Q3 2019 Earnings Call
At this time.
For opening remarks, and introductions I would like to turn the call over to Beatrice Rosado director of Investor Relations at Broadcom incorporated. Please go ahead ma'am.
Thank you operator, and good afternoon, everyone.
Joining me today are hock, Tan, President and CEO and Tom crowd.
Chief Financial Officer Broadcom.
After the market closed today Broadcom distributed a press release and financial tables, describing our financial performance.
For the third quarter of fiscal year 2019, if you did not receive a copy you may obtain information from the investors section.
Broadcoms website at Dotcom dotcom.
This conference call is being webcast live.
And a recording will be available via telephone playback for one week.
You will also be archived any investor section of our website.
At Broadcom dotcom.
During the prepared comments section of this call Hock and Tom will be providing details of our third quarter fiscal year 2019 result.
Guidance for fiscal year, 2019, and commentary regarding the business environment, We will take questions. After the end of our prepared comments.
Please refer to our press release today and our recent filings with the FCC 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.
In addition to U.S. GAAP reporting Broadcom reports certain financial measures on a non-GAAP basis.
A reconciliation between GAAP and non-GAAP measures is included in the tables attached to todays press release.
Comments made during today's call will primarily refer to our non-GAAP financial results.
I'll now turn the call over to Hawk.
Thank you Debbie good afternoon, everyone and thank you for joining us today.
Looking at the third quarter consolidated net revenue was.
$5.5 billion.
A 9% increase from a year ago.
Semiconductor solution revenue was 4.4 billion down five, but saying, yeah, one year and up 6% quarter over quarter.
Net working continues to perform well driven by strong demand for merchants switching and routing platforms.
And as we also expect that shipments of custom silicon solutions in AI Simonton, Inc. and video transcoding to cloud data centers were strong.
Wireless you self golfing the beginning over the typical seasonal uptake and the initial and May need show positive effects of increased content.
These tailwinds were partially offset by weaker demand in storage and broadband.
Revenue for infrastructure software was 1.1 billion.
Let's see a business, it's running above our expectation vending screen benefiting from suffering enterprise demand for mainframe and distribute that software.
However.
Then switching demand has a pause as a partner OEM supply chain compressed in these uncertain conditions.
No let me address the current environment and outlook enterprise and mainframe software customer demand continues to remain stable, particularly North America and Western Europe .
San switching demand will likely continue to be done in another quarter for well inventory in the OEM channels are being worked on.
As it relates to semiconductors, although the U.S. China trade conflict continues we have not seen further deterioration in our business both specific to China as well as globally.
Accordingly, we continue to expect to achieve over $22.5 billion, our revenue in fiscal 2019, including.
17, then have bylin from semiconductor solutions, and 5 billion from infrastructure software.
Looking into next year.
Infrastructure software is stable as renewals among our core customer base continues to be very solid.
However, visibility continues to be very limited on the semiconductor side.
So we are managing the business with an expectation that we will continue to operate in a very low growth I'm certain macro environment for the foreseeable future.
Fortunately the fundamentals of our semiconductor business remain so strong.
As you know our business, it's all about connectivity.
From CP use the memory in data centers call to edge networks Central office to client devices.
You distribute that systems.
And yet we continue to benefit from the underlying trend may nine in the IP world.
And in safety or bone need for increasing then leave to connecting data centers.
Amongst reaching has gone from 3.2 Terabit.
But second just three years ago to 12.8 Terabit per second today in cloud computing.
As the limits the mall slot constrained CPQ and GPU performance.
The pipe linking computing cycles to the network and storage expense PCR Expressjet and fall today at 16 Gi replaces gentry.
With the likes of next generation rolled in CPQ legacy.
Network interface controllers mix as they see it becoming really intelligent what we now call smart mics and take on the Terrace office salary thing workloads offload from non optimized CPQ within cloud computing.
Even mean Sam.
That said historically written that was fiber channel progress this is Ben Weve.
At 32 gigabit per second generation six today, two generations and generations seven at 64 gigabit per second next year.
