U.S. Markets close in 3 hrs 50 mins

Edited Transcript of XLNX earnings conference call or presentation 23-Oct-19 9:00pm GMT

Q2 2020 Xilinx Inc Earnings Call

SAN JOSE Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Xilinx Inc earnings conference call or presentation Wednesday, October 23, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Lorenzo Flores

Xilinx, Inc. - Outgoing CFO

* Matt Poirier

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

* Victor Peng

Xilinx, Inc. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* 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

* 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

* Tristan Gerra

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

* Vivek Arya

BofA Merrill Lynch, Research Division - Director

* William Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon. My name is Cheryl, and I will be your conference operator. I would like to welcome everyone to the Xilinx Second Quarter Fiscal Year 2020 Earnings Release Conference Call. (Operator Instructions)

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, and good afternoon, everyone. With me are Victor Peng, CEO; and Lorenzo Flores, CFO. We will provide a financial and business review of the September quarter and the business outlook for the December quarter and full year of fiscal 2020.

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

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

Let me now turn the call over to Victor.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Matt, and good afternoon, everyone. I'm pleased to report our results for the second quarter of fiscal 2020 and provide an update on our expectations for the third quarter and the remainder of the year.

For Q2, we achieved sales of $833 million, which exceeded the midpoint of our revenue guidance despite the impact of continuing trade restrictions with Huawei. DCG business bounced back as expected and had a very strong quarter with a record revenue of $81 million, which represented 92% sequential and 24% year-over-year growth. This result was primarily driven by growth in sales to storage customers with some additional hyperscale customer demand and limited growth from cryptocurrency customers.

In our core vertical market, ABC revenues were in line with expectations while AIT revenues were better than expected. WWG revenues were weaker than anticipated due to minimal sales of permissible products to Huawei. While we expedited our application process to the Department of Commerce in early Q2, we have not received any license approvals to expand the product set permissible to sell to Huawei.

Through the first half of fiscal 2020, we recognized revenue of approximately $50 million from Huawei with a vast majority of that coming -- of that total coming in Q1 before restrictions were announced.

Multiple research analysts had estimated our full year revenue exposure to Huawei at approximately 6% to 8% of our total revenue, which is in the range of what we are anticipating at the beginning of the fiscal year. Considering the continued trade restrictions with Huawei and the uncertainty presented to our business, we believe it is prudent to remove all remaining revenue expectations related to Huawei from our fiscal 2020 outlook.

Huawei is an important customer, and we hope that an agreement between the U.S. and Chinese governments is reached as soon as possible so we can resume engaging in a manner consistent with an important customer.

Now I'll turn to some additional highlights for the second quarter. Revenue from our advanced products grew 29% year-over-year and represented approximately 74% of total sales. We saw broad-based demand for our 16-nanometer UltraScale+ family, which continues to be a strong revenue driver for our business. Demand from our Zynq platform also continues to be strong, driven by the adoption of MPSoC and wireless applications as well as across our core vertical markets, particularly in our auto business. Our RFSoC is also deployed with multiple wireless customers and is being evaluated by many customers at other end markets.

Overall, revenue from our Zynq family grew 61% year-over-year, which represented approximately 26% of total revenue in Q2. Customer feedback related to our Zynq family has been remarkable and gives us significant confidence in our transformation to a platform company.

We hosted over 1,300 attendees at our Xilinx Developer Forum in San Jose earlier this month. At this sold-out event, we announced a breakthrough in a new unified open source software platform called Vitis. We expect that over time, Vitis will drive significantly more Xilinx platform engagement with software developers and data scientists. We continue to make good progress building out our global ecosystem of partners, customers, developers and applications, which now has reached nearly 7,000 developers, over 750 ICs and includes more than 90 applications now in production.

We announced engagement with Microsoft Azure, which further demonstrates the breadth of hyperscaler relationships, which include Amazon, Alibaba, Baidu, Huawei and Tencent. Microsoft announced that it will be deploying Alveo U250 accelerated cards in its Azure cloud. Amazon announced that it has expanded its EC2 F1 instances, and additionally, they are adapting SageMaker Neo to run on Xilinx technology. Samsung shared a collaboration on leveraging Versal ACAP to enable their next generation of 5G solutions. We also saw many key ecosystem partners demonstrate examples of FPGAs being used for workload acceleration in the data center with increased presence of SmartSSDs and SmartNICs.

Considering a challenging business environment, I'm pleased with the progress we continue to make with our strategy and platform transformation.

I'll pause here and hand the call over to Lorenzo to talk you through the financials of this fiscal second quarter.

