Q2 2020 Earnings Call
Good afternoon, My name is Sheryl and I will be your conference operator.
I would like to welcome everyone to decide links second quarter fiscal year 2020, <unk> earnings release Conference call.
All lines have been placed on to prevent any background noise. After the speaker's remarks, there will be a question answer session. If he would like to ask a question at this time press the star and the number one I know telephone keypad, if he would like to withdraw your question press the pound.
Please limit your questions to one to ensure that management has adequate time to speak to everyone. I would now like to turn the call too much.
Thank you Mr. Please you may begin your conference.
Thank you and good afternoon, everyone with me are Victor paying or CEO and Lorenzo floor as CFO will provide a financial and business review or the September quarter, and the business outlook for the December quarter in full year fiscal <unk> 20.
Let me remind everyone that during our conference call today, we may make projections or other forward looking statements regarding future events for the future financial performance of the company. We wish to caution you that such statements are predictions based on information currently available and the actual results may differ materially we refer you to the documents the company files with the FCC, including our 10.
In case 10-Q's, a naked these documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward looking statements. In addition to GAAP financial measures will be disclosing certain supplemental non-GAAP financial measures used by management to evaluate the Companys financial results we provided.
These measures to facilitate period to period compare ability for purposes of evaluating continuing business operations by excluding the effects of nonrecurring and unusual items such as the amortization of intangibles in certain onetime items related to acquisitions. We believe it sharing these non-GAAP measures will be held for analysts and investors in analyzing the companys ongoing core business.
A reconciliation of non-GAAP financial information to the closest GAAP measure is included in our earnings release and it's been posted on our Investor Relations website. This conference call is open to all and is being webcast. What it can be accessed from our Xilinx Investor Relations website, Let me now turn the call over to factor.
Thanks, Matt and good afternoon, everyone I'm pleased to report our results for the second quarter fiscal 2020, and provide an update on our expectations for the third quarter and the remainder of the year.
For Q2, we achieved sales of 833 million, which exceeded the midpoint of our revenue guidance. Despite the impact of continuing trade restrictions with wawa.
D.C.G. business bounced back as expected and had a very strong quarter with record revenue of 81 million, which represented 92% sequential and 24% year over year growth.
This result was primarily driven by growth in sales to storage customers with some additional hyperscale customer demand and limited growth from cryptocurrency customers.
In our core vertical market APC revenues were in line with expectations, well, Hey, I T revenues were better than extending his family.
W. W.
W.W.G. revenues were weaker than anticipated due to minimum sales permissible products to walk away.
Well, we expedited our application process. The department of Commerce in early Q2, we have not received any license approval to expand the products that permissible b cell to walk away.
During the first half of fiscal 2020, we recognize revenue of approximately 50 million from walk away with the vast majority of that coming about total coming in Q1 before restrictions were now.
Multiple research analysts had estimate our full year revenue exposure to walk away approximately 6% to 8% of our total revenue which is in the range of what we are anticipating at the beginning of the fiscal year.
Concessionaire, considering the continued trade restrictions with walk away any uncertainty presented to our business. We believe it is prudent to remove all remaining revenue expectations related to walk away from our fiscal 2020 outlook.
Well away isn't important customer and we hope that an agreement between the U.S. and Chinese governments is reached as soon as possible. So we can resume engaging in matter consistent with an important Christopher.
Now I'll turn some additional highlights for the second quarter.
Revenue from our advanced products grew 29% year over year and represented approximately 74% of total sales.
We saw a broad based demand for our 60 nanometer Ultrascale plus family, which continues to be a strong revenue driver for our business.
That's where I would think platform also continues to be strong driven by him.
The option of MPS will see in wireless applications as well as across our core vertical markets, particularly at our auto business.
Our our sympathies also deploy with multiple wireless customers and is being evaluated by many customers at other end market overall revenue for the sake family grew 61% year over year, which represented approximately 26% of total revenue in Q2.
Customer feedback or where are you targeting family has been remarkable and gives us significant confidence in our transformation for platform company.
We hosted over 1300 attendees at our Xilinx developer farm in San Jose earlier this month.
At this filled out event, we announced a breakthrough and a new unified open source software platform called <unk>.
We expect that overtime by this will drive significantly more xilinx platform engagement with software developers and data scientists.
We continue to make good progress building out our global ecosystem partners customers developers and application, which now has reached nearly 7000 developers over 750 eyes fees and includes more than 90 applications now in production.
