Broadcom Limited (AVGO) Q1 2018 Earnings Conference Call Transcript

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Broadcom Limited (NASDAQ: AVGO)Q1 2018 Earnings Conference CallMarch 15, 2018, 5:00 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, please stand by. Your Broadcom Q1 2018 Earnings Conference Call will begin momentarily. Once again, thank you for your patience and please stand by.

Welcome to Broadcom Limited's First Quarter Fiscal Year 2018 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ashish Saran, Director of Investor Relations. Please go ahead, sir.

Ashish Saran -- Director of 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 Limited. After market close today, Broadcom distributed a press release and financial tables describing our financial performance for the first quarter of fiscal year 2018. If you did not receive a copy, you may obtain the information from the Investor section of Broadcom's website at www.broadcom.com.

This conference call is being webcast live and a recording will be available via telephone playback for one-week. It will also be archived in the Investor section of our website at broadcom.com.

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During the prepared comments section of this call, Hock and Tom will be providing details of our first quarter fiscal year 2018 results, guidance for our second quarter of fiscal year 2018, and some commentary regarding the business environment. We will take questions after the end of our prepared comments.

Please note that starting with the first quarter of fiscal 2018, we will only provide sequential revenue guidance as a range at the consolidated company level. This is consistent with the majority of our peers and customers. Given the puts and takes at the segment level during the quarter, which often end up offsetting each other, segment guidance is often not the best representation of likely results at a company level. We will of course continue to report and comment on actual results by segment.

This fourth quarter will be a period of transition and we will provide you with some color on guidance by segment during this call before implementing our new approach to guidance in the first quarter of 2018.

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 today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results.

Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call.

At this time, I would like to turn the call over to Hock Tan. Hock?

Hock Tan -- President and Chief Executive Officer

Thank you, Ashish. Good afternoon, everyone. Well, we really had a very good start to our Fiscal Year 2018 with first quarter revenue and earnings toward the upper end of our guidance. First quarter revenue of $5.33 billion grew 28% year-on-year and 10% sequentially. On the income front, earnings per share were $5.12, which grew 41% year-on-year and 12% sequentially. But, please, don't just get too excited by this as Q1 was actually a fourteen-week quarter and did include partial quarter contribution from Brocade, which we closed during the quarter.

But, having said this, we do expect business conditions to remain favorable in our second quarter as well, although the revenue mix by segment will be quite dramatically different. First quarter revenue, after adjusting for Brocade contribution, was all driven by wireless growth. While we expect the second quarter will be driven by double-digit growth of the three segments, offsetting a very sharp seasonal decline in wireless. As a result, thanks to diversification, second quarter topline continued to be very stable.

Let's go deeper into performance by segment, starting with wired infrastructure. In the first quarter, wired revenue was $1.88 billion, declining 10% year-on-year, 13% sequentially and the wired segment represented nearly 5% of October revenue. As expected, first quarter wired results reflected the bottom of the seasonal decline in demand for both our set-on-box and broadband area access products. The well-known weakness in optical access and metro end markets impacted us, as well, in this quarter but, in contrast, demand was strong from data centers and cloud shipments remained stable.

Turning to the second quarter outlook, Fiscal 2018, however, we have a different picture as demand in this wired segment returns with a vengeance. We project strong double-digit sequential revenue growth and this growth is driven by very strong increase in demand for our networking products from cloud and data centers as well as the weighted seasonal recovery in broadband carrier access. Set-top box continue to be flat.

Now, what I said in wired is in sharp contrast to wireless. In the first quarter, wireless revenue was $2.2 billion, growing 88% year-on-year and 23% sequentially. The wireless segment represented 41% of total revenue. First quarter 2018 wireless revenue growth was driven by the RAM of the next generation platform from our last North American platform customer. As you may recall, this RAM was pushed out into the first quarter from the fourth quarter as compared to prior years. This pushout, coupled with a very large increase in our content in this new platform, drove the substantial year-on-year growth in revenue in the first quarter.

But, as we look into the second quarter of Fiscal '18, we are expecting a much larger than typical season of decline in wireless revenue as shipments to our North American smartphone customers will trend down sharply from the exaggerated first quarter. We expect partially offset this decline in the first quarter from an increase in our product shipments to support our RAM of next generations like Ship Phone and our large Chorion smartphone customers. This phone also comes with an increase in Broadcom's wireless content on both our RS and Wi-Fi/Bluetooth combo products. Notwithstanding such volatile seasonality, I should note that year-on-year revenue growth for Q2 in this segment was still being in the double-digits.

Turning to enterprise storage, in the first quarter 2018, enterprise storage revenue was $991 million and included approximately $330 million in partial quarter contributions from the recently acquired Brocade fiber channel switch business. As reported, enterprise storage segment revenue grew 40% year-on-year and 54% sequentially. Without Brocade contribution, however, first quarter enterprise storage would have resulted in flat but still stable performance sequentially.

