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Edited Transcript of XLNX earnings conference call or presentation 24-Jul-19 9:00pm GMT

Q1 2020 Xilinx Inc Earnings Call

SAN JOSE Jul 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Xilinx Inc earnings conference call or presentation Wednesday, July 24, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lorenzo A. Flores

Xilinx, Inc. - Executive VP & CFO

* Matt Poirier

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

* Victor Peng

Xilinx, Inc. - President, CEO & Director

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Conference Call Participants

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* Ambrish Srivastava

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

* Blayne Peter Curtis

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

* Christopher Caso

Raymond James & Associates, Inc., Research Division - Research Analyst

* Christopher Adam Jackson Rolland

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Christopher Brett Danely

Citigroup Inc, Research Division - MD

* Christopher James Muse

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

* David Michael Wong

Nomura Securities Co. Ltd., Research Division - MD

* John William Pitzer

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

* Joseph Lawrence Moore

Morgan Stanley, Research Division - Executive Director

* Matthew D. Ramsay

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

* Quinn Bolton

Needham & Company, LLC, Research Division - Senior Analyst

* Ross Clark Seymore

Deutsche Bank AG, Research Division - MD

* 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

* Vivek Arya

BofA Merrill Lynch, Research Division - Director

* 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 Catherine, and I will be your conference operator. I'd like to welcome everyone to the Xilinx Q1 FY '20 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, Catherine, and good afternoon, everyone. With me are Victor Peng, CEO; and Lorenzo Flores, CFO. We will provide a financial and business review of the June quarter and the business outlook for the September 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 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 and 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.

Please note that we have also posted a document to our IR website that contains 5-quarter historical data for the new end market classification we adopted in May 2019.

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

Let me now turn the call over to Victor.

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

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Thanks, Matt, and good afternoon, everyone. I'm pleased to share our results today as they exemplify the durability and resilience of our business. We saw a solid growth in our WWG, AIT and ABC end markets, which enable us to achieve the midpoint of our Q1 fiscal 2020 revenue guidance despite unexpected challenges. I'm proud of the tremendous effort by our employees to achieve our targets despite the Huawei shipping restrictions which occurred midway through the quarter as well as the general uncertainty in the current global trade environment. Now let me share some highlights around our business units and core vertical markets.

I'll start with WWG. Despite our complete suspension of shipments to Huawei in the middle of the quarter, we saw continued strong demand at many of our wired and wireless customers in support of global 5G deployment. We remain well positioned during this initial wave of the 5G cycle, which we continue to believe will be [vastly] larger than the 4G cycle.

Following the deployments in South Korea last year, we are seeing the beginning of deployments in China, albeit are measured given the Huawei action. We are actively ramping sales of product supporting radio applications in addition to baseband.

As we noted in our Analyst and Investor Day, we anticipate a mix shift to radios as a push of our baseband revenues convert to ASICs. We've been monitoring the market closely, and today have not seen unusual inventory building at wireless customers. But we will, of course, continue to watch this very closely.

Moving to DCG, our business did not grow as expected, largely due to the suspension of shipments to Huawei for their FaaS deployment as well as the slowdown in orders due to a product transition at a significant memory customer, the latter of which we expect to meaningfully recover next quarter. That said, we continue to make good progress with multiple hyperscalers, both on FaaS and internal acceleration applications. Our hyperscale customers have begun deploying our platforms in production for accelerating applications such as search, streaming video as well as network acceleration with SmartNIC. Alveo continues to make progress with numerous proof-of-concepts or POCs with end customers, top-tier OEMs. We are anticipating revenue contribution to be meaningful later this fiscal year as those customers move those POCs into production.

Lorenzo will be sharing additional details regarding our core vertical markets later in the call. So now I'm going to turn over to other highlights in the quarter.

Revenue from the Advanced Products grew 53% year-over-year and was 69% of total sales in Q1. We saw broad-based demand for our 16-nanometer UltraScale+ family, which continues to be a stronger revenue driver for our business. Last year, we introduced an extension to that family with industry-leading 58-gig PAM4 SerDes. These products enable customers in the wired, TME and A&D markets to double the bandwidth of existing 25-gig systems without deploying new infrastructure. Our new Virtex UltraScale+ 58-gig devices will be shipping in production soon.

In addition, based on our strong customer demand, we extended our Virtex UltraScale+ high-bandwidth memory, or HBM family, by adding 16-gigabyte HBM capacity to that family. These high-capacity HBM products are ideally suited for workloads that process larger data sets, such as adaptable AI inference, database acceleration, data analytics, video transcoding and security processing. The 4-gigabyte and 8-gigabyte products are already in production, and we're sampling the 16-gigabyte products today. The 16-gigabyte products will go into production later this year.