We announced engagement with Microsoft Azure, which further demonstrates the breadth of Hyperscale hyperscale ever relationship which include Amazon Ali Baba Baidu Walkaway intensity.
Microsoft announced that it will be deploying I'll be O U 250 accelerated cards and its as your cloud.
Amazon announce it it has expanded its easy to F. One instances and additionally, they are adapting stage Baker neo to run on Xilinx technology.
Samsung shared a collaboration on leveraging personal eight cap to enable their next generation of Fiveg solutions. We also saw many key ecosystem partners demonstrate examples of FPL is being used to workload acceleration of the datacenter with increased presence of smart Ssds and smart mics.
Considering a challenging business environment I'm pleased with the progress we continue to make with our strategy and platform transformation.
I'll pause here at hand, the call over to Lorenzo to walk you through the financials for this fiscal second quarter.
Thank you Victor.
Before I go into the results I wanted to take this opportunity to thank all of you with whom I've had the pleasure working with over the last decade.
I sincerely wish all of you and of course, the great team here that I like all the best in the future.
Now onto the fiscal second quarter results.
Overall, our business performed well this quarter and we were able to exceed the midpoint of our revenue guidance.
Total revenue was in line with guidance at $833 million up 12% year over year, but down 2% sequentially.
Wired and wireless group grew revenue, 24% year over year, but declined 8% quarter over quarter.
Quarter to quarter wireless was flat as our diverse customer base showed strength, despite the wall way shipping restrictions.
Wired business declined significantly quarter to quarter due to walk away and softness from other customers.
No we had one communications customer that represented approximately 12% of the quarterly revenue in Q2.
Revenue from the data Center group increased 24% year over year, and 92% quarter over quarter.
We saw better than expected strength from one of our storage customers. We also had growth in multiple hyperscalers and broader account despite the wall way Ben.
Finally, we had approximately $5 million in revenue from solar learned this quarter.
Hey, I T grew 7% year over year, but declined 9% quarter on quarter.
Year over year, we saw significant strength and Andy and flatness in industrial.
T. M me did decline significantly this was as expected and is due to a specific customer program. We have highlighted previously.
Quarter on quarter, our declines primarily due to tell me and industrial partially offset by the strengthened Andy.
In a b C. We continue our strong long term growth trend with 9% growth year over year quarter to quarter, we grew 6%.
Both year over year and sequential growth were driven by double digit growth in our auto business.
Broadcast also grew borough grew both on a quarterly and year over year basis, although consumer was down sequentially and year over year.
Gross margin was lower than expectations with GAAP gross margin of 65% and non-GAAP gross margin of 66%.
Gross margin was impacted by product and customer mix in the <unk> tea and customer mix and DCG.
As a reminder, the difference between GAAP and non-GAAP is due to M&A related amortization.
GAAP opex at $337 million and non-GAAP Opex at $331 million were both below expectations non-GAAP operating expense, excluding solar flare was $321 million below our guide of 322 million.
Solar flare, which closed on July 31st contributed around $10 million to Opex in Q2.
GAAP operating income was $204 million or 24% operating margin.
non-GAAP operating income was $217 million or 26% operating margin.
Our GAAP and non-GAAP tax rates were approximately negative 5%, we had expected a low rate this quarter due to the tax accounting rules for share based compensation.
GAAP net income was $227 million and diluted earnings per share where 89 cents.
GAAP EPS grew 6% year over year.
non-GAAP net income was to it.
$240 million and non-GAAP diluted EPS.
Was 94 cents a share yielding an 8% growth over last year.
Diluted share count decreased to 255 million shares.
Next I'll cover a few key points on the balance sheet and cash flow.
Gross cash was $2.5 billion with 1.2 billion in long term debt.
Accounts receivable increased to $335 million ended at 37 days.
Still within our normal operating range.
Overall, we generated $224 million in operating cash flow.
During the quarter, we also repurchased approximately 1.5 million shares at an average price of $103 and 60 $603.60 per share and pay dividends of $93 million.
Finally, the board of directors of Xilinx have approved a new share repurchase authorization of $1 billion note that we aren't providing details on the timing an exact number of common shares to be purchased as that will depend upon prevailing market conditions and other factors.
Now, let me turn the call back to Victor for comments regarding the business outlook.
Sure. Thanks, Lorenzo and let me take this opportunity to express to you on behalf of the company and personally our appreciation and gratitude for all your contributions and accomplishments over the last decade.
Thank you so much whereas I think you Victor.
