Broadcom Inc. (AVGO) Q4 2012 Earnings Report, Transcript and Summary

Welcome to the Avago Technologies Limited Fourth Fiscal Quarter and Fiscal Year 2012 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Tom Krause, Vice President of Corporate Development. Please go ahead, sir.

Thank you, operator, and good afternoon everyone. Joining me today are Hock Tan, President and CEO, and Doug Bettinger, Chief Financial Officer of Avago Technologies. After the market closed today, Avago distributed a press release and financial tables describing our financial performance for the fourth quarter and fiscal year 2012. If you did not receive a copy, you may obtain the information from the Investor section of Avago's website at avagotech.com. This conference call is being webcast live and a recording will be available via telephone playback for one week. It will also be archived in the Investor section of our website. During the prepared comments section of this call, Hock and Doug will be providing details of our Q4 and fiscal year 2012 results, background to our Q1 2013 outlook, and some commentary regarding the business environment. We will take questions after the end of our prepared comments. In addition to U.S. GAAP reporting, Avago reports certain financial measures on a non-GAAP basis. A reconciliation between the GAAP and non-GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. At this time, I would like to turn the call over to Hock Tan. Hock?

Thank you, Tom. Good afternoon, everyone. We are going to start today by reviewing recent end market business highlights, and then Doug will provide summary of our fourth quarter and fiscal 2012 financial results. Revenue for Q4 fiscal year was $618 million, which was slightly above the midpoint of our guidance. This represented an increase of 2% from last quarter, but a decrease of 1% from the same quarter a year ago. However, if we just look at our three primary target markets, revenue from those markets grew 8%, sequentially, on an apple-to-apple comparison basis. For the full fiscal year 2012, revenue was $2.4 billion, which represented an increase of 1% from fiscal 2011. Essentially here, a 20% in our Wireless business was offset largely by 23% decline in industrial revenues. Wired Infrastructure, remain relatively flat. Back to Q4 results, Wireless was very strong, driven by simultaneous product ramps at two of our large smartphone OEM customers. While there were certain bright spots in Wired Infrastructure, Wired revenue was down due to largely weak core routing spending with service providers. Industrial was also down below our estimate at the beginning of the quarter, here though is because, our distribution partners reduced inventory levels. Looking forward to Q1 Wireless demand continues to be strong. However, we expect that continued supply chain contraction in industrial and the continued hiatus in core routing spending will result in a sequential decline in revenues overall. Let me now provide more color on each of our end markets. Starting with Wireless, revenue from Wireless came in at the upper end of our expectations, growing 30%, sequentially. This sequential strength was driven primarily by product ramps at two large OEM customers. I guess I will let you figure out who those are. We also benefitted from seasonal…

Okay. Thanks, Hock. Good afternoon, everyone. Thanks for joining the call. Before reviewing the fourth quarter and fiscal 2012 financial results, I want to remind you that my comments today as always will focus primarily on our non-GAAP numbers. A reconciliation of our GAAP and non-GAAP data is included with the earnings release that we issued today and it's also available on our website at avagotech.com. Revenue of $618 million in Q4 represents an increase of 2% from last quarter and a decrease of 1% versus the same quarter a year ago. The sequential increase was essentially in line with our guidance for the quarter. Revenue from our wireless target market came in at the upper end of our expectations. Revenue from our wired target market came in approximately as we expected, maybe a little bit better. And then finally as Hock took you through revenue from our industrial target market was a little weaker than what we saw a quarter ago and that was driven by contraction in our supply chain. For the last two quarter, we've disclosed that Foxconn was a greater than 10% customer, and when we file the K, you will see that they continue to be one again this quarter. We saw the third consecutive quarter of growth in distribution resales in our three primary target markets. However, at the same time which our reslaes improved, we also saw distribution inventory fall. This dynamic is the main reason we saw our industrial market revenues declined. Our Q4 gross margin was 51.1%, which was slightly below the midpoint of the of the guidance that we provided. This result was driven primarily by a stronger finish in our lower margin wireless target market and a weaker finish in our higher margin industrial market. So, now let me…

Okay. (Operator Instructions). Your first question comes from the line of Terence Whalen with Citi. Please proceed.

