Welcome to Avago Technologies Limited Fourth Quarter and Fiscal Year 2014 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ashish Saran, Director of Investor Relations. Please go ahead, sir.

Thank you, Operator, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO; and Tony Maslowski, Chief Financial Officer of Avago Technologies. After the market closed today, Avago distributed a press release and financial table describing our financial performance for the fourth quarter and fiscal year 2014. If you did not receive a copy, you may obtain the information from the Investors section of Avago's website at www.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 Investors section of our website at avagotech.com. During the prepared comments section of this call, Hock and Tony will be providing details of our fourth fiscal quarter and fiscal year 2014 results, background to our first fiscal quarter 2015 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 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’d like to turn the call over to Hock Tan. Hock?

Thank you, Ashish, and good afternoon, everyone. Thanks for joining us. We are going to start today by reviewing recent business highlights and then Tony will provide a summary of our fourth quarter and fiscal 2014 financial results. So revenue for our fourth quarter was $1.61 billion, an increase of 25% from the prior quarter. The sequential revenue increase was above the upper end of our guidance, which was 18% to 22%. Wireless growth was better than expectations, with revenue growing 73% sequentially, driven largely by product ramp of new smartphone generation at a large OEM. Enterprise storage also performed significantly better than expected, even before considering contribution from our recent acquisition, PLX. Now before I provide more color on each of our segments, let me quickly provide a short update on the integration of the Avago and LSI operations. As you know, we have completed the sale of two non-core businesses, the LSI flash and Axxia businesses which had NOIs operating spend of approximately $200 million. This has been a key contributor to the significant improvement in our operating model. We have also made great progress in extracting synergies from integrating LSI onto the Avago platform. We’re now more than halfway through this process and expect to complete the balance of the integration program as we exit our fiscal 2015. Clearly, the financial benefits from the integration program and the divestiture of non-core businesses, are being achieved faster than we had originally planned and has definitely given us flexibility to step up R&D investments in certain core businesses. Now turning to the discussion of our various segments, starting with Wireless. In the fourth quarter, revenue from Wireless was much better than expectations said earlier, growing 73% sequentially. Wireless represented 39% of our total revenue from continuing operations, and on…

Thank you, Hock, and good afternoon everyone. Before reviewing the fourth quarter and fiscal 2014 financial results, I want to remind you that my comments today will focus primarily on our non-GAAP results from continuing operations unless otherwise specifically noted. A reconciliation of our GAAP and non-GAAP data is included with the earnings release issued today and is also available on our Web site at www.avagotech.com. In prior quarters, we have provided revenue results for our four target markets, Wireless, enterprise storage, Wired infrastructure and industrial and other. Starting with this quarter and going forward, these four target markets will become our reportable segment, aligning our financial reporting with how our management views the business. We will provide certain segment level results in our SEC filings starting with our upcoming Form 10-K. the business composition of our reportable segments remains the same as previously defined target markets. Please note that our fourth quarter results include contributions from the PLX acquisition which closed on August 12, 2014. Revenue of $1.61 billion in the fourth quarter represents an increase of 25% from the prior quarter, and came in higher than the upper end of our guidance. Revenue from our Wireless and enterprise storage segment came in better than our expectations. The Wired segment performed close to expectations and we saw weaker than expected revenue from the industrial and other segment. Foxconn was a greater than 10% customer in the fourth fiscal quarter. Our fourth quarter gross margin from continuing operations was 58%, which was above our guidance range of 55% to 57%, primarily due to better revenue mix and fab utilization. Turning to operating expenses, R&D expenses were $214 million and SG&A expenses were $89 million, driving total operating expenses for Q4 to $303 million, $4 million below guidance, primarily because of…

[Operator Instructions] Our first question comes from Blayne Curtis with Barclays. Please proceed.

Thanks for taking my questions, great quarter. I was wondering if you could just comment on the Wireless business. You’re looking for a very flat guidance. You saw flat guidance last year. I was wondering if you just -- looking at the inventory levels and the ramps, how -- if you had to relate it to a normal seasonal -- I know it's hard in Wireless, how would you compare? You probably don't want to give guidance for April, but how does it relate as you look into April in terms of normal or not? Thanks.

We don’t really have visibility that far out, Blayne all the way out to April, but we do have pretty clear visibility frankly in this Q1 fiscal 2015 in terms of backlog from customers, forecast some certain customers. And particularly when you have a fab that’s running full, you get pretty good -- you get very good visibility for the quarter of that period. Right now Q1 as we see it, we see sustaining the levels pretty much of what we saw in Wireless of Q4. And that’s not dissimilar from what we saw a year ago.