Demand for our Zynq platform remains strong, driven by the adoption of our MPSoC family in wireless and across our core vertical markets. Revenue from our Zynq family grew 68% year-over-year, which represented approximately 23% of total revenue in Q1. In fact, cumulative revenue from our 28-nanometer Zynq products has crossed the $1 billion mark.

We see our 16-nanometer Zynq products growing at an even faster pace. In terms of our progress in Q1 with our adaptive computing strategy, we started sampling our first 7-nanometer Versal AI Core and Versal Prime series products to select customers. We'll be expanding our early access customer engagements throughout this quarter Q2.

Our Versal silicon testing to date indicates that we're solidly on track to deliver 10x increase in performance and significant power efficiency gains for a number of applications compared to the latest-generation FPGAs and general purpose processors. We'll be showcasing our Versal platforms in a new unified software development environment that will greatly enhance the user experience at our XDF this October. I hope to see many of you there.

Now shifting to M&A activities. We announced the acquisition of NGCodec that adds a differentiated video compression software to our portfolio to support our Data Center business. This product is already gaining traction with key cloud customers, including Twitch and Alibaba. Video acceleration will be one of the key growth drivers for the DCG business.

We're also on track to close the acquisition of Solarflare in Q2. Recall that this acquisition brings a new class of SmartNICs to hyperscalers, HPC, enterprise and telco networking customers. These new SmartNICs will eliminate network bandwidth bottlenecks, free up CPU cycles, enable network and data centric computing as well as customizations to unique customer needs.

Now before I hand off to Lorenzo for a detailed view of our Q1 financials and our Q2, I want to provide some additional comments related to Huawei. Xilinx is committed to ensuring full compliance with all U.S. export control regulations. As such, upon the Commerce Department's addition of Huawei and its non-U. S. affiliates to the Bureau of Industry and Security's Entity List in mid-May, Xilinx immediately suspended shipment of all products to Huawei. Then after a review of the Export Administration Regulations and Entity List restrictions, we determined that we could lawfully resume shipping select products. We have recently begun fulfilling orders from Huawei during our current quarter. These products are mostly 28-nanometer or older products and are not designed into 5G applications. We have also submitted request to the Commerce Department for licenses to sell additional products to Huawei. Xilinx will continue to comply with all government and legal requirements across our global operations. I want to emphasize that we cannot predict whether additional government actions may further impact our ability to ship Huawei as the situation remains dynamic.

We hope a resolution of these issues that led to U.S. and China trade actions is reached as quickly as possible so market-driven trade can resume.

In conclusion, we are focused on executing to our strategy and remain very confident in our significant and unique long-term growth opportunities, driven by 5G, Data Center and Automotive disruptions and our transformation to platforms.

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

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

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Yes. Thank you, Victor.

Overall, our business performed quite well this quarter even with the challenges Victor just described. Total revenue was in line with guidance at $850 million, up 24% year-over-year and 3% sequentially. Our results are a testament to the resilience of our revenue base from our broad set of end markets and diverse customer set. The continued 5G build-out drove the growth in wired and wireless group with revenue expanding 66% year-over-year and 2% quarter-over-quarter. Quarter-to-quarter, wireless declined slightly and wired grew. Our broad customer base drove this growth in the quarter, although less than expected due to the Huawei shipping restrictions.

Revenue from the Data Center Group was below our guidance, declining 13% year-over-year and 4% quarter-over-quarter. We showed growth in multiple hyperscalers and broader accounts, but the Huawei ban did have an effect on DCG. In addition, one of our memory-related customers was going through a product transition and had an inventory-related slowdown.

In AIT, all end markets outperformed expectations with strength in Industrial and less-than-anticipated declines in Aerospace & Defense and TME. AIT grew 10% year-over-year and 2% quarter-on-quarter. In the quarter, A&D, Industrial and TME were broadly strong, and we had a modest amount of accelerated orders by some industrial customers.

In ABC, we continue our long-term growth trend with 10% year-over-year growth. Quarter-to-quarter, we grew 8%, though we were weaker-than-expected in auto. The auto decline was due primarily to slower auto sales in China stemming from trade-related factors. Broadcast and consumer were stronger than expected in the quarter.

Gross margin was in line with guidance with GAAP margin of 66.2% and non-GAAP gross margin of 66.6%. The difference between GAAP and non-GAAP is due to M&A-related amortization.

Operating expense with GAAP OpEx at $312 million and non-GAAP at $306 million was slightly lower than our guidance. GAAP operating income was $251 million or 29.5% operating margin. Non-GAAP operating income was $260 million or 30.6% operating margin, better than expected as gross margin was slightly higher and operating expense was slightly lower.

