. We are divesting this LIS think product line as they do not strategically fit with our long-term [business]. The impact from this divestiture to our total revenue on an Avago-LSI combined basis is not material. Okay. Starting with our Q3 fiscal quarter, our mix of revenue will change and will now include a new end market, enterprise storage in addition to the previously defined Avago wireless, wide infrastructure and industrial markets. I will provide additional color on the changes in the end market discussion. Revenue for second quarter was $701 million and represented a decline of 1% from last quarter and an increase of 25% from the same quarter a year ago. Q2 revenue came in high than the upper end of our guidance, and the primary driver of our better than expected revenue performance was very strong wireless shipments into Korean and Chinese handset OEM. Let now proceed to provide much more color on each of these end markets. Starting with wireless, the composition of our wireless end market remains unchanged post the LSI acquisition, basically comes from Avago classic and for fiscal Q2 revenue from wireless came in significantly above our expectations and was flat sequentially compared to our prior expectations for mid-teen decline on a percentage basis. Wireless represented 50% of our total revenue, and on year-on-year basis, wireless grew 25%. As mentioned during our Q1 call, we had expected our Q2 revenue to decline sequentially as we worked through the normal annual product transition and are large North American OEM customer. While we did experience that anticipated product transition related decline, we were able to fully offset that decrease with a strong product ramp at another smartphone OEM and strong demand from LTE-enabled Chinese smartphone. We are also achieving high penetration with these Chinese OEMs who our industry leading FBAR technologies. The growth in FBAR related revenue help us to continue to expand our gross margin. Looking at Q3 fiscal 2014, and clearly this end market is only classic Avago. We expect mid-single digit sequential growth in our wireless business with the beginning of a ramp from our North American smartphone customer as they transition to their next-generation platform and we continue to also see very strong demand for our FBAR related products from the Chinese LTE smartphone OEMs. We also expect to see additional Avago content for handset-enabled by our FBAR technology and taking advantage of all the expected increase in RF content across both, traditional high-end smartphones as well as even entry-level solutions. For Q3 revenues from our wireless end market will be a little over 25% of our total revenues, which would have included the impact of the LSI acquisition. Moving onto Wired Infrastructure for fiscal Q2, in which we talk only about Avago classic, Wired revenue decreased 4%, sequentially, performing below our expectations at the beginning of the quarter and represented 31% of overall revenues. However, we continue to see a fair amount of strength in this end market as on a year-over-year basis we still grew 43%. ASIC was flat sequentially as data center switching remained relatively soft, but we are starting to see a rebound at a major data networking OEM. We saw sequential decline in our fiber optics with slower than expected shipment for our 40G products, which are also influenced by data centers switching softness. Please note too that starting fiscal Q3, in addition to Fiber Optics and SerDes-based ASICs, our wired infrastructure end market will now also include LSI's ASICs as well as standard [Xia] based products. In this regard, we expect Q3 revenues from our combined wired infrastructure end market to be a little over a quarter of our total revenues. Looking