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Edited Transcript of XLNX earnings conference call or presentation 24-Oct-18 9:00pm GMT

Q2 2019 Xilinx Inc Earnings Call

SAN JOSE Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Xilinx Inc earnings conference call or presentation Wednesday, October 24, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lorenzo A. Flores

Xilinx, Inc. - Executive VP & CFO

* Matt Poirier

Xilinx, Inc. - Senior Vice-President of Corporate Development & IR

* Victor Peng

Xilinx, Inc. - President, CEO & Director

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Conference Call Participants

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* Adam Gonzalez

BofA Merrill Lynch, Research Division - Research Analyst

* Ambrish Srivastava

BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst

* Blayne Peter Curtis

Barclays Bank PLC, Research Division - Director & Senior Research Analyst

* Christopher Brett Danely

Citigroup Inc, Research Division - MD

* Christopher James Muse

Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst

* JiHyung Yoo

Deutsche Bank AG, Research Division - Research Associate

* John Nguyen Vinh

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* John William Pitzer

Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head

* Joseph Lawrence Moore

Morgan Stanley, Research Division - Executive Director

* Toshiya Hari

Goldman Sachs Group Inc., Research Division - MD

* Tristan Gerra

Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Erica, and I will be your conference operator. I would like to welcome everyone to the Xilinx Second Quarter Fiscal Year 2019 Earnings Release Conference Call. (Operator Instructions)

I would now like to turn the call over to Matt Poirier. Thank you, Mr. Poirier, you may begin.

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Matt Poirier, Xilinx, Inc. - Senior Vice-President of Corporate Development & IR [2]

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Thank you, Erica, and good afternoon, everyone. With me are: Victor Peng, COO; and Lorenzo Flores, CFO. We'll provide a financial and business review of the September quarter, the business outlook for the December quarter and a revised outlook for fiscal year 2019. We will then open the call for questions.

Let me remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to documents the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

As we discussed in last quarter's earnings call, in addition to GAAP financial measures, we will also be disclosing certain supplemental non-GAAP financial measures used by management to evaluate the company's financial results. We provide these measures to facilitate period-to-period comparability for purposes of evaluating continuing business operations by excluding the effects of nonrecurring and unusual items, such as amortization of intangibles and certain onetime items related to acquisitions.

We believe that sharing these non-GAAP measures will be helpful for analysts and investors in analyzing the company's ongoing core business. A reconciliation of non-GAAP financial information to the closest GAAP measure is included in our earnings release and has been posted on our Investor Relations website.

This conference call is open to all and is being webcast live. It can be accessed from our Xilinx Investor Relations website.

Let me now turn the call over to Victor.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [3]

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Thanks, Matt, and good afternoon, everyone. I'm very excited to report that executing on our new strategy is returning results at FY '19 that are well ahead of our original plan. We had broad strength in our business in Q2, with growth in 6 out of 9 of our end markets.

Establishing ourselves in the data center and accelerating growth in our core markets resulted in a new quarterly revenue record of $746 million, which is up 19% year-over-year and drove non-GAAP EPS up 30% year-over-year.

Given our first half FY '19 results and the continued near-term strength we see in multiple markets, we're raising our guidance for all of FY '19 to be between $2.95 billion to $3 billion.

Now to be clear, we are watching the macro environment very carefully. Nonetheless, we see all these as the appropriate forward guidance. So let me share some recent business highlights. So communications was very strong in Q2, driven by LTE upgrades, pre-5G and some early 5G deployment. Our wireless business grew very significantly with broad-based strength in both radio and baseband applications with major OEMs across multiple geographies, and we resumed shipping to ZTE.

Our wired business grew due to customer transitions to next-generation products in several applications, including OTN/Metro, Access and Data Center Interconnect. In the Data Center segment, we continue to build momentum with hyperscale companies and acceleration deployments.

So for example, Twitch, a subsidiary of Amazon, shared at our developers forum how they achieved the industry's first broadcast quality live-streaming platform using a new video encoding format, VP9, and all accelerated on our FPGAs.

Samsung announced, at their Tech Day, their SmartSSD product, which was the result of a year-long collaboration between our companies. Samsung's SmartSSD combines our 16-nanometer Ultrascale+ FPGA with their leadership storage technology for accelerating computing years of stored data.

With regard to SAS, our leadership position in China market expanded as Alibaba changed their FPGA as a service from beta access to general access. And this follows on Huawei's general access that occurred for their SAS program this past June. And recently, Amazon Web Services doubled their SAS availability zones from 4 to 8, adding London, Sydney, Frankfurt, and most recently, China.

Now continuing in terms of Data Center and our platform. Earlier this month, we announced Alveo, our portfolio of very powerful adaptable accelerator cards that will increase performance in industry-standard servers, both in the cloud and on-prem data centers, for a very broad range of applications, including AI inference.

Now Alveo did ship for revenue very late in Q2, but the revenue ramp really begins in the second half of FY '19. We expect revenue to grow at a good pace but, in absolute terms, it will be relatively modest for FY '19. We do expect Alveo to contribute meaningful revenue in FY '20.

