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Edited Transcript of XLNX earnings conference call or presentation 23-Jan-19 10:00pm GMT

Q3 2019 Xilinx Inc Earnings Call

SAN JOSE Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Xilinx Inc earnings conference call or presentation Wednesday, January 23, 2019 at 10:00:00pm 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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* 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

* Charles Paul Kazarian

Crédit Suisse AG, Research Division - 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

* John Nguyen Vinh

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

* Srinivas Reddy Pajjuri

Macquarie Research - Senior Analyst

* Toshiya Hari

Goldman Sachs Group Inc., Research Division - MD

* Tristan Gerra

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

* Vijay Raghavan Rakesh

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst

* Vinayak Rao

Morgan Stanley, Research Division - Research Associate

* Vivek Arya

BofA Merrill Lynch, Research Division - Director

* Wayne A. Loeb

Citigroup Inc, Research Division - VP

* William Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good afternoon. My name is Liz, and I will be your conference operator. I would like to welcome everyone to the Xilinx' Third 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 your conference.

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

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Thank you, Liz, and good afternoon, everyone. With me are Victor Peng, CEO; and Lorenzo Flores, CFO. We will provide a financial and business review of the December quarter and the business outlook for the March quarter.

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.

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 and unusual items, such as amortization of intangibles and certain one-time items related to acquisition. 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, and 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 strategy has continued to deliver excellent results in FY '19. We saw substantial and broad strength in our business in Q3. Revenue was $800 million, up 34% year-on-year, driving non-GAAP operating income up over 60% year-on-year, and non-GAAP EPS up over 40% year-on-year to $0.92 per share.

We had growth in each of our primary end markets, led by strength in the Wireless Communications, Aerospace & Defense, Test, Measurement & Emulation markets. We expect to surpass a record $3 billion of revenue for fiscal 2019 with the Q4 guidance that Lorenzo will cover in his remarks.

Now let me share some Q3 highlights. Communication was very strong in the third quarter, driven by the wireless market where we are seeing growth from the very early production of 5G and pre-5G deployments as well as some LTE upgrades. The strong growth was primarily driven by 5G deployments in South Korea and a very early start of the ramp of 5G deployments in China.

Aerospace & Defense revenue was also sharply increased as we expected in the third quarter, driven by broad strength across multiple defense and space programs. Test, Measurement & Emulation revenue was also strong across both the test and measurement as well as the emulation and prototyping subsegments.

If you look at our core Data Center revenue, and what I mean by core is not including cryptocurrency, that grew double digits within the quarter, and on a year-on-year basis, nearly doubled. However, cryptocurrency was off, so there were some offset from that perspective. Now that said, we continue to build a very strong momentum with hyperscalers, where we are expanding our ecosystem for a broad adoption of our products and applications across the compute, storage and networking segments. We had design wins in applications, including big data analytics acceleration, machine learning inference, video transcoding, network acceleration as well as in-storage controllers. We have now won designs for SmartNIC applications with multiple hyperscalers. And in the FPGA as a service area, we have additional engagements beyond our previously announced deployments with Amazon, Alibaba and Huawei.

We also expanded our Alveo board family that we had just launched this past October at our Developers Forum. We recently added the Alveo U280 product for the previously announced U200 and U250. The U280 has a large capacity Virtex UltraScale+ FPGA, together with high-bandwidth memory, these are the 3D memory stacks, for the ultimate in high-performance acceleration of applications, such as big data analytics as well as data mining.

In addition, Dell EMC has certified and is now selling the Alveo U200 as an add-on accelerator card for multiple versions of their power edge servers.

With respect to our transformation to a platform company, our 28-nanometer and 16-nanometer Zynq SoC products continue to grow very robustly. Zynq sales grew approximately 80% year-on-year, led by our 16-nanometer MPSoC products, and there was strength that we saw across a very broad set of application in communications, automotive, particularly ADAS as well as industrial end markets. Zynq MPSoC revenues grew over 3x from the year-ago quarter.

And there -- our SoC design win momentum also continues to grow. We are now engaged with over 300 unique customers in multiple end markets, which is more than triple the number we had just in the last quarter. We are also seeing increased activity in design-ins of our MPSoC in autonomous driving and other forms of automotive applications. These revenues -- excuse me, these wins will drive revenue growth in more of the mid to long term. So just recently, Daimler unveiled at CES their MBUX Interior Assistant in the Mercedes-Benz GLE model, and this is powered by one of our MPSoCs that is running a number of image recognitions running multiple neural networks. ZF also announced a strategic collaboration with us at CES, where, again, our technology will power ZF's very advanced AI-based automotive control unit for autonomous vehicles.

And finally, I'm really pleased to report that we taped out our first 7-nanometer Versal product, the industry's first ACAP, just as we planned. As you may recall, ACAP is a new product category, and that stands for Adaptive Compute Acceleration Platform. ACAPs are adaptable, very scalable, they are heterogeneous compute platforms that are both hardware as well as software programmable and they are far more powerful than FPGAs. So we will be sampling our 7-nanometer Versal products to customers in the second half of this calendar year.

So I'm extremely proud of our team for their execution, both on the business results as well as on the major engineering programs as we head into the fourth quarter of what's been a truly exceptional fiscal year.