Storage segment represented 19% of a total revenue for the first quarter. Now, the Brocade revenue in the quarter was essentially higher than our prior expectation of $250 million and this has been driven by stronger-than-expected demand of fiber channels and switches. Our service storage connected with products also had a strong quarter with substantial increase in revenue driven by RAM in the regeneration service shipments and this growth, though, was partially offset by decline in our hard drive hardless drive business as demand bottomed out during the quarter.

Into the second quarter of Fiscal '18, the contrast here we expect to see is strong double-digit sequential growth in revenue in enterprise storage driven by robust demand from both enterprise and data centers. Finally, industrial first quarter is also segment revenue of $251 million and represented 5% of total revenue. Industrial product revenue remained very robust and grew by over 20% year-on-year. Resales also grew by 20% year-on-year and trended up 7% sequentially. Looking into the second quarter, we expect strong double-digit sequential growth in industrial product revenue and we continue to expect resale to trend up by the same amount.

In summary, that's all for the first quarter. As we expected, we delivered very strong financial results and completed acquisition of Brocade during that period. Our second quarter Fiscal '18 revenue outlook reflects the benefit of a well-diversified product portfolio. We expect to fully offset the impact of a much higher than normal seasonal decline in wireless revenue with strong increases in our wired, storage, and industrial segments.

As a result, we expect second quarter revenue to be sequentially flat at $5 billion on a normalized 13-week basis for the quarter. However, the change in product mix will have a dramatic impact on second quarter gross margin, which we expect to sequentially expand by 100 to 150 basis points. Tom will provide more color during his guidance commentary on the impact this will have on our Q2 profitability.

With that, let me turn the call over to Tom for a more detailed review.

Thomas Krause -- Chief Financial Officer

Thank you, Hock, and good afternoon, everyone. My comments today will focus primarily on our non-GAAP results from continued operations unless otherwise specifically noted. A reconciliation of our GAAP and non-GAAP data is included with the earnings release issued today and is also available on our website at www.broadcom.com.

Let me quickly summarize the results for the first quarter Fiscal '18, focusing primarily on balance sheet and cash flow items. We delivered strong financial results for the first quarter starting with revenue at $5.33 billion, which was at the upper end of guidance. Our first quarter gross margin from continuing operations was 64.8%, 80 basis points above the mid-point of guidance as we benefited from a more favorable product mix in the quarter driven by higher than expected revenue from the Brocade fiber channel SAN switches. Operating income from continued operations for the quarter was $2.6 billion and represented 48.2% of net revenue. EBITDA from continuing operations in the quarter was approximately $2.7 billion and represented 50.6% of net revenue.

Our day sales upstanding are running on target at 45 days, a 1-day decrease from the prior quarter. Our inventory at the end of the first quarter was $1.3 billion, a decrease of $156 million from the prior quarter as we depleted wireless inventory we had built up to support the large ramp in first quarter shipments. We are pleased with this level of inventory going into the second quarter. We generated $1.7 billion in operational cash flow, which reflected the impact in the first quarter of approximately $460 million in payments of annual employee bonuses for Fiscal Year '17, $240 million of cash expended primarily on Brocade restructuring and acquisitional-related activities and an additional $129 million payment on the legacy pension plan. Capital expenditure in the first quarter was $220 million or 4.1% of net revenue.

Now let me turn to free cash flow, which we define as operating cash flow less CapEx. Free cash flow in the first quarter was $1.5 billion or 27.5% of net revenue and reflects the impacts of the items I just mentioned including an annual bonus payout, restructuring, and pension contribution. Without those items, I would just note free cash flow as a percent of net revenue would have been 43%. As a housekeeping matter, I'd also note that CapEx was $94 million higher than depreciation in the quarter. We expect CapEx to continue to trend down and approach our long-term target of 3% of net revenue in the second half of Fiscal '18.

We also continue to make significant progress in increasing our free cash flow per share. We calculate this metric as our free cash flow divided by the sum of our outstanding ordinary shares and limited partnerships, or LP, units. For the first quarter of Fiscal '18, free cash flow per share was $3.39, based on 410 million outstanding ordinary shares and 22 million LP units. More importantly, on a trailing 12-month basis, free cash flow per share for the period ending Q1 '18 was $13.79, an increase of 71% compared to the trailing 12-month period ending Q1 '17.

Now let me turn to our non-GAAP guidance for the second quarter of Fiscal Year '18. This guidance reflects our current assessment of business conditions and we do not intend to update this guidance. This guidance is for results from continuing operations only. Net revenue is expected to be $5 billion plus or minus $75 million. Gross margin is expected to be 66% plus or minus 1 percentage point. Operating expenses are estimated to be approximately $890 million; tax provision is forecasted to be approximately $103 million; net interest expense and other is expected to be $114 million; the diluted share cap forecast is for 461 million shares; share-based compensation expense will be approximately $305 million; CapEx will be approximately $190 million.