Now turning to our outlook for fiscal Q3, we expect revenue between 710, and 740 million, which is a decrease of 9% year on year and 13% sequentially.
This drop is due to several headwinds that coincide in the quarter that will explain.
That said, we're expecting Q3 to be a bottom with strong rebound in Q4.
DCG revenues expected to be slightly down in Q3 with more meaningful growth resuming in the fourth quarter.
We're seeing a pause and hyperscale customer orders in Q3, but expect growth to resume in Q4 as customer if you see transitions.
Two production.
We also expect continuing contributions from storage and networking customers, including those from solar player.
We expect crypto contribution to moderate over time from low teens of millions that single digit millions every move into Q4.
For WWJ, we expect revenues to be meaningfully lower in both the third and fourth quarters.
This is principally due to the removal of revenue expectations can walk away. In addition to the expected transition to a six for select based AD products previously discussed.
We expect our revenue from our wired business to recover somewhat in the fourth quarter wireless remains weak.
Lastly, we are seeing global trade uncertainty, causing some customers to exercise caution and ordering as well as some slower than expected customer ramps.
For a core vertical markets revenue is expected to be flat in the third quarter and up in the fourth quarter.
Q3 revenue will be lower than prior expectations, primarily due to macroeconomic related headwinds.
The increasing growth in Q4 is expected to come from a broad base of customers, including TM anyway.
Jason Defense automotive and industrial customers.
Fiscal Q3, non-GAAP gross margin is expected to be between 67% to 69%, which has a return to our historical range with a less wireless heavy product mix.
non-GAAP operating expense is expected to be approximately 33 million.
non-GAAP other income is expected to be approximately 1 billion.
Our tax rate is expected to be between 4% to 6%.
Now turning to F. why 20 outlook, we expect total revenue to be between 3.21 and 3.28 billion.
We expect the second half that's halfway 20 to be down relative the first half of the year with an expectation for strong sequential growth in fiscal Q4, following the bottom in fiscal Q3.
This represents approximately 6% year over year growth following a record definitely 19.
This performance is a testament to the durability of a model given that we haven't been able to ship too.
Fully to an important customers since mid Q1, and the current global trading uncertainty and macroeconomic headwinds.
We expect an F.I. 20, non-GAAP gross margin range between 66.5% to 68.5%.
non-GAAP operating expenses are expected to be approximately 1.3 billion for the year.
It is approximately 50 million lower than private prior expectations at analyst day reflects the active expense management that we put in place the second half of year, given the current business conditions.
Note that when normalizing for the incremental expense of recent acquisitions. Our operating expense is now expected to be approximately 80 million lower than our expectations at the start of the fiscal year.
non-GAAP . Other income is expect to be approximately 25 million our tax rate is expected to be between 4% to 5%.
Now I'll take a few minutes to provide some additional color on business units and core vertical markets as we head into the back half of the year.
D.C.G., we expect fight 20 revenues to grow approximately 30% relative to two point 19 revenue.
We have continued to build out our capabilities as we address a dynamic datacenter market that has continued to evolve as customers are valuing evaluating the use of EFI, Jason for compute network and storage acceleration.
Despite a slower start in the first half of the year and leveraging the impact of Walkaway trade restrictions, we are expecting stronger growth in the second half that builds on the progress we made with other hyperscale customers both in the U.S. and in China.
Now in compute we continued to expand our F.A.S. platform with all the key hyperscale customers.
We have built deep engagements with both enterprise and Hyperscalers to bring real time video streaming and database acceleration programs to production.
Now in some cases, the coffee vacation time needed to reach production deployments is taking longer than expected.
This has moderated the revenue growth rate, we had anticipated at the start of F. by 20.
These expanded timelines weren't in original model, but we have now factor that into our outlook going forward.
With the launch of Vitesse, we expect that over time customers will be able to develop and deploy our board's into production more rapidly.
In storage, we expect the computational storage and smart SSD market to continue to be a significant growth driver with key customers, including micron and Samsung.
At the Flash memory summit in August we showcased 14 separate partners with computational storage platforms, each using xilinx products.
In networking, we have meaningfully integrated our telephone team and we have strong engineered engagements with multiple hyperscalers. We believe we're well positioned to compete in the early stages of a growing spartech market.
Lastly on DCG, we expect revenue volatility to abate overtime as the diversity of our customer base increases and our revenue reaches a higher run rate.
Now for W.W.G., we expect revenue to be flat year over year, we'll have relatives fynineteen, including the impact of the why wait trade restrictions.