Thank you. Good afternoon. I guess, the first question will be on the comments that Hock made regarding quadrupling and FBAR capacity. That seems like it's an incremental update from what you had last shared with us. Specifically, what I wanted to understand is what the gross margin effect on Wireless will be if you can help us understand the magnitude of that? Thanks.

Yes, Terence. I'm not going to quantify it for you, except I think you know that the margin on FBAR, when we sell FBAR is better than some of the other products we sell in wireless, and so Hock's comment is telling you that we expect wireless gross margin ended up itself to get better as we ramp FBAR.

Okay. Terrific. Then perhaps the follow-up question that I have is around the core routing. It's a little bit of a surprise to see the magnitude of weakness two quarters in a row when some of the other competitors and peers in that space have actually seen some improvement. Can you help us understand what's driving that for Avago specifically, and do you have line of sight into that business improving in April? Thank you.

Yes. Very interesting question, Terence, is on core routing. The products we supply, these are fiber products. We supply proprietary fiber products I should add we supply into core routing is fairly unique, is proprietary by that definition. In a sense, that there are not too many OEMs who make those core routers. They need it for very high volume, high bandwidth flow of data and usually invest that in the backhaul side of any infrastructure development as opposed to the front side, which is more the base station discrete. This is really more related to backhaul as connect interface to transport, and those investments do tend to be rather lumpy, we do have some line of sight but it does get lumpy and it's fairly substantial each time a program comes in. I guess, what I should have added is, sitting here looking ahead as I used the word hiatus and it's true. There's a hiatus in investment in core routing at this point by some service providers. But eventually, such investments need to be made in order to create the bandwidth needed as there are more and more smartphones and especially LTE running. We do see a line of sight that, while this quarter Q1 might continue weakness in core routing investment and therefore demand for proprietary fiber products, we do see coming fall fairly shortly a large program in China, and probably another one in China latter part in the year. We see one being recently awarded in Japan though it takes a while for it to translate into demand for our product, not very long and we definitely do see with an expansion of LTE networks in North America for investments by carriers in North America to be made in core routing for the rest of this year. So, we are pretty positive. So, we are kind of, as I say, in the midst of a hiatus right now.

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

Hi, guys. Just a question on the guidance, on the per segment comment. It seems like if wireless is flat, the math barely gets you to the low end of your guidance range, the down 5 versus the down 9 end? Is there something I am missing in the guidance range that, Hock, you gave to explain how you would get to the mid or the lower end of our guidance range?

Well, you should understand that what is left of consumer of, Ross, is, going to decline also. So, you got about $10 million drop-off if we were giving you that next quarter. That might be why your numbers are netting up?

Okay. That's helpful to know. And then, I guess, as a more forward-looking question here, the extra week that you guys have in the January quarter, how should we think about that impacting both, the revenue and OpEx side of the equation not only in the January quarter but also in the April quarter?

I guess, it's a simple thing. It's more likely to impact expenses than revenue. We'll have one more week of expenses. That's for sure, as given where, how it runs. But, for the November to January quarter, when you pretty much have Christmas and New Year's break in between, I think from a revenue point of view, historically, we've not seen much change in terms of how it runs compared to other quarters in the fiscal year but expenses with 14 weeks would definitely add an extra week of spending.

And, Ross, our guidance comprehends the extra week in both items revenue and expenses.

So, that 130 was not just the variable pop back to a 100% payout, but also the inclusion of the extra week?

The biggest thing is the variable comp, but there is other stuff in there as well. I don't always give you every single detail, but variable comp is the biggest but certainly the extra week is part also.