Our second quarter gross margin guidance anticipated a very favorable revenue mix driven by strong high margin networking and enterprise storage product sales and a more than seasonal decline in relatively lower margin wireless product sales. Our guidance for second quarter operating expenses includes a full quarter of Brocade expenses and anticipates our typical increase in employee payroll taxes from the annual vesting of RSUs in the quarter. Please note that after we've completely redomiciled affiliation in the United States, we presently expect our effective cash tax rate to be approximately 10%. We expect to start reflecting this new rate in our non-GAAP results starting with the third fiscal quarter of 2018. In the second quarter, we are anticipating very healthy free cash flow and expect to deliver results above our target model of 40% of revenue.

Before we open the call for questions, I would like to briefly address this week's events. Yesterday, we announced that we had withdrawn and terminated our offer to acquire Qualcomm. We have also withdrawn our slate of independent director nominees for QualComm's 2018 annual meeting of stockholders. Although we are disappointed with this outcome, we will comply with the order issued on Monday, March 12th, 2018 regarding the proposed transaction. Importantly, we sincerely appreciate the overwhelming supports we received from QualComm and Broadcom stockholders throughout these past few months. Indeed, I have to say we are touched by the ISS report issued just last night that continues to recommend the Broadcom independent nominees and by our understanding that, based on the vote tally as of today, the 11 Qualcomm nominees are only garnering between 15% to 16% of the outstanding shares, not necessarily something to celebrate down in San Diego.

In any event, back to Broadcom. Consistent with our announcement in November to redomicile the company, we continue to believe the U.S. represents the best location from which to pursue our strategy going forward and we don't see this week's events putting any constraints on our ability to pursue acquisitions more broadly going forward. To that end, we also announced that we continue to move forward with our redomicilation to the U.S. and now expect to complete this process after the close of the market on April 4th. This timing will allow us to hold our annual meeting of shareholders on April 4th as presently scheduled. Our special meeting for stockholders to vote on the redomiciliation will still be held on March 23rd.

So, with this, we know many of you are asking what's next. Hock and I have had the last couple of days to reflect on this. First and most importantly, we remain focused on delivering superior returns for our shareholders. Broadcom benefits from a long history of technology innovation, engineering excellence, and product leadership across our 20 franchise businesses. We believe this will allow us to sustain mid-single digit revenue growth and increasing operating and free cash flow margins. To reflect our confidence in the sustainability of the current business, we will continue targeting aggregate dividends of approximately 50% of free cash flow. This should afford us the opportunity to provide material dividend increases in the future.

The allocation of the remaining 50% of free cash flow is governed by the returns that we believe we can drive via acquisitions versus buying AVGO stock and/or paying down debt. As you all know, Hock and I are quite familiar with the industry landscape and, sitting here today, we do see potential targets that are consistent with our proven business model and that also can drive returns well in excess of what we would otherwise achieve buying our own stock and/or paying down debt. If this view changes, rest assured we will not hesitate to change our approach. Providing superior returns for shareholders has been and always will be our focus.

One final point I want to make: QualComm was clearly a unique and very large acquisition opportunity. Given the maturity of the industry, the consolidation it has seen, and our relative size now, our future acquisitions are much more likely to be funded with cash available on our balance sheet and without the need to flex the balance sheet much beyond our current financial policy of 2X net leverage. I would like to remind you that the purpose of today's call is to discuss our quarterly earnings. Consistent with our previous call, please keep your questions focused on today's financial results. We will not be commenting in Q&A on this week's events.

That concludes my prepared remarks. 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 the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Again, that's * then 1 to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. In the interest of time, please limit yourself to one question and one follow-up.

Our first question comes from Craig Hettenbach from Morgan Stanley. Your line is now open.

Craig Hettenbach -- Morgan Stanley -- Executive Director

Yes, thank you. Can you talk about the strong rebound expected in the wire segment? I know you mentioned data center continues to be strong. Also, anything around traditional enterprise or seen some rebound in enterprise IT spending and how much that helps the segment a bit?

Hock Tan -- President and Chief Executive Officer

We've seen strength and we saw it, obviously, in bookings in Q1, for shipments in Q2, and we saw a lot of strength in both enterprise as well as cloud data centers in both respects -- it's just strong. And it's strong across the full range of the networking products that I commented on. We also saw strong bookings which were translating to revenues, obviously, in Q2. Very strong revenue recovery in our broadband carrier access, which basically reflects DSL, digital subscriber lines, PON, and attach enterprise and carrier Wi-Fi. And that's typical seasonality and it came back very, very strongly. What we don't see a sharp recovery is obviously fiber optics in networking. Fiber optics out of data centers continue to be better -- not continue but has shown renewed strength. So, basically, data center cloud that are showing enterprise, showing a lot of strength to offset metro networks and, in our case, to continue flatness in set-top box.

Craig Hettenbach -- Morgan Stanley -- Executive Director

Got it. Thanks for all the color there. And then, just a quick follow-up for Tom, just on Brocade, the integration -- just now that you have the business, just how you see it performing, anything we should be aware of just from a margin perspective and that should take some cost out?

Thomas Krause -- Chief Financial Officer

Yeah, look, we've been really pleased with Brocade. Obviously, that's something that's been in the works for some time and the business we were targeting there was with SAN-switching business, it's continued to sustain as we had envisioned throughout not only the sign-to-close period, but also as a good start as part of Broadcom going forward. Clearly, it's a unique asset. From a financial standpoint, as well, Craig, it's margin-accretive to the company. We've seen that continue to contribute positively, the earnings and free cash flow. And, frankly, to echo some of the comments I said in the prepared remarks, it really reflects the kind of transactions that we're looking to target going forward.