So thank you, and let me turn it over to Lorenzo now.

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

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Yes. Thank you, Victor. As Victor said, we are very pleased that our focus and execution are delivering outstanding results. Xilinx achieved a significant milestones this quarter attaining $800 million in revenue for the first time. We exceeded our guidance, growing 7% sequentially and 34% year-over-year. This performance is again due to the strength of our Advanced Products, which grew 9% sequentially and 51% year-over-year. All 4 of our primary end markets showed growth in the quarter. Data Center and TME grew with strength in both businesses, as Victor said, excluding a decline in cryptocurrency. Communications increased as significant growth in wireless easily offset an expected decline in wired. Industrial and A&D also grew significantly, as A&D increased more than expected and Industrial was slightly weaker than expected.

Automotive, Broadcast and Consumer increased, driven by growth in broadcast, offsetting an expected decline in consumer, while the auto business was flat. Channel revenue was approximately $14 million, in line with expectations. Gross margin was 69%, in line with guidance.

Operating expense with GAAP OpEx at $294 million and non-GAAP at $289 million was in line with our guidance. With revenue higher than expected and gross margin and operating expense in line with expectations, our operating income was higher than expected. GAAP operating income was $258 million or 32.2%, and non-GAAP operating income was $263 million or 32.9%. Our GAAP tax rate was 7% for the quarter and the non-GAAP rate was 10%. The primary difference from our guidance and between the GAAP and non-GAAP rate is related to tax reform.

Earnings, again, set a record for the company. GAAP net income was $239 million, which yielded diluted earnings per share of $0.93. Non-GAAP net income was $237 million, which yielded non-GAAP diluted earnings per share of $0.92. Share count increased slightly to just over 256 million shares.

The key points on the balance sheet and cash flow. Gross cash was up to $3.5 billion, with $1.7 billion in net debt. Note that in fiscal Q4, we have $500 million of debt instrument coming due.

Accounts receivable declined to $359 million and is at 41 days. Inventory increased $40 million to $283 million as we built inventory to support future demand, particularly in wireless communication. In sum, we generated $314 million in operating cash flow.

This quarter, we returned $92 million to shareholders, almost entirely by dividend. We repurchased $1 million worth of shares this quarter, bringing our total for the year to $162 million, 2.4 million shares at an average price of $66.30. We continue to apply our capital allocation strategy as discussed at our Analyst Day.

Now on to guidance for the final quarter of fiscal year '19. We expect continued revenue growth with sales to be between $815 million and $835 million. With regards to primary end markets, we are forecasting growth in Communications and Data Center and TME. Particular strength will be in wireless and TME. After a very strong December quarter, we're expecting Industrial and A&D to decline. We are also expecting a decline across Automotive, Broadcast and Consumer.

Channel revenue is expected to be between 0 and $10 million. Our inventory management processes have taken us close to target levels of inventory given distributor revenue levels. Gross margin is expected to be 68.5%. GAAP operating expense is expected to grow to $310 million, driven by increased mask and wafer expense and employee compensation. Non-GAAP operating expense will be approximately $305 million. GAAP other income is expected to be approximately $4 million. Our tax rate is expected to be between 6% and 8%, and we expect share count to slightly increase.

As I close, I want to highlight our financial performance for the fiscal year-to-date as this longer view clearly demonstrates the consistent strength of our business. Revenue is up 22% compared to the first 3 quarters of last year. All 4 of our reported end markets showed double-digit growth. Advanced Products are up approximately 40%. Our revenue growth has allowed us to continue to invest in our business, while delivering outstanding profitability. Operating income dollars are up greater than 35%, GAAP net income and EPS have more than doubled and non-GAAP net income and EPS are up 30%.

Finally, operating cash flow exceeded $800 million, an increase of nearly 40% over the first 3 quarters of fiscal year '18. 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) Our first question comes from the line of Vivek Arya with Bank of America.

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Vivek Arya, BofA Merrill Lynch, Research Division - Director [2]

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Congratulations on the strong growth and execution. It's good to see at least one semiconductor company outperforming. So Victor, I'm curious as you're starting to get into these 5G deployments, what is the range of content you are seeing in these deployments? And how would you contrast it with 4G? And as part of that, how do you address some investor concern about when there could be competition from ASICs or merchant silicon, right, which we saw back in the 3G and the 4G base?

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

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Sure. I think in earlier calls, we had talked about how we are in virtually all the pre-5G proof of concepts and demonstrations. Not only in the radio, but even in the baseband. So as we really started seeing true deployments in North Korea and the very, very early beginnings of that in China. We do have content both in radio, which we've traditionally always been strong in, and also in the baseband. So I would say, yes. South Korea -- I would say, yes. We have higher content right now. I would also point out that 5G is going to be, I've said this in previous calls, 5G is going to be a larger deployment overall compared to the past generations. And we're also innovating quite a bit with our SoCs as well as the analog, really high-performance analog that we've integrated for our RFSoCs.

So I do think because of our capability, we will have more persistence than in the past. However, yes, ASICs will come on board. I would say that in this first generation of deployments, it's not clear that we'll necessarily hang onto the baseband component, but they'll be followed on with the second and third generations. And again, on the radio side, we're very strong and even stronger than ever. And on the baseband side, particularly when we come out with our 7-nano Versal product, I think we have a good shot of having good longevity also even in baseband.

