Broadcom Inc (AVGO) Q1 2019 Earnings Conference Call Transcript

Broadcom, Inc. (NASDAQ: AVGO)Q1 2019 Earnings Conference CallMarch 14, 2019, 5:00 p.m. ET

Contents:

Continue Reading Below

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, please standby. Your conference will begin momentarily. Once again, ladies and gentlemen, please standby.

Ladies and gentlemen, please standby. Your conference will begin momentarily. Once again, ladies and gentlemen, please standby.

Good day, ladies and gentlemen. Welcome to Broadcom, Inc.'s first quarter fiscal year 2019 financial results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Beatrice Russotto, Director of Investor Relations of Broadcom, Inc. Please go ahead, ma'am.

Beatrice Russotto -- Director, Investor Relations

Thank you, Operator. And good afternoon, everyone. Joining me today are Hock Tan, President and CEO and Tom Krause, Chief Financial Officer of Broadcom. After the market closed today, Broadcom distributed a press release and financial tables describing our financial performance for the first quarter of fiscal year 2019. If you did not receive a copy, you may obtain the information from the investor section of Broadcom's website at Broadcom.com. This conference call is being broadcast live. And a recording will be available via telephone playback for one week. It will also be archived in the investor section of our website at Broadcom.com. During the prepared comments section of this call, Hock and Tom will be providing details of our first quarter fiscal year 2019 results, 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 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. In addition to US GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the table attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. So, with that, I'll turn the call over to Hock.

10 stocks we like better than Broadcom LtdWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Broadcom Ltd wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Hock Tan -- President and Chief Executive Officer

Thank you, B. And thank you, everyone, for joining us today. So, we had a good start to fiscal 2019, growing 9% in the first fiscal quarter compared to the same period a year ago. The strength of our business model delivered another quarter of sustained revenues, strong earnings, and an extremely strong free cash flow. Our semiconductor business held up relatively well. Not surprisingly, our wireless business was down sharply. And our storage business underperformed somewhat. However, these challenges were more than mitigated by our networking business which grew double-digits year-over-year. In addition, we were very pleased to see that the broadband business has started to recover and stabilize in the quarter. In fact, putting it all together, the semiconductor segment was actually up year-over-year in the first quarter if you exclude the expected sharp decline in wireless.

Turning to infrastructure, this business which includes SAN switching, mainframe, and enterprise software delivered solid top-line results, benefiting from a very robust enterprise-spanning environment. The integration of CA onto the Broadcom platform is very well under way. And we are confident that we can meet if not exceed in the long-term -- exceed the long-term revenue and profitability target that we laid out for CA to you last year. In fact, renewals in our CA business have been strong this past quarter. And we believe the dollar commitments from our call customers will continue to grow. Many of our peers have commented that they are seeing a softening demand environment, especially out of China. While we are experiencing the same demand dynamics, we have factored in much of this macroeconomic backdrop when we provided fiscal 2019 guidance last quarter. As a result, after a solid start to the year, we are reaffirming our fiscal 2019 revenue guidance of $24.5 billion.

Having said that, we expect our semiconductor business to bolster in the second fiscal quarter, driven almost entirely by the season drop in wireless. But looking to the second hand, we are confident that semiconductor business will resume very meaningful growth. This will be driven by strong product cycles in both wireless and networking coupled with a recovery in broadband. Infrastructure software, on the other hand, is expected to sustain throughout the year. So, in summary, our diversification strategy is working. And we are effectively managing the decline in wireless as well as the broader semiconductor industry headwinds. Now let me turn over to Tom to provide you with more color on Q1.

Tom Krause -- Chief Financial Officer

Thank you, Hock. Consolidated net revenue for the first quarter was $5.8 billion, a 9% increase from a year ago. And EPS came in at $5.55, an 8% increase from a year ago, off of a $441 million weighted average fully diluted share count. In addition, free cash flow was $2.03 billion or 35% of revenue. I would highlight free cash flow grew 39% year-over-year. The semiconductor solution segment revenue was $4.4 billion and represented 76% of our total revenue this quarter. This was down 12% year-on-year on a comparable basis. But as Hock explained, the semiconductor segment was actually up slightly year-over-year in the first quarter, excluding wireless. Let me now turn to our infrastructure software segment. Revenue was $1.4 billion and represented 24% of revenue. SAN switching continues to perform extremely well. And as Hock mentioned, mainframe enterprise software is off to a good start. Let me now provide additional detail on our financial performance.

