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Edited Transcript of XLNX earnings conference call or presentation 28-Jan-20 10:00pm GMT

Q3 2020 Xilinx Inc Earnings Call

SAN JOSE Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Xilinx Inc earnings conference call or presentation Tuesday, January 28, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matt Poirier

Xilinx, Inc. - Senior VP of Corporate Development & IR and Treasurer

* Victor Peng

Xilinx, Inc. - President, CEO & Director

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Conference Call Participants

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* Ambrish Srivastava

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

* Christopher Adam Jackson Rolland

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Christopher James Muse

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

* Jamie Rebecca Zakalik

BofA Merrill Lynch, Research Division - Research Analyst

* JiHyung Yoo

Deutsche Bank AG, Research Division - Research Associate

* Joseph Lawrence Moore

Morgan Stanley, Research Division - Executive Director

* Matthew D. Ramsay

Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst

* 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 Rob, and I will be your conference operator. I would like to welcome everyone to the Xilinx Third Quarter Fiscal Year 2020 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 your conference.

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Matt Poirier, Xilinx, Inc. - Senior VP of Corporate Development & IR and Treasurer [2]

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Thank you, and good afternoon. With me are Victor Peng, our CEO; and Sumeet Gagneja, our Corporate Vice President and Chief Accounting Officer. As the search for our new Chief Financial Officer remains ongoing, for this call, Victor will provide a financial and business review of the December quarter and a business outlook for the March quarter of fiscal year 2020. Sumeet and I will participate in the Q&A portion of the call as needed.

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 the documents that 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.

In addition to GAAP financial measures, we will 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, unusual items, such as amortization of intangibles and certain one-time 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. Let me jump right into our results for the third quarter and provide an update on our expectations for the fourth quarter of fiscal 2020. Overall, the quarter played out largely as we anticipated. Total revenues were $723.5 million, near the midpoint of our expected revenue range. We made a concerted effort to reduce operating expenses and achieve better-than-expected operating margin and GAAP earnings per share of $0.64, non-GAAP operating earnings per share of $0.68.

Now I'll turn to highlights for the third quarter. The advanced products category constitute approximately 70% of total revenues in the third quarter, a decrease of 4% year-over-year. Zynq-based revenue grew 26% year-over-year despite the impact of a weaker wired and wireless business. The Zynq SoC platform, which includes Zynq at 28 nanometers and both MPSoC and RFSoC at 16 nanometers, represented 23% of total revenues, which is higher than the year ago period. We continue to see strong Zynq traction across our target markets, which is a positive indicator of our progression, transitioning to platforms.

Our overall customer engagement momentum continues to build as we position for the long-term profitable growth by executing on our strategy of growth in the data center, 5G and the automotive market as well as accelerating growth in our core markets.

In the communication markets, we are actively engaged with a global non-Chinese OEM for a second-generation 5G radio design, that includes beamforming and is based on our 7-nanometer Versal ACAP. Beyond communications, Versal continues to be well received by customers across several end markets. While production shipments of Versal is expected to begin in late FY '21, we have already recognized initial revenue from early shipments to customers.

In the data center, Alibaba Cloud announced that Xilinx is powering the data center and is being used by their cloud services enterprise customers. They also shared that unprecedented traffic during Singles' Day in China has proven the reliability and security of their systems platform running on RFPGAs.

In addition, Supermicro unveiled 2 new Alveo systems that power compute platforms to accelerate some of the most algorithmically demanding workloads in the enterprise and in the cloud. On the software front, as announced earlier, the latest Vitis platform is now available for download and free to users who purchased Alveo development board. We also announced the availability of the Vitis AI inference development platform that empowers software developers to utilize deep learning acceleration framework, like TensorFlow and Caffe.

Lastly, we announced our Zynq MPSOC (sic) [Zynq UltraScale+ MPSoC] is powering Baidu's production-ready Apollo Computing Unit for automated valet parking, the industry's first dedicated computing solution for this emerging automotive application.