--------------------------------------------------------------------------------

Lorenzo Flores, Xilinx, Inc. - Outgoing CFO [4]

--------------------------------------------------------------------------------

Thank you, Victor. Before I go into the results, I want to take this opportunity to thank all of you with whom I have had the pleasure of working with over the last decade. I sincerely wish all of you, and of course, the great team here at Xilinx, all the best in the future.

Now on to the fiscal second quarter results. Overall, our business performed well this quarter, and we were able to exceed the midpoint of our revenue guidance. Total revenue was in line with guidance at $833 million, up 12% year-over-year but down 2% sequentially. Wired and wireless grew revenue 24% year-over-year but declined 8% quarter-over-quarter. Quarter-to-quarter, wireless was flat as our diverse customer base showed strength despite the Huawei shipping restrictions. Wired business declined significantly quarter-to-quarter due to Huawei and softness from other customers. Note we had 1 communications customer that represented approximately 12% of the quarterly revenue in Q2.

Revenue from the Data Center Group increased 24% year-over-year and 92% quarter-over-quarter. We saw better-than-expected strength from one of our storage customers. We also had growth in multiple hyperscalers and broader accounts despite the Huawei ban. Finally, we had approximately $5 million in revenue from Solarflare this quarter.

AIT grew 7% year-over-year but declined 9% quarter-on-quarter. Year-over-year, we saw significant strength in the A&D and flatness in industrial. TME did decline significantly. This was as expected and is due to a specific customer program we have highlighted previously. Quarter-on-quarter, our decline was primarily due to TME and industrial, partially offset by the strength in A&D.

In ABC, we continue our strong, long-term growth trend with 9% growth year-over-year. Quarter-to-quarter, we grew 6%. Both year-over-year and sequential growth were driven by double-digit growth in our auto business. Broadcast also grew both on a quarterly and year-over-year basis, although consumer was down sequentially and year-over-year.

Gross margin was lower than expectations with GAAP gross margin of 65% and non-GAAP gross margin of 66%. Gross margin was impacted by product and customer mix in AIT and customer mix in DCG. As a reminder, the difference between GAAP and non-GAAP is due to M&A-related amortization.

GAAP OpEx at $337 million and non-GAAP OpEx of $331 million were both below expectations. Non-GAAP operating expense, excluding Solarflare, was $321 million, below our guide of $322 million. Solarflare, which closed on July 31, contributed around $10 million to OpEx in Q2. GAAP operating income was $204 million or 24% operating margin. Non-GAAP operating income was $217 million or 26% operating margin.

Our GAAP and non-GAAP tax rates were approximately negative 5%. We had expected a low rate this quarter due to the tax accounting rules for share-based compensation. GAAP net income was $227 million and diluted earnings per share were $0.89. GAAP EPS grew 6% year-over-year. Non-GAAP net income was $240 million and non-GAAP diluted EPS was $0.94 a share, yielding an 8% growth over last year. Diluted share count decreased to 255 million shares.

Next, I'll cover a few key points on the balance sheet and cash flow. Gross cash was $2.5 billion with $1.2 billion in long-term debt. Accounts receivable increased to $335 million and is at 37 days, still within our normal operating range. Overall, we generated $224 million in operating cash flow.

During the quarter, we also repurchased approximately 1.5 million shares at an average price of $103.60 per share and paid dividends of $93 million. Finally, the Board of Directors of Xilinx have approved a new share repurchase authorization of $1 billion. Note that we aren't providing details on the timing and exact number of common shares to be purchased because that will depend upon prevailing market conditions and other factors.

Now let me turn the call back to Victor for comments regarding the business outlook. Victor?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Lorenzo. And let me take this opportunity to express to you on behalf of the company and personally our appreciation and gratitude for all your contributions and accomplishments over the last decade at Xilinx. Thank you so much, Lorenzo.

--------------------------------------------------------------------------------

Lorenzo Flores, Xilinx, Inc. - Outgoing CFO [6]

--------------------------------------------------------------------------------

Thank you, Victor.

--------------------------------------------------------------------------------

Victor Peng, Xilinx, Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

And now, turning to our outlook. For fiscal Q3, we expect revenue between $710 million and $740 million, which is a decrease of 9% year-on-year and 13% sequentially. This drop is due to several headwinds that coincide in the quarter that I'll explain. That said, we're expecting Q3 to be a bottom with strong rebound in Q4. So DCG revenue is expected to be slightly down in Q3 with more meaningful growth resuming in the fourth quarter. We're seeing a pause in hyperscale customer orders in Q3 but expect growth to resume in Q4 as customer POC transitions to production.