Now we also made excellent progress in our Data Center partnerships and ecosystem. Now working with AMD, we achieved an industry record for the highest AI inference throughput performance at 30,000 images per second with less than 2 milliseconds latency, all packed in a 4U server form factor with 2 EPYC CPUs and 8 Alveo accelerator cards.

Huawei has announced that they're integrating and deploying Alveo acceleration cards in their server product portfolio, and we are collaborating together to foster an applications ecosystem in China.

Inspur, a leading global data center and cloud computing solutions provider, announced that they'll be qualifying 2 Alveo cards, together with their server platforms.

And on the investment side, we made multiple investments last quarter in applications ecosystems, both in the Data Center as well as in other markets for a breadth of applications, including database acceleration, mobility and next-generation wireless technology. In respect to acquisitions, we did complete our acquisition of DeePhi Tech, which is an AI technology company, and integration is going quite well. Their products and technology significantly strengthen our AI capabilities and what we can offer for use cases in the cloud, at the edge and at end points.

Now moving on to our progress overall as a platform company. Our 28- and 16-nanometer Zynq product family continues to grow very robustly. Zynq sales achieved a new record, growing 70% from the year-ago quarter and now represents 18% of sales. Growth was across a broad set of applications in the Communications, Automotive, mostly Advanced Driver Assist (sic) [Assistance] Systems and industrial end markets.

Our Zynq RFSoC products had a revenue growth of approximately 4x versus the prior quarter's revenue. And we have well over 100 unique customers at various stages of engagement. And we see our opportunity pipeline growing in double-digit percentages.

And finally, the most profound recent milestone, by far, was our official announcement of our 7-nanometer Versal product family, the industry's first ACAP. ACAP, to refresh your memory, stands for adaptive compute acceleration platform. And this is a new product category that goes far beyond the capabilities of FPGAs. ACAPs are adaptable, scalable and a heterogeneous compute platform that is both hardware as well as software programmable.

So the Versal family will accelerate a very broad range of applications, including AI inference and applications that have embedded AI in them across multiple end markets and from use cases that stay in the cloud, to the edge and end points and at the communications infrastructure that connects them.

Versal delivers effectively the power of full-custom silicon without the high cost and very long development cycles of silicon. And they can be optimized to accelerate applications on the fly in actual running systems. So we're on track to tape-out the first 7-nanometer Versal product at TSC later -- TSMC later this quarter, and also to next year.

So in closing, I'm extremely proud of our team's excellence in innovation and consistent execution. I'm excited to see the fruits of our efforts in our Q2 results and our expectations for the full fiscal year. We continue to be deeply focused on executing our strategy for sustained, robust long-term revenue growth and shareholder value.

So thank you, and now I'll turn it over to Lorenzo.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [4]

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Great. Thank you, Victor, and good afternoon, everybody. As Victor said, we are very pleased with our business performance this quarter and our outlook for the rest of the fiscal year. Xilinx established several financial records, and we are, again, in the fortunate position of increasing our guidance for FY '19. I will elaborate on that guidance after reviewing the quarter.

Now for Q2. Revenue was at an all-time high of $746 million, growing 9% from last quarter and 19% year-over-year. We exceeded the high end of our guidance on the strength of our Advanced Product, which grew 25% over last quarter, and 43% year-over-year. Victor pointed out the strength of Zynq. It grew 70% year-on-year and highlights our progress as a platform company.

From an end market perspective, we saw strength from 3 of our 4 primary end markets. Data Center and TME grew significantly, with both businesses contributed -- contributing to the increase in sales. In Communications, wired grew more than expected and wireless was particularly strong. Automotive, Broadcast and Consumer was stronger-than-expected as automotive and broadcast growth more than offset a slight decline in consumer.

Industrial and A&D declined as expected, with the decrease mostly in A&D. Finally, Channel revenue was in line with expectations at $19 million. Note, we remain below target levels of Channel inventory.

Gross margin was 69%, slightly below our guidance due to the strength of wireless and lower A&D in our end market mix. GAAP operating expense was $282 million and non-GAAP operating expense was $279 million, both in line with our guidance.

GAAP operating income was $233 million or 31.2%, and non-GAAP operating income was $236 million or 31.6%. Our tax rate was 10% for the quarter. Our non-GAAP rate was 6%. The primary difference between these rates consists of discrete items related to tax reform.

Our GAAP net income was $216 million, equating to $0.84 a share of earnings. Non-GAAP net income was $221 million or $0.87 of earnings per share. This is a record level of earnings for Xilinx. Diluted shares for the quarter were flat at 256 million shares.

There are a few key points on the balance sheet and cash flow I would like to highlight. We ended the quarter with $3.4 billion in gross cash, down slightly quarter-on-quarter, and $1.7 billion in net debt. We generated operating cash flow of $313 million due in part to reducing accounts receivable to $372 million, approximately 45 days.