Moving to a review of our business groups and core markets for the third quarter. Our core markets performed as expected, with some adjustments in mix across our AIT and ADC markets. We saw less than expected declines in A&D and ISM, while macroeconomic and trade-related headwinds impacted automotive more than expected. We saw increased revenue from emulation and prototyping customers in TME market, albeit somewhat less than expected. This mix of revenue helped drive a higher blended corporate gross margin in the quarter.

The data center group performed as expected and benefited from sales of both compute and networking products to hyperscale customers. Networking revenue from Solarflare somewhat outperformed expectations in the quarter. We also saw increased revenue from customers shipping storage class memory. However, this was offset by weaker demand from high-performance computing and some crypto customers.

The wired and wireless group performed largely as anticipated with both wireless and wired down sequentially. Wireless revenue meaningfully declined because of the anticipated baseband ASIC transition and some program-related delays with one of our global OEMs.

Now moving on to the financials. As I mentioned, total revenue was $723.5 million, down 10% year-over-year and down 13% sequentially. Data center group revenue increased 8% year-over-year, but was down 16% sequentially from a record quarter. Wired and wireless group revenue declined 18% year-over-year and was down 29% sequentially. Note that we had 1 communications customer that represented greater than 10% of revenues in the third quarter.

AIT revenue declined 10% year-over-year and was down 5% sequentially. ABC revenue increased 10% year-over-year and was up 2% sequentially. Gross margin was in line with expectations with GAAP gross margin of 67% and non-GAAP gross margin of 68%. GAAP operating expense at $324 million and non-GAAP OpEx at $318 million were both meaningfully below guidance of $330 million due to significantly reduced hiring and discretionary spending. GAAP operating income was $159 million or 22% operating margin, non-GAAP operating income was $174 million or 24% operating margin. Our GAAP tax rate was approximately 2%, and non-GAAP tax rate was approximately 5%. GAAP net income was $162 million and diluted earnings per share was $0.64, a 31% year-over-year decrease. Non-GAAP net income was $171 million and non-GAAP diluted EPS was $0.68, a 26% decline from last year.

Diluted share count decreased to 252.8 million, and gross cash was $2.4 billion, with $1.2 billion in long-term debt. Accounts receivables decreased to $254 million and is at 32 days, down from 37 days last quarter. Overall, we generated $324 million in operating cash flow.

During the quarter, we repurchased approximately 2.8 million shares at an average price of $93.70 per share and paid dividends of $93 million.

Turning now to the outlook for the fourth quarter. We still believe Q3 will be our low quarter for fiscal '20 from a revenue perspective. However, our revenue recovery is now expected to be more gradual than we had anticipated at the start of last quarter. We expect total fourth quarter revenue to be between $750 million and $780 million, which at the midpoint of the guidance is down approximately 8% year-over-year, but up approximately 6% sequentially.

Fourth quarter revenue growth is being driven by meaningful improvement in our core markets and moderate growth in DCG, but is significantly offset by greater-than-anticipated weakness in WWG. We expect modest growth from our distribution channel.

For core markets, we are on track with our prior expectations for strong sequential revenue growth as programs for multiple emulation and prototyping customer's ramp. Both A&D and ISM are expected to be up in Q4. Auto is also expected to recover in Q4 as ADAS demand increases relative to Q3. AVB and consumer are expected to be somewhat weaker.

For DCG, revenue is expected to grow moderately, albeit somewhat less than prior expectations. We expect continued contributions from compute acceleration, driven by a mix of cloud and high-performance compute customers. We expect to see slower revenue ramp from storage and networking customers, and we expect additional cloud customer PoCs to move into production. But revenue will likely continue to be lumpy given that we're in the early stages of scaling the DCG business.

The most significant change to our outlook is in WWG. We now expect Q4 revenue from both wired and wireless customers to decline more than previously anticipated. The additional negative impact to our wireless business are a result of a slowdown in 5G rollout across multiple regions, as many operators take a pause before the next wave of infrastructure deployment. In addition, wired revenues are being impacted by a broad-based weakness in demand across multiple customers. Note that these headwinds are in addition to the impact of the loss of revenue from Huawei since last May. We now expect WWG revenue to be down in FY '20 versus FY '19.