Without the Wawa impact our WWJ business has performed roughly in line with the expectations. We shared at analyst day in May.
Our first half wireless revenue benefited from early Fiveg deployments, mainly in South Korea, and China at a modest about another market.
Our second half is more challenged given the expected based and AC transition and unexpected program delays with some communication customers.
That said this basic transition will be largely completed in the fourth quarter.
Keep in mind that were just at the beginning of the global Fiveg rollout, which remains a significant opportunity for xilinx over the coming years, but we'll continue to be somewhat lumpy.
Going forward, given our market leadership position versus the competition and our capabilities and RF design, we are well positioned to grow our wireless business as intended density increases into radio head with new Fiveg deployments.
For a core vertical markets. We now expect fight 20 revenue to grow high single digits year over year.
Well revenue in the first half at that by 20 grew close to our expectations. We are seeing macroeconomic related headwinds impacting customer demand and both AI tea and APC markets in Q3.
Additionally, we are expecting revenue from a plan program ramp at a key emulation and prototype and customer, but that will extend over somewhat longer period beyond FY 2000 and into every 21.
However, we expect strong customer demand from a broad range of customers Kimi eyes, Sam Andy and auto coming in Q4.
We also expect modest growth in distribution channel demand in Q4 anticipation of some growth in our broad markets heading into endpoint 21.
So in closing we are executing the strategy, we outlined at our analyst day in May as we believe it's the right long term path xilinx, despite some near term headwinds.
Thanks remains well positioned to capitalize on the secular growth trends that will continue to driving our business for years to come.
We will continue to invest in growth aligned with our strategy, but we're actively moderating our R&D and overall operating expenses given the current business environment.
Well now open the call for questions.
The floor is now open for questions.
Next question, Please press star and the number one on your telephone keypad once again that the star.
Telephone keypad. Please limit your questions to one to ensure that management.
Your first question comes from Ambrish Srivastava CMO.
Please go ahead your line is open.
Hi, Thank you.
I just wanted to stick with the full year fiscal year guidance picture.
What gives you the confidence is pretty large Q over Q embedded in the in the 6% growth. So.
Tony recently.
Turns requirements a higher for the business so.
Sitting here how can you what gives you the confidence on that girls for the fourth quarter.
Yes, I think.
From the sequential perspective, right to Q3 as I said in my prepared remarks that had a coincidence of a bunch of headwinds occurring sort of at the same time right some of which as we generally said, we expect that some of which were not expected.
I would say one thing is just the contrast to that but we do have strong confidence in Q4, because it is broad across a number of things, including some strong wins that we had that are we're tracking very closely and clearly are going to move as expected right.
So you know I mean, obviously I.
I think it's really a contracts of the Q3 to the Q4, but we we feel we have good visibility into Q4.
Your next question comes from Tristan Gerra of Barclays. Please go ahead. Your line is open.
Hi.
What are you seeing in terms that said base station build activity in China.
Given the U.S. span is that he'd ongoing.
Oh, it has that changed significantly in the quarter and where do you see meaningfully vitrification.
With shipments in base station outside of fluctuate.
So you know from what we see that we do think that there are approximately on the path of the base stations deployment. They said they were initially going to do in China. Clearly you know the wall way has begun to impact, but they're not our only customer in China. So we we are still participate in.
Trying to deployment clearly, though away has a big impact.
I think there are some second order things too, but I think it's probably simple to stays at overall I think it sounds like the first points about on track, but you know and we are participating, but but not with one of the top players.
Great. Thank you.
Your next question from Chris Danely of Citigroup. Please go ahead. Your line is open.
Hey, guys just a question on taken while it is zero it seems like most of the other semi companies of.
Kind of restored.
Anywhere from two thirds to three fourths of their shipments to them can you just elaborate on why you're not doing that versus it seems like most of their economies have already started to re ship.
You know again, I can't really speak to how other customers.
Justify how they believe they can ship, we we obviously have.
And tracking this extremely carefully with our internal external counsel, we talked to department of Commerce, We applied as I said in prepared remarks, our licenses none of those have come through.
I guess, one thing I would say is that many people supply Wally I have a very diversified business.
Fiveg being explicitly cited as a security issue.
There could be differences there, but all I can say is that were falling all the rules and regulations, but were carefully monitoring this and we put in licenses and we just havent had anything approved yet.
Okay. Thanks for the color.
<unk>.
Your next question is from Chris So of Raymond James. Please go ahead. Your line is open.