forward, we expect strength on a number of fronts, we expect a significant ramp in our ASIC revenue from shipments into base stations patient as well as enterprise and data center switching platforms. ASICs increases will come from both, Avago and LSI design wins, and we are expecting recovery in Fiber Optics as it relates to enterprise switching. we believe that the combination of LSI and Avago positions us extremely well to take advantage of next-generation data center switching and LTE transitions and our network upgrades on the wireless infrastructure side. Onto enterprise storage, this is a new market for Avago addressed by LSI's hard disk drives and servers and storage connectivity product lines. Accordingly for Q2, we have no discussion as it relates to Avago classic. For Q3, however, we expect to continue the momentum and leadership LSI had established across all the storage product lines and expect some strength in Q3. For hard disk drives, against the backdrop of a fairly stable market especially in our focused areas of 3.5-inch and enterprise SaaS, we expect to continue to benefit from a strong design win positions in three channels and PreAmps across all hard drive OEMs. Our server and storage connectivity business, which includes our SaaS and rate silicon, adapter and Software Solutions, are now entering the seasonally strongest second half of the calendar year for the server and external storage market. We remain very enthusiastic with our progress in 12G SaaS design wins and ramps across multiple OEM customers and we expect Q3 revenues from enterprise storage to be approximately one-third of our total revenues. For now, we expect enterprise storage will be the largest end market for us. Finally, moving onto industrial, fiscal Q2 industrial re-sales were very strong in the quarter, with double-digit sequential growth on a percentage basis, which was in line with our expectations for this end market. We saw strength especially in Europe and Japan. However, we reduced shipments to our distributors to reduce inventory levels in the channel. This resulted in industrial sales increasing only 2%, sequentially, during Q2. Way below what we had guided at the beginning of the quarter at up 3% from a year ago. Industrial sales represented 19% of our overall revenue in Q2. In Q3 through, we expect to replenish inventory, the low-level inventory at many of our distributors to support expected growth in the high single-digit level, sequentially, as a result of continuing worldwide recovery in industrial activity. Now, starting Q3, we will also included in the industrial is the LSI intellectual property licensing business. Combined with this, our Q3 revenues will be approximately one-eighth of total revenues in this segment. In summary, for Q3, this is how we would see our business. In the beginning of a strong product ramp in wireless a rebound in wide infrastructure and continued stability and slight growth in enterprise storage and industrial. We expect overall revenue for fiscal quarter Q3 therefore to come in between $1.32 billion to $1.4 billion. As you know this is the first quarter for the combined Avago-LSI businesses and integration activities are still progressing, but progressing very well. Our restructuring activities to achieve forecast annual cost synergies of $200 million have just kicked off, but we remain very much on track to achieve these by the end of our fiscal 2015, the first full fiscal year after closing. We are also working to drive the combined LSI-Avago businesses long-term towards a non-GAAP operating margin model that is consistent with the Avago classic business model. With that, let me now turn the call over to the Tony for more detailed review of our second quarter fiscal 2014 financial.