On capital allocation. We returned $114 million to shareholders with $91 million in dividend and $23 million in share repurchase at an average price of $66.08 a share. As Victor discussed, we completed the acquisition of DeePhi in the quarter. This acquisition, intended to accelerate our strategy, the dividend and our buyback, reflect the application of our capital allocation strategy as discussed at our Analyst Day.

On to Q3 and our updated FY '19 guidance. We expect revenue to continue to grow with Q3 between $760 million and $780 million. We are forecasting growth in Communications, Data Center and TME and Industrial and Auto -- Industrial and Aerospace and Defense. Particular strength is expected in Aerospace and Defense, wireless and TME. Automotive Broadcast and Consumer looks to come in approximately flat. Channel revenue is expected to be between $10 million and $20 million.

In Q3, our gross margin is expected to be approximately 69%, and GAAP operating expense in the range of $295 million. We expect non-GAAP operating expense to be approximately $290 million. The increase, quarter-to-quarter, in operating expense is related to increases in employee compensation, including profit-sharing and sales incentive and the full integration of the DeePhi acquisition.

Other income will be approximately $5 million, and our tax rate is expected to be between 10% and 12%.

For the full year FY '19 forecast, we are now expecting our revenue to be between $2,950,000,000 and $3 billion. At the midpoint, this would be 20% year-over-year revenue growth. Gross margin for the year is expected to be between 69% and 70%. GAAP operating expense for the year is expected to be approximately $1,155,000,000 and non-GAAP operating expense is expected to be approximately $1,140,000,000.

GAAP other income for the year will be approximately $15 million of income, and non-GAAP Other income will be approximately $5 million of income. Our GAAP tax rate for the year is expected to be between 10% and 12%, and the non-GAAP rate, between 9% and 11%. Share count is expected to be flat to very slightly up for the rest of the year.

In summary, we expect the year to show exceptional growth in revenue and profits. We are at the initial stages of realizing the benefits of our strategy and execution, and we are excited to see our opportunities developing ahead of our expectations.

Let me now turn the call back to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Vivek Arya from Bank of America.

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Adam Gonzalez, BofA Merrill Lynch, Research Division - Research Analyst [2]

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This is Adam Gonzalez on for Vivek. My question relates to your Comms business. Just -- can you talk about any geographic concentration you have there?

More specifically, can you quantify your exposure to the China market and talk about the growth, excluding China? And should we expect this to be the new baseline for the communications business? How sustainable are these trends as we move into 2019?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [3]

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Well, China is an important market, but as I said in my comments that we saw growth actually with all the top customers in that segment worldwide. So I would say that we're seeing growth in a number of areas, although China is important.

I think we mentioned in -- on the forums, in any event, one of the areas where there's maybe an acceleration of 5G deployment is happening in Korea, actually. So again, while China is important, we're seeing growth actually in multiple geographies.

We have consistently, in the past, say that we expected the really large ramp to happen in 2020. It does appear that it's happening -- it's starting a bit earlier. We still believe that it'll continue to build and carry over past in the -- of course, past 2020, but it does appear that it's happening a bit earlier. So I think, from that perspective, that's a new recent trend, I suppose.

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Operator [4]

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Your next question comes from Joe Moore with Morgan Stanley.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [5]

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Great. Can you talk about the growth in Zynq? That was pretty impressive growth there. How do you see it? Is it -- are you expanding the TAM? Are these sockets that you might not have had, had you not had Zynq integration? And what's your visibility on continuing this very strong ramp that you've seen in Zynq?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [6]

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Yes, Joe, I mean, I think Zynq, is -- it is very broad-based, which is what's so exciting about it, right? As you know, this is something that we pioneered quite some time ago, and I would say that in the early days it took a little bit longer.

And the thing that we gained from that was that there was more software work and things that took a while. But now what we're seeing is just -- we're just seeing very broad strength everywhere. And certainly, we do think that we are taking away from other types of solutions, right. Other ASSPs, other embedded controllers and certainly, some -- we were on that board before with an FPGA perhaps, but now we're capturing more of the BOM. And MPSoC is the second-generation and the RF associated is based on that, added to it the really high performance integrated ADCs and DOC.

So we are expanding, I would say, the footprint of Zynq as well as the fact that the investments we made back in 28-nanometer, indeed most of the revenue is still 28-nanometer Zynq. We're seeing tremendous uptake in terms of design-ins on the 16-nanometer but most of the revenue for that is still in front of it.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [7]

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Great. I guess, I met with several of your customers at your developers forum and we kind of heard about the use of Zynq and about, specifically, we heard the comment that if Xilinx had more libraries, then we'd be able to use Xilinx in more applications.