The next question comes from the line of Blayne Curtis with Barclays. Please proceed.

Good afternoon, guys. Hock, I was wondering if you could talk about, you talked about sell-through industrial or sell-out being flat by reducing inventory. Can you compare this to the levels you saw last January when the business did bottom out and how close are we to those levels?

We are pretty close to that level right now. First quarter fiscal '12 is when there was Thai floods, those big floods in Thailand and that's when it hit in our industrial business as many others industrial and automotive business all over the world and that ruled down a lot in inventory at distributors worldwide simply because they couldn't ship much to distributors and end customers were pulling it out of these three channels. By the time we end this quarter Q1, we will be pretty close to that level.

Thanks. And then on the Wireless, I guess, flattish with the extra week is a little bit down. You talked about the strength of your top two, so does that just mean the non-top two are seeing weakness. And then, can you talk about your outlook for the rest of the year and whether you see yourself as a share gainer as you go through the year?

Well, I guess, trying and looking ahead on Wireless. By the way I have to qualify that to say we seem to be in a room here wireless, where things change all the time. The fact you're experiencing one year doesn't mean it's the same the next year. As I indicated to you guys, I think, a few months ago, we expected this quarter Q1 Wireless to be relatively flat from the preceding quarter, which is typically our strongest quarter in a 12-month period. And as we see it here now, we have Q1 running at the same rate as Q4. It depends on how fast the product transitions occur at those two major OEMs. I think, that's what more than anything else drives the characteristic that drives what one would call the ups and downs of the wireless business for us. And in other words, if the launch of new ramps on one of those two OEMs or both those two OEMs occur earlier and as you saw in this year '12 it launched around September-October, timeframe, kind of later. But, if that thing were to be pulled forward, then probably product transition quarter would occur probably earlier than this year. This year it occurred in our fiscal Q3. If these things will pull forward, which possibly could, though we don't know, it's too early to know, then it could move forward one quarter or it could push back one quarter and could still remain at Q3 as we did in calendar '12. So, given the information I have right now, I would probably say, most likely we would have the same situation as we had this year, product transition in wireless which means the lowest quarter of the year would occur in our fiscal Q3, but I could be wrong by one quarter.

And your next question comes from the line of Romit Shah with Nomura. Please proceed.

Yes. Thanks a lot, guys. Hock, I was somewhat encouraged just by your comments on industrial. I know it was down in January. You mentioned that industrial demand or resales is flat to improving. Is that a trend that you guys have observed more recently?

No. We are seeing that now for three quarters in a row. Okay? As, you know, most of our industrial business goes through distributors, not all but I would say 85% to 90% of it goes through distributors. And based on resale, our industrial business has in fact been virtually flat the last three quarters. And, so, I would say we are definitely in the trough and we are probably looking at it probably slowly gradually creeping from the trough, especially when it comes to China.

Then my follow-up would be, what normalized revenues are for the segment. Because, on your January guidance, it looks like industrial will be around $130 million to $135 million. That's up from where it was a year ago, but it's still well below the 180-plus you guys were doing in the back half of 2011?

Right. Well, as I said, because it goes through distribution and we recognized revenue and you correctly pointed out ship into our channels. You will see in periods of volatility, like on periods of uncertainty I should say, this sort of thing happening and part of it relates to the fact that tracing back to the beginning of fiscal '12. Another way of putting it in, beginning of calendar '12 when we were experiencing like many other industrial component manufacturers, the Thai flood, at that time, we obviously had to draw down substantially our end customers that have drawn substantially on channel inventory to meet their needs and we weren't able to replenish those channel inventory in the obviously timely manner and that was beginning of '12. And, we obviously started to replenish it in our fiscal Q2 and fiscal Q3. And since then, we have been drawing back, the distribution channels has been bringing down their inventory levels quite significantly and that's pretty much what we are seeing over the course of fiscal '12. An answer to an earlier question from the audience was that by the end of this fiscal quarter, our inventory level in the channel would be as low as it was as it was in January calendar '12 when we had the Thai floods and when inventory was really been drawn down, but through all this my point is as it generates our revenue shipping that is resale has been pretty flat.