Operating expenses were $1.08 billion. Operating income from continuing operations was $3.05 billion and represented 52.7% of net revenue. Adjusted EBITDA was $3.24 billion and represented 55.9% of net revenue. This figure excludes $143 million of depreciation. Inventory decreased $50 million from the prior quarter. Similarly, semiconductor receivables were actually down which is typical for Q1 even though receivables increased $352 million overall due to the CA acquisition. Total current liabilities, excluding debt, increased $2.5 billion due to CA. However, excluding CA, total current liabilities, excluding debt, decreased meaningfully more than receivables, primarily due to the payment of our annual performance bonus in Q1. In addition, we spent $99 million on capital expenditures. As a result, we had record Q1 free cash flow from operations at $2.03 billion or 35% of revenue. This represents 39% growth in free cash flow in operations compared to Q1 of 2018.

I would not a couple things. 1) Fiscal Q1 is typically our seasonally weakest cash flow quarter due to the annual performance bonus payment we make to our employees in the quarter that we accrue for throughout the prior fiscal year. In Q1, we paid approximately $530 million in APB cash bonuses to our employees. And second, I would also note that we accrued $723 million of restructuring integration expenses, of which, that includes $363 million of cash payments in the quarter. In Q1, we returned $4.6 billion to stockholders, consisting of $1.1 billion in the form of cash dividends and $3.5 billion for the repurchase and elimination of $14.2 million AVGO shares. We ended the quarter with $5.1 billion of cash, $37.6 billion of total debt, 396 million outstanding shares, and 451 million fully diluted shares outstanding.

Turning to our fiscal year 2019 guidance, as Hock discussed, we are reaffirming our full-year revenue guidance of approximately $24.5 billion, including approximately $19.5 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 51%. Net interest expense and other is expected to be approximately $1.25 billion. We do not contemplate any debt paydown in fiscal year 2019. The tax rate is forecasted to be approximately 11%. Depreciation is expected to be approximately $600 million. Capex is expected to be approximately $550 million. And as a result, free cash flow from continuing operations is expected to be approximately $10 billion. And finally, stock-based compensation expense is expected to be approximately $2 billion.

As we outlined last quarter, we granted approximately $31 million of restricted and performance stock units as part of the multi-year grant that we'll vest over the next seven years. As a result, for modeling purposes, we would expect the fully diluted share count in the second quarter to be approximately 450 million. This excludes any stock repurchases. Similarly, for modeling purposes, we would expect stock-based compensation expense to be approximately $530 million in Q2. Looking forward, beyond Q2, we would expect the share count, excluding any stock repurchases and eliminations, to remain relatively unchanged and the quarterly stock-based compensation in the second half of 2019 to start to decrease slightly each quarter. We would expect stock-based compensation to level out at approximately $1.5 billion in 2021. Now, onto capital allocation. Our capital allocation strategy remains the same.

We plan to maintain the current quarterly dividend payout of $2.65 per share throughout the year, subject to quarterly board approval which means we plan to pay out over $4 billion in cash dividends in fiscal 2019. In addition, we remain committed to buying back and eliminating a total of $8 billion of stock in fiscal 2019. That concludes my prepared remarks. During the Q&A portion of today's 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.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * then 1 key on your touchtone telephone. Again, we ask that you limit yourself to one question. Our first question comes from Harlan Sur with JPMorgan.

Harlan Sur -- JPMorgan -- Analyst

Good afternoon. And congratulations on the solid quarterly execution. Hock, on the strong double-digits year-over-year momentum in your data center network and computer acceleration segment, you've been shipping your new Tomahawk 3 switching platform now since the second half of last year. I think Google's using it for 200-gig. We hear Amazon's gonna transition to 400. We're hearing good things from Baidu, Tencent, and all of the cloud guys. Additionally, you're ramping compute acceleration, ASIC, into some of the big cloud guys as well. Question is do you anticipate continued double-digits year-over-year of growth for the full year here for the networking business as the pipeline here appears fairly strong?