We also expect continuing contributions from storage and networking customers, including those from Solarflare. We expect crypto contribution to moderate over time from low-teens of millions to single digit millions as we move into Q4. For WWG, we expect revenues to be meaningful lower in both the third and fourth quarters. This is principally due to the removal of revenue expectations from Huawei in addition to the expected transition to ASICs for select baseband products previously discussed. We expect our revenue from our wired business to recover somewhat in the fourth quarter while wireless remains weak. Lastly, we are seeing global trade uncertainty causing some customers to exercise caution in ordering as well as some slower-than-expected customer ramps.

For our core vertical markets, revenue is expected to be flat in the third quarter and up in the fourth quarter. Q3 revenue will be lower than prior expectations, primarily due to macroeconomic related headwinds. The increasing growth in Q4 is expected to come from a broad base of customers, including TME, Aerospace & Defense, automotive and industrial customers.

Fiscal Q3 non-GAAP gross margin is expected to be between 67% to 69%, which is a return to our historical range with a less wireless-heavy product mix. Non-GAAP operating expense is expected to be approximately $33 million (sic - see press release, "$330 million"). Non-GAAP other income is expected to be approximately $1 million. And our tax rate is expected to be between 4% to 6%.

Now turning to FY '20 outlook. We expect total revenue to be between $3.21 billion and $3.28 billion. We expect the second half of FY '20 to be down relative to the first half of the year with an expectation for strong sequential growth in fiscal Q4 following the bottom in fiscal Q3. This represents approximately 6% year-over-year growth following a record FY '19. This performance is a testament to the durability of our model given that we haven't been able to ship to -- ship fully to an important customer since mid-Q1 and the current global trade uncertainty and macroeconomic headwind.

We expect in FY '20 non-GAAP gross margin range between 66.5% to 68.5%. Non-GAAP operating expenses are expected to be approximately $1.3 billion for the year. This is approximately $50 million lower than prior expectations at Analyst Day and reflects the active expense management that we have put in place for the second half of the year given the current business conditions. Note that when normalizing for the incremental expense of recent acquisitions, our operating expense is now expected to be approximately $80 million lower than our expectations at the start of the fiscal year. Non-GAAP other income is expected to be approximately $25 million. Our tax rate is expected to be between 4% to 5%.

Now I'll take a few minutes to provide some additional color on business units and core vertical markets as we head into the back half of the year. For DCG, we expect FY '20 revenue to grow approximately 30% relative to FY '19 revenue. We have continued to build out our capabilities as we address a dynamic data center market that has continued to evolve as customers are evaluating the use of FPGAs for compute, network and storage acceleration. Despite a slower start in the first half of the year and layering the impact of Huawei trade restrictions, we are expecting stronger growth in the second half that builds on the progress we made with other hyperscale customers, both in the U.S. and in China.

Now in compute, we continue to expand our FaaS platform with all the key hyperscale customers. We have built deep engagements with both enterprise and hyperscalers to bring real-time video streaming and database acceleration programs to production. Now in some cases, the qualification time needed to reach production deployments is taking longer than expected. This has moderated the revenue growth rate we had anticipated at the start of FY '20. These expanded time lines weren't in our original model, but we have now factored that into our outlook going forward. With the launch of Vitis, we expect that over time, customers will be able to develop and deploy our boards into production more rapidly.

In storage, we expect the computational storage and SmartSSD markets to continue to be a significant growth driver with key customers including Micron and Samsung. At the Flash Memory Summit in August, we showcased 14 separate partners with computational storage platforms each using Xilinx products.

In networking, we have meaningfully integrated our Solarflare team, and we have strong engineering engagements with multiple hyperscalers. We believe we're well positioned to compete in the early stages of a growing SmartNIC market. Lastly, on DCG, we expect revenue volatility to abate over time as the diversity of our customer base increases and our revenue reaches a higher run rate.

Now for WWG, we expect revenue to be flat year-over-year relative to FY '19, including the impact of the Huawei trade restriction. Without the Huawei impact, our WWG business has performed roughly in line with the expectations we shared at the Analyst Day in May. Our first half wireless revenue benefited from early 5G deployments, mainly in South Korea and China, and a modest amount in other markets. Our second half is more challenged given the expected baseband ASIC transition and unexpected program delays with some communication customers. That said, this ASIC transition will be largely completed in the fourth quarter.

Keep in mind that we're just at the beginning of the global 5G rollout, which remains a significant opportunity for Xilinx over the coming years but will continue to be somewhat lumpy. Going forward, given our market leadership position versus the competition and our capabilities in RF design, we are well positioned to grow our wireless business as antenna density increases in the radio head with new 5G deployments.