Yes. Thank you just a little bit of color on what's going on with the DCG and I guess with the lowered guidance as compared to the analyst day, maybe you can break out what what what's changing thinking how much of that was attributed to while weeks I believe that was a customer.
DCG.
And how much of it is just customers.
But little bit slower to adopt solutions or perhaps this is indicative of the economic environment as well. Thanks.
So she did a fairly good job of hitting some of the points I mean, <unk> incomplete candor and as I said in the prepared remarks, we're seeing great traction.
You know the opportunity is still can you do really.
Great, but we have learned that in some cases getting to that production from proof of concepts, what I referred to as Pcs and also just qualification of some of them that is taking a bit longer than we expected and just you know we hadn't anticipated, but as we as I said, we have now fold that into our go forward. So that's one thing the other thing as you hit it exactly right.
While way did has an f. PJ as a service Fms program and we had to.
Stop that we're still working through through things around that but that had an impact and then I would say that there was this we express some some digestion. Some pullback having said all of that you know our second half is quite a bit stronger that our first and 30% growth as our Esmin. If you come in mid point to our guide is.
Strong guide.
You know, it's an emerging market, we've clearly feel good about this long term opportunity in being over $1 billion, but.
Sometimes in emerging market, it's a little challenging to get the timing exactly right, but yes. That's.
As of the points third degree you kind of hit.
Okay. Thank you.
Your next question comes from teaching of Evercore. Please go ahead. Your line is open.
Good afternoon. Thank you for taking the question.
One of the key questions out there is the ability for your your wireless business to grow into fiscal 21. So I guess now that you've pulled while we are 100%.
Out of the numbers and you're guiding W.G. flat what are the symptoms that we need to kind of a assume.
Into fiscal 21 to have the confidence on that growth. Both in terms of I guess ace replacement on the baseband processor as well as rising content.
Thanks.
Yes, CJ so.
Let me say that first of all just to reiterate like you said is that weve for the remainder Fytwenty I think we've de risked everything that we're aware of right.
I don't want to give us any specific for fight 21, but just a broader picture you know our view has not changed from the analyst days Fiveg is nothing going to be a bigger deployment overall, it's a bigger opportunity for us because we're not just doing the same old thing.
Innovating delivering more value to our customers, but things like RFS, we'll see but things like parcel.
So we still feel good about that obviously, the big variance from that day and analyst day has been the whole trade situation.
But I guess, what I would say is that we're still early early innings on deployments. So as those other earnings come through and as the some of things that trials and things way if RC go into production and we get wins and personal and so forth and even the ones. We haven't MPS will see we still think this a strong opportunity.
And of course will give you the f. by 21 in the usual timeframe.
Right after this fiscal year.
Great. Thank you.
Yeah.
Your next question comes from Ross Seymore Deutsche Bank. Please go ahead. Your line is open.
Hi, guys. Thanks for all the color on segments in the fiscal year and Lorenzo best of luck with your NEXMET. So Vicki I wanted to ask a question on the core vertical market side of things it doesn't get as much attention, but it's still sitting at some part of your business. Obviously overall I just wanted to see what gives you the confidence in the flat in the fiscal third quarter outlook sequentially and then up in for.
Fiscal fourth quarter, and we can contrast set against T. I last night too I think surprise the vast majority of us with the weakness that day alluded to at least in the December quarter. So what gives you the confidence in being so much better than that broad base guy or broad based peers in general for both of those quarters.
Yeah, I guess, you know again, I I really can't speak for others I guess, what I would say said, we do we do see softness and macroeconomic related and some of that is probably also somewhat related to the whole trades situation. We kinda Express I think we specs even in Q1 that we have Oh, we call that I think I referred to it as a product transition.
The key team he customer.
Give me a little more color that that ramp is happening, but it's going to happen a little bit more spread out. So that's an example in puckett and the English and prototyping of one and since.
Our channel definitely has softened, especially in Europe .
You know also in Asia.
And auto.
I'll pause, but on the other hand.
Let's take auto for instance, I Ada Es is where we play as you know.
And even though near term auto units are down what we're hearing from a different different signals that in 2000 calendar 2020, right that is going to strengthen and so we see that and we still have already.
Shipping units that will just continued rapid assay as well as being designed into fully autonomous driving so I guess, what it is is the confidence that we actually see.
The dip in Q3, but we are seeing from multiple markets. So it's kind of broad if I won't say that it's just one market. It is broad that we're seeing it coming back in Q4.
And so and a few key things, where we were very confident just because of we know those programs very very well.