And your next question comes from the line of Vivek Arya with Merrill Lynch. Please proceed

Thanks for taking my question. Hock, first one on Wireless. I am curious how your visibility is into design wins in the flagship smartphone products for 2013. Do you think you will be able to maintain your content in terms of absolute dollars for phone, because as you also acknowledge your top customers have a habit of changing suppliers with every generation of phone?

You said it, exactly. These guys have a habit of going for the things they need, be it, the best performance or the best price and it depends on the program they are engaged in and depends on the OEM themselves. Usually, we have visibility out six months, good visibility out about six months, so it's limited but out six months and sometimes nine months and that's the extend of it.

But, Vivek, we wouldn't be investing CapEx if we weren't feeling pretty good about the broad market need for FBAR, so we're talking to people. We don't know the exact design wins, but we kind of know to know what they are going to need and we kind of know where they are going to need to come to get the performance that FBAR provides.

The trend is very clear, especially when we went from CDMA to 3G and now particularly from 3G to 4G or LTE and the proliferation of smartphones that are LTE-enabled, which doesn't mean they are just LTE (Inaudible). They go back what's into better comparable to 3G and 2G and CDMA, which basically puts a lot of bands and requirements on any particular piece of a device, which basically creates a lot of what we have said before coexistence problems. All that rose into a situation where as I've mentioned in my opening remarks, a situation where when five years ago maybe one or two bands in the spectrum uses FBAR. Today, we have 15 bands that uses FBAR. Of course, the number of bands have proliferated since then. I mean five, six years ago may be there was less than 10 bands. Today, there are 40 bands, but having said that, out of 40 bands 15 uses FBAR, so those kind of trends and demand and the proliferation of smartphones and content in basically in those smartphones is what's driving the need for us to expand our capacity in a fairly, fairly radical manner.

Got it. And then follow-up, Hock, is if you look at your top customer they have already made the move to LTE. The last time they made the move to 3G, the next generation of phone RF content probably came down, because they were able to integrate different components. So, now that they have already made the move to 4G LTE, do you think it's possible that their next one or two products RF content perhaps on a like-to-like basis comes down, because they are able to take advantage of integration and just a competition in the RF frontend market?

It is possible. We are talking a bit conceptual here, so please take that in mind and audience when I say it. It's possible because, you are right. They will try to integrate. I mean, the number of bands hasn't changed. In fact, the number of bands will increase as we go into more and more LTE in various parts of the world. Offsetting that number of bands means more content in theory linearly. But in practice, your point is taken. The integration or so to say the consolidation of RF components will reduce the content the other direction. Having said that, I do want to remind you from our very self-interest bias point of view, you can see that in power amplifiers. You don't see that in filters or duplexers. You cannot integrate duplexers or filters. Every band needs a separate filter. You don't integrate them together, but power amplifiers has been as we have seen in a recent 8960 Qualcomm chipset have supported or supports power amplifiers, 2G and some of the 3G bands integrated as one single chip solution in power amplifiers. But for duplexers and filters, which is the main thrust of interest for this company, it never gets integrated.

Your next question comes from the line of Stephen Chin with UBS. Please proceed.

Hi, Hock. Hi, Doug. Thanks for taking my question. Wanted to ask a couple of more follow-up questions on industrial just to better calibrate my understanding there, but in the past I know that emerging markets such as china was a big part of the growth in your industrial story. Is that still the case now or is North American group, a big component of what's driving the trends there? And, secondly, in the terms of product areas, are alternative energy power electronics, that's still something that's maybe on the rise or playing some factor in variability in your industrial demand?

I apologize. I didn't quite catch the first question you asked. I know the second one is about alternative energy. You got it? Doug go ahead.