For our core vertical markets, we now expect FY '20 revenue to grow high-single digits year-over-year. While revenue in the first half of FY '20 grew close to our expectations, we are seeing macroeconomic related headwinds impacting customer demand in both AIT and ABC markets in Q3. Additionally, we are expecting revenue from a planned program ramp at a key emulation and prototyping customer but that will extend over somewhat a longer period beyond FY '20 and into FY '21. However, we expect strong customer demand from a broad range of customers; TME, ISM, A&D and auto coming in Q4.

We also expect modest growth in distribution channel demand in Q4 in anticipation of some growth in our broad markets heading into FY '21.

So in closing, we are executing a strategy we outlined at our Analyst Day in May as we believe it's the right long-term path for Xilinx despite some near-term headwind. Xilinx remains well positioned to capitalize in the secular growth trends that will continue driving our business for years to come. We will continue to invest in growth aligned with our strategy where we're actively moderating our R&D and operating expenses given the current business environment.

We will now open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Ambrish Srivastava of BMO.

--------------------------------------------------------------------------------

Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [2]

--------------------------------------------------------------------------------

I just wanted to stick with the full year fiscal year guidance, Victor. What gives you the confidence -- is a pretty large Q-over-Q embedded in the 6% growth. So notoriously, [current] requirements are higher for the business. So sitting here, how can you -- what gives you the confidence on that growth for the fourth quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I think from a sequential perspective, right, Q3, as I said in my prepared remarks, had a coincidence of a bunch of headwinds occurring sort of at the same time, right? Some of which, as we candidly said, we expected, some of which were not expected. So I would say one thing is just the contrast to that. But we do have strong confidence in Q4 because it is broader across a number of things, including some strong wins that we have that we are tracking very closely; and clearly are going to move as expected, right? So I mean, obviously, I think it's really a contrast of the Q3 to the Q4, but we feel we have good visibility into Q4.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Your next question comes from Tristan Gerra of Baird.

--------------------------------------------------------------------------------

Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [5]

--------------------------------------------------------------------------------

What are you seeing in terms of the base station build activity in China given the U.S. ban? Is that still ongoing? Or has that changed significantly in the quarter? And where do you see meaningful diversification with shipment in base station outside of Huawei?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So from what we see that we do think that they are approximately on the path of the base station deployment they said they were initially going to do in China, clearly, the Huawei has a significant impact, but they're not our only customer in China. So we are still participating in China deployment. Clearly, though, Huawei has a big impact. I think there are some second order things, too, but I think it's probably simple to say is that overall, I think it sounds like the first point is about on track, but -- and we are participating but not with one of the top players.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Your next question is from Chris Danely of Citigroup.

--------------------------------------------------------------------------------

Christopher Brett Danely, Citigroup Inc, Research Division - MD [8]

--------------------------------------------------------------------------------

Just a question on taking Huawei to 0. It seems like most of the other semi companies have kind of restored anywhere from 2/3 to 3/4 of their shipments to them. Can you just elaborate on why you're not doing that versus it seems like most other semis have already started to reship?

--------------------------------------------------------------------------------

Victor Peng, Xilinx, Inc. - President, CEO & Director [9]

--------------------------------------------------------------------------------

Again, I can't really speak to how other customers justify how they believe they can ship. We obviously have been tracking this extremely carefully with our internal/external counsel. We talk to the Department of Commerce. We applied, as I said in prepared remarks, our licenses. None of those have come through.

I guess one thing I would say is that many people supply Huawei -- they have a very diversified business. 5G being explicitly cited as the security issue, there could be differences there. But all I can say is that we're following all the rules and regulations, but we're carefully monitoring this, and we put in licenses and we just haven't had anything approved yet.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Your next question is from Chris Caso of Raymond James.

--------------------------------------------------------------------------------

Christopher Caso, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

Just a little bit of color on what's been going on with the DCG. And I guess, with the lower guidance as compared to the Analyst Day, maybe you can break out what's changed in your thinking. How much of that was attributed to Huawei, because I believe that was a customer in DCG? And how much of it is just customers being a little bit slower to adopt solutions or perhaps this is indicative of the economic environment as well?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Actually, you did a fairly good job at seeing some of the points. I mean I, in complete candor, and as I said in the prepared remarks, we're seeing great traction. The opportunity is still -- continues to be really great. But we have learned that in some cases, getting to that production from proof of concepts, what I refer to as POCs, and also just qualification of some, that is taking a bit longer than we expected. And just -- we had anticipated. But as we -- as I said, we have now folded that into our go forward. So that's one thing.