Fiscal Q4 non-GAAP gross margin is expected to improve to approximately 69.5%. Given the more persistent revenue headwinds we're facing, we're taking several actions to drive structural operating efficiencies across the company. We plan to reduce our global workforce by approximately 7% to a targeted reduction in force and meaningfully slower attrition replacement. In addition, we are taking several actions to reduce further discretionary spend and realize additional operating efficiencies across the business.

Excluding severance charges related to the reduction in force, non-GAAP operating expense is expected to be approximately $318 million, which reflects the adjusted spending profile. This includes approximately $17 million to $20 million of savings from various operating expense reduction actions we plan to take in the fourth quarter. This is offset by expenses related to a 7-nanometer tape-out in the quarter and increased legal expenses. Non-GAAP other income is expected to be approximately $8 million due primarily to an anticipated IP settlement with a customer that was recently acquired. Finally, our tax rate is expected to be approximately 8%.

In closing, we are faced with persistent trade-related impacts to our business and other headwinds. We are taking thoughtful and decisive actions that, while painful, we believe are in the best interest of all Xilinx' stakeholders. We continue to see great long-term opportunity in the second secular growth trends in data center, 5G infrastructure and automotive markets as well as TAM expansion and share gains across our foundational core markets. We remain extremely focused and committed to our strategy to drive profitable growth as a leader in adaptable platforms.

Operator, we'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Joe Moore from Morgan Stanley.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [2]

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I wonder, before you had said that the impact of the baseband transition would be largely done by the March quarter, is that still the case? And what are you kind of thinking about the progression of wireless beyond that, particularly assuming that we don't get Huawei back into the mix? Can you grow from there? Is it going to take a while? Just what do you think is the progression there?

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

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Yes, Joe. I mean, what we said is the baseband impact did occur in the last quarter as expected. So that's -- you're correct. If you're implying that's not new news, you're right. That's not new news. Really, the additional pressure we're feeling in the current quarter is from slowdown in deployments across multiple geographies and then both weakness both on the wireless side as well on the wired side. That level of weakness, we did not anticipate last quarter when you kind of gave the overall guide for the second half.

In terms of how we see things going forward, we're not giving guidance for FY '21. But I guess, in a broader picture, what I would say is, clearly, in the near term, we have some meaningful headwinds here. Huawei remains on the Entity List, and I really think that from that perspective, we don't think about that as, even if that were to change in the Entity List, that account revenue would be at levels that it used to be. I think it's just the reality of it, and that's how we think about it now. However, we're still, relatively speaking, in the first phase of deploying for 5G. And you've heard me, and I'm sure other people talk about, we talked to all our customers, they see like 3 waves of technology rollout. And so it's certainly been more challenges first wave. But when we think about the longer term, we still think this is a good growth opportunity for Xilinx, particularly because we've been innovating with things like RFSoC and Versal ACAP. And we've got really good engagement, as I had alluded in my prepared comments, already with some customers for the second generation. And that's actually using our 7-nanometer Versal ACAP. So that's how we think about the big picture.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [4]

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Great. And just to clarify my question in terms of the baseband transition, is that an ongoing headwind beyond the March quarter? Or is the impact of that kind of mostly done in the current quarter?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [5]

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I guess we -- the way we think about it is mostly done, it's factored in. Exactly. It's not like a one-time event. It was -- we expected it would happen. It did happen in that quarter, and we keep it out.

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Operator [6]

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Your next question comes from the line of Toshiya Hari from Goldman Sachs.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [7]

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Victor, when you're talking about the wireless business in your prepared remarks, you talked about the ASIC transitioning. You mentioned something about a program delay at 1 of your customers. How significant or insignificant were those 2 dynamics in the December quarter? I guess, more importantly, at your Investor Day, you guys talked about 3x to 4x more opportunity in 5G relative to 4G given more base stations, higher content and higher market share. Outside of Huawei, having issues, has anything changed there? Or is everything still very much intact long term?