Stephen, you're asking if China still drives our industrial business as much as it used to, right?

Correct.

Okay. Good question, and it's a question I don't really know 100%. It's not as obvious it is driving and so the best answer is not as much as it used to in the heydays of 2010, and definitely part of 2011, much less now but it still does have an impact and quite a big impact. Because, the industrial multinationals resell into Central Europe and into Japan and even part of North America, export a fair amount of their products into China for China programs. So, it does have that. It still drives part of it, but much less than it used to. You asked me to quantify how much, I'm not sure. I could quantify that. By drives, it has much less impact which is probably the reason why we are seeing industrial resale among Tier 2, Tier 3, which tend to go through distribution a lot. To be very flat in countries like North America and in countries like and more than flat declining in countries like Europe and Japan offset by gradual increase in industrial resale in places like China and in emerging countries. It balances out globally industrial resale what we've seen over the last nine months has been virtually flat. On the second question on renewable energy, there are two parts to it. One of the major part, you're talking about is remaining to solar, wind those kind of renewable energy things. Yeah, there was strength few years ago in the period of 2009, 2010, it's pretty strong. From 2011 onwards, things have come down quite dramatically. It's now, I think, shrunk to a relatively smaller percentage of our total industrial business probably maybe down to about 5%, 10%.

Your next question comes from the line of Chris Danely from JPMorgan. Please proceed.

Chris are you there?

Can you hear me okay?

We can't hear you. Try again. We can't hear you, Chris.

Your next question comes from the line of Mark Lipacis with Jefferies. Please proceed.

Hi. Thanks for taking my question. Can you hear me?

Yes. We can hear you, Mark.

Great. Two easy questions first on FBAR. What's your market share now? What do you think it will do over the next year or two? And, second on the FBAR business. Can you help us understand to what extent you get attach, where you sell the FBAR par which you guys have a great position and you get attach rates of other silicon in the handset. Thank you.

Okay. Great. To answer the first part of question, I'll now rephrase your question. I apologize for doing it, but I'll rephrase your question. It's not really sharing the FBAR as much as the filter business. What penetration is FBAR, and as I mentioned before in simple terms, there are 40 bands right now roughly operating in the world 40 cellular bands and 15 of that do use FBAR. It doesn't mean every one of them use it, so if I were to guess market penetration by handsets, I would probably say 20% only if at all, 15%, 20% is FBAR. Maybe even less, which it's interesting thought gives us lot of room to grow, but only 15%, 20% uses FBAR at this points and that includes all the LTE bands. And the way FBAR pulls other components. That's very interesting good question and I'd like to highlight that and it refers back to an earlier question about, A, if FBAR has sold discretely that means staying standalone duplexer filter. FBAR creates a lot of gross margin, generates a very high gross margin for us but they do not sell on its own most of the time. You pair an FBAR or it pulls with it power amplifiers usually. Among other small other components, largely power amplifiers. And, so that kind of dilute our mix, but it is a necessary think. That it gives us content and a lot of times those two pull together as package in the frontend module as we call it, or as some people call it paired or frontend modules which basically gives a higher prices, higher dollar content but relatively lower margin. But as more of this frontend modules requires FBAR, obviously, it's also good for us in improving not only our dollars, but our margin. It's not typically, but I would say 75% at least of our volume of FBAR, are sold paired with power amplifiers.

Thank you.

And your next question comes from the line of Joanne Feeney with Longbow Research. Please proceed.

Thank you. Can you guys hear me?

We can hear you, Joanne.

Perfect. Okay. Question on the FBAR capacity expansion. So in the past, you talked about doubling capacity by the middle of 2013. Today you said quadruple. I'm wondering if that's just a change in your starting point of comparison or if you've actually doubled your intentions. And if so, can you tie that to CapEx for the year? And then, I have follow-on.