To reap the full benefit of all flash arrays.
In enterprise storage.
And to truly connect computer storage, replacing direct attach copper.
Fiber optics roaming and hundred gig Hundredg channels are moving to 400 G. As high put clone, our hypercloud customers scale out data centers Weve Pall mall three to date.
Turning to telco networks called thing has gone from 1.6 Terabits per second a few years ago to 9.6 Terabits as represented by our Jericho to relative today in broadband.
Cable modem with DOCSIS 3.0 at one gigabit today, we'll move to DOCSIS 4.0 at 10 gigabit over the next few years as cable operators need to compete against Fiveg networks.
So it is with DSS digital subscriber line, where EMEA 500.
Megabit per second of data flow today, you will ups sheets to over.
One gigabit per second in G., Dawn fast, which may seem inadequate. So we need jeep on at 2.5 Gigawatts, beating.
And even today with points today to launch into mass markets Weve 10 G export.
Of course wireless connectivity to wed seen the most headlines and mean enterprise access gateways.
The protocol has moved from Italy to Dot 11 AC.
To the new web DMEA enable April two dot 11 a. eggs.
Otherwise call White five six.
And we'll add the cost of satellite communication.
Migrating from Fourg to make generation Fiveg in radio access networks and smartphones.
We are.
Enabling these fundamental trends in the marketplace. This gives us confidence that we will continue to sustain and grow our semiconductor business over the long term.
Moving on let's talk about software.
Let's see.
As we mentioned.
Our multi port CA is to focus on the 500 largest enterprises in the world. The biggest uses all our infrastructure software based on experience experience true.
Fiscal third quarter 2019, we expect our core customer business.
That's up for renewal in fiscal year 2019 to grow over 20%.
Meanwhile, the attrition rate of business from the long tail of customers customers behind this call group is anticipated to be.
Over 10% for fiscal 2019.
We have another two plus years to turn over the sea customer contract, but based on the trends of renewable growth from these core customer base.
In excess of the tradition of non call business over the last nine months.
We're confident that we can meet if not exceed the long term revenue and profitability targets that we laid out for sea to you last year, when we acquired that business.
Oh integration activity is we'll actually complete with operating expenses to support CE approaching target level.
Finally, let me take a few more minutes to talk about playing acquisition of the Symantec enterprise business and announced in August acquiring cement think furthers our efforts to build on the world's leading infrastructure technology platforms and so now is the logical next step in Broadcoms infrastructure software strategy and as 160 billion cyber security market to sell to the Broadcoms addressable Tam.
We will gain a portfolio of mission critical security security solutions that are deeply embedded among our core customers.
There wont be meaningful cross selling opportunities with brocade and CA solutions and we believe.
This acquisition will enable brought on to gain a larger share of the wallet of this call customers and we expect this transaction to add more than 2 billion of sustainable.
Run rate revenue, we've been leading franchises in cyber security.
And we also expect to achieve.
The next phase of a billion dollars in run rate cost synergies within 12 months post schools and importantly.
This transaction gives us the opportunity to achieve finance, our ongoing financial objective of double digit digit cash on cash returns.
The integration planning process is well underway and as you likely saw we cleared HSR last week.
We're rain remain on track to close the transaction in the first quarter fiscal 2020 subject to antitrust approvals in the European Union, and Japan, as well as of course customary closing conditions.
To sum ABR on an increasingly diversified portfolio of leadership technology franchises has allowed us.
Today to sustain revenue.
An increase.
Cash flows even in this challenging market environment.
Now, let me turn this call over to Tom.
Thank you hock.
Consolidated net revenue for the third quarter was 5.5 billion, a 9% increase from a year ago.
So let me get your solutions segment revenue was $4.4 billion and represented 79% of our total revenue this quarter.
This was down 5% year on year on a comparable basis.
Our infrastructure software segment revenue was 1.1 billion and represented 21% of revenue.
Free cash flow was 42% of revenue or $2.31 billion and grew 8% year over year.