Craig Hettenbach -- Morgan Stanley -- Executive Director

Got it. Thanks.

Operator

Thank you. And our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.

Ross Seymore -- Deutsche Bank -- Managing Director

Thanks for letting me ask a question. Hock, I just wanted to talk about the wireless business. I think everybody's pretty up-to-date on why the volatility to the upside and then to the downside in the April quarter, given what your largest customer is doing. I want to think a little bit longer-term. As we think about the rest of this year and next year, can you talk about what you see from a content perspective across the two components of your wireless business as well as from a market share perspective?

Hock Tan -- President and Chief Executive Officer

Well, good point, I guess. Let's talk about content and, as I've articulated before earlier in previous calls and that view hasn't changed. On a sustained basis, I'll put it, over the next five years, in the multiple sockets we have been -- which, as you know, represents both RF front-end Wi-Fi/Bluetooth combo chips in wireless connectivity and basically phone touch and, to some extent, wireless charging as well. Combined all together with those many sockets, on a sustained basis over the next three years or possibly five years, we see that content sustaining growth in the teens, double-digits. This has been the way it was for the last five years and the trend toward increased content, whether it's 4G, 4.5G, or 5G, we do not see that changing.

Ross Seymore -- Deutsche Bank -- Managing Director

How about on the share side of things?

Hock Tan -- President and Chief Executive Officer

Okay. On the share side, I'll say it this way: the business we are in -- and it's not just wireless, by the way, no differently in wired, enterprise storage, and industrial -- the core businesses -- we call them franchises -- that we are in, all 20 of their product lines, we picked them, product lines, franchises, to be businesses that we are very clearly out there in the lead -- technology and market share and where we continue to invest a lot of money for further innovation, for progressing technology. The bottom line to what I'm trying to get at is, in those businesses, what we worry about or what we have left to worry about are really ankle-biters. And, to be honest, ankle-biters' biggest problem, they cannot bite above the ankle.

Ross Seymore -- Deutsche Bank -- Managing Director

Okay. And I guess, as my follow-up question, one for you Tom. You made it pretty clear about the use of cash flow on the dividend side, the 50/50 split, but your commentary about what you may do with the other 50% gave a little more detail than we've heard in the past and you included the phrase about paying down debt and share repurchases. Was that meant to be something that those are increased or were you just stating the obvious as far as potential uses of the other 50%?

Thomas Krause -- Chief Financial Officer

No, I think, Ross, what it's trying to reinforce is that Hock and I are focused on doing what's in the best interest of the shareholders and we have the opportunity to reflect after this week's events on, obviously, the go-forward capital allocation strategy and we feel, looking at the landscape, that the strategy that we've had in place here for quite some time remains a strategy to drive those returns. And I think we want to maintain that we continue to be very focused on shareholder returns and, if that strategy no longer presents that type of returns, then we'll focus elsewhere.

Ross Seymore -- Deutsche Bank -- Managing Director

Great. Thanks, guys.

Operator

Thank you. And our next question comes from Stacy Rasgon with Bernstein Research. Your line is now open.

Stacy Rasgon -- Bernstein Research -- Managing Director and Senior Analyst

Hi guys. Thanks for taking my questions. First, given the gross margin upset in Q2 on the heavy makeshift of the businesses, how should we be thinking about the drivers of gross margin into the second half of the year and given that mix shift that we're seeing into Q2 may be different as we move through the rest of the year? How's that going to influence it?

Thomas Krause -- Chief Financial Officer

I'll take it. Look, I think there's a couple of things going on. There's short-term and then there's long-term -- let me comment on both. Short-term, when you look at the seasonality in the business over the fiscal year, obviously, the second half of the year is typically more wireless weighted. Wireless, as everyone knows, tends to carry slightly lower than corporate gross margins So, I think I wouldn't get too excited in terms of where gross margins go from here through the end of this fiscal year. However, that being said, as you look longer-term, consistent with the business model that Hock's been driving the last 11 years, we continue to see content gains, we continue to have very good product leadership across the 20 franchise businesses, we've added Brocade, which is margin-accretive, So, we don't see any reason, as I said in the prepared remarks, that as we sustain mid-single-digit revenue growth, you're not going to see leverage not only from an operating and free cash flow perspective, but a lot of that's going to get driven by gross margin expansion. We don't see any reason that that can't continue.

Hock Tan -- President and Chief Executive Officer

And we have articulated in prior calls as far back as a couple years ago that this business model we have put in place is one that, on an annualized basis -- thinking, as Tom said, longer-term -- we tend to drive gross margin expansion around 100 basis points each year. It may be plus/minus 25 basis points, but year-by-year, if you look back several years, we have expanded gross margin around 100 basis points and we believe that trend still continues.