Our GAAP and non-GAAP tax rates were approximately 8%. One detailed note here. Some of you may be aware of the Altera case related to the tax impact to share-based expenses in cost-sharing agreements. We have not recognized any impact on our tax rate from the recent Ninth Circuit Court decision as we view this matter as unsettled. Please refer to our 10-Q for more disclosures.

GAAP net income was $241 million and diluted earnings per share, $0.94. GAAP EPS grew 27% year-over-year. Non-GAAP net income was $249 million, yielding a record non-GAAP diluted EPS of $0.97 a share, a 29% growth over last year. Diluted share count decreased slightly to 258 million shares.

Next, I'll cover a few points on the balance sheet and cash flow. Gross cash was $2.9 billion with $1.2 billion in long-term debt. Accounts receivable declined to $306 million and is at 33 days. Inventory increased $21 million to $337 million as we built for future demand particularly in 16-nanometer. Overall, we generated $298 million in operating cash flow.

We continue to implement our capital allocation strategy as discussed during our Analyst and Investor Day. We made multiple investments in our ecosystem and continued our strategic M&A activities. During the quarter, we also repurchased approximately 3 million shares at an average price of $105.50 per share and paid dividends of $94 million.

Now on to our guidance for the second quarter of FY '20. We expect our revenue to be between $800 million and $850 million. The midpoint and wider-than-usual guidance range reflect a full quarter impact from the shipping restrictions to Huawei, other than trade -- other current trade-related uncertainty and our usual business variability.

More specifically, our guidance range includes an estimate of revenue from the resumption of shipments of currently permissible products to Huawei and contribution from other products that are pending government approvals for shipping license. On Huawei, while we aren't quantifying their revenue contribution, our expectation for Huawei this year have been reduced by more than half.

Building on that point, our outlook for the WWG business is for a slight decline. Wired is expected to decline, and wireless is expected to grow slightly. Again, we do anticipate a headwind from the Huawei situation, but we expect strength across our broad customer base to provide some offset.

Data Center is expected to rebound strongly. Our backlog is healthy and indicates significant growth just coming from our advanced memory architecture-related business. We're expecting growth from the expansion of business at other hyperscalers as well. Finally, we expect some growth from crypto, although that business remains volatile and relatively small.

For AIT, we expect the business to decline in Q2. This is primarily a result of an anticipated pause in a customer-specific program driving a decline in TME. Industrial is expected to be negatively impacted by order timing and macro issues. A&D is expected to grow, providing a partial offset. Our ABC business is expected to grow in Q2. We forecast growth in auto and broadcast, and we expect consumer to remain steady.

To recap, we are guiding our Q2 modestly downward, mainly due to the shipping restrictions on Huawei. That said, we believe that outside of the trade-related issues, our revenue outlook continues to demonstrate the breadth and resilience of our business model. Gross margin is expected to be between 65% and 66% on a GAAP basis and 66% and 67% on a non-GAAP basis. Non-GAAP gross margin is essentially flat from Q1 as expected. The decline in GAAP gross margin is due primarily to incremental acquisition-related amortization expenses.

As we discussed at our Analyst Day, GAAP operating expense will grow in Q2 and is expected to be $326 million. The increase is primarily due to increased employee compensation and acquisition-driven expenses. The growth in compensation reflects our annual focal process, including stock grants and organic and inorganic growth to our employee base. Non-GAAP operating expense will be approximately $322 million.

While we expect Solarflare to close this quarter, precise timing of the close is uncertain. Therefore, we have not included revenue or expense estimates in our outlook for Q2. Depending on the timing of the close, additional non-GAAP OpEx could be between $10 million to $15 million for the quarter as we on-board Solarflare employees. We also expect to have incremental revenue of mid- to high single-digit millions in the quarter. This revenue would be slightly higher than corporate gross margin.

GAAP and non-GAAP other income is expected to be approximately $11 million. Our tax rate is expected to be approximately 0% for Q2. This low rate is a 1-quarter phenomenon due to the tax accounting rules for share-based compensation. We expect the quarterly tax rate to normalize in the second half of the year to a range between 7% and 10%. We expect share count to decrease slightly in Q2, which is the net result of our share repurchases offsetting our annual stock grants.

As I close, Victor and I realize there will be a great interest in our outlook beyond Q2. At this point in time, we are monitoring the China trade situation and the overall economic environment. Given the uncertainty of -- regarding these important factors, we are not reiterating or updating our full year guidance today. We expect to provide an update on our fiscal '20 outlook at our October earnings call.

Overall, we believe our long-term growth drivers remain very much intact. Although our FY '20 revenue expectations have been somewhat moderated by trade-related concerns, we continue to believe that the second half of our fiscal year will be better than our first half. 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 Vivek Arya with Bank of America.