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Operator [4]

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Our next question comes from Joseph Moore with Morgan Stanley.

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Vinayak Rao, Morgan Stanley, Research Division - Research Associate [5]

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This is Vinayak calling in for Joe. Congrats on a very strong quarter. I wanted to follow up on your comments on Zynq and MPSoC, right. Growth there remains very strong. Like how much of that is just TAM expansion due to new applications versus share gains that you're seeing? And like how much visibility do you have for that business? Like how should we think about growth over the next couple of years there?

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

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Yes. I think it's attributed to both those, and I would add one other. But let's first cover those two, I mean, certainly, we are winning in a lot of traditional applications and use cases that we've had in the past. And by the strength of both of our execution and the innovative architecture, we're winning more. But there are, again, in many cases, what we've displaced -- or the real competition we've had is more with ASSPs and other nontraditional competitors. So there's definitely SAM expansion.

The third element, I believe, is everybody is moving towards more standard platforms. The whole intelligent connected world is really happening. People have data strategies, digital strategies, and so they can't have custom kind of incompatible kind of solutions. And this cuts across multiple end markets, right. So we think, in general, we see move towards a more standardized platforms, and Zynq first and second generation are just absolutely ideal for that kind of architecture.

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Vinayak Rao, Morgan Stanley, Research Division - Research Associate [7]

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Got it. That's very helpful. I wanted to follow up on your Aerospace & Defense business. Traditionally, that's been a little lumpy, but you're seeing real growth on new platforms. Like how is the backlog there? And like anything you can share about your visibility for that business going forward.

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

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Yes. I have -- I'll make a comment and maybe Lorenzo can speak to the backlog. Let me just talk generally. I mean, yes, our overall Aerospace & Defense is definitely on track for a record on an annual basis. You will see bursts from quarter-to-quarter. It's cyclical in a sense that these are driven by the cadence of those programs, and those programs, obviously, have times when they are doing a lot of buying versus digesting and so forth.

I will say, from a trend perspective too, we're encouraged that we're seeing a little bit more -- on a relative basis, more rapid adoption of more advanced technologies than we've seen in the past in that segment now. It's still a fairly long cycle to production from design win, nonetheless we are seeing a bit of that change. And then for the answer on backlog, I'll let Lorenzo answer it...

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [9]

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Yes. No. I guess, I would say simply that we don't break out backlog by end market for disclosure. Our backlog, in general, for this quarter is quite strong. But as Victor pointed out, A&D business, actually as you pointed in your question, A&D business is lumpy. But if you look overall, the trend year-on-year is significant growth based again on the expansion of the types of designs we're in as well as the -- come to market with the designs that we won in the past. So I think both things set up the trend longer term with some broad strength.

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Operator [10]

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Our next question comes from the line of 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 is on the gross margin side of things. Can you talk about, I guess particularly on the comp side, what you're doing there, if at all, to drive margins higher, particularly with next-generation products? And how we should think about the trajectory as we move forward? And if I could just throw in the second question here. How are you thinking about tax rate into fiscal '20?

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [12]

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Okay. We'll try to cover it all.

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

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Yes, I'll cover the first and Lorenzo will definitely cover the second. So -- yes, I mean, in terms of the gross margin, you're right. I mean, as we have a big component of our growth is the actual production deployments now we're starting to see with 5G. And because of that and a few other product mixes, that does bring the gross margin down somewhat. I would say what do we do in terms of driving gross margin? Well, there are a number things that we've done, not just for wireless, but in general on what we do to drive our margin, and that ranges from all kinds of cost-saving issues, just discipline in terms of other things on the business side.

But I think the biggest thing and the RFSoC is a perfect example of that, we're innovating, so we are providing a great deal more value to our customers. And we end up in a sense both profiting, the classic win-win, right. Because at the system level, we are actually saving cost, power, form factor, weight. And because of that, we do hold more value when we truly innovate and provide this capability that, in the case of RFSoC, no one has a product like that. So I think there is all the -- there's not one silver bullet we go, walking and tapping on all these things that we always do on an ongoing basis. But the big needle mover is when we innovate, right. And again, starting with when we integrated the SoC with the first juncture in Zynq and continuing that innovation road map is, I think, the big needle movers over time.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [14]

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So I think Victor covered the gross margin piece quite comprehensively. So I'll just get on the tax rate. I will say, we haven't provided specific guidance for FY '20 on the tax rate. But if you look at the general expectations for tax in FY '19, we were thinking we'd be in the 10% to 12% range. The quarter-to-quarter lumpiness has come from, as the tax reform regulations have solidified, there are different pieces that we have to incorporate into the quarterly tax rate that we're providing for. But over the long term, I would expect to get back to that more normalized rate. But again, I have to take the caveat, we haven't given specific FY '20 guidance yet, C.J. I hope that helps.

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Operator [15]

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Our next question comes from Ambrish Srivastava with BMO Capital Markets.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [16]

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I had a question on China, Victor, and of course, all the concerns could change in a tweet. But how are you thinking about risk mitigation? You have a pretty meaningful exposure, and I thought I heard you say that some of the 5G strength was coming from China as well. So just help us understand or give us your perspective on how you're thinking about it. And then my quick question, follow-up, is could you talk a little bit about the growth and the traction that you talked about that Alveo, if I'm pronouncing it correctly, was a second half phenomenon? So is that contributing to the margins being slightly below and just talk about the ramp there, please?