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

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Sure. Let me deal with the last question first. It's exactly, as you said, Huawei is significant. But if you sort of -- okay, understand that and move on from that, we still do think it's a significantly larger opportunity than 4G. Now back to sort of the issue around 1 customer's program delay. Really, the bigger -- higher-order bit on the headwinds that we're seeing in Q4 causing us to see a more gradual recovery from the Q3, which we didn't anticipate was going to be kind of a confluence of kind of a perfect storm thing. It's really the general slowdown in deployment in multiple geographies. And that's affected essentially all the OEMs that we're working with, right, that we're still working with and allowed to work with. The program delay was another factor. But I think the way you should think about it is the highest-order bit is just a pause or a slower deployment that we are seeing across -- from the carriers, and that's reflected in the OEM customers that we have and multiple of them in all the different regions.

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Operator [9]

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Your next question comes from the line of Christopher Rolland from Susquehanna.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [10]

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So I guess, first on WWG. So this pause, is it purely geographic? Or is it also -- does it have something to do with the applications they're addressing, for example, moving from baseband to remote radio head or to Massive-MIMO? And then if you could talk about where we are with RFSoC and how you think that rollout will go?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [11]

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Yes. On the broader question, I don't think it has to do with a rollout of a particular technology, and you're right, there are different types of technologies that fall out of the umbrella of 5G. It just seems as though the multiple operators that cover multiple regions are -- done some initial deployments and are just taking a pause. My position is that they're seeking more profitability before they further invest. But in any event, we talked to you both carriers as well as our OEMs, and we see that fairly broad. So I guess, again, then in terms of the longer-term view and all that, again, I think that the long-term view still seems very -- like a very good opportunity for us. And again, we have to keep in perspective that we're only in the very first phase and deployments will come back. It's just like we have a pause right now that we didn't anticipate.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [12]

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Great. And then on data center...

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Victor Peng, Xilinx, Inc. - President, CEO & Director [13]

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I'm sorry, you know what, I just realized I didn't quite answer your RFSoC. So RFSoC, we do have -- that's being deployed with different OEMs that cover different multiple regions as well, both in sub-6. But also, we think there's some strength there in millimeter wave bands. We're still relatively speaking in the early stages, but it is deployed. So it is out there in multiple regions and through multiple OEMs. So I apologize, I didn't quite cover that initially.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [14]

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No problem, Victor. And on the data center side, nice progress on the Alveo cards. But I think in your road map, you had AI core either coming out soon, or actually maybe even sampling now. Maybe talk about where we are there. And have you had any feedback from any hyperscalers or customers?

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

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Yes, I think so. I think when you're talking about the AI engine, I think that's with respect to our Versal products, and we do have some -- the early Versal development board. So just to clarify some of the brand names. I think there is good excitement in multiple markets I kind of alluded to the 5G, but certainly, in data center that's being evaluated. And also, in other markets as well, even in, let's say, 1 application that even though it's just in the initial silicon. People are already doing some deployments in terms of very high-resolution camera, where they're also doing some image recognition to some augmented reality for an interesting entertainment experience. And so I think that's a good indicator of not only the quality of our initial silicon, but also the breadth that people are using AI on that platform, not just in what's considered the cloud, but maybe you would call that -- some people might call that an Edge application, right? So it's still early days, but we're pretty excited about the diversity and the traction that we're getting.