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

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Victor, since Huawei is of so much importance to investors, I was really hoping that you could give us some rough sense of how large it was as a customer in your last fiscal year. I realize that it was not 10% so you have not disclosed that, but any rough sense would be really helpful. And then how much of a headwind was it in June and how you're thinking about it in the September quarter? Just because it's such a large variable in thinking about the business in the near term.

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

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Yes. Well, look, again, Huawei is a very important customer for us. And -- but as you said, we have no 10% customer in FY '19 nor in first quarter of FY '20. Huawei is important. That said, we are able to hit the midpoint of our guidance because there -- we were able to for half the quarter, but as I said, the resilience of the business and all the other markets being very strong, particularly AIT, also seeing some lower strength in some of the other wireless as well as the wired growth as we expected and just plain lot of hard work, we managed to offset that. I think you should take away the fact that at our Analyst Day we had said that Q2 would be flattish to Q1 and now we're guiding slightly down from that shows that clearly there is impact despite the fact that we're able to hit the midrange.

And just in terms of the general size, I mean clearly as Lorenzo said, this range that we gave for Q2 shows that our current expectation is well less than half than what we thought of to begin with. So the way you should think about this is kind of the exposure to volatility around this is greatly reduced now because of how we're thinking about the business.

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Operator [4]

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Your next question comes from the line of Joe Moore with Morgan Stanley.

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

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Wondering if you -- obviously, there's variability in the second half of the year. That is pretty clear. How are you thinking about OpEx in that context? Could you see OpEx come down if the revenue expectations come down? Or just what's the flexibility around that?

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

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Yes. So I mean, look, I think if you take a step back and say, other than this trade situation, our main thesis of everything we said during the Investor and Analyst Day remains intact, right? That's what Lorenzo closed with, the fact that we have really still strong growth drivers in 5G. Yes, Huawei is an impact, but the rest of 5G is still there, data center, automotive in the longer term and built on top of all the multiple diverse markets that we have and so forth. So I think when we think about it, we said we are investing in order to stay in kind of mid-teens kind of growth for the next 5 years. Nothing really in the near-term sense that we should get off of that strategy and that investment thesis, right? So we are still essentially moving forward with our investments, but of course, we're monitoring the situation very carefully.

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Operator [7]

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Your 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 [8]

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I guess a gross margin question. Revenues guided modestly lower, but gross margins also lower. And I think we all thought that wireless, particularly Huawei in the mix, was the headwind. And therefore, if that's getting pulled out, why are gross margins at the midpoint guided lower? And then what gives confidence that you can get back to that kind of 69% territory in the second half of the fiscal year?

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

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So C.J., couple of points. First, in this case, I would say you should look at the non-GAAP gross margin guide as more relevant to the question you asked. And we -- what I should have said, if I didn't say it I'll clarify, is that non-GAAP gross margin is basically flat quarter-on-quarter. How that comes about due to the mix is we've also said that the wireless part of our business is going to grow albeit slightly. And significantly, I also said that in AIT, we should see a decline, which has generally benefited gross margin. So the result is a mix of those factors. Does that help?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [10]

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And I'd also just add that it isn't just Huawei being a little more [margin gen], it's the wireless sector as a whole, right? And so while wireless is down a bit, it's still pretty meaningful part, right? So I think we really -- I think that's the way to think of it. It isn't just a Huawei issue. It's that we still have very meaningful wireless business. And then the other part that Lorenzo said about the other segment.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [11]

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Just in case I wasn't clear when I gave my prepared remarks, from Q1 to Q2, wireless business, despite Huawei shipping restrictions, is going to increase slightly.

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Operator [12]

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Your next question comes from the line of Ambrish Srivastava with BMO.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [13]

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I just wanted to get back to Data Center. This is such a big underpinning of the -- one of the big underpinnings of the investment case for Xilinx. Could you just provide us with a rough breakdown of -- and you have given numbers now for the last 3 years plus the additional quarters. What is the makeup of the business, Victor, if you think about the -- kind of the old traditional workhorse for Xilinx which was storage, servers and as well as automation versus the new businesses that you're winning? And then in your full year guide that you are not able to reiterate, which I completely understand given the uncertainties, but do you expect Data Center -- because this was supposed to be the biggest growth driver, I think up 55% to 65% at the Analyst Day. Are you willing to stick to that or even that's off the table for now?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [14]

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So Lorenzo is going to give you some clarity on the first detailed part about the traditional versus new. What I would say is the following again, is like Huawei, actually everybody tends to think of that as wireless business. But their cloud business is a significant business for them. Everybody is aware that they had been in production with FaaS. So as we said, one of the big hits for the quarter was we weren't able to ship some additional deployments they were going to do in FaaS. The second, as Lorenzo kind of expressed, was kind of a transition on a significant memory business. And again, both of those businesses are the new, good interesting business, right, as opposed to traditional, not really acceleration storage kind of business, right?