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

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Okay. Yes. The China trade situation, we have continued to monitor that very carefully. As you said, it's very difficult to predict. So certainly, we think about what appropriate actions might be reasonable should certain scenarios occur, but really, since that's really unpredictable and we don't want to just take action rashly, we're just going to watch it and then react, respond appropriately. So I think we've put thought into different scenarios. But clearly, right now, for the facts, we know that the tariffs that are in place do not impact us. Where if things stay the way they are, we will continue to do the business. But we have put thought into different scenarios. So I probably should just leave it at that since, again, once it's quite speculative what could happen.

To the question around Alveo, and you did pronounce it correctly, we've already said that this fiscal year is going to be very modest revenue, and it will become more meaningful next fiscal year, and actually more in the second half because we did only launch it in October and we only started shipping and production in November. So it's very early. But I would say that, I think I mentioned in earlier calls, that the really early, very right out of the gate there was very strong interest, I'd say we're very comfortable happy where it is right now. I mentioned the qualification at Dell, there's activity with other OEMs as well as partners, we're building out the channels, the infrastructure, we're engaged in a number of POCs. And next fiscal year is when we'd see that going more, transitioning more into production. So I'm very happy with it. It's a small amount right now.

In terms of the margin piece, no, it doesn't really -- we don't anticipate it particularly impacting the margin. Again, we think we deliver tremendous value, not only in just the silicon on the board, but the software infrastructure that goes along with it. We will price it competitively, but we feel like we are delivering a lot of value. So we don't see that as an exposure, let's say, and weakening the company's overall margin.

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Operator [18]

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Our next question comes from Blayne Curtis with Barclays.

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Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [19]

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Congrats. You mentioned in Data Center TME, you highlighted TME being up, kind of just curious how much that's 5G related? And then, you didn't mention data center, I know you had a couple of knockout quarters there, so maybe just updates there. Is there any lumpiness? Or is it just smaller and you didn't mention it?

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

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Yes. On the TME side, there is some related to the 5G specialty testers, high-end testers. But actually, there's also good amount of strength in the emulation and prototyping side of the world, where our product strength is really quite unmatched. I think I mentioned before where we might see some degree of softening is more on, say, the pure semiconductor test, in some of the other areas, but as a whole TME was strong, and not just because of 5G. So that's maybe the way to think about it that way.

With respect to core data center, again, it is still relatively small, and we said, we had double-digit growth on a quarter-on-quarter basis and on a year-on-year basis from small numbers it nearly doubled. But it's still relatively modest today, right. Again, we see all of that growing more materially next fiscal year. But we're quite happy about what we're seeing. In terms of lumpiness, I mean, I think because things are emerging, yes, there is a degree of lumpiness. But I don't think we're anywhere close to seeing what steady state is. I don't think intrinsically. I have no reason to believe intrinsically this will become a bursty kind of market.

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

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And I think some of the aggregate lumpiness that you might have -- might be reflected in the business results have been more attributed to the cryptocurrency, as we've said, that declined in the quarter.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [22]

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Yes. And again, just to put that in perspective, cryptocurrency is a very small percentage. But because we're talking about a relatively small of our core data center that's strategically interesting it's big enough that those fluctuations can impact that on a near-term basis. But as Lorenzo said, that -- we don't consider that part of the core business.

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Operator [23]

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Our next question comes from John Pitzer with Crédit Suisse.

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Charles Paul Kazarian, Crédit Suisse AG, Research Division - Research Analyst [24]

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This is Charlie Kazarian on behalf of John Pitzer. Congrats on the strong results. You had previously painted a picture of a less steep, but longer rev ramp for 5G. But with year-on-year comps rev up about 40% year-on-year, it looks like this ramp is perhaps a bit steeper than the prior cycle and December rev only about 5% lower than the 2014 peak. I was hoping you could elaborate a bit on, one, how this ramp has played out relative to expectations, say, 12 months ago? And then two, just the content growth you're seeing that has already brought you close to the 2014 peak levels just given we're still relatively early innings in this build-out?

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

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Yes. Clearly, we didn't anticipate the ramp starting as early as it did, I think we said that on the last call. So the start of this ramp is happening faster than we had thought. And the strength for coming out of the gate is pretty strong. I did allude to the fact that we're shipping both in some cases, not all, in some cases, both in baseband as well in the radio. So I think a combination of all those is what's giving this strong -- strength.

I will say that this speaks to one of our strengths relative to ASICs, right. I mean, just -- again, we've talked about one of our key value props in multiple markets is you're not tied to get to market on tape-out cycles as much. Once we've come out with products, people can come out with new capability very rapidly. But I would still say, if you look at -- there'll still be some burstiness to this market. That's unlike what we said about Data Center, I don't think 5G is going to be just a steady climb. But this is still the earlier deployment. We definitely still believe that in 2020 and beyond that there'll be more strength and more growth. So yes, this is a bit stronger than what we anticipated, but I think there's more to come. So does that help?

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Charles Paul Kazarian, Crédit Suisse AG, Research Division - Research Analyst [26]

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Yes. Very helpful.