How do you think about that from an investment standpoint? How do you balance -- it seems like there's a fairly direct guide to developing sort of more of the Xilinx-generated IP and revenue, but obviously it takes a lot. So how do you balance that in this growth environment? Should we expect R&D to maybe continue to move up as you look at those opportunities?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [8]

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It's a very good point. And again, we're really trying to work that balance of continuing to invest so we can keep on this very strong growth but also return to investors. And so you will see some growth. And on a percentage basis, we're increasing our headcount in software and IP and things above the silicon level, if you will, much more.

Having said that, we're also putting a big focus, that's why you hear me in the highlights, and I think hopefully you took away from our developers forum, that we're really trying to drive an ecosystem. So it's not just the Xilinx R&D budget, but it's the collective budget of the ecosystem as well as partners like A&D, like Samsung and others.

So it's an and of all those things, we're going to try to do all those things. But it is part of our balance on how we deliver returns as well as continue to invest so that we can get higher leverage and more leverage in the model.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [9]

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Congratulations.

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Operator [10]

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And your next question comes from C.J. Muse with Evercore.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [11]

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I guess, first question, as it relates to wireless and early 5G deployment, can you speak to, I guess, whether this is just prototyping today or other. And then importantly, what you've learned now on a content basis and how that translates into sustained growth into 2020 and beyond?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [12]

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Yes. So for the first part of it, it's -- what we're now seeing is not prototyping. I mean, we -- I think we've been saying for some quarters that we're in virtually all the early proof of concepts and prototyping. So now what we're sort of seeing is some of that going into production.

And I would say -- and then you heard me make the comment of radio and baseband, so we do have more content than we have had traditionally. RFSoC is another element, and that is actually still emerging.

And in terms of what we'll see there, and that is absolutely production, is most cost-effective, power-efficient and size, weight form factor-based solution out there. No one really has a product like RFSoC. So yes, it's pretty strong. Sorry, second part of the question regarding?

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [13]

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How the deployments...

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [14]

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What you're looking for from the early deployments today as to what the revenue contributions can look like as we go into [past] deployment.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [15]

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Yes. I mean, we continue to see wireless for the year ending up very strong. And although we still expect that things will be bursty at times, right, overall, 5G will be the largest deployment, I think, the industry has seen. And so we're extremely well positioned for that.

I mean, again, I think, particularly with RFSoC, I think on the radio, we have an extremely strong position. Yes. So I do think this will build but again, no doubt there'll still be some lumpiness, right, as we go through.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [16]

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Great. And I guess, as a follow-up here, at your developers forum -- and you've launched Versal, I think one of the key questions was software, to follow up on Joe's question. So curious how we should be thinking about key milestones there in terms of developers, training instances. What should we be focused on?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [17]

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Yes. We're trying to share each of those elements, right. I mean, as you just said, expansion of SAS but also non-SAS, it's certainly not all about that.

Indeed, there tends to be a little bit of focus of us just in Data Center compute, but the Samsung SmartSSD product. I mean, we accelerate in storage, we also have positions in SmartNICs and converged NICs, I think there's a very strong trend in the networking side of the business.

There's the ecosystem and then our board business, right, which I think we gave a little bit of a foreshadowing all the way back to our analyst day, and now we've executed to that.

So I think, watch to see how many people are developing and offering that board and as those board -- as that board business more meaningfully contributes to revenue in the next fiscal year, that will be another sign of things.

On investment level, right, if we can keep up this great growth, we're going to return some to the shareholders and we're going to reinvest to keep this -- the flywheel spinning.

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Operator [18]

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Your next question comes from John Pitzer from Crédit Suisse.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [19]

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Congratulations on the strong results. Victor, I was wondering if you could elaborate a little bit more. In your prepared comments, you said that you have your eye on the macro. And if I look at the businesses that are probably most macro-influenced for you, it's Industrial and A&D.

And yet, despite kind of a macro backdrop that we're all worried about, you're guiding pretty strong growth for the December quarter. Curious if you could kind of square that circle for me. And as you answer the question, maybe talk about what might be share gains that you're picking up in those end markets?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [20]

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Yes, well, A&D was actually was down a little bit in the current quarter but that was off a very strong quarter. And we actually believe that going forward, that's going strengthen up again. So we actually don't see any signs in the A&D area sensitive to that.

I'll give you one where we do as a subsegment of our overall basket. As you know, our baskets are pretty big, right, so test measurement and emulation and prototyping, for instance. Within that, there's semiconductor test. And we are seeing weakening, as you might expect, within that. On the other hand, emulation and prototyping, we're seeing great strength.

So given all of those puts and takes, we're still seeing TME is on track for an excellent year. So -- and also within test, there's also very -- especially test, including device 5G test equipments, and we're seeing good strength there, for obvious reasons.

So I think this is -- part of this is the strength of the diversity that we have and also the high value and the innovation that we have, that we're less sensitive than to other products that have -- perhaps there are more options available for people just to switch in and out or it is just not as high value or not in the core of the systems, right. So I think that's one aspect of it.

And again, we walked into this quarter with very strong backlog. I mean, we feel good about the guidance. And then, of course, FY '20, we give that in the Analyst Day and we'll certainly learn a lot between now and then. But again, we've looked at it, and, certainly, we're very keenly aware of the environment. We're just seeing good signals for our business so...