To your broader question around if this is going to be one of our big growth drivers, yes, it was going to be one on a percentage basis, you're right, on an apples-to basis, obviously, since it's still small, that's -- I guess what I would say is that -- I just want to say that it wasn't the only thing that was going to drive our business of course, right? And look, we're still -- see our opportunity is very big, we're going after that aggressively. We're not re-guiding the year again, but we're sticking to our significant opportunity for growth there. So again, stay tuned to Q2. And then we -- and one other thing is, you didn't actually specifically ask this, but we're confident that we're going to bounce back in Q2 with strong double digits because we see the backlog, right? We've already factored in that we can't ship to Huawei. So that downside that we couldn't have predicted is in there, and we see the solid backlog. So Lorenzo, do you have the approximate between "new and old"?

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [15]

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No. I actually -- Ambrish, I don't want to make that cut up on the fly. I don't have it handy. But what I can tell you, if this helps, is the core Data Center business growth that Victor alluded to as we go from Q1 to Q2 is almost entirely the new business, if you will. And we can get back to you on the historical stuff. Sorry about that.

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Operator [16]

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Your next question comes from the line of Blayne Curtis with Barclays.

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Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [17]

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Maybe 2 related, we'll see. Just on the wireless side, with it guided back up, you're back close to kind of peak levels. And that's without, I guess, some portion of Huawei. So I'm just kind of curious if you can comment on some of the strength. And then I know geographic breakdown of revenues is never a great way to look at semis, but Asia was up big. Just wondering if you can comment on that as well.

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

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Yes, I mean again just qualitatively, I think this speaks to the overall strength of 5G, which again, that isn't -- our thesis doesn't change there. Obviously, Huawei is important for us. So it's not like it had no impact. But if just speaking to the strength of the 5G deployment, it's really happening. Korea started last year, but that's not as though that's over, and I think I'll remind everybody that Huawei is a key customer as is ZTE. And we continue to ship to ZTE and as well as all the other ones, right? We ship to all the big players in wireless. So I think that's really what you're seeing and...

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [19]

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No. I think that aligns with the Asia growth stories as driver. And we did see -- maybe significantly less important in overall impact, we did see some strength in the industrial end market in Asia as well.

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Operator [20]

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Your next question comes from the line of John Pitzer with Credit Suisse.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [21]

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Victor, just relative to the September guide for wireless to be up slightly, I understand the headwind coming from Huawei. I'm just kind of curious if that up factors in baseband ASIC displacement with radio growth? Or is the ASIC displacement more something we see as a headwind in the second half of the fiscal year? And as that becomes a bigger headwind, how do you -- how should we think about your ability to grow the business sequentially?

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

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Yes, I mean as far as the ASIC displacement, as I said in my opening remarks, just to lean into that a little bit more, is that that's factored in. It was factored in when we shared what we thought we would do at the Analyst and Investor Day. So we are planning on the fact that we will see some displacement. I would say that it's not that we've seen that to date, but we are still no change in terms of when we think that's going to happen, let's put it that way. And so that also means that, as Lorenzo said, we still do feel that the second half will be stronger than the first half, but we'll give you the detail after the close of this quarter. That again factors in any ASIC displacement.

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Operator [23]

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Your next question comes from the line of Ross Seymore with Deutsche Bank.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [24]

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I wanted to go to the AIT segment. You gave a little bit of color why that was better than expected, but I wanted to see 2 parts on that. Was there an inventory dynamic there, where there was some inventory build that was benefiting that in the June quarter? And the September quarter guide, it seems like, if I put all the moving parts in right, that it has to fall off pretty substantially on a sequential basis. So I just wanted to see if there's a little more color about what's happening in the September guide for that segment.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [25]

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So let me start with the growth -- the smaller piece, the history. There was some inventory build in the strength in industrial in Q1, low double -- very low double-digit millions, if you will. In the Q2 guide, even as we went into this fiscal year and incorporated in what we said at Analyst Day, we were aware of a significant customer whose program timing would cause a pause in this quarter in the revenue. And so that's factored in and is a significant decline in the TME part of the business specifically.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [26]

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Is that something that will bounce back in the next quarter?

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [27]

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We expect it to bounce back in the second half of the year.