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Operator [27]

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Our next question comes from John Vinh with KeyBanc Capital.

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John Nguyen Vinh, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [28]

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I just had a follow-up question for you on 5G, Victor. When you look at RFSoC, you've benefited from the discrete integration of some of these analog components that historically many of your analog peers have played into. They have also introduced integrated products as well, and everybody seems to be talking about gaining share on 5G here. I'm wondering if you could just comment, are we talking about just an expanding TAM and everybody is benefiting? Or there are potential kind of relative losers and winners here? I was wondering if you could just provide your perspective on that.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [29]

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There is definitely an expanding TAM. Because, again, I think 5G over time will definitely be a much bigger deployment. It's so much more rich in terms of what it's doing, the performance is going up by orders of magnitude, so there's going to be TAM expansion. I do think that we will also gain share, right. People are, as you say, playing the game, coming from the other side, perhaps. But I would say that still today, and we haven't heard of any credible real comparable product, people are trying to do integrations that are more in advanced packaging kind of mode, which is not the same thing as fully monolithic integration. We already have a road map for follow-on products, not only in 16-nanometers, but 7-nanometers. So I think it is going to be both.

And by the way, this isn't simply just an integration play. People are rearchitecting the radio, right, and the different layers in terms of what's in the radio and what's sort of at the next level and up in the cloud and ORAN and things like that. So there is also disruption in the overall architecture. And we enable the things that I think are going to be more challenged from some other traditional solutions.

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John Nguyen Vinh, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [30]

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Got it. And then my follow-up is just a question on kind of the Chinese risk component. Obviously, there's different perspectives on this. But do you think some of the strength that you're seeing in comms is potential pull-ins by Chinese OEMs ahead of a potential export ban on U.S. components there?

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

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So look, we're very sensitive to that situation. So we definitely triangulate from multiple perspective and also, we work on various business things to sort of filter that out. So we don't believe what's going on is just pure pull-ins or any sort of double bookings. I would also add that our strength in wireless is not just in China. I mean, all our Tier 1s across all the geographies, we're seeing strength. So yes, China is an important region, but it's certainly not only China. So that's important.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [32]

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I think that's an important point. And as Victor said, we try to triangulate the business we see through what we're learning about the deployments and trying to map as best we can that our demand matches what we think deployment demand is because we are cognizant of that kind of risk. So yes, we don't see that to any significant degree, if at all.

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Operator [33]

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Our next question comes from Tristan Gerra with Baird.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [34]

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Just a quick follow-up on a prior question. So specifically to Huawei given the geopolitical climate, do you see some impact on the revenue to that customer and this may be outside of China? And does that have any impact on the timing of the ramp that you see for 5G in which, so far, you seem to see is ahead of what you previously expected?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [35]

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Well, again, this is a very -- I guess, what I'd say complex situation, and it's not just us, of course, it's the whole industry. So we monitor this very carefully. I'm on the FIA board and there are other things that we do to try and keep a very careful track of the situation. I would say that, so far, we're not seeing anything, at all, material in terms of the business with Huawei. But we're watching that very carefully. In terms of the ramping earlier than expected, I want to repeat that the strength is more on the South Korea deployment than what I'd say. It's just the very beginning, I'd say, of what seems to be the start of the China plugs, I mean, there was some initial licenses signed with some spectrum assigned but it's still very early on the China side. So what we are seeing is -- and I think we expressed this last quarter as well, is real strength in South Korea in terms of production deployment.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [36]

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Okay. And then just a quick follow-up in ADAS. It looks like there is primarily level 2 opportunities in ADAS industry-wide. Does the potential pushout of higher level of autonomous driving having an impact on the ramp of your Zynq products in automotive? And is -- are your Zynq products targeting more like level 4 type of opportunities?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [37]

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I think where we have a lot of activity, both in more pure ADAS as well as autonomous driving as well as other features that I'm not sure how you've been exactly like a lot of these occupant monitoring systems to just have a really nice customer experience. Some could be safety-related like drowsy detection and things. Others are just convenience and better experience.

So I would say, we're in all these kinds of applications, and I did say in my opening remarks that the ones that are geared towards autonomous driving whether it's Ford or whatever, those are more mid-term, long-term opportunities. The revenue today is largely around ADAS and other kinds of heads-up display and other kinds of better passenger, driver experiences. So I don't think our success there is super dependent on really when very autonomous, higher levels autonomous driving deploys.

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Operator [38]

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Our next question comes from William Stein with SunTrust.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [39]

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First, I'm hoping you can quantify the impact of crypto. I think it was at the Analyst Day you talked about this actually being a sort of growth opportunity for you as you're engaging with the OEMs, and that's been -- or let's say, company is building mining farms in that space. Should we assume that revenue is approximately 0, and we're not going to talk about it much anymore? Or is this still sort of target business and growth opportunity in your view?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [40]

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So I actually don't think we convey that we think this is a big opportunity. I think we did convey it's opportunistic, and we were seeing at that time some increased usage. I think we raised it not too long on the earnings call because it is volatile, and we want everybody to be clear about that. But we've always said when asked, like, look, it's low tens of millions of revenue on a quarterly basis. And again, from an annual basis, it's low single digit. Again, it's opportunistic. So we will service those customers. But we don't focus on it. It's nonstrategic.