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [21]

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The other...

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [22]

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The other follow-up, just relative -- go ahead, Lorenzo, I'm sorry.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [23]

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No, no. I think if you were -- I wasn't sure, John, whether you're referring to the overall growth that we're expecting quarter-on-quarter or just in industrial and A&D.

One of the pieces Victor didn't talk about is continuing strength in Communications, particularly in wireless. I think that aligns with the -- both the 4G LTE continued fill out and the growth in 5G. So that's the last piece of the overall growth story. And then -- I'm sorry, go ahead.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [24]

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That's helpful. And then I guess, Victor, as a follow-up, I was intrigued by your comments about growth in Data Center in FY '20. Your confidence level seems pretty high. It seems like you've got a good line of sight.

I know there's probably a lot you can't talk about, but I wanted to give you the opportunity to elaborate on that comment and what gives you that confidence. Is this new customers? Is it silicon to board, maybe if you can help us just kind of parse that out?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [25]

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Yes. Well, it's actually a blend. As I said, we actually did get some revenue at the very end of Q2 for the Alveo boards. And by the way, we only have one board. Well, actually, we have 2 boards, the U200 and U250 but we are going to launch more boards through the course of the next short number of quarters. And I said that it'll grow at a good rate, but it's starting from a very small number, so it's not meaningful. But FY '20 will be meaningful.

So if you step back, I mean, we didn't have a boards revenue stream at all, right. So that, certainly, is contributing to that. The other thing is, there's a lot of engagements I can't really speak to right now. But I did get -- I am able to say -- so I mentioned Samsung's SmartSSD, they launched that. I could tell you that we have a design win to do a smart memory DIMM with a very major memory supplier, but I cannot say who.

As you know, a lot of the customers, for competitive reasons, play things close to the chest, but we do feel that next fiscal year, we will start seeing much more meaningful revenue. We've been saying that we're seeing good percentage growth off of a relatively smaller number in Data Center as a segment. But in the next fiscal year, particularly in the back half, we really see that it's going to start coming together so. Does that help?

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Operator [26]

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Your next question comes from Ambrish Srivastava with BMO.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [27]

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I just wanted to make sure I understood the confidence for the full year. Victor, is it -- and Lorenzo, is it dependent on comms, 5G, 4G as well as Alveo beginning to kick in? And what about the other segments? I'm talking beyond the quarter that you're guiding for. And then...

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Victor Peng, Xilinx, Inc. - President, CEO & Director [28]

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Let me give a briefing and I'll let Lorenzo add comments to this as well. I mean, I think one of the reasons, and I mentioned also, while we're very dialed into watching the macro situation and we still feel it is the appropriate guide is because of the breadth of the strength that we saw in Q2, which is carrying over into this quarter and also from what we can see for the fourth, so including the first half, came in stronger than our initial expectations for the year.

So I would say, it's the breadth, yes. So that means generalizing your statement, you just pointed out communications and then Data Center and boards, but it goes beyond that because we're seeing strength in all these other markets, even though within some of those markets, there are weaknesses, right. As I said, TME, there are weaknesses in some of the segments within that bucket, but the overall larger end market that we report out looks really good for the year. Okay. So, Lorenzo?

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [29]

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Yes, no, I don't have much to add. I mean, just it's kind of obvious given the relative size of the end markets and the dynamic that we talked about with the growth of Communications. That continues. It's a large dollar contributor, but it is much more broad than that in a portfolio of end markets we support.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [30]

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Okay. And then within Communications, if I remember the number correctly, you said it was up 35% year-over-year. But if we go back, because you gave us a sense for -- it has to be well below the peak level we saw a few years ago. So how far below are we from that level?

And now you have more content, so we should expect, as we get into the broader 5G rollout 6, 8 quarters from now that number should be higher than what you did in the last build?

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [31]

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Give me just one second to make sure I'm not misaligning things. It is still, for both of the end markets in Communications, it is still meaningfully below the highs we've seen for both wired and wireless in the past 3 and 5 years ago.

But I think, also, the other thing to think about it, given the growth of our other end markets, it's a smaller percentage of our overall business. So our overall exposure to that is smaller. But we do expect that we have headroom, as we discussed in both wired and wireless, to get past the historic levels at some point in the future.

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Operator [32]

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Your next question comes from Toshiya Hari with Goldman Sachs.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [33]

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Victor, obviously, there's quite a bit of concern around end markets like Industrial, Automotive, semi-test, as you sort of addressed them. Can you give us an idea what's sort of embedded in your back half guide for some of these end markets, where we do have concerns?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [34]

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Well, I think I talked a bit about the TME, right. Yes, there are some weakness in some areas, but then some areas are up. So again, from what we can see, we think that for the year, TME will be up quite nicely, overall. And certainly, in the first half, everything is strong, right, including semis right, semiconductor test.