Thank you.
Welcome.
Your next question comes from Matt Ramsey of Cowen. Please go ahead. Your line is open.
Thank you very much good afternoon.
I think there I just wanted to ask a couple of questions on on the on the guide for the December quarter, just a couple of moving parts. I know you guys I think called out in the commentary.
$50 million to walk away in the first half.
I would assume that most of that was during the first quarter. So if we get understand a little bit about the sequential difference between Q2 in the Q3 guide there and similar for the solar flares revenue coming into the model I guess this will be a full quarter in December just trying to understand those moving parts. Thanks.
Yes.
I know this is a pretty pack.
Prepared statements because we didn't want to give a lot of color.
So just to reiterate yes, you're you're exactly spot on would walk away the 50 million was.
Predominantly in Q1 prior to the restrictions going in place.
Last quarter, we had determined that even with the restrictions. There's some older products that we could legally continue to ship. It turns out that revenue was you know very essentially negligible, which is why after one quarter of seeing that not seeing any additional revenue license approvals. We have decided that it's just proven to take.
All the risk out there remains a fiscal year.
With regard to solar flares that closed that only close in July so you're right. It's only the first full.
Quarter of revenue in the December quarter, and it's what we expect Okay 10, 10 on the order of.
10, Millionish you know, but you know we did the acquisition from a strategic perspective of you know they really bring the software and driver expertise and overall system expertise complementing our strength in silicon in the hardware and so we're feeling very good about the integration engagements, we haven't found that the revenue.
This is also what we expect but I think were really more important the strategic thesis now that they're part of US we feel even better about.
Yes, Matt it's a I'd just point out one thing is we plan to consolidate obviously those results and not break those out in future calls, but that's just gives you a sense what factors comments around what we expect run rate going forward.
Your next question comes from the line of David Wong.
Please go ahead your line is open.
Thanks, very much if it can you clarify what do you have applied for like licenses for just cover all of the revenues that you previously shipping to fly away or if not approximately what percent of proud revenues to fly away to your current license applications cut though.
Yes, [laughter], it's actually very detailed so I wouldn't want to give you you know.
I don't think it's probably try to break down exactly I would say over the if what we had applied for and early July all got approved it may be meaningful.
You know I when I went to say the entirety, but it would be meaningful and clearly that happened we would continue to try and seek.
But unfortunately like nothing has been approved and as I said, the small set of mostly older products. It hasn't Matt to any kind of meaningful revenue. So we've just decided to risk.
Great. Thanks.
Welcome.
Your next question comes from more of Morgan Stanley . Please go ahead. Your line is open.
Great. Thank you you said that the base band to ASE Inc. transitional impact is kind of.
Winds down by the fourth quarter of your fiscal year is that you know can you give us a sense for the wireless business. So that's that remains you know how much face Spanish still in there from from other customers any transitional risk and you know and just a.
I assume that the radio deployments are sort of start starting to ramp up as we move beyond that is at a fairly to look at it.
Yeah, I mean, yeah, we still have meaningful wireless business, but yet the the based Ben.
Hey, six which we had said even on analyst day that we expect that was going to happen that has happened. We do still have some position, but I don't think it's very significant at this point and they said.
I think we've always said that even you know a super placement as you know Joe is not not new to US. We've always said that our opportunities is bigger in the radio but.
Even in the future that we expect some degree of a base band revenue, but we had an outsized amount.
You know earlier and I think we're up front about that but again I would sort of say that.
You know we it is significant that it would be radio, but we still do based connectivity like again, that's historically been the thing where we were in the heart of the overall base back in the starting as early deployment.
Yeah.
Okay got it thank you ranch.
Okay.
Your next question is from William Stein of Suntrust. Please go ahead. Your line is open.
Great. Thanks for taking my question.
If we get some resolution to the terrorists situation, but we still have a ban.
On flaw way going forward.
Victor I Wonder if you could.
Comment on expectation for relative to the longer term growth you outlined at the analyst day, not what's it going to do next year, but you talked about these Sam gross of I think 35% in DCG and I think 16% in wired and wireless are those still realistic as share would shift.
Other customers of yours or do you think it would call those gross estimates in question.
Well first of all regarding tariffs you know every time those things have occurred we've analyzed so things in the terrorist don't directly impact us anyway, there could be like secondary tertiary thinks of just being a damper on macroeconomics.
But it doesn't impact us in our direct way. So if there was some relief there but.
But the the restrictions on walkaway stayed intact.