[Tony Maslowski:]

Thank you, Hock, and good afternoon everyone. Before reviewing the second 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 on our website at www.avagotech.com. Revenue of $701 million in Q2 represents a decrease of 1% from last quarter and an increase of 25% compared to the same quarter a year ago. Overall, Q2 revenue came in higher in the upper end of our guidance. Revenue from our wireless target market came in better than our expectations, though it was offset by weaker than expected revenue from our wired infrastructure in industrial end market. Foxconn and Samsung were greater than 10% customers in fiscal Q2. Our Q2 gross margin was 54%, which was above our guidance for the quarter and also higher than the prior quarter, primarily due to higher than expected FBAR revenues, which have favorable gross margin. Turning to operating expenses, R&D expenses increased by $3 million to $101 million and SG&A increased by $3 million to $47 million driving total operating expenses for Q2 to $148 million or $1 million above our guidance. As a percentage of sales, R&D remained unchanged at 14% in SG&A was 7% of net revenue. Income from operations for the quarter increased by $9 million, sequentially, to $233 million and represented 33% of net revenue compared to the $158 million for Q2 of last year, income from operations increased by $75 million helped by higher revenues and better gross margin. Taxes came in at $9 million for Q2, $2 million above our guidance. This was primarily due to higher income than forecast as well as a change in the jurisdictional mix of income and expense. Q2 net income of $223 million increased by $6 million from the prior quarter. In Q2 earnings per diluted share was $0.85 or $0.01 higher than Q1. Compared to Q2 of last year, net income was $70 million higher and earnings per diluted share the $0.24 higher. Our share-based compensation in Q2 was $30 million. The breakdown of the expense for Q2 includes $3 million in cost of goods sold, $10 million in R&D and $17 million in SG&A. In Q3 2014, we anticipate share based compensation will be approximately $79 million and this includes the impact from the LSI acquisition. Just as a reminder, our definition of non-GAAP net income excludes share-based compensation expense. Moving onto the balance sheet, our day sales outstanding remained at 42 days, same as the prior quarter as we observed stable revenue linearity throughout the quarter. Our inventory ended at $301 million, an increase of $15 million from our last quarter. Our wireless inventory increase in anticipation of a continued strong demand throughout the remainder of the calendar year, particularly for our FBAR product. Days on hand were 86 days, which increased 10 days from Q1 due to this planned inventory build. We ended the quarter with a cash balance of $1.3 billion and we generated $251 million in operational cash flow. We spent $73 million on capital expenditures. For Q3, we expect CapEx to be approximately $125 million which primarily relates to spending to support our continued build-out of FBAR capacity and also the impact from the LSI businesses, which include a campus rationalization. During the quarter, we did not we purchase any shares in anticipation of completing the LSI acquisition which closed on May 6. Our 2013 share repurchase program has expired and the board has not as yet authorized any new share repurchases while we digest the LSI transaction. However, it is something that we and the board look at regularly. On March 31, 2013, we paid a quarterly cash dividend of $0.27 per ordinary share, which consume $68 million of cash. The 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 turn to our non-GAAP guidance for the third quarter of fiscal 2014. This guidance reflects our current assessment of business conditions and we do not intend to update this guidance. Our Q3 guidance includes the LSI acquisition, which closed on the second day of the quarter. This guidance is not adjusted for the business divestiture announced earlier today. Total revenue is expected to be in the range of $1.3 billion to $1.4 billion. Gross margin is expected to be 55%, plus or minus one percentage point. Operating expenses are estimated be approximately $386 million. Taxes are forecasted to be approximately $20 million. Interest expense is expected be approximately $54 million. Finally the diluted share count forecast is for 276 million shares. That concludes my prepared remarks. Operator, please open up the call for questions.

[Operator:]

All right. (Operator Instructions) Our first question comes from the line of Vivek Arya from Bank of America Merrill Lynch.

[Vivek Arya:]

Thank you for taking my question. I actually had two questions. Hock, maybe the first one for you, what's your sense of the wireless market. You know you had a very strong quarter in Q2 and you are guiding to mid-single digit-type growth in Q3, partly related to China as the deployment. Do you think there is some kind of bubble or inventory building up in China or do you think just the growth trends that you are seeing are more sustainable in the second half also?

[Hock Tan:]

I don't know the answer to that to be honest. I know though, the demand continues to be very strong. As you know the band - and it's obviously related to LTE build-outs in China, because of the bands and strong demand for our FBAR products, which are particularly strong as it relates to LTE and Wi-Fi, I should add, and this strength we saw beginning of Q2, middle of Q2 to be precise and has continued till now and we have very strong backlog, but we have very strong demand and the question is how long it will continue. I don't really know. While we do see within our lead times, which runs out over 10-week is continued strength.

[Vivek Arya:]

Then as a follow-up, the divestiture of the plant sale of the flash business, how do we think about first of all the benefit that you might get from a profitability perspective? Is that included in the $200 million cost synergies you had given out before? Would it be incremental to that? Then also sort of related, I think, Seagate is being roughly three times sales for that division. Is that a fair price? It seems like I think Western Digital paid more like six-seven [times], so any color around the operating sort of savings from divesting the division and just the price you are getting for that division would be helpful. Thank you.

[Tony Maslowski:]

First off, I will answer the first part of the question, which says that the $200 million of cost savings we've always talked about never included any divested businesses. We believe that we could drive $200 million of cost savings from whatever business we would inherit, so that is not included. Now, I qualify that by saying for us to [march] to our long-term business model of the Avago operating margin that did contemplate some divestitures and I will let Hock comment on the part of your question that says did they pay too much or whatever.