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Operator [28]

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Your next question comes from the line of William Stein with SunTrust.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [29]

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I'm hoping to dig into the 5G dynamics a little bit. The way that you're describing this market, it almost sounds like, well, if our customers can't buy from Huawei, there's a bunch of other vendors, and they can buy from them, and we're shipping there. And so it's almost as though their ability to switch is rather easy. And I'm surprised to hear that, and maybe I'm misinterpreting it. But maybe can you comment as to the performance and demand trends at your customers and what your customers' customers, the carriers are telling you about their ability to adjust in that regard?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [30]

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So no, I do not think at all that we were trying to convey that, and we don't believe that. It's not like they can just swap. I think maybe a better way to think about it is the initial -- remember, we're in the early phases of 5G. We're just in the initial phases of the first -- the initial deployments in the first phase, and we see multiple phases. I think what we're seeing is in China, for this very first phase, there's not that much change. And as you know the big players are Huawei and ZTE. Then other vendors get some portion of the market, but it's relatively modest. There's really no change to that qualitative thing. And the other deployments outside of China of course are not affected, right? Everybody is rolling through that. We aren't saying that we have great visibility in what's going to happen to later deployments in China, right? Obviously, we can't because you don't know what's going to happen with trade situation and so forth. And to your point, it's not just like they could just -- everybody could just swap. So yes. No, we don't -- we didn't mean to imply that, and we don't subscribe to that perspective.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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Perhaps I misunderstood. If I can squeeze a follow-up in. There has been a lot of speculation that Huawei might have built as much inventory as they could. We've heard speculations up to 2 years, which seems impossible to me. Do you have any perspective on Huawei's potential build of your products?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [32]

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Yes. Look, I mean we had that question multiple times at the Analyst Day, and we reiterated we absolutely do not see that, absolutely not. We do not see that. And just so you know why we're so adamant from our perspective, I can't speak to anyone else's part, is because to do the 5G, you need our most advanced parts. And we know exactly where this is going. You can't buy that through other sources. So we're very confident about there is not anything near that kind of inventory build, right?

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Operator [33]

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Your next question comes from the line of 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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Looking at the potential displacement of your FPGAs in baseband against ASIC, how should we look at the trajectory of your average content per base station in terms of magnitude a year from now? Are we looking at maybe a 50% cut on average at your large China customer? Any quantification you could give us?

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

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Look, I mean I think in our Analyst and Investor Day, we kind of walked through that as best as we can. So I don't want to attempt to try and go through that again. And so if you were to take this trade thing off, I would say there's nothing different about how we feel about it today from what we shared at the Analyst and Investor Day. The exact details of the value content does vary by OEM as well, right? In the case of China and Huawei, it's like, okay, if we can't ship, then -- in those systems, then it's not a matter of the degree. It's just that we're not shipping, right? So again, I would just summarize and say that there's really no difference in how we think about broadly the content, including ASIC displacement. We've factored that in, right?

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Operator [36]

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

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [37]

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Victor, I was hoping you could talk a little bit more about the automotive business. You mentioned that there was some weakness in the quarter given some of the unit trends in the market. But how fast is the business growing on a year-over-year basis? What's kind of the outlook into September and beyond? And I think at the Analyst Day, you guys have talked about the design wins and those ramping over the next year or 2. Any changes to that outlook, again, as it relates to automotive? And then separately, you guys gave accretion details for Solarflare. I was hoping you could do the same for NGCodec.

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

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Okay. Let me take the auto one, and then perhaps Lorenzo can speak to the last part. So as Lorenzo said, there is softness in the auto market. And I think -- broadly, I think people have heard that, and there is correlation to the whole China situation, right? Because a lot of -- there's a lot of business that they ship into China, so the fact that we have some issues there has caused some slowdown in the things that are in production. Now if you kind of look at a lot of what we talked about at the Analyst Day too is how we're being designed into new systems in addition to what's already in production. That continues with full momentum. Very broad in terms of next-generation ADAS, in-cabin kind of systems and occupants kind of new systems as well as fully autonomous driving. So that continues, and we feel very good about, no change. Everybody's investing for that future growth. In the near term, there's some softness. Nonetheless, we will still -- we still do expect to see growth in this segment, but obviously that's moderated.

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [39]

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Yes. So I'll take the last 2 on auto. It was a little bit lower than previous quarter, this quarter. And we expect it to grow. And what we're seeing is the impact of would you characterize our business in -- customers from outside of China selling autos in China was of course one of the drivers for the lower-than-expected performance. I do appreciate the fact that you asked about the longer-term growth trend. Year-over-year, we did see greater than 5% growth. And maybe more importantly, if you take the trailing 12 months versus the prior trailing 12 months, you see double-digit percentage growth in our auto business. So we still see very strong growth trajectory there over the course of time. About NGCodec, it's a relatively immaterial transaction. So we're not providing the kind of accretion assessment that you asked for, but we did in the transaction get a very, very good, highly qualified IP team. And so we're really pleased with that acquisition.

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Operator [40]

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Your next question comes from the line of Chris Caso from Raymond James.