And clearly, like any other solution, I mean, when currency is quite depressed, then it goes down. And when it goes up, I think maybe one thing that's a little bit different for us, too, is that when things are changing, like when they are changing some of the algorithms or how they get to the various calculations that can sometimes benefit us. What we do think maybe longer term, might be of an opportunity, but we've never -- it's not anything we've quantified today but is Blockchain technology as a whole, not necessarily related to crypto. So -- anyway, hopefully that clarifies how we really think about it.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [41]

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Helps a little bit. One other question, if I can squeeze it in on your sort of midrange growth opportunity. We're seeing your year-over-year revenue growth accelerating in the quarter and the guide over 20%. Now despite some shortfalls in crypto and industrial and wireline not doing great, just as everyone else is seeing growth decline pretty precipitously, in some cases going negative. When you're doing sort of mid-range planning, not a quarter or 2 out, but let's say 4, 5, 6 quarters, do you believe that you have an opportunity to continue this rate of growth or maybe even accelerate it when the problem spots go away? Or do you think this is really a pretty unique and special time in the company's history and we revert to something more, let's say, normal for -- relative to your history and relative to the industry?

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

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Look, at the last Investor/Analyst Day in May, we said that we believe that we can drive 10-plus percent growth on a sustained basis, which is a departure from our history. That still stands. We're not giving any updated FY '20 or beyond guidance at this point, you will hear that again at our next Investor Conference. But certainly, we still do stand by and we are executing strategies and so forth to do that 10-plus percent, right. Clearly, we're well ahead of that now. But again, I would say wait to hear from that.

But again, that goal is already a departure from history. And if you look at what we deliver, and that's why I've said if you heard or you attended the XDF conference that we had is that we're not an FPGA company anymore, right. We are a platform company. We are delivering high-performance analog. Versal, ACAP is going to change the game over time. So we are a different company, and that's why we believe we can sustain double-digit growth.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [43]

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Yes. I mean, just think about in simplest terms, we've significantly expanded the addressable markets we serve and we are gaining share. So we are, as Victor said, fundamentally different and our outlook includes that.

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Operator [44]

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Our next question comes from Toshiya Hari with Goldman Sachs.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [45]

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I had a question on OpEx. You've been growing OpEx sort of in line or consistent with revenue growth over the past couple of quarters. I think you're guiding to a pretty big number for the March quarter as well. As we look forward into fiscal year '20, how should we think about the rate of OpEx growth relative to revenue growth? I think Victor, in the past, you've talked about big opportunities facing the company, therefore, you need to be aggressive. At the same time, I think you've talked about being a little bit more selective or a little bit more disciplined with OpEx. So if you can sort of comment on that, that would be helpful.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [46]

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Yes. I mean, in one sense, I suppose my response will be a little boring in that, yes, you just repeated it, there's no change in that perspective. We do want to be able to sustain this growth. We think the opportunity we have on a strategic level and long arc of things is very significant, but it does take investment. We just taped out our 7-nanometer product, 36 billion transistors, right. This is an incredibly complex and powerful product. As you can imagine, that's the first product we announced when we launched it at XDF [6 subfamily]. So we are going to continue to invest in 7-nanometers.

We're not completely done in 16 because of the strength of 16 we've gotten some additional interest and some follow-on. So we are going to drive this growth, and we're going to balance earnings expansion as well as continue to invest so we can keep this kind of growth up.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [47]

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So the quarter-to-quarter step-up was exactly in line with what we had provided at our -- for an annual guide. So it's within the parameters we've already discussed, all based on the strategies that Victor just articulated. And we haven't -- and we're not going to in this call give FY '20 guidance. But I think the strategy remains consistent. And it's consistent if you refer back to the previous question on how we're going to drive revenue growth in the future.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [48]

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Got it. And then I have a quick follow-up on M&A. Your name has been in sort of the news quite often over the past couple of months. Without obviously talking specifics, if you can remind us what characteristics or what conditions you would look for in a company or business when filtering through potential targets? That will be helpful.

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

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I mean, if you look at the DeePhi acquisition, which we did, so we can talk about that, is strongly aligned with our strategic goals, right? Obviously, we feel that we have a very strong position from the cloud to the edge to endpoint, in all kinds of applications and artificial intelligence and machine learning, in particular, is going to be deployed across all of those. DeePhi is very strong and had capability, they were designing to our platform. So that was, obviously, it's a tuck-in, but the point being that the way we think about it and the rationale would be strong constructiveness towards achieving our strategic goals. And we'll continue to have for tuck-ins and if there's a business, we are prepared certainly to do that as well. And I guess, it's probably just best to leave it at that. We wouldn't be doing these kinds of adjacency kind of things that seem more like an unrelated bolt-on just because we think there's some nice deal going on. It would be very strategically aligned.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [50]

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I mean, I think there's the very disciplined, strategic filter that Victor talked about. And then very clear eye on providing financial return in the long term.

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Operator [51]

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Our next question comes from Chris Danley with Citi.

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Wayne A. Loeb, Citigroup Inc, Research Division - VP [52]

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This is Wayne Loeb for Chris Danley. Can I ask what percentage of your revenue is specifically coming from China? And what is the year-on-year growth in China? Also, how big are sales from ZTE and Huawei right now?