The other thing is you hit it exactly right. Huawei has an FPGA as a service FaaS program, and we had to stop that. We're still working through things around that, but that had an impact. And then I would say that there was, as we expressed, some digestion, some pull-back.

Having said all of that, our second half is quite a bit stronger than our first, and 30% growth is our estimate if we come in mid-point to our guide is a strong guide. It's an emerging market. We clearly feel good about this long-term opportunity being over $1 billion. But sometimes, in an emerging market, it's a little challenging to get the timing exactly right. But yes, that's -- those are the points to the degree you kind of hit on them.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Your next question comes from C.J. Muse of Evercore.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I guess, one of the key questions out there is the ability for your wireless business to grow into fiscal '21. So I guess now that you pulled Huawei 100% out of the numbers and you're guiding WWG flat, what are the core assumptions that we need to kind of assume into fiscal '21 to have the confidence on that growth both in terms of, I guess, ASIC replacement on the base processor as well as rising content for you guys to decide?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, C.J. So let me say that, first of all, just to reiterate, like you said, is that we -- for the remainder of FY '20, I think we've derisked everything that we're aware of, right? I don't want to give any specifics for FY '21, but just the broader picture. Our view has not changed from the Analyst Day. 5G is definitely going to be a bigger deployment overall. It's a bigger opportunity for us because we're not just doing the same old thing. We're innovating, building more value to our customers with things like RFSoC, with things like Versal. So we still feel good about that.

Obviously, the big variance from that day, an Analyst Day, has been the whole trade situation. But I guess what I would say is that we're still in early innings on deployment. So as those other earnings come through and as some of the things, the trials, the things -- we have [RFSoC] go into production, and we get wins in Versal and so forth, and even the wins we have with MPSoC, we still think this is a strong opportunity. And of course, we'll give you the FY '21 in the usual time frame right after this fiscal year.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Your next question comes from Ross Seymore of Deutsche Bank.

--------------------------------------------------------------------------------

Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [17]

--------------------------------------------------------------------------------

Lorenzo, best of luck with your next move. So Victor, I wanted to ask a question on the core vertical market side of things. It doesn't get as much attention, but it's still a significant part of your business, obviously.

Overall, I just want to see what gives you the confidence in the flat -- in the fiscal third quarter outlook sequentially and then up in fiscal fourth quarter? And we can contrast that against TI last night who, I think, surprised the vast majority of us with the weakness that they alluded to, at least in the December quarter. So what gives you the confidence in being so much better than that broad-based guy or broad-based peers in general for both of those quarters?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I guess -- again, I really can't speak for others. I guess what I would say is that we do see softness in macroeconomic related. And some of that is probably also somewhat related the whole trade situation. We kind of expressed -- I think we expressed even in Q1 that we have, we call it -- I think I referred to it as a product transition with a key TME customer. I'll give you a little more color of that: That ramp is happening but it's going to happen a little bit more spread out. So that's an example in the emulation and prototyping of one instance. Our channel definitely has softened, especially in Europe. Also in Asia. And auto, a little pause.

But on the other hand, like let's take auto for instance, right? ADAS is where we play, as you know. And even though near term, auto units are down, what we're hearing from a different signal is that in 20 -- calendar 2020, that is going to strengthen. And so we see that, and we still have already shipping units that will just continue to ramp in ADAS as well as being designed into fully autonomous driving.

So I guess what it is, is the confidence that we actually see the dip in Q3, but we are seeing from multiple markets, so it's kind of broad. It's -- I won't say that it's just one market. It is broad that we're seeing it coming back in Q4. And so -- and there are a few key things where we're very confident just because of we know those programs very, very well.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Your next question comes from Matt Ramsay of Cowen.

--------------------------------------------------------------------------------

Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [20]

--------------------------------------------------------------------------------

Victor, I just wanted to ask a couple questions on the guide for the December quarter. Just a couple moving parts. I know you guys, I think, called out in the commentary $50 million to Huawei in the first half of the year. I would assume most of that was during the first quarter. So if we could understand a little bit about the sequential difference between Q2 and Q3 guide there. And similar for the Solarflare revenue coming into the model, I guess this will be a full quarter in December. Just trying to understand those moving parts.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I know this is a pretty packed prepared statement because we did want to give a lot of color. So just to reiterate, yes, you're exactly spot on. With Huawei, the $50 million was predominantly in Q1 prior to the restrictions going in place. Last quarter, we had determined that even with the restrictions, there are some older products that we could legally continue to ship. It turns out that revenue was very -- essentially negligible, which is why after one quarter of seeing that and not seeing any additional license approvals, we have decided that it's just prudent to take all the risk out for the remainder of the fiscal year.