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Christopher Caso, Raymond James & Associates, Inc., Research Division - Research Analyst [41]

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I wanted to return to some of your earlier comments about 5G and some of the advanced parts that you're shipping in there. And the question is what's your customers' alternative to what you ship in the event that either they can't get components over the long term or if because of the trade situation, they choose to reduce their reliance on U.S.-based suppliers, and have to imagine with all these going on, that's one of the things in their mind, what sort of long-term risk does that provide for you? And do you think there are reasonable alternatives out there that would be a competitive threat to you?

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

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Well, look, I guess in the near term, the -- Huawei, everybody knows, has a subsidiary HiSilicon that does their ASICs, and they do use them quite a bit. I have no -- I don't really have any insight, so I don't want to speculate exactly what they do. I would imagine that if this situation prolongs, they'll lean into what they already use, right, which is ASICs. That can't happen quickly because they do -- when you're architecting in some ways, it's not like you could just change that on a dime. In terms of other replacement and if you -- you didn't say this, but if you're referring to like in China, domestic replacements, those customers -- companies we watch, they're all doing very low-end things that certainly could not replace us in anything approaching 5G. So I think that's fairly far out. In terms of other kinds of strategies, replacement or whatever, again, I don't want to speculate. But basically, as I said, for the near term, I don't really see how they will do other than just focusing on ASICs more.

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Operator [43]

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Your next question comes from the line of Christopher Rolland with SIG.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [44]

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On 5G, I think you guys covered Korea and a bit of a pickup in China. But have you seen anything yet really -- or can you describe what you've seen in North America, Japan and perhaps any other geos popping their head up?

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

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Yes. I mean Japan is going to start. We believe that will happen, but it will be kind of a little bit more of a moderate thing than what we've seen the first 2 geographies going. North America will -- traditionally has moved a little slower. We don't see anything different than that. And then probably Europe after that. So we don't see something really imminent, although there are certainly a lot of activities. So that's our outlook at the moment.

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Operator [46]

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Your next question comes from the line of David Wong with Instinet.

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David Michael Wong, Nomura Securities Co. Ltd., Research Division - MD [47]

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You mentioned that you were applying for licenses to ship the remaining products Huawei wants to them. Are there any guidelines the Commerce Department provides for the types of licenses as to when you might be able to expect a decision?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [48]

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Two clarifications. It wasn't licenses for all the remaining products. Again, we -- what we've just recently begun shipping is things that we feel, even with the restrictions that we have, we can legally ship. What we've applied the license is some additional products but certainly not all of them because, again, there's been no change to the overall restriction with respect to security, national security, right? So that's kind of what Lorenzo was trying to express, is that the midpoint of our guidance for Q2 is just assuming that we can continue to ship the things that we just started shipping and it's our estimate of what we'll ship. The upper end of the range certainly would require us getting some approval for some additional products but not all of the products. And of course, we'd have to get that approval soon enough so that we can ship though there's still uncertainty and dynamics around that.

So -- and then in terms of when these things typically get responded to by the government, in usual circumstances, what we have heard is 69 days, but as you may have read, there's been some recent high-level meetings with the administration and various departments and saying that they are going to be expediting those companies that have put in licenses, and that might happen much sooner than that, in a matter of weeks. But nothing specific has been given, and of course, we have no idea where we are on the queue.

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Operator [49]

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Your next question comes from the line of Chris Danely with Citi.

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Christopher Brett Danely, Citigroup Inc, Research Division - MD [50]

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Just 2 quick clarifications. So Victor, you said you're trying to restore some of the lost Huawei business. How much of that business do you think is just gone forever, like you can't ship? And then how big was the one memory customer that's having the products transition in the Data Center Group?

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Victor Peng, Xilinx, Inc. - President, CEO & Director [51]

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Well, let me talk to the first one. So I don't think that we've lost anything that we just will completely lose because, again, that would suggest 1 of 2 things, that they've got to completely replace them on a dime or they're just going to give up on that business. And they're certainly not going to give up on 5G. And again, as you said, they've architected it in certain ways. That's not something that anybody could just change on a dime. If this starts to prolong for a very long period of time, which I certainly hope isn't going to happen, which I expressed in my comments as well, we really certainly hope we could resolve these important issues as quickly as possible. In which case then, we will have some resumption. But I think again, if you kind of think about the guide, if you kind of look at it, even if we got meaningful, the vast majority of everything we applied for in the license and we continue to ship what we have, that's still less than half of the revenue we would have expected for Huawei if nothing had occurred. That's what Lorenzo had guided to help you understand what we're doing. So that tells you that, of course, that 5G and the other things that Huawei were doing were very meaningful for us, right? And then the last part...

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [52]

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The last part of your question, Chris, on the memory-related customer, clearly, I won't just give you a very specific number for them. They're less than 10%. And we'll say that in relation to the overall Data Center business, which is relatively small, as we've disclosed, it's a significant customer.