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [53]

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So I'll deal with this kind of in the reverse order. We're not disclosing any customer-specific revenue information. We don't have any 10% customers. So we'll keep it at that. Last year, in our K, you'd see that our China revenue was $664 million. It's about 1/4 of our overall revenue. I would think, year-to-date, it's slightly above that, but it's trending along with the business.

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Wayne A. Loeb, Citigroup Inc, Research Division - VP [54]

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As a follow-up, are you seeing any extension in lead times given all the revenue growth?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [55]

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There were some components for a while where there were some challenges, and we've -- I'm sorry.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [56]

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You're talking about ours, right?

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

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Yes, I'm sorry. Right. I thought you're talking about components, but you mean our lead time. I think we've been getting good -- really good customer evaluations in terms of our lead time. And so now -- again, in a few critical components in terms of the 5G since that's been very strong, we've delivered, but I wouldn't say that it's not an effort to sort of do that. But no, we are not really pushing out in general lead times, though.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [58]

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On some of our newer products, we have extended lead times. So we work very carefully with our customers to deliver to their needs. So it's point issues not systematic.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [59]

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And I think, in general, we are compared to peers, we're still doing very well in terms of delivery and lead times.

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Operator [60]

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Our next question comes from Chris Rolland with Susquehanna.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [61]

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Congrats on the super quarter. Victor, I know you've talked about Intel perhaps pushing density for 10-nanometer a little too far here. And I know there's been a lot of discussions about architecture here. But can you talk to us about your view on getting to the node first? This used to be the big battle between you and Altera. If you were to get there first, what does a 6-month lead mean for your general business, in your opinion?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [62]

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Yes. I mean, I would say it still does matter for certain programs and markets. And certainly, when we are talking about pure FPGAs, it had a stronger correlation to how people would do. But since we've moved beyond pure FPGAs, that's why I think architecture is becoming more and more important. It isn't just capacity of logic cells because we offer a whole lot more value than that. Additionally, I would say, that this has been very silicon-focused, but all the tools, the IP and now higher levels of the software stack that we're now providing. Ergo us saying that you should think of us more as a platform company, that's also adding value and, therefore, barriers.

So we are still continuing to execute very well relative to Intel PSG from a pure silicon, but it's actually, the barrier is actually even higher than that. Because they're not innovating like we're innovating in terms of the architecture or the technologies we're integrating and also the whole software stack. So having said that, we continue to watch them. We respect Intel, of course. You never want to get arrogant in any way, shape or form. But we feel really good about what we're doing, and I mean, I think we've been leading from the front for a while. So we'll not going to let up.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [63]

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Great. And then Victor perhaps, your expectation for AI Core, is the idea here kind of to seed the market with Alveo to kind of prime the pump for AI Core? Is that where you guys are expecting kind of Data Center inflection for the inference market? Or do you expect AI Core to be kind of that next step in the evolution?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [64]

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So it's not evolutionary. It is definitely more revolutionary like we are going to get significant factors of improvement. In the AI Core, from the inference market, I want to expand to make sure that the inference market, we mean not just in the Data Center, but we see that, again, on edge computing as well as really endpoints. Versal, including the AI Core, will be used in automotive. We have a lot of strong interest in automotive. We certainly have interest in the Data Center, and it's multi-market, right. So we really do see that it's going to expand quite a bit.

I think Alveo, I wouldn't say it as strongly correlated to AI Core per se, but I think this whole thing of delivering a platform, right, not just a physical board piece, but the software stack that lets you just, in this case, a very standards-based infrastructure and data center PCIe cards, in the future other types of data center cards. In selective areas, you're going to see us do more platform kind of things, right.

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Operator [65]

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Our next question comes from the line of Srini Pajjuri with Macquarie Securities.

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Srinivas Reddy Pajjuri, Macquarie Research - Senior Analyst [66]

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Victor, just a question on the SmartNIC market. I think you mentioned a couple of design wins there. Could you put that into perspective as to how big that market is? And when do you think that ramps will start? And how that might impact your revenue growth?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [67]

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Yes, I think we've always talked about both the compute segment, the storage as well as the network and the SmartNIC. I would say, SmartNIC is probably the second of the 3, right, where in the long arc of things, compute could be the largest. But having said that, I would say is that SmartNIC, unlike in compute, there's less criticality of us making it kind of super simplistic in the sense of being -- needing to operate only at a very high-level design abstraction, not knowing anything about the hardware, the nature of the customers we're engaging with on SmartNIC are much more technical.

So the good news is we don't have to -- there's not a critical dependency on that piece of it. And also since we're not trying to support a broad swath of ISVs and things like that, it's not an ecosystem element either. So from those perspectives, it's very attractive. It's also nice because we're seeing customer pull, not just us pushing, right. So those are -- we see that that is a very important area for us. I think it's not just us, but I think people are doing ASIC. So it's clear that other people see value in the architecture of doing offload, obviously, some face value, also just getting more bandwidth into the data center as well as doing other things like security and so on and so forth. So it's a very attractive market.

I'm always reluctant to calling kind of like an inflection point. I view it as we are getting strong design wins across many end customers, regions and applications. That's a good thing. Unfortunately, we can't -- I can't publicly talk about some of this either, but we're feeling very encouraged about design win momentum.