[Hock Tan:]

We obviously believe that there is a fair value on both sides in making this transaction happen as I articulated in my opening remarks. We do not see this business in the long-term being very strategic to our business model. You would require continued level of investments. Obviously, this business has great capability that would continue for the investments to sustain that capability and given it is not part of our long-term plan to make those kinds of investments, we obviously chose to divest it and I think it was a very fair deal both sides. We will benefit as will Seagate.

[Vivek Arya:]

Thank you.

[Operator:]

Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed.

[Ross Seymore:]

Hi, guys. Congratulations on the strong reporting. First question Hock, one for you on the Wired business, a little surprise given what the data points were that we have seen beyond Avago that that business actually missed in the quarter. Can you give us a little more color on what [below] your expectations and then why the confidence and reacceleration heading into the July quarter please? Then I have a follow-up. Thanks.

[Hock Tan:]

Well, a big part of the business these days, especially on fiber optics side of it relates to - demand comes a lot from this hyper data center guys, the big cloud guys and the guys who build huge data centers or social media, cloud and all that stuff and there they start behaving a lot more like service providers than traditional enterprises, where demand is more stable and more predictable. It did a bit less predictable. We are not looking at this miss in the 2Q obviously on fiber optics, which is what this is, because our ASIC business sustained and one might remind fiber optic is simply because at the leading edge especially on 40G interconnect fiber transceiver interconnect, which is where we largely see a miss and that's probably because either state-of-the-art data center build-out that requires a use of those 40G, and the fact that we don't hit all the demand - what we thought we should hit in the quarter, that demand is likely to reappear in the following quarter. Hence, our expected rebound in Q3 what we missed in Q2.

[Ross Seymore:]

Great. Thank you. Then there's one follow-up, Tony. One for you on the OpEx level that $386 million that you are guiding to, how should we think about that going forward? If you want to include the announcement that you put today otherwise, what's the sort of trend we should think about in that in achieving that $200 million cost synergies that you have prior set out to the target? Thank you.

[Tony Maslowski:]

Well, as Hock mentioned, we were off to a good start, so we believe that you know there is easily several million that we are going to realize in Q3 and you will see kind of an acceleration in Q4, because those will be the quarters where especially people costs are fully gone for a full quarter, so we are really confident on the acceleration on removal of cost. As we mentioned, most of it is going to come from the R&D and SG&A line. Now, I won't comment at all on the divestiture just yet, but you we will break that down in the future as we complete the sale and so forth.

[Ross Seymore:]

Simply put, fiscal fourth quarter OpEx should be down - sale side?

[Tony Maslowski:]

Yes. Again, which is small caveat that I always give you, Ross, is that that for example if we over perform on some of our bonus metric that sometimes in Q4 we have a little bit of a catch up there, but everything else held equal, we should trend down over time quite significantly.

[Hock Tan:]

I think we did indicate to you guys in our last call, I think, that you should expect to see the OpEx on our first $200 million therefore go down by $50 million a quarter by the middle of fiscal '15 or by the end of fiscal '15.

[Ross Seymore:]

Yes.

[Hock Tan:]

…and we are very much on track on that.

[Tony Maslowski:]

We always said, Ross, is we will have immediate benefit, we will go through flat kind of quarter three and four and then we will see this reacceleration as we complete some of our integration.

[Hock Tan:]

We don't expect and that would not include the divestitures we are announcing here.

[Ross Seymore:]

Thank you very much.

[Ashish Saran:]

Our next question please?

[Operator:]

All right. Our next question comes from the line of Craig Hettenbach from Morgan Stanley.

[Craig Hettenbach:]

Yes. Thank you. Question on the gross margins, in the quarter Avago came in above the high end of your previous targets. Then LSI will be a little accretive to that. Can you just talk about the sustainability in terms of some of the things you have seen from mix in wireless as well as maybe the growth in comm. and how you are thinking about gross margin longer-term?