Yes. We have doubled our intension, Joanne, and it's because we are going a little further out in time and so that's why I told you next year CapEx will be at least as high as it was in 2012 and maybe slightly higher. And, Hock mentioned the fact that, cumulatively between what we've already invested and what we will invest in 2013, it will be $300 million on FBAR alone.

And, I would add a little bit more. It's not that we improve or increase our intension. We're so pull forward a part of that, so from 2011 to today to early next year we would have doubled the capacity. And about another year's time, we would double it again.

Okay. Perfect. And then could you give us a sense of how that might affect gross margin. What I'm wondering in particular is the timing of when this new capacity comes online and how that matches up to the programs you see demanding your FBAR products?

Joanne, it kind of comes in the way we do this. As it comes in tool-by-tool and we try to do it such that we bring the constrained tools in and it gradually increases capacity. And, if we're going to do in this we'll match it with demand. You don't always get that exactly right.

We expect to trend gross margin up, but it's a trend not a spike and it's hard to predict it accurately at this point other than to be able to tell you it will continue to trend out this capacity. It basically depends on whether we sell it individually discretely as FBAR duplexer or we sell it in a frontend module which obviously affects the revenue, but brings down gross margin somewhat and it's a mix of the two and it's pretty hard to predict the mix going out that far. All we do know is the trend.

And your next question comes from Ian Ing with Lazard Capital Markets. Please proceed.

Yes. Thank you. So, given the fall off in core routing is, what's the mix between proprietary and standards optics? Is it still 50-50. And for standard optics, what's the pricing environment right now given the current demand?

So, it's a little more standard than it used to be given the fall off in parallel. Ian. I don't know. Hock, you want to take the pricing question?

The pricing question, optics always has this price, a downward price trend line in semiconductor products which is considered as though. I don't think it really is a semiconductor product. It's a normal pricing environment we see today, which is roughly, frankly depending on which particular generation of product it is somewhere in the range of anywhere from 5% to 10% annually is what we tend to see in our mix of fiber optics products. Obviously, the newer product tends to ramp down faster and stabilizes, the older product pretty much stays firm. Older products, I mean the 1G tends to be more firm, 10/100, if you imagine that's still exists, still it's more firm and the newer 8-gigabit per second storage product or 10-gigabit per second would tend to start off at a higher price and move down much faster. So, the mix of that, I would say on the most steady state basis, will range from 5% to 10% a year, sometimes into the low double-digits.

And your next question comes from the line of Aalok Shah with D.A. Davidson. Please proceed.

Hi, Doug. Just a real quick clarification. Can you go over the consumer business again? So, does that business go down about another $10 million going into the January quarter and then you are going to include it into the industrial business?

Yeah. Exactly right, Aalok.

Okay. And then, if we look at kind of how you are thinking about the FBAR business it does sound like that the seasonality is changing again next year. How do you guys view, I mean I know you don't want give me full guidance, but are you guys seeing a change in how handsets are being delivered or designed for next year?

No. I think it's the same way. It's just that. the dynamic, it is still very much there for most part. I guess, you probably see two big guys and also other significant OEM guys out there and there's still seasonality for the most part, which comes at this time of the year and everybody tries to get their products launched before fall towards this seasonality but the difference also is there are one or two of those big OEMs who go through more than one product launches, significant product launches a year and the other big one, do it once a year. And, so you still see that, but it tweaks one as a component supply to everyone, we see each year somewhat. In the old days, when the OEM makers were all not that far apart in size more or less about the same size, we do see the seasonality of year end, Christmas year-end becomes very pronounced. Today, the seasonality is pronounced for the significant OEM. But, because of also the way share is shifted, that seasonality gets to a large extent muted by the size of the two big guys continuing their strong ramps.

Next question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed.

Good afternoon, gentlemen. This is Matt Ramsay on for Mike. Thanks for taking our questions. The first question is, Hock, it's fairly well understood which two of the unnamed dominant smartphone OEMs are driving your wireless business. A quick question there, were each of those two, both 10% customers in the quarter or only your leading one?