Stacy Rasgon -- Bernstein Research -- Managing Director and Senior Analyst

Got it. Thank you. That's helpful. For my follow-up question, I just wanted to ask about sustainability of storage. So, we're seeing some upside -- you admitted Brocade was a little stronger than you had expected -- and I think you've talked about this business longer-term, just given the drivers of the different segments as being flattish, but in reality, it's quite volatile. We have years where it's very strong and years where it's very weak. I know, last year, when we were seeing the strength in storage, you warned us not to get too excited about the sustainability of that. How should we be thinking about the sustainability of that growth? And, frankly, even in your other non-wireless segments as we're seeing that strong double-digit growth into Q2, how should we think about sustainability of that versus your long-term organic growth target?

Thomas Krause -- Chief Financial Officer

Yeah, So, I think you've got to unpack it a little bit, right? So, with the enterprise storage, we've got, obviously, the LSI businesses and the SAAS connectivity business which is an absolute franchise. It is going to move from a cyclical standpoint with the intel server platform release. Obviously, with Perla, we've had very good leadership position with the new products in that area and So, that business is doing well and we expect it to continue to do well this fiscal year. Contrast that with HDD -- obviously, HDD, we think is in slight structural decline. We also have very good leadership position with those product lines and So, there has been more volatility than probably Hock or I would have anticipated in that business over the last several years and I wouldn't think that would change, frankly, going forward as you look out.

And then, beyond that, Brocade, frankly, Brocade's probably the one that's the most stable in our view -- of course, we've owned it the shortest period of time -- but, as you look forward, that's a business that we think can sustain at the levels that we saw on a full run rate basis in the first quarter. So, we think, when you put all that together, I'd echo where I think you were going, which is this is a low single-digit type growth rate segment as we currently report it.

Hock Tan -- President and Chief Executive Officer

And, to add to that, the last few years, what Tom is saying is the only volatile part of it is the half-described business and that's related... for years, it has been on the whole enterprise storage business, we see the various components are very, very stable grow low single-digits -- nothing exciting but very, very predictable and stable. What happened, probably, a year or two ago was flash coming in the picture and shortages and creating impact to the extent it creates impact which is on the consumer, client, side of hard disk drives and that creates some level of impact. Beyond, as client goes down as a portion of the hard disk drive market and the data center part of the business expands -- what we call near-line -- you'll see that volatility start to go away, too. And what you will end up with then, enterprise storage business as an extremely stable business, single-digit growth, if at all, but extremely profitable.

Stacy Rasgon -- Bernstein Research -- Managing Director and Senior Analyst

Got it. Thank you, guys.

Operator

Thank you. And our next question comes from John Pitzer with Credit Suisse. Your line is now open.

John Pitzer -- Credit Suisse -- Managing Director

Yeah, good afternoon, guys. Congratulations on the strong results. Hock, my first question goes back to the wired segment in the January quarter -- and this might be a moot point just given how strong your April guidance has been -- but I'm still trying to figure out that business being down 10% year-on-year. You characterized it as a seasonal lull, but I would assume a year-over-year compare would catch that and you did have the extra week this quarter that you didn't have last quarter. So, I guess I'm just trying to figure out -- you mentioned a bunch of factors in your prepared comments -- I'm trying to figure out what was the most significant factor?

And, as you think about the long-term growth in this business, to the extent that you have a 5% growth rate for the overall business, how did this business fit in? Because it's hard to believe, with your exposure to data center and cloud, this is probably the business that investors are willing to pay the highest multiple on, but it's one that, over the last several quarters, has actually been growing much slower than the other businesses. And I know there's a lot of different businesses inside of wired, but how would you think about the long-term growth rate and the moving parts on that?

Hock Tan -- President and Chief Executive Officer

Right. That's the best part of the question, but to try to answer your technical part, which is what the hell happened in Q1 and all that, first you've got to compare year-on-year. If you compare year-on-year, which was Q1 a year ago, don't forget what we did a year ago that was some exceptional item a year ago. What we did as part of the integration of classic Broadcom is where to dispose of certain efforts and, as part of that, we sold manufacturing rights, which we articulated at that time we announced earnings, to certain companies out there as part of the disposal process on overlapping products and integration. And that jacked up the revenue artificial one-time a year ago So, we're that little compare to hit on. And the amount there wasn't small -- it was over $60 million, $70 million -- small by total standards of $2 billion, but nonetheless, it was a percentage and you worry about 10%. So, that's one thing I want to add on.

But, on Q1 to address your question on it, our wired infrastructure, our wired business is really two parts when you look at it. One is data center, enterprise business, which is networking and that's about just almost... it's roughly half. And you have the other half, which is more carrier-related, operator-related, service provider-related, which is really the set-top box business, the carrier access business, and a part of our optical transceiver business this side of the part of transceiver business and land to data centers. And it's really interesting that the enterprise and data center business, which are most holding up in January quarter, but the other side was all down -- all down -- including optical, which relates with fiber to the home and networks and operators, especially in China, and as well as carrier access seasonally down, set-top box, seasonally down quarter.