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Operator [16]

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Your next question comes from the line of C.J. Muse from 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 [17]

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I guess the question on the restructuring. Can you walk through what is permanent versus temporary? And can you help us kind of understand how you will plan to deliver both the operating margins in this more subdued environment as well as obviously invest, I guess, most importantly, in the coming SoCs as well as the software stack in the coming few years?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [18]

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Yes, C.J., it's a good question. Look, I mean, when we first started seeing some weakness, we took some proactive actions to control expenses as reflected in the Q3. Really what happened is late in the year, as we saw that some of these headwinds that we just walked through were more severe. And also, I think the ongoing persistent effect of the whole China-U. S. trade situation in the Huawei business that I've reflected, it was clear that we had to do something that was more structural, right? So it's very painful, something for us as a company to impact some of our employees. But a good portion of this is a matter of reducing labor, and that's both from that targeted reduction in force as well as significantly controlling even attrition replacement. So that labor component, obviously, is an ongoing thing.

Now some of the other things that we're doing, just many other actions in terms of discretionary spend. But we also even looked at programs. I think that's what you're alluding to. We spent a lot of time thinking about that, of course, because our goal, and I think we've achieved that and how we're coming out here is to not further impact both near-term business nor degrade our long-term opportunity, which we remain very confident in. And I think you heard me mention in the prepared remarks that we expect a certain level of OpEx savings in the quarter, but we're doing a tape-out in 7-nanometer in the quarter, so that somewhat offsets all of that. So we are still very much committed to executing to our strategy. And I think, again, there's some difficult decisions here, but I think we struck a good balance of things that will bring us in a more reasonable profitability profile, like you said, a more subdued near-term revenue environment, but not in any way materially impacting anything in the future, or for that matter, even the near-term business. I do think that as we drive and recover and grow out of it, this does position us to have maybe more efficiency in the business and leverage because we will watch very carefully our OpEx even as we get back to a growth trend.

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Operator [19]

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Your next question comes from the line of Tristan Gerra from Baird.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [20]

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Could you give us some color on the weakness you see in the wired business? Also, I'm trying to reconcile the commentary that 5G wireless deployments are taking across geographies. But in the U.S., the ramp has barely started. So maybe if you could elaborate, and I know you've already got a few questions on the topic, but if you could elaborate on the reasons of the pause? And when do you expect to rebound with specifically ramp in the U.S.?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [21]

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Yes. I mean, as you know, we really serve virtually all of the OEMs that support all the different geographies, including, of course, the U.S. And without getting into specific customers, we do see the broad softness and feedback we're getting is because they're also not seeing some demand materialize across regions, and that includes the U.S. I do think that this is not necessarily something that is -- it's hard to tell the visibility right now, but I don't think this is something that's going to necessarily persist until the second wave comes. It's just that, clearly, after they've done some deployment, it just appears from both when we talk to carriers as well as to multiple OEMs that there seems to be a pause now. And again, we're -- that's what we see right now. Yes, it's hard for us to predict exactly the timing of when that will restart. But again, I come back to -- when I look at the engagements we already have going actively in the next wave of equipment, I feel good about that we still have good opportunity there. And when there is more deployment of the current generation of equipment, then obviously that could also help our business recover.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [22]

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Okay. And then could you give us a quick sense of your mix at 7-nanometer versus 16?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [23]

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Yes, 16 is -- 16-nanometer, our portfolio there is on track to break all the records that we have, and we hold the most successful product family in the programmable space with our 7-series back in the 28-nanometer generation. We're clearly outpacing that. And that's due not only to the fact that we executed with the innovations we have with MPSoC, RFSoC and a number of other areas that's tremendously successful, and that revenue is going to continue to grow for some number of years. 7 nanometers, remember, is just still in a sampling stage, right? So we're not in production. But we're getting very good traction. I mentioned multiple markets, communications and 1 area that's more of a video and broadcast kind of area, data center or getting good looks, aerospace and defense, a lot of strong demand. But that will take time as it usually does for us in some of these markets to ramp to sort of a more meaningful revenue. But we have logged revenue already, particularly in the development board. So a very encouraging sign.