On Automotive, we're seeing growth, and we do still expect it to continue. But just to put that in context, I think we started to talk about how Automotive is sort of in the around...

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [35]

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It's 7 -- what -- 7% of our business, yes.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [36]

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Yes, about 7% of our business. So I mean, even if there's some fluctuation on that, let's just put that in context, right. So I would say, again, yes, we watch it very carefully.

And there are some segments that will feel it but because -- not to be repetitive, but since we had such broad strength, in some of these areas, we know the dynamics are such that they won't be affected. Like, since the operator decided they want to pull in 5G, they're not going to back off. Now they may modulate, right, the ramp, but since we have always said that we really were planning more of a ramp in the later time frame, to some extent, just the fact that it accelerated has been upside, right.

And then RFSoC, which we've never had before, that continues. We won like 3 more awards just this last quarter because there's just no other product like that. And so we will have more value in the radio side and there's more radio that are going to be deployed.

So yes, there are some areas that are weaker but, again, because of the broad strength in some of the leadership products that we have, I don't think we're going to be as affected. But of course, we're going to watch this very carefully.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [37]

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Yes, we're in a good position obviously in areas like wireless, and even in Auto, where the platforms that we've been designed into with our products, our high-value products are tending to be in the ramp phase. So while macro factors may impact it, they're still, in some ways, gaining share versus alternatives in multiple end markets. But that's put us in a pretty good position.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [38]

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Great. And then as a quick follow-up. Victor, obviously, you've been on the road quite a bit hosting a lot of sessions, and I'm sure you've had conversations with customers. But for Alveo specifically, what's been the feedback so far? You talked about the ramp into December and more so into calendar '19. How should we think about the magnitude of that ramp, again, for Alveo, specifically?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [39]

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Yes, for FY '19, again, it's starting from, effectively 0, right, just at the very end of last quarter, so it will grow on a percentage basis. But we're just not -- we're not seeing that to be very material.

But through the course of FY '20, as I said in my comments, it will be meaningful revenue. I think the interest is high. I do think that how much more upside versus it -- maybe being a little bit more moderate, there is certainly a degree of -- around some of the things that -- the earlier questions around application development, inside, also, just education and so forth. And that's why we did the developers forum, and hopefully, you saw some of the momentum that we are getting a strong interest there, right.

So it's early days, but we do feel like the signals are there's a lot of interest and -- so revenue being meaningful is going to be an FY '20 time frame, not FY '19.

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Operator [40]

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Your next question comes from Tristan Gerra from Robert Baird.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [41]

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You're now starting to go after semiconductor content that traditionally has been discrete chips adjacent to FPGA such as DACs and ADCs in your Versal RF series. What are the other content adjacency opportunities that you are seeing? And can you talk about the candidate, if any, in addition to that could be play as part of the FPGA integration going forward?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [42]

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Yes. So one is, if you look at Versal, to a degree, the reason why that we keep trying to make sure people appreciate that it's not an FPGA, is exactly because of the richness of the multiple different types of compute engines and all the infrastructure we built into that.

It's got multi-core SoC. It's got a network on a chip. It's got the next-generation programmable adaptive hardware at the fabric and distributed DSP in memory. And it's got this new -- some of the products, some of the subfamilies, we call them series, like for instance, the AI Core series, will have this new architecture called the AI Engine.

And so if you look at just the integration level, and on top of that, of course, it's still going to have all the multi-MAC, Ethernet MAC, high-speed SerDes, some will -- talk to integrated HPM on a silicon interposer. It's a really, really complete and powerful platform. So that is exactly the direction that we're going in.

And so because of that, we can expand, and we will expand, our SAM. And we're increasing more and more -- the competition isn't just other FPGAs, it's indeed well beyond that.

And then to get the leverage, and there's been a lot of good questions around this area, is that's why we were so focused also on delivering the whole software stack, and then driving an ecosystem around that. So yes, we're integrating a tremendous amount of capability into our Versal products.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [43]

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Okay. That's very useful. And then just going back on the Alveo broad -- Huawei opportunity, if we -- even if we assume that their ASPs or has the list price that you've mentioned, trying to reconcile this with your targeted incremental revenue coming from Data Center suggests that you're probably making very conservative market share or adoption rate assumptions.

Any color you could give us in terms of assumption of market share or any type of adoption rate that you see for that new revenue stream to get to your guidance?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [44]

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Well, what I would say is that we -- I wouldn't say that we're being very conservative, but we're certainly trying to be measured because it is new for us. But as we said, we are seeing strong interest.

It's just pretty early days. I think we also we have to build out, which we are, we're actively building out the whole go-to-market channels. All of that is being produced. So I would say, again, that we are going to be priced competitively, but we deliver an awful lot of value. And then we'll see about share.

I mean, the whole acceleration segment is relatively new, right? But we do feel like this is a whole new product revenue stream as well as a way to accelerate people getting to market with applications, right, because we don't -- people have to start with a chip. So that's why, again, we're pricing the value, and we think we're going to capture that value but it's an emerging area so.