Thanks. And then just the outlook. The gross margin is very strong in the quarter and the outlook is also very strong. Obviously, you're running your fabs fully utilized, but also adding capacity. I was wondering if you could talk about when do you get back to some normal supply/demand with FBAR? And then if you could just comment on the competitive landscape. Obviously, others are trying to chase this market that's been so good for you in terms of TC-SAW or others pursuing [BAW]. Can you just comment on both of those? Thanks

Again to try to give you -- to try and answer your question in a couple of sentences, the answer is the demand for I guess high performance filters is the best way to describe it, very high performance filter, especially into LTE bands, be they China or beyond China is very strong, has been very strong since last quarter. It continues to be extremely strong, particularly with the full launch in late Q4, in Q4, our Q4 that is of the next generation smartphone from the North America, that certain North American OEM. And that demand has -- as far as we see, continues to sustain. So the strong demand for high performance filters and we know there are competitors out there, be they BAW or on a limited basis, TC temperature compensated source. And I mentioned it on a limited basis because obviously with our fab full, we can only supply so much short term, though our plans to increase the fab will enable us as time progresses fairly rapidly to be able to address the markets in a normal basis. But short term is not or as the seasonal uptick is not happening, which basically lead some certain other customers, potential customers to perhaps look for alternatives and they do. Having said that, we believe the performance of our FBAR far surpasses anybody else and if there’s a choice, we do get selected. If not, good enough might do.

Our next question comes from Romit Shah with Nomura. Please proceed.

Thanks a lot. Great results. Your Wireless business for this calendar year looks like it will exceed 50%. And Hock, we know that content was a major force behind that. Looking into next year and the platforms that you're designing too, how do you think your content will improve into 2015?

The overall trend towards pad architecture as RF architecture using pads as you all know, power amplify duplex modules that is, is increasing. The trend towards this will occur more and more and won’t be just restricted to any particular phone maker. And the simple reason is simply because while the overall number of phones out there are kind of flattish to maybe single digit growth, the switch, the conversion of feature phones, low end phones towards smartphones is happening fairly rapidly and especially smartphones which goes higher and higher end. People require roaming features which means importing bands that are not just unique to a particular local country or carrier, but multiple carriers globally. And the content in every smartphone will have to increase. So RF components as we all know and has been evident the last 12 months, RF component demand has been very strong. And even within RF components, filter demand is still particularly strong because while in semiconductor processes or in semiconductor typical trend, you can and do integrate chips functionality together. For instance multiple -- one power amplifier can support multiple modes, multiple bands. In filters, you need one separate filter for every single band. And as more and more bands enter smartphones, which are expected to roam multiple continents, multiple carriers, the sheer content of filters in each smartphone will increase, especially when you go to 3G, 4G now and potentially forward in the future. So the trend is towards more and more content increase.

Okay, thanks for that. And second question on operating margin, I might have missed it, Tony but do you guys have a new long term target model for operating margin? You came in at slightly below 40% this quarter and the prior target of 28% to 32% feels like it’s a bit stale.

Again remember like I said, we’re going to update it after we get a couple more quarters under our belt. So it’s still a little early for us to do the long term model so just …

We want to be pretty sure, Romit. We can’t [indiscernible] outrunning us.

I guess tied into that, how do you guys get away with spending 13% of your revenues on R&D? is it that enterprise networking or enterprise storage and industrial don’t require much R&D? Because if I look at some of your networking comparable, nobody is spending less than 20% on R&D. Analogue is a little bit better than that, but you could argue the model is different. So maybe you can just talk about R&D here at 13%. Can you sustain that without compromising future growth?

Let me get your first point first. You think 13% is too low, right?

It’s low compared to most of your networking comparable. Most analogue companies, with the exception of TI which we would argue is a totally different model.