With regards to Solarflare, that only closed in July. So you're right, it's only the first full quarter of revenue in the December quarter. And it's what we expect, okay, 10 -- on the order of $10 million-ish. But we did the acquisition from a strategic perspective. They really bring the software and driver expertise and overall system expertise, complementing our strength in silicon and the hardware. And so we are feeling very good about the integration and the engagements we are having from that. The revenue is also what we expect, but I think really more important, the strategic thesis, now that they're part of us, we feel even better about.

--------------------------------------------------------------------------------

Lorenzo Flores, Xilinx, Inc. - Outgoing CFO [22]

--------------------------------------------------------------------------------

Yes. Matt, I would just point out one thing. As we plan to consolidate, obviously, those results and not break those out in the future calls. But that just gives you a sense with Victor's comments around what we expect run rate going forward for now.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

David Michael Wong, Nomura Securities Co. Ltd., Research Division - MD [24]

--------------------------------------------------------------------------------

Can you clarify what you have applied for licenses for? Does this cover all of the revenues that you were previously shipping to Huawei? Or if not, approximately what percent of prior revenues to Huawei do your current license applications cover?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. It's actually very detailed so I wouldn't want to give you -- I don't think it's appropriate to try to break it down exactly. I would say it would be -- if what we had applied for in early July all got approved, it would be meaningful. I wouldn't necessarily say the entirety, but it would be meaningful. And clearly, if that happened, we would continue to try and seek licenses. But unfortunately, like nothing has been approved, and as I said, the small set of mostly older products, it hasn't matched any kind of meaningful revenue. So we've just decided to derisk it.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Your next question comes from Joe Moore of Morgan Stanley.

--------------------------------------------------------------------------------

Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [27]

--------------------------------------------------------------------------------

You said that the baseband to ASIC transitional impact just kind of winds down by the fourth quarter of your fiscal year. Is that -- can you give us a sense for the wireless business that remains? How much baseband is still in there from other customers? Any transitional risk? And just I assume that the radio deployments are sort of starting to ramp up as we move beyond those. Is that a fair way to look at?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I mean we still have meaningful wireless business. But yes, the baseband ASICs, which we had said even on the Analyst Day that we expect that was going to happen. That has happened. We do still have some position but I don't think it's very significant at this point in baseband. I think we've always said that even ASIC replacement, as you know, Joe, is not new to us. We've always said that our opportunity is bigger in the radio. But even in the future, we expect some degree of baseband revenue. But we had an outsized amount earlier, and I think we were upfront about that. But again, I would sort of say that we -- it is significant that it would be radio, but we still do baseband connectivity. Like again, that's historically been the thing. We were in the heart of the overall baseband in the start of this early deployment.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Your next question is from William Stein of SunTrust.

--------------------------------------------------------------------------------

William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [30]

--------------------------------------------------------------------------------

If we get some resolution to the tariff situation but we still have a ban on Huawei going forward, Victor, I wonder if you could comment on expectation for relative to the longer-term growth you outlined at the Analyst Day, not what's it going to do next year. But you talked about the SAM growth of, I think, 35% in DCG and I think 16% in wired and wireless. Are those still realistic as share would shift to other customers of yours? Or do you think it would call those growth estimates in question?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, first of all, regarding tariffs, every time those things have occurred, we've analyzed those things. And the tariffs don't directly impact us anyway. There could be like secondary, tertiary things of just being a dampener on macroeconomics, but it doesn't impact us in a direct way. So there was some relief there. But the restrictions on Huawei stayed intact for a prolonged period of time. That would be the bigger thing than tariffs by far, which is why I think I've been consistent in saying that we really hope that the governments can come to agreement and resolve the structural issue so can we can continue to engage with Huawei.

Now that said, we're still -- just again, I want to say that we're still participating in the China 5G, but clearly, they're a very big player there. And I don't want to speculate on what happens in the long term, right? It's just too difficult and we certainly look at different scenarios internally, so we're prepared for the things, but it's really clearly premature to speculate beyond FY '20.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Your next question comes from Quinn Bolton of Needham & Company.

--------------------------------------------------------------------------------

Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [33]

--------------------------------------------------------------------------------

Victor, I was just wondering if you could give us a little bit more color on where you saw the weakness in the wired business and what drives the recovery as we get into the fourth quarter? Is the weakness mostly the Huawei effect? Or is it broader than just that one customer?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, that was definitely an impact because people tend to think of Huawei as just purely [wires] but actually, they play in both places. And so they're pretty substantial there. But it's not just the one customer. I think there's been some slowness in access in cable. I think that there is a particular situation where things, people initially start to deploy, then they took a more cautious approach because, of course, with 5G, it's both wireless and then ultimately the wired network has to be upgraded as well. And I think with all this uncertainty, there has been, as I said in my prepared remarks, some caution around that. So Huawei is definitely a big deal, but it is not the only thing.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

Your next question comes from Blayne Curtis of Barclays.