Hock Tan -- President and Chief Executive Officer

Very good question, Harlan. And listening to you, you really got me going. Yes, in networking. And it's broader than just data centers. But let's talk data centers. Tomahawk 3 which is the 12.8 terabit, top of the rack switch has just barely started production shipments. In fact, we do expect -- we are fully expecting the ramp of Tomahawk 3 as part of the broader data center scale-out with 400-gig pipes in the connect, so to speak. To really start just about right now. In fact, our fiscal Q2 and progressing up to the rest of the end of the year is more and more of the names you mentioned and type of cloud, jumping and expand and refresh, upgrade, I would say, their datacenters and simply because, as you know, expanding the capacity of data centers and pipes is the simplest way to decongest, to minimize or mitigate congestion, control in these huge datacenters and these large cloud cases. So, that's a broad refreshing and upgrading of datacenters among these cloud kinds.

One area that's mentioned [inaudible] is shipping which is just starting this quarter in significant volumes. What's also not so, perhaps, obvious but is very real for us is the fact that in order to run 400-gigabit per second throughput pipes, you need interconnects, fiber optic interconnects that are built and dedicated and that are -- that's very high-tech products which we are very deeply engaged in. And that brings the content by a multiple sector in this datacenter RAM. And then as you're expanding the top of the right switch, I can't resist saying you need to connect datacenter to datacenter, what is called DCI interconnectivity. And the approach that has been taken, which we are also very engaged in with multiple OEMs who are supporting the cloud guys is obviously coherence, coherence fiber optic connection at 400-gig. And we believe we are very much in the lead on that area as well. So, these are product cycles we are seeing that are continuing the impetus of double-digit growth in networking.

And it extends more than that in routing. We are going to be launching and ramping our new generation router, Jericho 2 probably in Q3 of our fiscal year. And that's going into ad shopping, call routing, among the service providers, especially the telephone guys. And we're starting to see the preparation in that happening. So, yeah. We feel very good about networking and the ability to sustain the level of growth we have been seeing.

Harlan Sur -- JPMorgan -- Analyst

Thank you, Hock.

Operator

Thank you. Our next question comes from Ross Seymore with Deutsche Bank.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Wanted to echo my congratulations. Sticking on the formerly called wired category, Hock, you mentioned that the -- I think you said the broadband space had stabilized and recovered. Can you talk a little bit about the product cycles that will be driving demand in that segment? And any geographic color, product cycle color would be helpful.

Hock Tan -- President and Chief Executive Officer

Sure, Ross. Yeah. In broadband, happy to say finally the thing recovered. And I think probably, the driving, the recovery is cable modems, video delivery, DOCSIS, as they call it, 3.1. We've seen implementations across multiple carriers, service providers of DOCSIS 3.1. So, that's very good. What we're also seeing, of course, is in gateway access, which is part of broadband, among many carriers too is the new generation of DSL, digital subscriber line, as they need to expand capacity and throughput and go to what is called the next generation G.fast or 35b. And we're seeing a lot of that in Europe, some in North American carriers too. But what's also equally interesting is as they go to the last mile into households, what we're also seeing is adoption of wireless connectivity or what we all call Wi-Fi.

And what we're seeing now is -- as we see this wide gateways where there is cable modem, DOCSIS 3.1, or digital subscriber line, we are seeing, especially in the back half of the year, enterprises and more and more service providers, telephones, start to attach the next generation Wi-Fi, Wi-Fi 6 onto those gateways. And in Wi-Fi 6, I'm very, very pleased to note that we are very much in the lead in having developed and productized a whole suite of products that are perfectly addressed toward those enterprise and service providers. But most of that will be only shipping we believe in the second half of the year. But fiscal and both calendar. And we're looking forward to seeing that happen. But it's a very nice product cycle that will basically push the recovery of our broadband business.

Ross Seymore -- Deutsche Bank -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Timothy Arcuri with UBS.

Timothy Arcuri -- UBS -- Analyst

Thank you. Hock, I'm wondering how you handicap Huawei. And I believe that they're the single-digit customer right now. And we're hearing a lot of evidence that they may be double ordering impossible sanctions. So, I'm wondering how you think of that and how you handicap that for the full-year guidance. Thank you.