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Operator [24]

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Your next question comes from the line of Matt Ramsay from Cowen.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [25]

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Victor, I wanted to ask, and I guess it's a little bit related to C.J.'s question on the reduction in force. But more specifically, as you guys look at prudent cost cuts and the like going forward, the level of investment and has that level of investment changed in the Vitis software stack that you guys introduced? And I guess, the second part of the question is, separate from the investment, how are the early engagement has been on that software stack with customers across the business? And if there is anything to highlight there on that progression, that would be really helpful.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [26]

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Okay. Yes, thanks. Maybe I didn't touch on that part of it. First, I guess, what we'd like to say, on a relative basis, some of the labor-related reductions that we're doing, on a relative basis, we're doing more in SG&A than in R&D in general, okay? We are also, again, continuing to invest in the areas that are critical for our growth. So I think you're both making the point that it's not just silicon road map, it's also what we're doing on the software, IP and so forth, and we fully agree. So my comments weren't -- didn't mean to sort of imply that we just looked at tape-out. We are also -- yes, we are also focused more on everything we need, all the ONUs we need to execute our source strategy and move into platforms and be a much more mainstream-targeted platform. Everything we see in terms of, for instance, Vitis, those [$3] when we announced new webinars or training, they fill out immediately. So that's really encouraging. I know at the end of the day, everyone is -- we certainly are looking for the revenue. But when I look at other things to measure in terms of developers in terms of just hits we get on various videos that we do in training, it's all looking very promising.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [27]

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And just as a quick follow-up. In the data center portfolio, I wanted to ask if you can give us an update on the traction you guys might be having on the design win side and the SmartNIC space? And if that revenue can be material to the company over the next 12, 18 months?

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

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Yes, I think I kind of mentioned that, for instance, Solarflare revenue last quarter was a little higher than expected. I think that was a record for them. It's still relatively modest revenue. I think that does bode well. And we -- that integration is going very well. And clearly, I think the position will get even stronger when we really fully realize all the positive synergies of their expertise in software and system-level expertise with our execution on hardware and platform. So I do think that the SmartNIC opportunity is significant. And I think, thinking in terms of a year and beyond, is reasonable. And I think it will be -- it will grow for multiple years.

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Operator [29]

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And your next question comes from the line of Ambrish Srivastava from BMO.

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

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Victor, I just had a question on the ASIC transition that you experienced this time? And you said that this was -- so this is a onetime and it's done. But when wireless starts to ramp again, why should it not occur again, i.e., you see growth and then you'll see a headwind again? Just kind of help us understand the dynamic and why would this not repeat? Or would it repeat again, was my first question. And the second was given what seems to be a pretty sizable reduction, what does it say about the longer-term mid-teens growth target that you have laid out for the company?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [31]

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Yes. Look, on the first part, I think when we said that we expected ASIC replacement in the baseband, I think from the very early stages when we had strong upside in 5G deployment, we said that we ordinarily don't get baseband wins. And because there was an early rapid deployment in South Korea, and the only way anybody can get to market was they -- using our technology, which is one of the value adds that we have as we enable people to be agile and get things to market quickly. We had that. But we didn't expect longevity there.

I know it's a competitive marketplace. Everybody hears about that. But I want to bring people back to -- we've competed against ASICs at our customers for well over a decade. I mean Huawei has HiSilicon and has had a HiSilicon for a long time. Clearly, everybody is aware that there was a meaningful impact when we couldn't ship to Huawei, and clearly, we weren't totally replaced by ASICs by HiSilicon and Huawei. That's just one example. I mean -- I know you guys are familiar with all the other OEMS, they have ASIC teams, right? So this is nothing new. And I don't take that lightly by any means either. I think we are able to still win against ASIC even our own customers because we are continuing to innovate, innovate with things like RFSoC, with things like Versal on the software and IP side. So yes, look, I mean, could this happen again? It could. But we traditionally have really good strength in radio. We're innovating, we're moving rapidly and we continue to be very focused on this business. So we maintain that we feel like in the long-term that this is a very big opportunity despite the very significant impact of the trade situation here. So that was all on the ASIC side. So I'm sorry, can you repeat the second part of the question?