Yes, we are and we have quite totally different model from the rest of the world too by the way, Romit. To answer you seriously, we have a range. We have four end markets as you know and give you a sense. One extreme side which is Wired or enterprise networking on the ASIC side, especially on service side, of course we’ll be spending R&D in the mid-20s. Really not much different from many of our peers in that area. We do spend that. And then on the other extreme, industrial which tends to be very analogue, in our case extremely 35 compound semiconductor analogue, not just silicon analogue, we spend single digits in R&D of revenue. And the others are somewhere in between. So we average out 13%, 14%. A big part of it frankly is on the standard products we drive in Wireless as an example, we get huge revenue scale up, real operating leverage in specific areas where the volume is high. So when you look at this range of products we are in and obviously enterprise storage and Wireless falls in between the extremes of industrial and networking, ASIC especially. All the rest fall between, we just average out 13%, 14% R&D spend. And we believe we’re spending at a fairly comfortable level because the comment I made at the beginning of my remarks, we’re running ahead of our financials, achieving financial synergies with this integration. We’re running ahead of it and it also, because of that, allows us a lot of flexibility, not that we need that to do it because we always have the habit of investing a lot more even into our core businesses to defend it and strengthen it even more. We’re not being -- we’ve never been cheap about doing it. Where the difference we don’t see the business, we developed it. We divest it then we don’t spend it anymore, but where the businesses that are core, believe me we will invest what we need to continue to lead in technological leadership, which is central to this entire business model.

Our next question comes from Vivek Arya with Bank of America. Please proceed.

Thanks for taking my question. Maybe Hock first one for you, I know you’re not guiding to Q2 Wireless, but in general given the large contribution from your North American customer, do you expect your Wireless segment to show more volatility or more seasonality going forward? Because I’m trying to offset that against some of the content growth you’re seeing in China. So the question really is, do you see your Wireless segment being more or less seasonal than before? And if it is more seasonal, what does that do to your FBAR capacity utilization and gross margins?

To be direct and I made the comment right upfront when I talked about Wireless, we don’t know. We don’t have that clear visibility. I like to say that this year repeats from last year and you know how last year’s cycle is and I get that’s why you’re driving this particular question. And so keeping that in mind, I’ll answer you this which by itself tells you something, we don’t know. We don’t really know. And that’s why even in Q1 as we forecast Wireless, and please don’t read too much in what I’m trying to tell you then, when I purposely stated in my Q1 Wireless for this particular quarter. Right now our sense is Wireless is flattish. It could be down slightly, but you’re talking about a fairly substantial number either way. Right now, sitting here right now, we think it’s flattish. I could be wrong even then sitting here right now. And I definitely would be in no position to give you a sense of what Q2 is at this point.

Got it. And then as a follow-up, maybe one for you, Tony, can you remind us what your target debt leverage ratio is and what do you plan to do with the cash that's coming in and the cash flow that you are generating? I know that you have been increasing your dividend consistently. You’re investing in CapEx. But do you see leverage getting to a point where you feel comfortable expanding the buyback plan or considering more M&A, maybe another home run, like an LSI?

Yes. So just to be very clear that our priorities on cash usage hasn’t changed. So it’s number one, it’s internal investments and that includes as Hock mentioned, some of the things that we’re opportunistic with or strengthening our product portfolio. Second is really the dividend and then also the debt pay down. The debt pay down I want to be clear is that our leverage ratio at the beginning of the transaction was roughly a little over 3. And if you look at some of the models you guys have out there, we could end up in the twos quite easily this year. So really once we hit around two is that when we’ll go back to our board and say hey, do we want to change our capital structure and put some more longer term debt on the balance sheet. The pause that I talked about in my speech was really just to say hey, we’re thinking about it still. So think about it more as a one or two quarter pause only in the debt pay down that we’re thinking about. Of course, we don’t comment on any M&A.

Or buyback, is that also …

Buyback is like fourth or fifth.

Our next question comes from Jim Covello with Goldman Sachs. Please proceed.

Congratulations on the terrific results. Could we get a little bit more color on the one-time item, or nonrecurring item, or end-of-life item that's impacting the Industrial sequentials? Thank you.

It’s really not very significant material and in fact all of the foregoing. We just have to say it’s a one-time non-recurring thing. It’s our last time buying on a legacy program by a customer, which won’t recur. It’s just significant enough for industrial to tweak the thing, which is why I took pains to explain that for industrial, we expect Q1 to be declining low single digits sequentially. Instead, with this thing thrown in, becomes increasing single digit sequential. So you can probably guess at the size of the number of this particular item. And I really don’t mean it to be anything to be misleading or anything else. It’s just not worth talking about.

No, that's very helpful. Thank you. And for a follow-up, understanding you're capacity constrained and the fabs are full, have the lead times changed meaningfully over the course of the last couple of quarters? Because obviously your business has been terrific for a while now. Are you seeing any change in the lead times or capacity constraints, recognizing that you're running full out? Thank you.

And you’re referring I assume just to our FBAR related products, right, Wireless products?

Correct. Thank you. Yes.