Hock Tan -- President and Chief Executive Officer

I probably know as much as you do, seriously, in terms of what's publicly available and the concerns and the issues overhanging broadly Chinese sponsor, China, and specific high-tech companies like Huawei from China. They're a good customer. And they buy products which obviously helps their products in a competitive -- in an export market. And I hope they continue to do so. But certainly, the overhand of that is something that we are closely monitoring and are very concerned about. But as far as specific things you're mentioning, I'm not able to basically comment on it simply because I don't know.

Timothy Arcuri -- UBS -- Analyst

Okay, Hock. Thanks so much.

Operator

Thank you. Our next question comes from Vivek Arya with Bank of America.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question, actually, a quick clarification on a question. I believe, Hock, you mentioned software could sustain throughout the year. That suggests annualized closer to $6 million rather than the $5 million I think you had before. And if that is the case, shouldn't profit margins than what you had? And then the question -- there has been some more consolidation in semis and video acquired [inaudible] We're just curious how you think, if at all, does it impact on Broadcom. And even if there isn't how you -- just think about the M&A environment and semis. Thank you.

Hock Tan -- President and Chief Executive Officer

Okay. You got two questions here. Very clever. Let me try to answer -- let me start with the second one. It's easier. As I say, we have done quite a bit of acquisitions in very strong assets in the semiconductor space. And it's obviously an er -- it's something we continue to look at because obviously, semiconductor is a hard area for us. But you also know we're not necessarily limiting ourselves to that. We'll look toward the broader area of technology, software, and appliances as Broadcom would be considered. And while we continue to be interested in the semiconductor space and that's still targets, and we'll continue to be very thoughtful and kindly in terms of the time and in terms of how we approach those acquisitions. And we have observed our behavior over the last several years. We tend to do it in a very unimaginative simply because it's important. In fact, it's critical on any acquisition we make that we can integrate it very, very well.

And that's what we're doing with CA right now. And we're right in the thick of it, as you notice in the numbers we are going through as we drive down to generate the kind of business model we expect to get out of CA. Turning onto the next question you asked which leads to software, yeah. It's turning out to be a very, very nice deal for us. We actually are seeing -- for our core customers -- as you recall, we have differentiated customers throughout the year between very tall, large customers who considers most mainframes and enterprise distributor software as opposed to much smaller long tail of non-core customers. And we'll get those core customers. They are focusing on -- after about at least one quarter now -- now, today, more than one quarter of going through, selling renewals, and adoption of our software. We feel that a business model has been extremely -- our business model has been extremely successful.

The growth as we see it, of dollars that we get through renewals and expansion of his footprint in those core customers is surpassing our expectations. It's gone double-digits. But that's only three months. So, we're still early stage. And we'll continue to push that but as we have also made an announcement on at least one or maybe two deals we have done on our new PLA model about mainframe and enterprise-based software. And these have been very well-received in the marketplace by our core customers. And we are hopeful it's something that makes so much sense that we'll expand. We expect to see more and more of these significant transactions occurring as we move forward toward the rest of the year. All right?

Operator

Thank you. Our next question comes from John Pitzer with Credit Suisse.

John Pitzer -- Credit Suisse -- Analyst

Yeah. Good afternoon, guys. Thanks for letting me ask the question. I'll echo my congratulations on the results. Hock, relative to the full-year guide, it does imply many of your semi-peers, some pretty meaningfully above seasonal growth half on half on the semi-solutions business. And I think you did a good job on some of the prior questions specific to datacenter and broadband access of some of the bottoms-up product cycles that are driving that. I'd be curious or it'd be helpful if I could get your views on wireless and how that progresses throughout the year and how you're thinking or how we should be thinking about your content this year versus dependency on units this year within the wireless.

Hock Tan -- President and Chief Executive Officer

Somehow, I knew this was going to come up somehow, someway, someplace. I truly know if you did that. Yes, I know. It's actually not that because that product cycle in wireless is -- in all our views, this is mine, very predictable. And we will see that happen in our Q3, fiscal Q3-Q4 of this fiscal '19. It will. We're already starting production in our wait of that which has longer product cycle on FBAR and some of our products. And we will see for one of better one because it's so seasonal, and it's very significant, a shop bounce-back which -- it's to our confidence that our full-year guidance is something that's gonna happen. Very simple. And that in the second half, we'll see that meaningful -- you correctly pointed out -- somewhat double-digit growth in the semiconductor segment of our business. As I mentioned in answer to earlier questions, datacenter, especially now networking -- we have a whole slew of new product cycles will generate a big part of that double-digit growth.