--------------------------------------------------------------------------------

Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [36]

--------------------------------------------------------------------------------

I guess I'm struggling a little bit with the March -- implied March guidance. Obviously, if WWG is down, it suggests substantial growth in the 2 other segments to get anywhere near the sequential. And it would be record revenue across the board for all the segments. So I think I'm doing the math right. I guess I'm just trying to understand in this environment why you'd be doing record revenue with the substantial double-digit increases into March?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, data center, as I said, we hit the midpoint of the guide will be about a 30% year-on-year increase. And obviously, the first half is a little softer. So DCG is definitely robustly growing in the second half, right? I mean, Q2 was a record. So Q3 is coming off of that a little bit, but that was a record. But then, we said that we resumed sequential strength in DCG in Q4. So overall, DCG is growing very strongly. And yes, it will be a record.

In some of the other markets, I think we had said that TM&E had earlier because of some product transitions that that was slowing down. And also, earlier semis are a little weak, so in terms of semiconductor tests. So it's a variety of different things. But we had already expected that in the second half things would strengthen. It's still going to strengthen, maybe a little more moderated than we had expected back in the spring for sure because of some of the macro and some of the other issues, but that's still happening.

And as I said, auto -- people are starting to see ADAS is still growing, auto is still going to pick up. It will be double digit. So it's actually in Q4 kind of broad. Q3 is just -- it really is kind of a perfect storm of a bunch of things, some expected, some unexpected happening all at once. You have this big contrast there, but yes, that's how we see it right now.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Your next question comes from Vivek Arya of Bank of America.

--------------------------------------------------------------------------------

Vivek Arya, BofA Merrill Lynch, Research Division - Director [39]

--------------------------------------------------------------------------------

Good luck to Lorenzo on his next adventure.

--------------------------------------------------------------------------------

Lorenzo Flores, Xilinx, Inc. - Outgoing CFO [40]

--------------------------------------------------------------------------------

Thank you, Vivek.

--------------------------------------------------------------------------------

Vivek Arya, BofA Merrill Lynch, Research Division - Director [41]

--------------------------------------------------------------------------------

So maybe, Victor, if you could help us differentiate your position in the radio side. I think you mentioned that you expect to have a very resilient business in the radio side. What is it you need to do in FPGA in the radio that cannot be done with an ASIC? I assume that some of your customers already use some ASICs in the radio side in China and other places. So what gives you the confidence that there cannot be ASIC replacement on the radio side at some point?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, again, first of all, what I would say is if you look at our MPSoC and absolutely our RFSoC, those aren't just pure FPGAs, right? So I will -- I really want go back to those have multicore SOCs in them. They have a lot -- a number of other features that are hardened and yet still flexible and programmable, and of course, the RFSoC has integrated RF quality ADCs and DACs. There are no products in the marketplace even today after we've released this for quite some time out there.

So what we could do is we could be used in different geographies for different standards with the same piece of silicon. Obviously, we get people to market very rapidly. And there's just optimizations, particularly in the trend to O-RAN and where things is virtualization. That's a disruption and an opportunity and we definitely see that in the long range, that's a big thing.

Then, I should say, as we announced ACAP a year ago. Now we delivered silicon, and we're shipping that. We have development boards. That's way not an FPGA, right? That's a whole new class of product. And absolutely that's -- I've said that we feel like we have an even stronger position versus fixed architectures. And if you heard about XDF. And in my prepared comments, Samsung was on the stage talking about how we're collaborating, looking at how ACAP could intercept their 5G road map.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Your next question comes from Christopher Rolland of Susquehanna.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Victor, so for WWG, where do you see your biggest opportunity in the next 18 months coming from? Is it really the European guys at this point? And then I think you also mentioned some customer delays. So any thoughts on timing of resolution and relaunching those products?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, gosh, I mean, 18 months is pretty far out. I sort of feel that that's not something we can give guidance on at this point in time. We clearly have de-risked everything that we've seen for the remainder of this fiscal year. We're in the early stages of deployment. So I would generalize with your comments to say, clearly, there's going to be several generations as well as geographical deployments. Right now, it's South Korea and China, a little bit in Japan, but not very meaningful.