So where one side is dramatically down, one side holding up. Then comes April and we see the part that's down a lot start to recover quite strongly, especially in carrier access pop right up. The fiber optics in China on networks instead of box-set-top but that's part of it popped up. But what we really start to see is the half of the business and data center enterprise took on huge strength. A big part of it is we start to ramp on some start of new products. I don't want to get into specifics what they are -- you probably know what they are -- they are networking and they are in AI, especially, as well as various other programs related to cloud and enterprise being very strong. And that's what drove this April strength and that's the whole story.

John Pitzer -- Credit Suisse -- Managing Director

That's helpful, Hock. And then, Tom, maybe as my follow-up, I think I understand the OpEx guidance going into the April quarter relative to period costs that come in on the payroll and Brocade. I'm just curious, given that you're going from a 14-week to a 13-week, how is that impacting sequential OpEx? I would have thought just having one less extra week would have helped you on the OpEx front. And how do we think about OpEx trending from April on to the second half of the year?

Thomas Krause -- Chief Financial Officer

Yeah, it's a good question. Look, there's a lot of things going on. You've got the payroll uptick because of RSUs, which is material. You've got Brocade transition costs, which we have the benefit of having a longer time between sign and close So, we're very much actually past Day 2 now and on our way to being fully integrated So, that should come off and bring numbers down. So, as we look at the second half of the year, look, I would be thinking you're not going to see OpEx go up any more -- it probably does trend down slightly -- but we're running at or about these levels when you exclude Brocade transition expenses.

John Pitzer -- Credit Suisse -- Managing Director

Perfect. Thanks, guys. Appreciate it.

Operator

Thank you. And our next question comes from Vivek Arya with Bank of America Merrill Lynch. Your line is now open.

Vivek Arya -- Bank of America Merrill Lynch -- Vice President

Thanks for taking my question and congratulations on the continued strong execution. For the first one, Hock, I just wanted to go back to the prior line of question around wired segment, but maybe from a longer-term perspective. If you just set aside the seasonal aspects, what is the right way to think about a two-to-three-year growth set for the wired business? You obviously have the strength in your cloud switching and AI businesses but is set-top box going to be a headwind longer-term? Just, conceptually, do you think your wired business grows in-line, above, or below your overall company 5% growth rate?

Hock Tan -- President and Chief Executive Officer

That is the one that will grow around 5% and it's because -- I didn't finish the previous question, I do apologize -- but to answer the question on that, remember, look at our wired business as two parts. One is enterprise data centers, which includes, basically, a lot of it is the switching, the controllers, routing -- even part of routing -- and even fiber optics that go to data centers. That area, we have been seeing, is growing very, very fast. Now, occasional hiatus flattening out -- not going down but flattening out -- is happening generally, as I indicated even though demand continues to be good but it keeps growing. And it goes, I would say, across to, on a year-on-year basis, probably close to 10%.

Then we have the other side of business, which is more related to networks service providers and those are more volatile, more seasonal, but if you take it on an annualized basis, I would say it's practically flat. And that's why I say they're, on an average, I think mid-single-digits when you average out on an annual basis over five-year period and they've been running at that rate. It's very strong enterprise and cloud products or enterprise in cloud and there continues to be a lot of innovation in that areas, which we are right in the thick of which we drive, in fact, a lot of it, which includes new applications and new ways to optimize data centers in cloud -- less So, in enterprise, but definitely in cloud -- and associated within fiber optics that ties the cloud computing. And, against that, a more traditional but, nonetheless, very, very stable and sticky service provider wired business in the video delivery -- set-top box, OTT, as well -- and carrier access, which is gateways mobile and gateways, especially, for carriers.

So the mix of the two and the dynamics of the two was very clear that a big part of the half is growing very fast, relatively speaking, and the other half doesn't grow.

Vivek Arya -- Bank of America Merrill Lynch -- Vice President

Got it. And for my follow-up, I appreciate that you want to talk about the earnings, but acquisitions have been a key part of your strategy longer-term and, if I look at most of your targets, they have been digital and logic companies. Are you open to also looking outside at, perhaps, analog or microcontroller assets? So, without being specific about the targets, are there any pros and cons you can think of looking at analog versus digital assets in the future?

Thomas Krause -- Chief Financial Officer

Well, look, Vivek, obviously, we don't want to get into the specifics and I think what I would say to this is we're open. We're open to looking at anything that helps, one, is consistent with our business model, and, two, helps us drive the kind of returns well in access of the alternatives. So, we've obviously shown openness, we obviously did Brocade, which is more an applied systems business but very consistent with our strategy and we'll remain that way going forward.

Vivek Arya -- Bank of America Merrill Lynch -- Vice President

Thank you.

Operator

Thank you. And our next question comes from Amit Daryananai with RBC Capital Markets. Your line is now open.

Amit Daryanani -- RBC Capital Markets -- IT Hardware Analyst

Yup, thanks. Good afternoon, guys. I guess two questions from me, as well. On the wireless side, Hock, I think you talked about mid-teens content growth and not too worried about competition there. Wondering, do you think pricing dynamics could be different in the industry as you go forward because two of the largest players in the industry are really struggling, I would say, to drive year-over-year growth at this point, So, do you think pricing could be different as you go forward in this industry what you're seeing?