Let me now provide additional detail on our financial performance operating expenses were $1.1 billion driven by further reductions from CA related.
Activities.
Operating income from continuing operations was $2.91 billion and represented 52.8% of net revenue.
Adjusted EBITDA was $3.06 billion represented 55.6% of net revenue this figure excludes a $141 million of depreciation.
In terms of working capital a payables increase of $237 million was somewhat offset by receivables increase of 55 million and an inventory increase of 57 million from the prior quarter. I would also note that we accrued 110 million of restructuring and integration expenses and made a $164 million of cash restructuring and integration payments in the quarter.
Finally, we spent $112 million on capital expenditures.
In the third quarter, we returned $2 billion to stockholders consisting of 1.1 billion.
In the form of cash dividends and $977 million for the repurchase and elimination of $3.5 million the biggio shares.
We ended the quarter with 5.5 billion of cash.
37.6 billion of total debt 398 million outstanding shares and had 442 million fully diluted shares for the quarter.
Turning to our fiscal year 2019 guidance as Hock discussed we are maintaining our full year revenue guidance of $22.5 billion, including approximately $17.5 billion from semiconductor solutions and approximately 5 billion from infrastructure software IP licensing is not expected to generate a material amount of revenue.
On a non-GAAP basis operating margins are expected to be approximately 52.5%.
Net interest expense and other is expected to be approximately $1.3 billion.
The tax rate is forecasted to be approximately 11%.
Depreciation is expected to be approximately $600 million.
Capex is expected to be approximately $500 million.
As a result free cash flow is expected to be approximately $9 billion.
Which does take into account projected restructuring and integration charges of approximately $1.1 billion note as of the end of the third quarter of 6.9 billion of free cash flow has been generated that includes $969 million of restructuring and integration charges.
Stock based compensation expense is expected to be approximately 2.2 billion.
And finally, we expect average diluted share count to be $440 million.
For Q4, and this excludes any impact from share buybacks and eliminations.
Now on to capital allocation.
As many of you know Broadcom has a business model that generates a very healthy amount of free cash flow across an increasingly diverse and stable set of mainly infrastructure technology franchises.
Over the last few years, we have worked to create a more transparent and balanced capital allocation policy.
First and foremost we've committed to return half of our free cash flow to shareholders each year in the form of cash dividends.
In essence this allows the agios stockholder decide how best to reinvest.
50% of the free cash flow that we generate.
In return, we have an effect as the Broadcom stockholder put trust and management to optimally reinvest the remainder of the free cash flow after the dividend is distributed.
Fundamentally we think that we have a unique M&A strategy allows us to consistently reinvest these excess cash flows that will drive returns well above our free cash flow yields over the past few years, we've developed a roadmap primarily around infrastructure software starting with brocade and then with CA.
And now Symantec that will allow us to continue to execute on the strategy for many years to come.
So going forward our plan is to use this excess cash for acquisitions and or to pay down debt.
That we bother to make these acquisitions.
Now over the last year. So we have bought back a lot of stock we had an opportunity to buy stock at depressed prices following the CA announcement.
We also wanted to limit the dilution from the onetime multiyear grant we did earlier this year.
In all we have invested $13.1 billion to repurchase or eliminate a total of 54.5 million shares.
At an average price of approximately $240 per share.
Over the last 16 months through the end of our fiscal Q3 19.
So in summary, we think this decision made a lot of sense.
That being said, maintaining our core a capital allocation strategy of dividends and M&A, while pursuing meaningful buybacks in parallel has caused us to increase our leverage and leverage multiples pretty substantially, especially in light of the weak macro environment.
We are seeing today, we are conscious of the risks that are more levered balance sheet creates and are very focused on managing those risks.
As a result, we have started to transition our focus to deleveraging the balance sheet.
Following the recent Symantec acquisition.
Announcement.
That concludes my prepared remarks during the Q and a portion of todays call. Please limit yourselves to one question. Each so we can accommodate as many analysts as possible.