[Tony Maslowski:]

Well, I think we've always commented that we have had the benefit the last couple of quarters of a very slow fab in wireless and good strong demand on our higher wireless product namely FBAR. We believe that's something that can continue well throughout the calendar year. However, we do have some CapEx coming online, so depreciation in the fab will go up slightly, but utilization in the fab is pretty much fact that 100% even as we add capacity throughout the year, so we think the tailwinds to our gross margin is still pretty good mostly driven by kind of our wireless, especially wireless mix. Then the overall wireless division is again closing that gap on the corporate average pretty quickly as well, so we are very positive on those things and the rest of businesses are holding up well. I would say it's mostly a wireless-focus right now.

[Craig Hettenbach:]

Got it. Then as my follow-up, Hock, on the comm. business outside of the variability quarter-to-quarter in fiber side, do you have a view in terms of where you think we are on the 10G to 40G upgrade cycle?

[Hock Tan:]

On the 10G to 40G for enterprises, traditional enterprises, is still very early. For the large data center guys with certain few exceptions, again is still very early in that upgrade cycle, hence once we get to see some of the variability on this particular 40G product line that we so position ourselves very well. Probably we see more sustainable 40G going forward over the next 6 to 12 months.

[Craig Hettenbach:]

Got it. Thank you.

[Operator:]

All right. Our next question comes from the line of Romit Shah with Nomura. Please proceed.

[Romit Shah:]

Yes. Hi there. Thanks so much for taking my question. I want to go back to the announcement this morning. Hock, the sale of the LSI flash business, I am curious what you think this means for your HDD business.

[Hock Tan:]

I am not sure what you are trying to address is, but there - very different businesses.

[Romit Shah:]

Just what we are seeing in the marketplace?

[Hock Tan:]

Sorry?

[Romit Shah:]

What we are seeing in the marketplace is that SSDs are replacing HDDs, where things like, speed, power, durability are important considerations in both, notebook and desktop platforms. To the extent that you don't have an SSD product line, I would think that this would negatively impact your HDD business.

[Hock Tan:]

I think that there's some level of - Romit you are correct in that respect that, flash SSDs that is, are replacing HDDs in certain segments of the market. One big part of which is obviously notebooks, which fortunately LSI is variable represented - not at all represented, hence the emphasis has been on 3.5-inch to SaaS hard drives. Also in certain parts of data centers, where you want really fast very good - latency excess. That is an element of our replacement in that regard. We see that and we do support that those enterprise markets through customized flash controllers that we develop for specific OEM customers of our. That continue to happen and we continue to be able to participate in that. What we are moving out of by this divestiture is the merchant market for flash controllers on SSDs, which is a big part of it will be obviously in the prime market and which we do not see our position to be very strategic in the first place.

[Romit Shah:]

Okay. Thanks for that. Then, Tony, just a question of stock option expense, when I look at Avago standalone, it's been about $30 million per quarter. That's about $0.10 to $0.12, and with the inclusion of LSI, it jumps up to about $80 million, which is more like $0.30, so how do we model that going forward? Is the $0.30 over time going to come down? How should we think about stock option expense going forward?

[Tony Maslowski:]

Well, again, there's two pieces in that $79 million. There is the traditional Avago piece, which we had a grant in March, so if we were to strip that out separately, it probably has increased probably from $30 million to roughly $40 million. Then for the LSI piece is the remainder, so it's $39 million. Now that is impacted as well by the early exit of certain executives, where they were accelerated, so we will see that trend down pretty significantly, pretty quickly over time to maybe a run rate of something closer to 20 in out orders like five or six quarters out. However, I still qualify that, because again we need to bring on the LSI people onto our plans for stock comp and so forth, so I don't really have a real long-term, but the $79 million is really somewhat of an anomaly for kind of this quarter and maybe next, because we this huge overhang from some of the exits that we have to pay for.