Hock Tan -- President and Chief Executive Officer

Well, you look and the phone dynamics is actually at the high-end flagship status and you could make the key assumption -- which we do -- that that flagship status remains and continues. To remain in a flagship status, those phone makers have to innovate, have to offer features that continue to push the envelope. They're probably more mindful, as they're working, about overall cost, but a lot of our components are not gimmicks. They are basic, basic fundamentals to a phone working in various ways. To give you an example of 5G -- 5G iPhone, a lot more Spectro bandwidth, which means you need more content. Just simple, basic, fundamental sense there that going to 5G means you've got to find your Spectro bandwidth to operate in in every spectrum you find. You need more components in that direction. You need more bandwidth -- what is connected with it, you push in that direction, too. So, yeah, there will be.

Now, not necessarily every place wants a touchscreen. People might be cheaper and not push as much into it -- we understand that -- So, there's a mix of both, which is why I say, on a long-term five-year trend, the fundamental feature requirements will be what drives growth because you are running with more requirements in terms of performance, even as basic as operating in more Spectro bandwidth as you go from 4G to 5G and on and on. And that, alone by itself, would drive if you compare -- that, at least low-double-digit growth in content. There's no getting around it.

Amit Daryanani -- RBC Capital Markets -- IT Hardware Analyst

Got it. That's very helpful. And, I guess, Tom, I'll follow-up with you. You guys have been 43%, 44% net income margins today. I think the free cash flow margin's about 1,600 basis points or below that number. Structurally, at what point do you see these three things converging and, ideally, I would hope, free cash flow margins improve, not the other way around? So, when do you see that happening? When do you see these one-off things are not getting away from you guys?

Thomas Krause -- Chief Financial Officer

Well, I think it's happening. That was the point of spelling it out for Q2, right? In Q1, you do have something that happens every year, which is we pay out our annual performance bonuses and, hopefully, we'll be able to continue to pay out the bonuses we've been paying out over the past many years going forward So, I would expect that. But, beyond that, the one-time items around the Brocade acquisition and the restructuring activities there, as well as paying down one of the last legacy pensions we had where there's a liability, those are one-time items. So, if you took those away, we're already running a little above 40%, which is actually very much in-line with our non-GAAP net income So, we feel pretty good you're already seeing that convergence, especially as we look into Q2.

Amit Daryanani -- RBC Capital Markets -- IT Hardware Analyst

Got it. Thank you and congrats on the quarter, guys.

Operator

Thank you. And our next question comes from Harlan Sur with J.P. Morgan. Your line is now open.

Harlan Sur -- J.P. Morgan -- Executive Director, Equity Research

Yup, thank you for taking my question and great to see the diversification in the business playing out. You guys, Hock, you provided a longer-term view on wired. More near-term, it looks like the double-digits quarter-on-quarter growth in April is going to take you guys back to year-over-year growth. Given the trends that you're seeing -- strong data center and cloud, you're ramping several new big ASIC programs -- hopefully normally seasonal trends in broadband until the end of the year. Second half, you'll be ramping Tomahawk 3, Jericho 2, but maybe still some headwinds on service provider. Net-net, do you expect full-year Fiscal '18 that your wired business is going to grow?

Hock Tan -- President and Chief Executive Officer

Oh, yeah. Oh, yeah, for sure. Our Fiscal '18 compared to Fiscal '17, we see our wired business growing and we articulated that out -- mid-single-digits. That's quarterly up, quarterly down, after all that, take it on an annual basis, it's just the trend from enterprise but, more than that, data centers, especially, from the cloud and push it very hard for a lot more silicon products in those data centers. Bandwidth, they need more bandwidth. They need setup pipes. They need offloading, which means controller chips that are getting very smart and things that do things beyond what a standard CPU would do. I get all these opportunities to see that drive this silicon growth in this area. Bandwidth alone is driving us to keep coming up with new and newer generation, faster and faster, finally.

Harlan Sur -- J.P. Morgan -- Executive Director, Equity Research

Great. Thanks for the insights there. And then the strength in the ASIC business has been highlighted over the last few calls -- switching, routing, AI, deep learning -- these are big, complex digital chips, but you also have a pretty strong ASIC franchise in mixed-signal analog ASICS -- things like human interface, PODS, 3-D sensing, wireless power, power management. I hear that you guys' forward-design line pipeline into segment continues to be quite strong. Can you just talk about the differentiators that the teams bring to the table here in mixed signal analog ASICS that is keeping the pipeline pretty strong?

Hock Tan -- President and Chief Executive Officer

Yeah, because our mixed-signal things -- you call it an analog thing in a digital age -- we have one strongest, I call it, analog teams in terms of DSP and converting analog, which is real-world signals, to digital in order for it do all kinds of stuff. Basically, ADCs -- analog to digital converters -- which is one of our key strengths, though we don't publicize it very much because that's what we do. People see us as a very strong digital company, but you can't do digital alone. What we have is actually one of the strongest analog to digital conversion capabilities in the world and that has enabled us to do a lot of things very well hidden, in many ways, away from the public eye. We can do digital front-end ADC for even things like base stations, as an example. And we do that for human interface as part of our capability and we do it for coherent receivers in DSP on a DSP basis. We just have a strong capability of people who describe it virtually walk on water from the viewpoint of many of our customers.