Operator, please open up the call for questions.
Yes, Sir as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please stand by while we compiled acuity roster.
Our first question comes from the line of Harlem Sir.
Of JP Morgan Your line is open.
Good afternoon. Thanks for taking my question did you see the business bottoming here in the second half of this year Hawk, we continue to hear that Tom obviously joke. What you are seeing strong demand for the 204 hundred gig cloud networking adoption also your revenue and design win pipeline on compute networking and security off load acceleration, Essex is pretty strong with guys like.
Google Facebook, Microsoft et cetera last earnings call you had anticipated full year double digits growth in your data center networking compute offload businesses question is are you still tracking to that end. Despite the muted growth outlook for the overall business looking into next year.
Given your design win pipeline do you expect continued double digit growth in the data center networking and compute offload looking into next year as well.
I guess the bottom line answer is our outlook.
Which we share the view materially on has not changed materially at all yes, we do see.
Continuing improved ram or ship deliveries into hypercloud gains on those various net working as phone is computing computing all slowed the silicon and.
That hasn't changed and that has in fact given.
Quite a lot of vascepa to otherwise been a family is uncertain and difficult markets at this point.
Thank you.
Thank you. Our next question comes from Vivek ARIA of Bank of America. Your line is open.
Thanks for taking my question Hock, you started mentioning something about next year and I just wanted to flesh that out.
I know you are not giving next year's guidance per se, but.
On the positive side Youre, saying business is bottoming, you outlined a number of product cycles or so.
But then you sound a little bit cautious on just the environment.
So I was curious how youre thinking conceptually about next year.
Pluses and minuses and then as part of that if you could also.
Give us some indication of how wildly figures into that both kind of in the near term.
Q4, and next year. Thank you.
Why don't you answer my question for me in many ways, which is Europe .
You, implying and we just correct that.
Your West China trade dispute is turning into an extended that fair with lots of twists and turns and uncertainty.
And we are assuming.
Things on conditions environment is not going to change from what we've seen no and if we make that assumption next year, you'd probably see a very uncertain 2020, but as we see.
As we sit here right now and we probably have another three at least another three months the fall, we'd probably give you a much more clear 2020.
Guidance, but as we sit here right now over the rest of this.
Calendar year, if not fiscal year on what we're seeing is.
You're right. We appeared it appears we have hit bottom and listen the semiconductor.
As it relates to the semiconductor solutions side, we have hit bottom and we are tying off.
Looking ahead and seeing that we're staying right here more or less we have little seasonality that pops up every now and then as we are seeing to some extend probably in the next few months as right as we see it ramp up of our North American large north American OEM customer enhance as my other than that broadly what kind of staying at the bottom.
Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is open.
Yes, good afternoon, guys well, thanks, let me ask question.
I realize that you're trying to stay away from giving too specific guidance by business line, but I'm just kind of curious relative to your comments on the wireless side of the semi business. How should we think about this build cycle for you this year.
Prior relative to past years. When there is a view that you are gaining content on the RF side, you've got Wi Fi six your largest customers also not staggering their phone launch this year, they've got some tariff issues that they might want to pull in some builds so I just as you look at the results for the July quarter were they up sequentially kind of in that mid teens level. How do we think about October and how long is this build and what's the what's the seasonal look into January if you give us any sort of color that'd be helpful.
Well, it's only thing this kind of even.
In this kind of program, we have limited visibility as provided by our customers how far we can go and.
To be specific.
What youre asking in wireless.
It's we we only done in previous years, we see beginning of uptick seasonality in Q3, which is the July quarter, and we'll see malvinas in our last quarter of the fiscal year, which is October quarter, and we fully expect to see that and frankly, that's as far as we see in this typical game outlook.
Because it obviously depends on the end of the day on refit.
Although our OEM customers, but we do see that this year, we do not.
See any major departure from then.
And.
You know year on year.
Things are quite.
Predictable in this respect.
But having said that.
As you know we are company much more than just wireless today.