[Romit Shah:]

Okay. That's helpful. Thank you.

[Operator:]

All right. Our next question comes from the line of Joanne Feeney from ABR Investment. Please proceed.

[Joanne Feeney:]

Yes. Thanks. I was hoping we could go back into the Wired discussion a little bit. The 40G transition is underway, I am wondering if you have orders in place in backlog and placed it, that gives you that confidence that you talked about a little bit earlier. Then also what you are seeing on the 100G transition as well.

[Hock Tan:]

On the 100G hundred for short, which is basically for data centers as opposed to transport or long reach, on 100G short-reach it's still very early. It won't probably happen for at least a couple of years for most of the data center guys or enterprise guys on transporting short-reach data. 40G is happening right now and yes we do have substantial backlog on those businesses.

[Joanne Feeney:]

Okay. Then on the wireless backhaul, and seems - talk to more generally. We have heard that that strengthened and you confirmed that. I am just wondering how much visibility you have there. There's some concern that we might get a short versus spending and then a sharp decline. Do you have any insight into how that might play out through the rest of the year?

[Hock Tan:]

Not really. A large part of this growth driving is obviously happening in China as the Chinese carriers blew out their 4G networks. In so doing at the same time, I believe, they are obviously pushing the use of that network by being very aggressive in promoting, so deployed terminals. I guess, we call it handset devices that 4G-enabled. All that is happening which is a big part of driving our wireless business between which we announced Q2 and which continue to see strength in Q3, because of the proliferation of the LTE-based handsets in China both, from local Chinese OEMs as well as benefiting some of the global OEMs who sell into China and we see both of that happening. As far as the infrastructure side, there is some strength, especially on the backhaul and it seems to move from backhaul to front-end on the base station side, and we have seen that vary quarter-to-quarter. As far as how long they'll keep sustaining, rest of this year? Don't know. We can only have [heresy], but in terms of actual line of sight, we probably don't more than one quarter at a time.

[Joanne Feeney:]

Okay. Thanks. That's helpful.

[Operator:]

All right. Next question comes from the line of Doug Freedman with RBC Capital Markets. Please proceed.

[Doug Freedman:]

Thanks for taking my question guys. Hock, can you maybe give us a little bit of your view on the growth outlook of each of these segments now that we have got the combined company?

[Hock Tan:]

Okay. Broadly speaking, and it would take us long-term, and long-term being six months perhaps. Well, you are saying realistically, while we see the highest growth drivers for our business is in wireless and wired infrastructure. In wireless the reasons are quite obvious, is that 4G comes into play more and more of what's also more clear it comes into play not just in China. Now that North America is very 4G enabled, but more slowly beginning into Europe and other places, we see content in handsets, smartphones in particular increase. While we are riding more than unit growth, content growth in smartphone is very strong and very short-term practically, the ramp this third quarter, the beginning of the ramp this third quarter of our largest North American OEMs customers. It's just the tip of the iceberg in our view, so it would drive our wireless business very nicely I think over the next 12 months our line of sight. On wired, we see a combination that helps. Some of it relates to China too. As I mentioned, I talked along in replying to earlier question, we see that 4G phenomenon, the convergence to be sustainable thing. Quarterly, you might see variability as we talked about, but over the next 12 months, we are very well positioned as evidenced by the size of our designs, but also the size of our existing backlog underway that would drive our fiber business and will also drive a whole generation of SerDes-based ASICs that we and LSI combine has been able to secure in data center switching as I articulated in my note. That coupled with more a local phenomenon in China metro network and backhaul, especially in areas in exits through MSA, where we have a very strong position. I see all that again China, build-out their expanded network especially in fiber, access and fiber networks through backhaul as augmenting the strength in our wired infrastructure business. We are seeing that today and we see that continuing through the end of this year in China, so those were two will-be businesses we see growing probably at least in the double-digit over the next 12 months. Against that, we stable businesses, and by stable I mean, business that may grow in the single-digit, mid-single digits slightly in both, enterprise storage and industrial. Low-to-mid single-digit, so we have an interesting combination of two businesses, two end markets that will growth double-digit and two that as we see now are very stable, if not, stably growing. The end point, when you combine all four together in a fairly balanced mix, is a business that probably what is what we had forecasted before, which was the business that will grow in the high-single digits to probably low double digits over the next 12 months.