And that will also enable us to keep getting the strong backlog of programs that we are actively engaged in in the various core business franchises we're in. This doesn't deviate us from a core franchises -- actually, I shouldn't say that -- it just enables us to drive those core franchises deeper and deeper into performance, whether it be next generation technology, whether it's driving 100Gs -- gigabits per second -- or driving ADCs that push the boundaries of where products, technology, driving certain products out and offering controllers and various other things. So, we see that as very useful tools, capability toward continuing to sustain our leadership in those various core franchises we are in.

Harlan Sur -- J.P. Morgan -- Executive Director, Equity Research

Thanks, Hock.

Operator

Thank you. And our last question comes from Edward Snyder with Charter Equity Research. Your line is now open.

Edward Snyder -- Charter Equity Research -- Managing Director

Thanks a lot. Hock, the comment you just made here was actually in line with what I was going to ask you about your core franchises. You've got these franchises, you've been articulate about where you're going to go, where you don't go, but there seems to be this other area -- the custom ASIC area -- you did router for Sysco years ago and then you got into AI, and then when your largest customer, when you got Broadcom, you obviously moved into connectivity. But you also jumped into areas that would be considered unnormal for Broadcom -- Obago, even -- like wireless charging, which the market, itself, is way below where your margin profile exists but you've done a really good job of that. So, I know it's not a franchise, but isn't it the case that your customer ASIC business is becoming a franchise unto itself with a select group of customers where you can go in and do things they can't do and offer them service? If that's the case, what are the boundaries in terms of what you can and can't do in that kind of a franchise? Thanks.

Hock Tan -- President and Chief Executive Officer

That's very, very insightful and perceptive question. You're right, we are something to see that and we are very careful, but we have been asked by... some of it, of course, we called and dig it out ourselves, but in some cases, certain customers who need technology that pushes the envelope like increasing speeds of ADCs, for instance, we've been asked by certain customers into areas beyond what we touch on. And I also mentioned it on the ADC on the front-end of DFE of base stations as an example but we've been approached by customers to design in CMOS silicon, what used to take non-CMOS processes to do and be able to achieve the same performance with much lower power and potential integration possibility.

All that comes in and, you're right, we don't know where the limits are, but we're very careful that we do not expend resources in the wrong manner, back to ROI, as Tom said. Every dollar, every resource we put into a program, we are very conservative, very risk-averse, you might say, about ensuring we get a very good ROI. And that comes in making sure customers put skin in the game with us when they ask us to do programs where we are expected to, as I keep saying, walk on water, literally. We want to make sure we get a high probability of a good ROI in doing that. But it goes to enhance our overall business model of franchises, in business in the various end markets, we are very, very good at. Alright?

Edward Snyder -- Charter Equity Research -- Managing Director

So is it safe to say, in that context, then -- because the feedback we've gotten is that, believe it or not, it does sound like you guys do an exceptional job in terms of delivering on-time and performance that they didn't think they could get -- but it leads to a puzzle then because I would have never expected you to get into some areas that you've moved into like wireless charging, for example -- much more analog, much more low-margin. Is it the case that, once you start engaging with these customers like the internal custom ASIC group, that they'll start throwing problems to you and say, "Can you do this?" and So, it opens up a much wider swatch of technologies that you could go into if the agreement is cast correctly? So, that we may be seeing you do stuff that's maybe a bit more uncharacteristic if you hadn't had the custom ASIC group?

Hock Tan -- President and Chief Executive Officer

Ed, again, very insightful and we see that. And I'll just say we're very disciplined -- extremely disciplined -- just like the way we do our acquisitions. Recent example, except, just kidding, but typically, we're very, very disciplined and here, in the use of resources and developing a program that is outside what we consider to be franchise areas, core areas we will be very, very careful and very, very disciplined. We don't take everything thrown in our direction.

Edward Snyder -- Charter Equity Research -- Managing Director

Thank you.

Operator

Thank you. That concludes Broadcom's conference call for today. You may now disconnect.

Call participants:

Ashish Saran -- Director, Investor Relations

Hock Tan -- President and Chief Executive Officer

Thomas Krause -- Chief Financial Officer

Craig Hettenbach -- Morgan Stanley -- Executive Director

Ross Seymore -- Deutsche Bank -- Managing Director

Stacy Rasgon -- Bernstein Research -- Managing Director and Senior Analyst

John Pitzer -- Credit Suisse -- Managing Director

Vivek Arya -- Bank of America Merrill Lynch -- Vice President

Amit Daryanani -- RBC Capital Markets -- IT Hardware Analyst

Harlan Sur -- J.P. Morgan -- Executive Director, Equity Research

Edward Snyder -- Charter Equity Research -- Managing Director

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