So even in our semiconductor solutions, we have a broad areas, where we participate in and multiple puts and takes and site.
Kind of indicate that in terms of what happened in Q3.
That.
While we see.
Continuing strength in networking computing all flown into data centers, we do see.
Some.
Witnesses Ames borrower in storage and broadband and it will probably things by probably a little better next quarter falls for wireless, but maybe there is some of the areas of.
Mitigate that will go the opposite way, but broadly given our launch portfolio and broad diversity.
And the fact that we are very fundamentally stronger in each of those areas. We are in.
Which were thing what we're seeing and what we're saying is that in the semiconductor macro market.
Which is where we have pretty well represent that on average.
We are not as strong as saying it was same time last year and if you look at our data so far this so year to date.
We're down probably on average about.
8%.
Year on year.
And our debt or about switches in my view, we think one the market what we think the market is.
On a broad basis, excluding memory of course, and the and the fact that we was year on year down more in Q1 Q2, this fiscal year and probably the last down.
In the back half of fiscal 19 should not be taken assets.
As the fact that the bottom end as possibly a recovery. That's why we made the statement. We know we are pretty confident were at the bottom.
The question is.
There is no no not much clarity of visibility yet of certainty that any sharp recovery is around the corner.
Thank you. Our next question comes from Chris Danely of Citigroup. Your line is open.
Hey, Thanks, guys, Hey, how can you talk about the expected timing of the Fiveg ramp, especially for your a sick and SSD business. When you think that starts as it's been pushed out at all is it about as good as you thought it would be three or six months ago or has the forecast changed and how much.
Oh.
Wow, that's a tough question in terms of the guns them well to be honest with you.
Well you know we do not participate then munch on Fiveg Ram on radio access.
In a broad perspective.
No we touch we touch at the handset level, we touch someone at the radio access, but we believe we probably punch moles at the back haul networks.
And I think each of them Rems, one ramn fiveg at different times so.
Our butts off and our perception and I want to ability to to see what how big that remedies and then for the good point in time. It's also dependent on the fact that the fact that.
Different operators in different countries were probably one to ramp at different points in time different parts of the network, where there is a front line ran all the back haul and my guess is probably you won't see much of it until.
Later this year.
Early part of next year. It was slides we are concerned which is more of the backhaul way it affects our numbers.
Thank you. Our next question comes from Stacy Rasgon of Bernstein Research. Your line is open.
Hi, guys. Thanks for taking my question.
I wanted to know you've had a growth target for sami's of mid single digits and obviously, we're in an uncertain environment, but you also talked a lot about I guess company specific.
Drivers and product cycles that then fundamentally can still drive so I guess are those fundamental drivers enough to keep the semi business growing at least you know somewhere in the ballpark.
Of that sort of mid single digit long term guidance, even in an environment that is uncertain and I guess, maybe even put it put a different way could you maybe talk about and so specifically some of the product cycles in trajectory that it may be unique to broadcom that you see kind of ramping next year and maybe compare with what we had this year.
Across your different businesses.
Well, yeah, when I'm when I went on this a quantification of the various trends driving the fundamentals of our.
Product lines, and our semiconductor business I really wasn't thinking necessarily.
And if I give the wrong impression I do apologize one year.
This is an ongoing trend and then I was using examples because these are examples ongoing that we see today reason path and going forward in the future, but what I do see is that yeah. Dane all of these areas we participated from beat.
ER as basic as.
Switching networking in Datacenters routing in call and Metro networks all.
And in cable in cable and broadband.
Well, we all on one thing is clear.
Which is the nice thing we havent, we see in the technology, especially to semiconductor technology base a constant.
Evolution.
All the problem of the products, we do that's constant demand.
For improved performance always had pulled it increase bandwidth.
In a sense, we do connectivity and bill and.
Depending on the end and the particular applications. Some may span a year's summit spent three years to make a transition, but they do happen and it continues to happen and that's what keeps the main sustain for our technology fall product and that's what underpins as reported a long term growth forecast.