So clearly, there will be other geographies that deploy and there will be multiple generations of 5G equipment. So we're engaged with all the OEMs worldwide, right, not just Samsung and Chinese OEMs, but also the Europeans. So we're engaged with all of them. And so yes, as these things deploy, we still feel again from a strategic perspective, that our opportunity is still great. Obviously, trade, we'll have to see.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Your next question comes from Ambrish Srivastava from BMO.

--------------------------------------------------------------------------------

Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [47]

--------------------------------------------------------------------------------

Before I forget, I would be remiss if I didn't say thank you to Lorenzo, and I wish you all the best. It's a pleasure working with you. Thanks for all the transparency and help as this year plays Xilinx.

I had a question. I want to come back to the data center side, Victor. And maybe this would be a good time for us, from our side, to get a little bit recalibrated with how you think the longer-term opportunities are. So compute, network and storage. And if we look out longer term, which of those 3 are going to be the big drivers to get to the long-term targets you have given?

And I had a quick one on data center as well. I think I heard you mention that one of the reasons gross margins was weaker was because of data center mix. Did I hear that correct? Does that imply that data center will be dilutive to gross margin?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So let me first talk about...

--------------------------------------------------------------------------------

Lorenzo Flores, Xilinx, Inc. - Outgoing CFO [49]

--------------------------------------------------------------------------------

You take the first part.

--------------------------------------------------------------------------------

Victor Peng, Xilinx, Inc. - President, CEO & Director [50]

--------------------------------------------------------------------------------

Yes, I'll take the first part and then Lorenzo will work at that -- the remainder of this call here. Yes, look, the first part, I think all 3 subsegments are going to be meaningful drivers. I mean, they are obviously different in nature. I mean, overall, in the very long run, compute is still the largest segment.

It's also -- in some respects, it is a long game because that's the place where we really -- we announced Vitis, we announced Open Source. We're doing a lot of things to sort of give users that traditionally have not used our platform feel comfortable in working their own environment, like the artificial intelligence, machine learning framework like TensorFlow and so forth, right? So that, in the long run, is the biggest opportunity but is also going to take time because that's where ecosystem and all those tools and so on, so forth is going to play a big role.

But both SmartSSD and SmartNIC, whereas they may not be so large and long, they're also still quite meaningful. And there, we don't have those issues, right? We're engaged with multiple hyperscalers. We also have some OEM engagements, and we have -- we've been setting up our channels like VARs and SIs and so forth. And so we see some really good opportunities there.

So again, it depends on your time frame, which is going to be big contributors. We see contributions from all of them, quite frankly. And yes, we're really excited. But in full candor, we've learned that it takes some time to get these POCs done. It takes some time to get all the requirements (technical difficulty). But now that we have those learnings, we're still going -- we're going to go after robustly.

--------------------------------------------------------------------------------

Lorenzo Flores, Xilinx, Inc. - Outgoing CFO [51]

--------------------------------------------------------------------------------

So on the margin piece, I think I'll start with the end of your question, which is do you expect growth in data center over long term to have a negative impact on our gross margin. I think the dynamic with data center over the long term will be similar to some of our other larger segments where we have large customers with relatively lower margins as would be expected, and a broad set of customers with relatively higher margins. And the overall impact on the mix, as we expect it today, is relatively neutral and close to our corporate average.

In the short term, the exact opposite thing is happening where we had customer concentration, which is actually a good thing in this case because it showed very strong customer growth. And it wasn't that the net result was significantly off of corporate gross margin, it was just that it was lower than our expectations. So that's why it pulled us down versus our forecast.

--------------------------------------------------------------------------------

Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [52]

--------------------------------------------------------------------------------

So maybe because of storage being a bigger driver, that led to lower gross margin?

--------------------------------------------------------------------------------

Lorenzo Flores, Xilinx, Inc. - Outgoing CFO [53]

--------------------------------------------------------------------------------

That's a good hypothesis.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

There are no further questions at this time. I'd like to turn the call back over to Matt Poirier for closing remarks.

--------------------------------------------------------------------------------

Matt Poirier, Xilinx, Inc. - Senior VP of Corporate Development & IR and Treasurer [55]

--------------------------------------------------------------------------------

Great. Well, thanks, everyone, for joining us today. We'll have a playback of this call beginning at 5:00 p.m. Pacific Time, 8:00 p.m. Eastern today. For a copy of our earnings release, please visit our Investor Relations website. Our next earnings release date for the third quarter of fiscal year 2020 will be Tuesday, January 28 after the market close.

Please note that we will be hosting a fireside chat at the Credit Suisse conference and attending the Barclays conference in December. The fireside chat will be webcast live and will be accessible through our IR website. This completes our call, and thank you all for your participation.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.