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [32]

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Yes. Yes. So that's helpful perspective. What I was asking was, given the reduction, which seems that I can remember the last time we saw is a big reduction for you guys. But what does that speak to the mid-teens growth that you have laid out for the company?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [33]

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Yes. Look, we're not -- as I said before, we're not going to give guidance for FY '21 now. We look to do that in the next call. But what I would say is that we absolutely are committed to getting back to double-digit growth. I think this is a recognition of the fact that it's going to come up a little bit more gradually to get to that kind of a run rate. We're committed to doing that. And we've recognized that because it is going to take longer. We've had to take some difficult steps here, but I think we're building this to execute -- continue to execute on our strategy and fulfill, I think, a very significant opportunity we have, not only 5G, but again, data center, our core markets and automotive as well.

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Operator [34]

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And your next question comes from the line of Ross Seymore from Deutsche Bank.

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JiHyung Yoo, Deutsche Bank AG, Research Division - Research Associate [35]

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This is JiHyung for Ross. It looks like DCG, even with some moderating growth in the March quarter looks to be potentially up 20% for the year versus the prior guidance were up 30%. So I guess, what has changed in DCG growth? Are some of the transitions from customer proof of concept to production actually been moving slower-than-expected previously?

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

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Yes. Look, I mean, we're not giving an overall reassessment of that. But I think the takeaway is, it is still growing double digit. In fact, and when we close out this fiscal year, that will be 2 consecutive years of double digit. I think in general, it's total reflection. As you said, some of these things like proof of concepts have taken a bit longer. I think it's also just we're growing the business, it's an emerging market. It's not quite at scale where you get the usual puts and takes of certain things are maybe a little bit slower, then you get other upsides. It's fairly small business so far in an absolute sense, even though it's growing very well. And I think I've said on the previous call that as we get to a higher scale and just more diversity of design wins and a different timing of the different programs that we'll see less quarter-to-quarter volatility. But I do think for the continued near term, I think the better measure to see is we're -- are we sustaining that good double-digit kind of growth and the quality of kind of wins that we get, the engagements that we have. And on those basis, we still feel very good about the business.

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JiHyung Yoo, Deutsche Bank AG, Research Division - Research Associate [37]

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Okay. And if we just compare Xilinx' growth to Intel's PSG business, clearly, the company Xilinx has had some good market share gains in the last calendar year. So I guess, even within the head -- face of Huawei challenges. So I guess, can you talk a little bit about the competitive dynamic?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [38]

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Yes. I mentioned a few times in my prepared remarks that our core markets is a key part of our strategy to continue to accelerate growth in our core markets. And if you look at how that's played out, I mean, our core markets are growing very solidly, right? And to your point, some of that is share game but some of it is also SAM extension, right? Those markets have different types of profiles, if you will, in terms of how quickly things move to market. But even in those markets, we're seeing the transition. Zynq being very, very strong. RFSoC, strong interest in some early design-in activity that haven't fully played out just because the time constant tends to be a little bit longer. But it's key to our business and has been progressing quite well. And we do fully expect to continue to take share, but also grow the SAM, right?

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Operator [39]

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And your next question comes from the line of Vivek Arya from Bank of America.

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Jamie Rebecca Zakalik, BofA Merrill Lynch, Research Division - Research Analyst [40]

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This is Jamie Zakalik on for Vivek. Is the pace of 5G, FPGA replacement, similar to the pace that you've seen in past cycles? And is this replacement limited to the baseband? And then on the radio side, do you see Marvell's Avera business as a direct competitor in the digital front end or is it more a complementary product?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [41]