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Operator [45]

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Your next question comes from John Vinh from KeyBanc Capital.

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John Nguyen Vinh, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [46]

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I just wanted to follow up on kind of the Data Center question that was asked earlier. It seems like you've got very good proof points right now with several of your customers like Huawei, AWS and BABA adopting SAS.

But it seems like there's a much more meaningful opportunity if you can convince one of your customers to move forward with an internal acceleration architecture similar to what we've seen at Catapult.

What do you think it will take for one of your customers or potential customers to move forward with that use case? And is that something that we can think about happening potentially next year that's potentially baked into your expectations for more meaningful growth in Data Center?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [47]

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Well, look, I mean, I agree that the world is not just about SAS, and indeed, like I said earlier, it's not -- for us, unlike many other suppliers, it's not even just about data center compute, right. Like in storage, just for -- we're working on memory and we're in smart and converged NICs.

But now back to your point, I agree and as I'm sure you heard in my opening comments, is the Twitch group, right, and they did acceleration on video, right. So just goes to show, again, we do, do that, and we are working with others. Again, it's just always a bit challenging in terms of when things can be shared and -- but yes, we have many engagements for internal acceleration, some of which involve machine learning, some of which do not.

I think Alveo is going to also help that because, again, it lowers the barrier significantly, right, for people to develop applications and also to bring that on-prem, because not everything is going to run in the public cloud, right? So I agree with you, and I hope that I can share more of that going forward.

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John Nguyen Vinh, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [48]

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Great. And then my follow-up is on 5G. It seems like your customers are approaching 5G with a combination of using RFSoC and MPSoC and some other FPGAs. Can you just talk about your expectations for 5G? Do you expect the majority of your 5G customers to move to RFSoC?

And because of the integration and the performance and the BOM cost savings, does that give you more staying power late in the cycle as your customers consider kind of ASIC reversion as a opportunity?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [49]

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Absolutely. I think, you -- I couldn't have made the same statement better than you just articulated. I mean, look, the RFSoC really is, like -- it's not hype. I mean, there's nobody that has a product like that.

And by the way, it's not just 5G, right, I mean, it's any kind of massive MIMO or antenna array application. We see it in cable, we see it in other kinds of radar applications. And people are changing their architecture, their radio architecture, based on this. And so in that sense, it's certainly pretty sticky.

I don't really see it -- what -- in that particular instance, people being able to disrupt that, and it's just getting started, right. We just recently went into production and people are deploying. So I think RFSoC certainly will be very, very strong. And -- but you're right, it was not just RFSoC, we're seeing usage of other MPSoCs as well as just FPGAs at the 16-nanometer node.

Some of that, over the course of time, could go to that. But right now things are so dynamic and things are moving so quickly. That isn't happening and I think that's going to -- actually 5G is so ambitious and there's so many things happening that, that will probably happen for a bit longer.

But I am not necessarily suggesting that our position in baseband will be as durable as our position in radio, for instance, right. I mean, I think radio is -- and we already have a road map, right, so it's not just the first-generation RFSoC. We already have product, the next-generation as well as in 7-nanometer so.

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Operator [50]

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Your next question comes from Ross Seymore with Deutsche Bank.

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JiHyung Yoo, Deutsche Bank AG, Research Division - Research Associate [51]

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This is Ji for Ross Seymore. You touched on this previously, but how do you view Xilinx's benefit from the 5G transition as compared to the 4G transition, perhaps from a magnitude and duration perspective?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [52]

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Yes, I mean, to expand on it, I think 5G is going to clearly, over time, significantly surpass what 4G was as an industry. And then for us, it's a bigger opportunity as well.

And it's both because the 5G, from a technology perspective, is so much more disruptive. It's much broader. And it really is not just a communication standard, but it's really being used as a term for a basket of technology, including things like massive MIMO, which isn't inherently necessarily 5G. There's IoT being associated, also automotive. So it's very broad, very ambitious.

And then it's not just because the segment is bigger, it's also like we're -- we've innovated, we added value that -- we're adding more value like, again, in RFSoC, for instance, right, for that matter MPSoC.

But back in the 4G, we didn't have integrated multicore RFSoCs and we didn't have really high performance ADCs and DACs monolithically integrated. So yes, I think the general market will be bigger and broader and I think our opportunity, over time, will be significantly larger.

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JiHyung Yoo, Deutsche Bank AG, Research Division - Research Associate [53]

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Okay. As a follow-up on the OpEx side, how far along are Xilinx's software investments in support of the Data Center efforts? Do you expect those investments to slow? Or do they need to persist on a structural or customer-by-customer engagement basis?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [54]

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Well, I think in broad strokes, it's certainly not going to slow. I mean, we need to -- in fact, within what's reasonable and affordable so that we can return value to the shareholders and still continue to invest we -- as I said, we'll probably invest from the headcount perspective, proportionally more in software and things above silicon, than we would at the silicon level.