For a prolonged period of time that that you know that would be the bigger thing been tariffs by far.
Which is why I think I've been consistent in saying that you know, we really hope that.
The the government's can come to agreement and resolve the structural issues. So we can continue to gauge with with Wawa now that said, we're still just again I want to say that we're still participating in the China Fiveg, but clearly there are a very big player there and I don't want to speculate on what happens in a long term right. It's just.
It's just too difficult and we certainly look at different scenarios internally. So we're prepared for the things but.
It's really clearly premature to speculate beyond halfway 20.
Thank you.
Your next question comes from.
Needham and company. Please go ahead your line is open.
You fix or it's just wondering if you could give us a little bit more color on on where you saw the weakness in the wired business and what drives the recoveries we get into the fourth quarter is the weakness, mostly the wall way effect or is it broader than than just that one customer.
Well, it's that but that was definitely an impact because you know people tend to think of why we just purely wise, but actually they play in both places and so they're they're pretty substantial there, but it's not just have one customer I think theres been some.
Slowness in access in cable I think that.
Now there is no particular situation where things people. Initially started to deploy then they took a more cautious approach because of course with Fiveg. It's both wireless and then ultimately the wired network has to be upgraded as Paul and I think with all this in turn uncertainty there has.
And as I said in my prepared remarks, some caution around that.
So what ways definitely big deal, but it is not the only thing.
Next question comes from Blayne Curtis of Barclays. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my question I guess, I'm, sorry, going a little bit with the March implied March guidance. Obviously, you have you WGS down is suggests substantial growth.
In.
In the two other segments to to get anywhere near this the sequential any of the record revenue across the board follow segment. So I think of doing the math right I guess Im just trying to understand in this environment why you'd be doing record revenue with this substantial double digit increases into March well data center as they said.
We hit the midpoint of Guy will be about a 30%.
Sure on your increase and obviously the first half as a little softer. So so DCG is definitely a robustly growing.
In the second half right I mean, no Q2 was a record so Q3's coming off of that a little bit but that was a record. But then we said that we presume sequential strength in DC in Q4. So overall cheap DCG is growing very strong in yeah, it'll be a record.
And some of the other markets I think you know.
We are I think we had said that team and he had.
Earlier, because of some product transitions that that was a slowing down.
And also earlier semi is what a week. So in terms of semiconductor test. So it was a variety of different things, but we had already expected that in the second half things would strengthen.
It's still going to strengthen maybe a little more moderated than we had expected back in the spring for sure because of some of the macro some of the other issues, but thats still happening and a you know as he said you know auto.
People are starting to see Ada Es is still growing auto is still going pick up it'll be a double digit.
So it's actually in Q4 kinda abroad Q3 is just it really is kind of a perfect storm of a bunch of things some expected some unexpected happening all at once you have this big contrast, there.
But yeah, that's that's how we see it right now.
Thank you.
Your next question comes from.
Bank of America. Please go ahead your line is open.
Thanks for taking my question and thank you and good luck to Lorenzo on his next adventure.
Thank you.
Good.
[laughter], maybe because you could help us.
Differentiate your position in the they deal side I think you mentioned that you expect to have.
Business and the radio side, what is unique to and SPG video that cannot be done.
Denise I assume that some of your customers already use some in six at any aside in China and other places. So why what gives you the confidence that that cannot be easily could they decide at some point.
Well you know again first though what I would say is if you look at our MPS, we'll see an absolutely our RFS, we'll see those aren't just pure SP Jays right. So I will I really want to go back to those have multi core SLC in them you have a lot a number of other features that are.
Hardened and yet still flexible and programmable and of course, the RFS. He has integrated RF quality 80 season decks.
There are no products in the marketplace. Even today. After we've released this for quite some time out there. So what we could do is we can be used in different geographies support different standards for the same piece of silicon.
Obviously, we get people to market very rapidly and.
You know, there's just optimizations, particularly and that the trend to old, Brad and where things as virtualization.
No. That's that's a disruption at an opportunity and we definitely see that in the long range. That's big thing then I would say is as it may be we announced a tab.
A year ago now we've delivered silicon and we're shipping that we have development boards that.
Way not enough PJ spread that's a whole new class of product.
And absolutely that's what I've said that we feel like we have an even stronger position versus fixed architectures.
And.
You heard about equity ETF and in my prepared comments that some was on the stage talking about how we're collaborating looking at how a cap interceptor fiveg.
Roadmap so.
Okay.
You're welcome.