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I guess, first, the thing of how to think about is 5G similar to 4G, or what is the level of similarity? And I really must say -- I know that there's been a lot of marketing hype around 5G, but I really must say, it is a radically more disruptive standards -- set of standards and set of technology. So I think it is significantly different, which is why we and many other companies have invested so much and are saying how it's going to be changed -- once it's fully deployed, how much will it change things from automobiles, the homes, the IoT. It's simply not data and voice, right, which is what 4G is all about. So I really do think it is meaningfully different even when you cut through some of the marketing buzz. Now in our side of it, we're also -- the value we deliver to our customers in 5G is meaningfully different, too, meaningfully upgraded, right? A good portion of our products are not just pure FPGAs and our now state-of-the-art FPGAs are so much more powerful than back in the 4G era. So I think on both fronts, the opportunity, the magnitude of the disruption is larger. And then what we bring to the table is larger. On the competition side, everybody's up their game. There's a lot of people that have been consolidated out. The players left are pretty good at what they do, ourselves included. I don't want to get into specifics about a specific competitor. All I would say, again, is it's not anything new for us to compete with ASIC solutions, with ASSP solutions, including ASIC solutions from our own customers. It's not new. It's not easy. And we have to create real value. We have to provide excellent support, great quality, and those are the things that we've been doing, and that's where we will remain focused on.

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Jamie Rebecca Zakalik, BofA Merrill Lynch, Research Division - Research Analyst [42]

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Great. And then on a quick follow-up, you mentioned 1 customer, I think, that was greater than 10% of sales in Q3. Could you give some details on who this customer was? Was it Huawei? If not, could you give any details on what percent of revenue Huawei was in the quarter? And just confirm that you're still removing Huawei from forward-looking guide.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [43]

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Okay. So a quick clarification. We don't have any meaningful revenue from Huawei because they're still on the Entity's List. And we had taken Huawei out starting from the last quarter. My comments about Huawei is really about even on a go-forward basis, even if they were moved from Entity List, it's pretty clear now, given that they've remained on the Entity List as long as they have, that revenue will never be at the level that we used to have. So it's definitely not Huawei. But we don't share the details of the specific customer for 10%.

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Operator [44]

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And there are no further questions at this time. I will turn the call back over to Mr. Victor Peng, CEO, for some closing remarks.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [45]

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Okay. Yes. Look, before we close the end of this call, I just want to share that, clearly, we're not where we expected to be if we go back to the start of this fiscal year. I think the unprecedented change in U.S.-China relations and trade clearly has an impact on the industry, and specifically, our business. And at a time that's really unfortunate, right at the beginning of the deployment of 5G. We proactively made some very difficult decisions, including a very painful one of doing a targeted reduction in force. But I think that is the appropriate thing to do given a slower near-term revenue growth trajectory, and I think what that does do is, again, position us very well once we get back to a growth trajectory in terms of efficiency in the business and leverage.

But I think it's important not to lose sight of the fact that our core markets, as we've discussed a few times, both in prepared remarks as well as in the Q&A, is very, very solid. It's growing very well on an annual basis. It's a core part of our strategy to accelerate that growth. At the same time, data center business, while it's an emerging market and still not fully at scale, tend to have some burstiness from a quarter-to-quarter basis, it looks like we will achieve double-digit growth on an annual basis for 2 consecutive years, and we continue to see greater opportunity there.

And even with 5G, we've talked about that quite a bit. It is important to remember, we're still in the relatively early innings on 5G. And it started out much stronger and earlier than people predicted. Now we're having a soft spot, but we're engaged. We have the right kind of engagements with top OEMs, and there's still many more innings to come. So we remain bullish in terms of our overall long-term outlook and those growth drivers.

So with that, thank you for being on the call, and I turn it back over to Matt.

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Matt Poirier, Xilinx, Inc. - Senior VP of Corporate Development & IR and Treasurer [46]

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So thanks for joining us today. We'll have a playback of this call beginning at 5 p.m. Pacific, 8 p.m. Eastern Time today. For a copy of our earnings release, please visit our Investor Relations website. Our next earnings release date for the fourth quarter of fiscal year 2020 will be Wednesday, April 22, after the market close. Please note that we will be attending the Goldman Sachs Conference in February and the Morgan Stanley Conference in March. Both events will be webcast live and will be accessible through our IR website.

This completes our call. Thank you very much for your participation.

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Operator [47]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.