So will, in our view, wireless. I'd say that's happening fast. In this particular year, perhaps the difference between this coming year, '19 versus '18 is simply to do two things. One is we're probably gonna get better share. I've mentioned that before. And secondly, content increase. It always happens year after year, as I mention. Example, in Wi-Fi, you'll see Wi-Fi 6. Wi-Fi 6 is not just in enterprise and access gateways in service providers. We are seeing Wi-Fi 6, the new generation. It'll do that .11ax in handsets. I call it strong content increase. As they increase the amount of bends in the FBAR that we constantly see as basically, wireless continue to proliferate in various areas of the world, continue to expand the amount of bends, content in this next generation phone.

So, all that is going to drive a bounce-back with, perhaps, that -- with the increased content for our products. As far as volume is concerned, yeah. I'll probably be as uncertain as you are how much the volume would be. But regardless, there's a lot of mitigating factors. And biggest part of that is pure content increase.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. Thanks, Hock.

Operator

Thank you. Our next question comes from Stacy Rasgon with Bernstein Research.

Stacy Rasgon -- Bernstein Research -- Analyst

Hi, guys. Thanks for taking my question. So, understanding the confidence on the semi ramp, your guidance also implies the infrastructure and software business has to decelerate pretty materially as you go through the year. It seems like right now, in Q1, the CA business must have already been hitting pretty close to the $3.5 billion annualized run rate that you were talking about that was a few years out. So, what drove the strength of CA in Q1? And why does that business decelerate have to decelerate so markedly as we go through the rest of the year in order to fit into the guidance that you provided?

Tom Krause -- Chief Financial Officer

Hey, Stacy. It's Tom. I think one element is -- we don't wanna get into the details between CA and SAN switching, but we're taking a conservative approach. It's just the first quarter out of the gate. We got three quarters to go. As Hock mentioned, we are actually pretty pleasantly surprised with the number of ELA and PLA opportunities that we see in the pipelines. And a lot of our success in terms of growing the dollars of each -- the counts is gonna be driven by our ability to convert those into wins. But so far, so good. So, I think we're gonna take this one quarter at a time. But for now, given that we're only one quarter into the year, we feel very comfortable reaffirming guidance on the top line. And, of course, we feel comfortable with the operating profit as well as the cash flow expectations going forward.

Stacy Rasgon -- Bernstein Research -- Analyst

But you said CA would sustain through the rest of the year. So, does that mean that Brocade has to come down a lot? Or is it just overall conservatism that's in the number?

Tom Krause -- Chief Financial Officer

So, Stacy, what we said is that the infrastructure software segment would continue sustaining throughout the year. That's our expectation. But we are taking a conservative approach relative to the overall outlook for the business.

Stacy Rasgon -- Bernstein Research -- Analyst

But if it sustains, wouldn't you be at 5.6 for the year instead of 5?

Tom Krause -- Chief Financial Officer

I'll leave that to you, Stacy, to figure out.

Stacy Rasgon -- Bernstein Research -- Analyst

Okay. Thank you, guys.

Operator

Thank you. Our next question comes from Toshiya Hari with Goldman Sachs.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you for taking the question. Hock, I had a question on 5G as it relates to your wireless business. Based on preliminary discussions with your customers, what sort of content uplift are you expecting in your wireless business as 5G is inserted going forward? And from a timing perspective, do you think -- is it more of a 2020 dynamic when 5G starts to move the needle? Or is it 2020 and beyond? Thank you.