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Srinivas Reddy Pajjuri, Macquarie Research - Senior Analyst [68]

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Great. And then just as a follow-up, I think in your comments about 5G baseband, I think you kind of said, you won't be able to hang on to some of the early designs wins in the preproduction baseband. I just want to understand that comment a bit more. I mean, if you can please elaborate on that. What do you mean by you won't be able to hang on? I mean, are you just seeing kind of ASIC transitions that we normally see here? Or are you seeing something else? Just want to understand a little better.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [69]

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Sure. And I guess, this is always this thing that I'm trying to do of being very candid, at the same time, not trying to get you to think that we don't have a very good opportunity here, right. So what I mean is, so 5G is not just a single point in time. There really clearly are going to be generations of 5G, because 5G is really an umbrella of standards as well as technology. And the very early deployments that we're seeing now, it doesn't have all the full features and capabilities. So you're going to see waves of 5G technology as well as, of course, deployment.

We are participating in baseband, which traditionally we haven't, and that's part of the growth, right. I think in this first generation, certainly in certain areas, we do think that when ASICs catch up, because again, they tend to lag, that we'll lose some of that baseband. Hopefully, we're still holding on to some of it. What I was saying is that with our 7-nano Versal, because that is so more powerful in some of the engagements that we're seeing that we believe we have a much stronger shot of maintaining baseband and, of course, continuing to expand on our strength in radio and so forth, right. And by the way, in 5G, there's going to be more radio. So it's not like our success hangs on the baseband, but of course, we'd like to capture as much value as we can. So I hope that helps a little bit more in my comment.

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Srinivas Reddy Pajjuri, Macquarie Research - Senior Analyst [70]

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Sure, it helps a lot.

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Operator [71]

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Our next question comes from Vijay Rakesh with Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [72]

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Good quarter here. Just wondering when you look at 5G side, obviously, comp grew nicely, how do you -- how would you characterize the growth trajectory in 2019 calendar year? I'm saying it on the Data Center side. And then you mentioned briefly about FPGAs and getting traction in Amazon and Alibaba and Huawei, I wonder if you can give us some more color on the outlook there for 2019?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [73]

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Okay. So for 2019, obviously, we gave guidance for the current quarter. We're not giving guidance for fiscal '20, which is a good portion of calendar 2019, right? So I think you might want to wait to hear when we have our Investor and Analyst Day for broader guidance. But again, I guess, what I would say on the 5G, these are early deployments. But again, you're going to see more of it, right. These are the early deployments. And it will still have some burstiness to it. So on a quarter-by-quarter basis, you're going to see some big ups and downs. But on an integrated basis, right, 5G will be higher in peak and higher in overall area under the curve, if you will, for revenue. I think there is no question that's going to happen.

And obviously, this will be -- we are stronger, we are more strongly positioned today than we were in some of the past generations for all the reasons we've discussed earlier in terms of RFSoC, Versal and future generations and even our 16-nanometer today, even in the baseband. So we feel very good about 5G, although you will see some burstiness and again, we're not guiding on detail in FY '20 at this point.

So I think one last thing, on the second part, you asked about Data Center and FaaS, I think. I mentioned that we have additional FaaS engagements, I didn't identify them because, unfortunately, I'm not at liberty to do that at this point in time. But what I'm saying is that we have some additional engagements beyond what has already been publicly announced, which is Amazon was first, and we've also had subsequently both Alibaba and Huawei who have deployed us in production. And we are seeing good activity there, but I was really referring to the progress we have and that we have other ones that, today, I can't name, but we have other ones. So there'll be more FaaS deployments is the takeaway there.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [74]

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Got it. And just one follow-up, if I may. On the FPGA side on 5G, obviously, good traction there, you see in the radio numbers. Do you see any competition from ASICs coming kind of being a low-cost alternative? Or is it too early in the FPGA ramp? Are you still kind of in a technology ramp mode there?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [75]

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Really, look, the quick answer there is when I was referring to the fact that in the first generation of wave of 5G deployments, on the baseband side, not the radio, we might not have persistence in that, holding that, and that is because ASICs might come along to displace some of that on the baseband side. So yes, there is, and there always has traditionally been some ASIC competition. But again, we are persistent certainly on the radio, and we believe in second, third generation, we should see some persistence in the baseband.

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Operator [76]

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And I'm not showing any further questions at this time.

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Matt Poirier, Xilinx, Inc. - Senior Vice-President of Corporate Development & IR [77]

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Okay. Well, thanks, everyone, for joining us today. We'll have a playback of this call beginning at 5 p.m. Pacific, 8 p.m. Eastern Time. For a copy of our earnings release, please visit us on our Investor Relations website. Our next earnings release date for the fourth quarter of fiscal year 2019 will be on Wednesday, April 24, after the market close. We will be attending the following conferences this quarter, so Goldman Sachs Internet Technology Conference in San Francisco on February 12 as well as the Morgan Stanley TMT Conference, also in San Francisco, on February 26. And then additionally, we'll be hosting our Investor and Analyst Day in New York City on May 14. So please save the date. We look forward to seeing you there, and more details to follow. This completes our call, and thank you very much for your participation.

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Operator [78]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.