Matt, we don't disclose unless it is a 10% customer. In my scripted remarks purposely gave you Foxconn as a 10% customer and that's all I have to tell you.

Fair enough. And, as a follow-up, now that your leading customer has included LTE in all their global SKUs, we're seeing in our checks other high tier OEMs may be forced to follow suite and Qualcomm's LTE based band solutions are definitely well positioned in that market. Hock, maybe you could talk a little about your FBAR alignment with Qualcomm's LTE roadmap and reference designs, relative to your competitors and maybe your attach rate with Qualcomm's LTE wins to this point? Thanks.

Well, the best way for me to describe is, we're obviously very, very closely engaged in enabling Qualcomm on our RF side with both, our FBAR duplexers as well as our PA designs as well as frontend design and a combination of anything else in the RF they need and we are obviously very, very well engaged with them on that. It definitely benefits us a lot to do that and we continue to do that. But, in terms of specifics pretty hard. That's a lot of designs. There are many, many designs that keep pouring out and I can't even begin to tell you how many we have engaged versus how many there are out there. Just sufficient that we do have, we have very close engagement, not only just with Qualcomm, but with the OEMs who takes those reference design and do not necessarily follow those reference designs either.

Your next question comes from the line of Christopher Danely with JPMorgan. Please proceed.

Hi. This is Sameer Kalucha calling in for Chris Danely. Can you hear me now?

Yes. We can.

Okay. Great. Sorry about earlier. I think, we need FBAR filters here in the phone here to.

Clearly.

Of course. The question I have is around taxes. The taxes have been in the $15 million to $20 million range as you pointed out during the IPO. But at that time, you also said you have visibility into the next three, four years going forward. I wonder how the visibility into tax holidays is at this point. Do you expect it to continue for another, I would say, two, three, four, five years or is it subject to change?

Sameer, the visibility is much longer than that. For the indefinite future, our effective tax rate will be 4% to 5%. It's not going away. Our tax holidays are double-digit number of years.

Got it. Thank you.

And we work to extend them all the time.

Great, and then a lot of people and some of your peers have also expressed some possibility of a snapback in macro demand going past once the uncertainties on fiscal cliffs and those sorts have cleared. I wonder does that change your outlook in, say, April timeframe if that uncertainty is clear from the flattish resales you are seeing right now?

It is hard for us to sitting here right now to know for sure with any degree of certainty that that would happen. And as I said, we only focus all the way out with any degree of guidance levels that we have here through the end of this quarter. Beyond that? Who knows? I'll be honest. With no clue.

Your next question comes from the line of Brendan Furlong with Miller Tabak. Please proceed.

Yes. Good afternoon, everybody. Thank you. Two quick questions both, on gross margins. I don't know if my first question has been addressed, but how much of the downtick in gross margin in the fiscal Q1 is mix related versus utilization, be it, backend or frontend and what the implication for that would be in the April quarter?

It's primarily mix, Brendan.

Okay. Then the second question, following-up on Joanne questions, you were expecting to double your capacity in the middle of next year and then your comment on gross margins for FBAR after that. So, should we assume that the see through on the gross margin side happens in the second half of your fiscal year? We don't see it for the first half in others words.

It should in the second half, and as FBAR gets to be bigger and bigger percentage of the mix which we see that happening as we go through back part of 2013, you should begin to see it trick its way through.

I would now like to turn the call over to Tom Krause for closing remarks.

Thank you, operator. Before we close, I would like to remind everyone that Avago will host its Investor and Analyst Day in New York on December 14th. In addition, we will be presenting at the JPMorgan Tech Forum and meeting with investors related to the Nomura Conference at CES in early January in Las Vegas. I want to thank everybody for participating in today's earnings call. We look forward to talking with you again when we report our first quarter fiscal 2013 results in February. Thank you, operator.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.