Having said that, we are investing in the ecosystem and also doing partnerships. So we're really trying to expand the footprint, so it's not just us.

Now the other part that you alluded to is also true, right. Some of the really, really big customers, there's a lot of customization. There's things that we work very closely with to make sure that we deliver to their needs. And we are investing and doing that as well for, obviously, the quite top customers.

So yes, for both of those reasons, just the broad horizontal investment as well as some key major customers, we are and we will be investing more on software and IT and related things.

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Operator [55]

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Your next question comes from Blayne Curtis with Barclays.

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Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [56]

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Just curious, into the September quarter, you mentioned ZTE was back. Just curious how much that was and maybe versus what you were planning when you guided.

And then just longer term, just curious, you talked about earlier 5G. If you can just relate it to the ramp of 4G. That saw 2 sharp quarters in the beginning of '14, and then kind of fell off. It sounds like 5G may be a little longer lived. Just kind of curious as you look out over the next few quarters or even years, the trajectory of 5G versus 4G.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [57]

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Okay. So the first part, ZTE. So as we said when the first order happened, and we just want to remind everybody, we don't have any 10% customers or anyone that's even near 10%, to be honest.

Having said that, ZTE is an important customer, and so it was a component certainly of our growth, but again, I want to emphasize that, that wasn't -- it wasn't just about ZTE. There's early deployments, and we're seeing strength from other major customers of ours that supply into wireless.

I would say, because, like, that occurred just at the very start of fiscal '19, I would say that it's not as though we see ZTE being above our original plan. I mean, obviously, they had 1 less quarter to ship in, but it's not over our original, original plan. But we did have to take them out at the start of the fiscal year. But then once we knew that it was back in, we addressed it appropriately.

So okay, so then in terms of 5G kind of ramp, I definitely -- as I said before, I think it will be larger. I think it will last longer because it's so ambitious and there's so many -- there's going to be so much innovation even at the business model level of what's going to happen with 5G.

But calling exactly the shape, I mean, heck, I mean, the last quarter, we weren't saying that we were going to see it now, we were saying we're maintaining the 2020 mainly. But now, lo and behold, it appears that people are wanting to do -- start that deployment next year.

So I don't feel entirely comfortable on telling you exactly how that rolls out. I do think it'll still somewhat be bursty. And that's why I want to caution people on that. But integrated over time, it's definitely going to be a big opportunity for us. And it will be a long opportunity because bandwidth is -- data bandwidth is going crazy, and people want low latency and high bandwidth.

So that buildout is going to be very substantial. Not only in wireless, by the way, I mean, that's wired, too, right, the whole entire network has to go and get upgraded.

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Operator [58]

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Your last question comes from Chris Danely from Citigroup.

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Christopher Brett Danely, Citigroup Inc, Research Division - MD [59]

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I guess, I'll try and ask that 5G question another way. How -- why not, I've been doing this for way too long. How far ahead of plan is your 5G? I know you're not going to give us the revenue, but if you look at the revenue you have right now, are we 1, 2, 3 quarters ahead of where you thought that would be?

And then I know you're not going to talk about, like, the curve, but if you go back and look at previous upgrades and area interface standards, how long was it from sort of the original -- or excuse me, the initial ramp until peak? And then do you think that this one, that 5G, could be a longer ramp from the initial until the peak?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [60]

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Okay. So the first part of your question is how far ahead, and you kind of said 1, 2 or 3. I guess, what I'd say is that order of magnitude you're probably right, probably more the 2, 3 kind of ish, I would say.

And then in terms of, again, intro to peak, that's tougher. I really -- and look, I'm not going to claim that I'm the visionary on this, to be quite candid, but from -- but I do talk to a lot of customers, right, and technologies people in Xilinx that are way brighter than I am.

So having said that, what I would say is that this is definitely going to be broader. It is very, very ambitious. And by the way, and to add another big macro trend into this, everybody's looking at Artificial Intelligence and machine learning in the network. That's going to bring a whole other level of things.

So just given how ambitious and how changing this is going to be, not just the traditional markets, I do think it'll be just broader, that would be my qualitative -- we've -- I certainly don't think I'm smart enough to call the delta to the peak. But you know what? When we get a whole lot closer to it -- it's the old the future is hard to predict, predictions are hard especially about the future.

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Operator [61]

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And there are no further questions at this time.

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Matt Poirier, Xilinx, Inc. - Senior Vice-President of Corporate Development & IR [62]

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Great. Well, thanks for joining us today everyone. We'll have a playback of this call beginning at 5:00 p.m. Pacific, 8:00 p.m. Eastern today. For a copy of our earnings release, please visit our Investor Relations website. Our next earnings release data for the third quarter of fiscal year 2019 will be on Wednesday, January 23, after the market close.

As far as conference participation this quarter, we will be attending the Crédit Suisse Technology Conference on November 27. This completes our call, and thank you very much for your participation.

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Operator [63]

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Thank you. This does conclude today's conference call. You may now disconnect.