Hock Tan -- President and Chief Executive Officer

Very good, interesting question. You're asking areas of very vast uncertainty here. But my sense of it is you start to see a little bit of it in 2020. But it will be only a small part. I think if 5G actually impacts content and components in the handsets, high-end smartphones, I might add, will only really impact in a big way I think beyond 2020. 2020 will see some starts. But the tax rate, for want of a better word to use, is gonna be not that high. But you're right. Beyond 2020, as 5G comes in -- and you've probably heard and seen that the amount of content, especially for the way it affects us on RS analog FBAR. And here, in this case, as those FBAR content attaches itself more and more to antenna and various other parts of the phone will be quite significant. But not so in 2020.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes. Thank you. Just a question for Tom. On the back of the strong gross margin upside in the quarter, can you talk about just trends you're seeing in gross margin for the core semiconductor business and then software and just how we think about expectations through the year?

Tom Krause -- Chief Financial Officer

Sure, Craig. Well, you can see that the gross margins are exceptional. They're all over 70% in the quarter. A lot of that is driven by including CA in the business. But you're right. The semiconductor business continues to increase from a gross margin perspective. Mix helps. As wireless comes down, we benefit, as I think you know, from the rest of the portfolio in semis being at or above the corporate average. But looking out longer-term, we've talked about this a lot. We continue to see the opportunity to improve gross margins and directly translate the course into our operating margins and our free cash flow conversion. So, we see that continuing.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. Thanks.

Operator

Thank you. Our next question comes from Harsh Kumar with Piper Jaffray.

Harsh Kumar -- Piper Jaffray -- Analyst

Yeah. Hey, guys. First of all, congratulations. Exceptional execution. I wanted to follow up on the gross margin question. Maybe for Tom. They stepped up quite dramatically. On one of the field trips, I think you had mentioned that it really takes an acquisition about a year to hum and really produce results. So, question is did you capture the vast majority of CA benefits very quickly in 1Q? Or is the best from CA reserved for the back half and later on?

Tom Krause -- Chief Financial Officer

No. I think as you might be able to look through the numbers, we're still not fully optimized around CA. We're only one quarter in. So, you've seen some meaningful improvement in profitability for the company that includes CA. But when you look specifically at gross margins, a number of elements within the CA business tie to gross margins, primarily services as well as support. So, we've taken some actions to improve gross margins and improve the P&L in general. One, in particular, is we announced a deal with HCL and have outsourced a lot of our service activity to HCL going forward for the CA business. But as we continue to work through our model which is really driving these PLAs, as we talked about, we see the opportunity to continue to get better returns on our investment which includes improving our gross margins going forward. So, we would expect them to continue to improve not just this year but really, over the long-term.

Hock Tan -- President and Chief Executive Officer

If I could add to that, on CA, we continue to go through transitions. And you're right. It takes at least a year for us to so-call hum. In the case of software companies, I believe it will take longer because these are contractual commitments. Probably closer to two years. But it will get there. I think a big part other than fact that we're combining software and hardware now and CA in the software infrastructure, software-sized deal transitioning is improvement. And as Tom said, just one quarter -- like to see more reductions.

And these are not just cost of goods sold but down below the line operating expenses as we go through it better. For Q1, it's very critical to -- just the fact that it's product mix while it is down and the other products are humming along, our semiconductor products. And remember, year by year, nature of a product life cycles in those semiconductor products, we always have an opportunity to expand by delivering more value to our customers, expand our gross margin around 50 to 100 basis points on just its natural cadence. That and mix I think is adding a lot of tailwind to our improvement in gross margin.

Operator

Thank you. Our next question comes from Edward Snyder with Charter Equity Research.

Edward Snyder -- Charter Equity Research -- Analyst

Thanks a lot. Hock, I'd like to, if we could maybe touch back on wireless. This rebound you're gonna see in the second half of the year -- and I understand you've got a year-over-year issue here because we were kinda weak last year. But this is flattening out units. This sounds like it's gonna be a much stronger rebound than normal just on content alone. Correct me if I'm wrong, but you've got three big areas that you're playing with just in handsets alone. Of course, your standard ball business which covers everything above 2.4-gig. You're doing more products in the antenna congestion area now because I know you're doing antenna flexors.

And that problem's getting much more acute over the next year, especially as 5G comes on. But the Wi-Fi and 802.11 ax, like you mentioned, not only enterprise but we're seeing that in handsets. And isn't it the case that you've got a big lead over your closest competitor, maybe Qualcomm here? So, shouldn't we expect 1) to see a big rebound just on content and 2) for maybe this to have more legs than we'd otherwise expect at the beginning of next year? I know units are an issue. But given Wi-Fi itself is being deployed, and you play strong into that, it should last longer, shouldn't it?