In semiconductors falls off mid single digits, and I don't mean a year.
I don't mean necessary, even two or three years I mean over the next five years 10 years because thing at Valliant nine in 2018 fiscal.
Our semiconductor business organically piccolo any acquisitions grew.
12%.
On you from 17 and in 17, we grew enough over 16.
About 10% organically.
So you know.
I frankly, do not expect that high end rate took a double digit rate in this business, where we have pretty well represented across a broad area to be able to continue at that rate of growth.
And so we see in 19, a decline from me from a strong 18 as I say are properly.
Mid to high single digits.
Not unexpected.
Ana, but taken over period or multiple years. We believe we have we will achieve that mid single digit compounded annual growth rate by won't do that every year.
Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is open.
Thanks, Tom I had one for you on the capital return side of things in the past that 50% dividend policy you have it's very clear, but the free cash flow that generates that at times has been a little more subjective due to onetime charges finish in the the classic Broadcom campus et cetera.
So how does restructuring charges, how do they fit into the math that free cash flow and then the investment grade target, where you want to keep it there what sort of leverage target should we think about with you guys more aggressively paying down debt as opposed to repurchasing shares in the near future.
Yes, I think on the cash flow side, Ron what we've tried to do is create somewhat of a formula because we do typically have acquisitions only do have investments we've made to get to the synergy targets.
And in effect what were trying to do is deliver the benefits to the stock over the year with which we are able to achieve those.
Synergies so what we've done as we said look let's look at the free cash flow from operations was obviously includes those restructuring charges and whats add back.
Those for the purposes of calculating the dividends so.
When we get to the end of the year and will take the cash flow from operations will add back the restructuring integration charges effect will divide by two to get to get to the number that we use to calculate the dividend. This year, we don't have any.
Specific onetime large campus initiatives and things like that that we would also look to back out so that should be a fairly good proxy for how we think about the dividend in the recommendation to the board at the end of this year.
In terms of investment grade I think we've talked about this before but maintaining investment grade similar to the dividend policy is a core principle here and I think the reason for that and how can I discussed it. Many times internally is it provides maximum flexibility for us to continue to pursue our strategy.
Always been very important and so overtime.
We had this one time event, we bought back a bunch of stock as I talked about in the prepared remarks.
Thats push leverage up more so than we normally would.
We think based on the economics.
The result, so far that was the right decision.
But we're really looking forward to going back to the the playbook, we pursued in the past which is following the distribution of the dividend. We still have a lot of cash flow and that cash flow. We think based on our strategy as best views for M&A, because that's where the returns are most optimal.
But as part of that we often borrow money.
To finance those acquisitions and then we go and pay that debt down. So I think we're going back to a more traditional playbook and done as part of that.
Given the size and the scale on the increasing diversity of the business and the sheer profitability.
And the cash flows were very much an investment grade company and we're going to be very focused on maintaining an investment grade status going forward.
Thank you. Our next question comes from Blayne Curtis of Barclays. Your line is open.
Hey, guys. Thanks for taking the questions. Tom for you just on the annual guidance for Op margin would suggest a tick down into October just want to make sure how literally to take that and if so can you talk about any drivers as to why properly becoming down in October . Thanks.
Yes, good point, maybe we were a bit conservative to be honest when I think the reality is you see the mix shift in the second half of the year. We got a couple of things going on one with wireless ramping seasonally as hock discussed those those margins are not as high.
As the rest of the portfolio and then and then on top of that we are giving back some on the on the San switching side in the back half, which is fairly high margin products. So we felt it made sense given the mix to stick to that number and Thats why were lower stand there.
Got you thanks.
Thank you. Our next question comes from just Yari of Goldman Sachs. Your line is open.
Hi, guys. Thanks, very much for taking the question Im Hawk Hawk I was hoping you could talk a little bit more about what you're seeing in the hyperscale cloud environment.
A couple of your peers are quite a few of your peers have talked about.
No signs of a recovery and into the back half and potentially into 2020. Following you know a pretty extended period period of weakness I. Appreciate you guys have.