[Doug Freedman:]

Great. Thanks for all that detail. If I could, can you talk a little bit about the mix of business that you are seeing in the wireless segment in terms of maybe diversity and any trigger point that you may have that are required to support it from a capacity standpoint.

[Hock Tan:]

I do not equate wireless to diversity. The consolidation more than 80% are wireless business, about 80% relates to handsets, and a bulk of it in handsets are triggered are tied to FBAR one way or the other. Power amplifiers that put into front-end modules with filters, FBAR filters or whatever, but it is. As you know the handset in this business, especially smartphone business has been very much consolidated. We are very well represented by the way in spite of the consolidations, but it is not that diversified in that regard. The positive side of looking at it though is that it's driven not by necessarily unique phone architecture related to specific OEMs. That's really by the fact that 4G whether it would be in U.S., Europe, China increases dramatically the use of FBAR focus, which we are very [position]. It also implies with 4G an increased number of band required on almost every smartphone around, whether they would be China, Europe, or the U.S. and increase content in three gives challenges to power, gives challenges to coexistence of different bands running on the same phone and just challenges to - which leads to architectures that favor our designs and therefore lead to increased content in our handset businesses. That's not necessary an issue of diversity as much as a technological trend, architectural trend that has favored our businesses. In terms of capacity, we continue to invest and whether we invest in CapEx or as Tony articulate, whether we invest by building product wafers early to handle sharp active ramps as evident in our inventory level growth in Q2. It is intended to be to able to ensure our capability and our capacity in addressing fairly substantial demand and ramp up by several of our large OEM customers.

[Ashish Saran:]

Can we get the last question please?

[Operator:]

Of course, and our last question comes from Blayne Curtis from Barclays. Please proceed.

[Blayne Curtis:]

It's Blayne Curtis. Thanks for taking my question. Maybe you could talk about the CapEx that you mentioned it was mostly FBAR and the increase. What was the catalyst behind that? Then Tony, what are you looking at for the full fiscal year?

[Tony Maslowski:]

Well, again, we didn't give a full fiscal year on CapEx. We are doing it quarter-by-quarter and the FBAR portion of it is probably a good third of what we are talking about in this $125 million. Just a reminder, the FBAR capacity teaser itself well within a year, so you know these are things we have line of sight that we have won, that we are excited about and we need the capacity desperately, because we can't build any more ahead than been we've been building ahead right now. For the full-year, again, we are not giving a full forecast yet and we will talk about it quarter-by-quarter until we get from stability both, in digesting LSI and in our outlook in FBAR.

[Blayne Curtis:]

Great. Then as a follow-up, you saw nice mix to FBAR driving your gross margin higher. That continues in the guide. How do you look at this level of gross margin and is this mix of FBAR sustainable when you look out at the ramps you have, the CapEx that would suggest that - just curious.

[Hock Tan:]

As I mentioned earlier on a trend basis of our wireless business, the mix of FBAR, relates FBAR in terms of discreet FBAR particularly in our business, particularly driven with China, but also more than China is that it has as is evident in our financials, been driving our overall gross margin to a level that we have never seen before, and because of it is on our wireless business as Tony indicated the gross margin from our wireless business product is pretty much running close to our corporate average at this point.

[Blayne Curtis:]

Okay.

[Operator:]

Okay…

[Ashish Saran:]

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

[Operator:]

Ladies and gentlemen, that concludes Avago's conference call for today. You may all now disconnect.