Your next question comes from Christopher Rolland Susquehanna. Your line is open.
[noise] he Victor so for W.W.G., where do you see your biggest opportunity in the next 18 months coming from is it is it really the European guys. At this point and then I think you also mentioned some [noise] customer delays, so any thoughts on timing of resolution and re launching those products. Thanks.
Yes, gosh it out I mean, I [laughter] 18 months is pretty pretty far out I sort of feel that that's not something we can give guidance on at this point in time you know, we clearly have you know deavers everything that we've seen for the remainder of this fiscal year, where.
In the early stage the deployment, so I would generalize where your comment to say clearly you know there's going be several generations as both geographical deployments.
Right now, it's you know South Korea, and China little bit in.
Japan, but not very meaningful so clearly you know there will be other geographies or deploy and they'll be multiple generations of fiveg equipment. So we're engaged with all the Oems worldwide right not just.
You know Samsung and Chinese Oems, but also the European So we're engaged at all of them and so yes. As these things deploy we still feel again from a strategic perspective that opportunities so great.
Obviously, no trade, we hope will have to see.
Your next question comes from Ambrish Srivastava.
Your line is open.
Thank you.
Q for a full likely that Ken.
Before I forget I'd be remiss, if I didn't say, thank you to Lorenzo and wish you all the best as the pleasure working with you. Thanks for all the transparency and help ahead as this year pledged settings.
I had a question I want to come back to the data Center say Victor and maybe this would be a good times for us truck from our side to get a little bit recalibrated bit how you think the longer term opportunities are.
So compute network Construal Ridge, and if you look out longer term, which helps to see are going to be the big drivers to get to the long term targets you have given and I had a quick one on data centers I think I heard you mentioned that one of the reasons gross margins because it was because of.
Data center mixed the here just correct.
Does that imply that data center will be dilutive to gross margin. Thank you.
Uh huh, Okay. So let me I.
When you first thought about first part I'll take the first part and then Lorenzo will.
Well, we'll work at that.
The remainder of this call here.
Yes, it looks at the first part I think.
All three sub segments are going see meaningful drivers I mean, there there are a there are obviously different in nature I mean overall in the very long run compute is still the largest.
Segment.
It's also in some respects it is a long game because that's the place where we really you know we announced Vitesse, we announce open source, where they're doing a lot of things to sort of give.
Users that traditionally have not use our platform feel comfortable and work in their own environment like you know.
It should be artificial intelligence machine learning frameworks like Tensorflow and so forth right. So that in the long run is the biggest opportunity, but it's also going to take time, because that's where ecosystem and all those tools and so and so forth is can play a big role.
But both smart SSD and smart Nick whereas they may not be so large in along there also still quite meaningful and there. We don't have those issues right. We're engaged with multiple hyperscalers.
We're also has some OEM engagements and we have we've been setting up our channels by bars in size and scale for and so we see some really good opportunities there.
So you know again it depends on your timeframe, which is going to be big contributors, we see contributions from all of them quite frankly.
And yeah, we're really excited but you know info candor, we've learned that takes some time to get these peos. He's done it takes some time to get all the requirements on full qualification, but now that we have those learnings.
We're still going we're going to go after robustly.
And so on the on the margin piece that I think I'll start with the end of your question, which is do expect growth in data center over long term Devon negative impact on a gross margin I think the dynamic with data center over the long term.
It will be similar to some of our other larger segments, where we have large customers was relatively lower margins as would be expected and broad set of customers with relatively higher margins.
And the overall impact on the mix as we expected today is relatively neutral in close their corporate average in the short term the exact office at things happening, where we had customer concentration and which is actually a good thing in this case because it showed very strong customer growth and it wasn't that if the net result.
Was significantly off of a corporate gross margin was just said it was lower than our expectations. So that's why it.
Pulled us down versus our forecast.
Maybe because the storage being a bigger driver Beth.
Led to lower gross margin.
That's a bit that's a good hypothesis.
Thank you operator, I think it's not a little bit more.
There are no further questions at this time I'd like to turn the call Tomorrow player for closing remarks.
Great well, thanks, everyone for joining us today, we'll have a playback of this call beginning at five PM Pacific time, eight P.M. eastern today for a copy of earnings release. Please visit our Investor Relations website. Our next earnings release date for the third quarter fiscal year 2020 will be Tuesday January 28. After market close. Please note that we will be hosting a fireside chat at the Curtis.
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This concludes today's conference call you may now disconnect.
Yeah.