Drivers that are very specific to the company, but in terms of.
Customer sentiment on spending and capacity expansion what are your thoughts there.
Thank you.
Okay well.
It's a very interesting question and I guess, they put it to wait two ways.
One is touching on fill out spending.
Yeah, we we might see some of what a lot of people dancing in Coleman's lately, which is an improvement.
In cloud spending and in multiple areas, especially in scaling out new generation.
Data centers as they expand that business and we obviously benefit from that in our strict chain routing and some of our specific custom offload programs in AI, all just montney, so and we see that but as we all know this days, while spending is proving to be a bit like telco spending very lumpy.
What we see on the other half of our business in infrastructure is weve.
Enterprises and uses and here.
From the viewpoint of.
An opportunity to see end users directly.
And we see and use the enterprise.
Enterprises are end users, who want to end users speech, especially the largest bunch.
I'll call customers.
Yes spending continues.
The budget is pretty strong and spending continues because they need that digital transformation as down business continues.
Fairly decently, and then and Thats hasn't impacted which is why our infrastructure software business.
Renewals continue to grow very nicely.
And that's not an issue.
It's when we sell components.
Two Oems, who then make it into systems to sell to these same end users that we see.
A difference and the difference is simply that I think given none so as far as that we could gather given uncertainty in this environment that.
Everybody is constraining all our partners are constraining their supply chain and compressing the supply chain so to speak and then action of compressing.
It's really a reduction in orders or reduction in what appears to be demand. So it's really interesting lease as we see it is that on a software site.
Things are direct sales to large enterprises continue fairly unabated.
But when it comes to selling components through partners through the same end users, we see a different perspective, and a slowdown a constrain and it's reflected obviously in the numbers. We are showing any it also is reflected in the.
Outlook that we're giving to you guys.
Thank you. Our next question comes from Craig Hettenbach of Morgan Stanley . Your line is open.
Yes. Thank you.
Shifting gears to see a and the software side can you talk about just some of the efforts around portfolio license agreements you know specifically what kind of sales efforts you have in place there and what this could mean for the business over the next couple of years as you try to gear it that way.
Yes, well it is in that portfolio licensing.
Arrangements.
Absolutely.
As a as a sales model our business model, we apply to our infrastructure software business, which is here. This morning has been in my mind and the Big thing is less than a year since we launch it but I don't know what we we since we took over let's see well I mean last November it's been I'm, calling very successful it's been very encouraging a and a big part of why we think it is encouraging them wind works is because we just focus.
On the larger Fivesix hundred customers.
Oh I see these are guys way, we have a lot.
Decent signed some large footprints to begin with and as we go towards renewals with our ability to offer up a portfolio white.
A licensing arrangement unlimited capacity on the full range of products brought products that we have that extend beyond from mainframe to distribute that software is extremely attractive and cost effective.
To those large enterprises, who buys a lot of those infrastructure infrastructure software. So we have done multiple deals as rental multiple renewal and we continue continue to be very engaged with those companies. So I guess my conclusion is.
By focusing on this largest customers with launch where we have large footprint that exists and where the ability.
To consume more of those software we have.
It makes a lot of sense an essay.
Put in some of my comments earlier on and this and this and this ability to focus on this largest guys.
And put the sales motion.
Technically and commercially very effectively on this this large customers.
And possibly not focus on the long tail of some non core customers.
Is a key part of the whole model and what makes the whole model was simply because conceptually.
We we are renewing those contracts with larger footprints.
On portfolio licensing agreements as I mentioned at a rate of over 20% annually. While we are probably because of lack of focus and.
Reducing our at treating smaller non core customers at 10% and those call customers represent 80% of our overall revenue while the long tail represent only 20% and sop in the situation. After one year, almost one year, where we show a net gain.
Of over 10%.
Keep that going three years later, we see which is average term of every contract we put in place.
We would see a clear.
Step up.
In our revenues from this business.
Offer we like we like to believe double digit growth.
[laughter]. Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.