Hock Tan -- President and Chief Executive Officer

Ed, we love all your comments. But I wanna be laid down, very straight down the center, simply. We see a rebound. My view, it's a normal rebound. And it's a normal rebound. And while content increases, it's not really over the top by that much either. But don't forget, comparing it against last year, it's relatively an easier compare. So, we definitely see a rebound. And it will be a good rebound. And it will not be an extraordinary rebound. Just wanna emphasize that. Just be a normal rebound. It's not hard to compare year-on-year against last year, which is second half fiscal '19, the fact that there will be an improvement.

Edward Snyder -- Charter Equity Research -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Aaron Rakers with Wells Fargo.

Aaron Rakers -- Wells Fargo -- Analyst

Yeah. Thanks for taking the question. And also, congratulations on the quarter. A lot of questions on wired and wireless have been asked. But I wanted to ask about the storage business. The storage business I think you've mentioned was up. I don't know if you framed how much in this quarter. But I'm curious on similar questions as prior. What kind of things are we to be focused on in that piece of the business over the next couple quarters? And how do you assume that that can grow through the course of this year? Thank you.

Hock Tan -- President and Chief Executive Officer

Okay. Very good, interesting question. In storage, we have a mixed bag here. A lot of it -- not all of it -- but a lot of it relates to hard disk drives. And as you know, hard disk drive's nothing to yell over these days. And we see that no different from the others, our mitigating factor here is that most of our hard disk drive -- in fact, all our hard disk drive component sales goes to near-line, all basically, and data centers. We do relatively less in PCs, desktops, or mobile. So, we do see the impact of it being weak but not as extreme as, obviously, the industry is saying. So, that helps mitigate it. But that's not a real variant.

Where we see a hopefully better new product cycle coming in is the fact that tied to storage is, especially on flash SSDs is PCI Express. Second of the year, we see pushing a strong push in the marketplace on PCI Express gen four. We have a lead on it. And we see a lot of interesting opportunities related to that lead in storage or even the lead in [inaudible] in upload computing from the viewpoint of machine-learning, GPU to GPU connectivity. But it's also related to storage. And that push PCI Express gen four is what's quite interesting in storage over the next -- well, I should say over the rest of this year, especially the second half.

Aaron Rakers -- Wells Fargo -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from William Stein with SunTrust.

William Stein -- SunTrust -- Analyst

Great. Thanks for taking my question. Hock, if you cut through the end markets and look instead at the business on a geographic basis -- I'm well aware that when you ship to one region, there may not be consumption in that region. China's a big export economy, certainly. But can you talk to the pace of demand that you're seeing in China as best you can tell it, in particular, relative to inventories there? Thank you.

Hock Tan -- President and Chief Executive Officer

Good question. No surprise. Across the regions, as far as I'm concerned, China is the weakest. And we all see that. We all know that. And I'm talking domestic demand products that are -- our products ship to those regions used in that region indigenously. And it's the weakest region. It also has collateral impact, we see, to some extent on certain sectors in Japan and certain sectors in Europe. Less so in the US, but broadly -- so, China has an impact beyond just the region, itself, China. It also impacts to a couple other regions. But North America continues to be quite decent. And that's what helps us mitigate this overall macroeconomic situation.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's question and answer session as well as today's call. This does conclude the program. You may all disconnect. And have a wonderful day.

Duration: 49 minutes

Call participants:

Beatrice Russotto -- Director, Investor Relations

Hock Tan -- President and Chief Executive Officer

Tom Krause -- Chief Financial Officer

Harlan Sur -- JPMorgan -- Analyst

Ross Seymore -- Deutsche Bank -- Analyst

Timothy Arcuri -- UBS -- Analyst

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Stacy Rasgon -- Bernstein Research -- Analyst

Toshiya Hari -- Goldman Sachs -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Edward Snyder -- Charter Equity Research -- Analyst

Aaron Rakers -- Wells Fargo -- Analyst

William Stein -- SunTrust -- Analyst

More AVGO analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Broadcom LtdWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Broadcom Ltd wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Motley Fool Transcription has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.