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Operator [53]

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Your next question comes from the line of Vijay Rakesh with Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [54]

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Just on the wireless growth, good to see you're growing from Q1 to Q2 despite Huawei. Is it fair to say that you're growing that wireless business not just by Huawei but also your ASIC, the audio baseband exposure is coming down? And also if you could give us some color on how your 7-nanometer Versal is ramping.

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

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So on the baseband, again, I would -- I know there's a lot of questions around that. I guess the way I would say it is we've always contemplated whatever replacement that we would see there. Nothing has really changed. Again, Huawei is -- the way to think of it is that even with the licensing, it's really not 5G designed in business kind of things, right? So there is -- it's not just a baseband question, it's just Huawei and wireless 5G.

With respect to Versal, actually that's going really well. As I said, we already sampled to the very leading customers. We have literally hundreds of people in the early access program, where they're already using the software and getting ready for designs. Obviously, we just initially shipped. Throughout this whole quarter, we'll be expanding sampling and so forth. As I said, the silicon testing is really rock solid. So we're very excited. The feedback has been good. I will say that, of course, so this is still sampling periods, so revenue will be very modest. Until we go into production in FY '21, you're not going to see meaningful revenue. But in terms of momentum and taking our platform to the next level, we're in really good shape, very excited about that.

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Operator [56]

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Your next question comes from the line of Quinn Bolton with Needham.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [57]

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Just wanted to clarify, I think coming out of the Analyst Day, you had sort of talked about WWG being sort of flattish to down on a quarterly basis in the second half of that fiscal year to incorporate that ASIC replacement. But on the call, I think, this evening, you said you think now WWG would be up in the second half despite the Huawei shipment ban. So just trying to reconcile those comments. Is the base business in 5G or wired just now better than 90 days ago? Or did I miss something?

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

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So Quinn, maybe there's some form of miscommunication. We didn't say anything specifically on this call about second half wireless trajectory. We're reserving the next few months to get much more clarity on the Huawei situation and the larger trade situation. So sorry if there was a miscommunication there. We didn't say that.

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

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What we did say is we expect our second half overall to be...

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Lorenzo A. Flores, Xilinx, Inc. - Executive VP & CFO [60]

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Overall, the whole business.

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Victor Peng, Xilinx, Inc. - President, CEO & Director [61]

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Yes. The whole business, our business in the second half, which we said at the Analyst Day, albeit it's moderating now because unless we get full resolution of Huawei, we can resume all shipping to Huawei, then obviously it's not going to be as strong as what we said. But we still think qualitatively, we believe the second half of this fiscal year will be stronger. And again, we will give you all that information after the close of this, which by the way, we -- part of that is we'll get clarity on these licenses we have put in that we discussed. And we just think we'll be in better place to give you something without speculating.

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Operator [62]

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And your last question comes from the line of Matt Ramsay with Cowen.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [63]

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Victor, I wanted to ask a bigger picture question on ACAP Versal as you're starting to sample and potentially ramp the product here in the coming quarters. If you might give us a little bit of context around the software ecosystem and the software environment that you guys have built behind the scenes for the product. Maybe the level of first customer engagement, you have NRE funding on software that you're engaged in. Just I guess the depth and breadth of the software engagement around that new platform. Any context will be really helpful.

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

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Yes, that's a very good question. Obviously, it's a very disruptive product, and it's very powerful. So we do need to bring along the software tools along with it. As I said in my comments that you're going hear we're going to do -- so I don't want to preview details. But we are at XDF in October going to announce a new software development environment that isn't just for Versal. But we'll, of course, go forward with Versal, and we are going to -- we've invested a lot in it, and we are going to significantly improve the user experience and make it more acceptable to more developers. So we are investing a lot.

We're also doing other things beyond just our internal in terms of driving ecosystem in IP, in libraries, optimized libraries and other things around runtime. So it's a good point. We are investing a lot. It is important, and you will hear more details about that at XDF. So hopefully you can make that or stay tuned.

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Matt Poirier, Xilinx, Inc. - Senior Vice-President of Corporate Development & IR [65]

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All right. Well, thank you, everyone, for joining us today. We'll have a playback of this call beginning at 5:00 p.m. Pacific, 8:00 p.m. Eastern Time today. And for a copy of our earnings release, please visit our Investor Relations website.

Our next earnings release date for the second quarter of fiscal year 2020 will be on Wednesday, October 23, after the market close. Please note that during the quarter, Xilinx will be attending the KeyBanc Investor Conference on August 13, and also we're very excited to be hosting our Xilinx Developers Forum on August -- sorry, October 1 to 2 in San Jose, and we look forward to seeing many of you there.

This completes our call, and thank you very much for your participation.

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Operator [66]

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Ladies and gentlemen, thank you for your participation. This concludes today's conference call, you may now disconnect.