We’re on product allocation as we sit here right now. So I guess yeah, the lead times have changed pretty significantly. It has extended up.

And do you think that's causing -- do you worry at all about double ordering that sometimes happens when folks are on allocation, or how are you managing that?

We are managing that very closely and managing that very tightly because we have pretty good sense for -- one of the benefits is that a large part of our revenues are coming from a few large guys and believe me we support these few large guys extremely well when we know what they need precisely. There’s also other portion of it that might not be so well managed simply because they’re more fragmented and that’s the area obviously that we do worry about. The positive side to it is it’s a relatively set of minority in terms of the size of business rather than the larger part of our business.

Thank you very much. Congratulations again.

Our next question comes from Ross Seymore with Deutsche Bank. Please proceed.

Echoing everybody else, congrats on another strong quarter and guide. Hock, I want to switch gears away from Wireless onto the Wired side momentarily. With the combination of your ASIC business with LSI's and then one other big player in that space getting out, I just want to see roughly what your expectations are for the growth potential of that business? And has there been any lash back from your customers because the combination of Avago and LSI now can be so dominant?

First let me rephrase. We’re not dominant. We have a scale now and we certainly have scale that allows us to benefit from investing in a lot more capabilities than we had previously. Our claim to fame used to be in Avago 30s. we now have very, very strong IP. It’s still in 30s but beyond 30s into memory and better processing, all the nice stuff that many of our ASIC customers love to have in communications Wired and Wireless infrastructure. That’s why we tend to focus our ASIC business in networking, but also Wired and Wireless infrastructure on a more focused basis, but still very much ASIC. And yeah, that business as I reported over the last couple of quarters, has been growing very nicely. A big part of it, having said that, is product ramps. Product ramps in new generation edge routers, new generation of this software defined network switches like the Nexus 9000. We’re in those very much. We’re in all the edge routers that I’m aware of, almost. And we even have ASIC base band in one Chinese base station OEM. And all that is driving very nice growth, not huge growth. That’s not the nature of this business, but it’s more -- I best call more direct growth. And that’s the way we like it. So we do see potential growth opportunity on a very moderate basis that is more sustainable over the next two, three years.

Great. My follow-up question, really quickly for Tony, is on the OpEx side of things. Can you remind us where we are in the integration path as far as getting to the $200 million originally you talked about? And I guess the angle I would put on it is more on an absolute basis. That's the $301 million you're guiding to. Is that the new base off of which we increase or decrease according to revenue? Or do you still have some of those, after last quarter, 1,100 people that had yet to exit the Company and therefore that would make OpEx actually decline?

So we still have some opportunities for OpEx decline. Remember is that the original base was like this 390 number on the combined company. So, the goal would have been 290, but then you’ve got to add in PLX, a couple of million. So really as Hock mentioned in his speech, we’re done with the divestitures which contributed that $50 million a quarter. And we’re probably about, as you can do the math yourself, $40 million towards the $50 million of the other. But as Hock mentioned as well, it gives us great flexibility to beef up other areas our R&D as these final stages happen. So those will happen as we combine the systems, the IT systems, which again is planned for the end of the first half, beginning of the second half of this current fiscal year.

Our next question comes from Craig Hettenbach with Morgan Stanley. Please proceed.

Hello. This is [Denai] calling in for Craig. I had a question on gross margins. Gross margins are benefiting from strong growth in FBAR. Are you seeing any benefit or any improvements in other segments of the business as well?

As we mentioned, there are other improvements. When we started with the whole LSI acquisition, we’re quite surprised that we’ve seen some upside to their businesses as well. So again we always focus on FBAR because that’s the headline you guys want to hear about, but we also do mention the other thing, that there’s a constant improvement here across most of the divisions.

There were two supply chains from two companies. There’s now one single supply chain organization. So that, we call that manufacturing overheads. That has significantly reduced for the combined company and that does add to the gross margin improvement.

Got it. That's helpful. And as a follow-up is on Wired Infrastructure. In your view post-LSI, how do you feel about your portfolio when you're trying to adapt the ASIC market and fiber optics? And how do you feel about the competitive dynamics in both businesses?

This combination as I mentioned earlier has given us a lot more capabilities in terms of a lot more capabilities, lots more IP to offer key customers as we compete for ASIC programs at major OEMs. If anything else, you’re right. One concern might be customers thinking we serve certainly larger and a larger percentage of their ASIC spend, silicon spend. But on the other side, there’s a lot of ASSP FPA out there that definitely provide very, very strong completion for us, not just ASICs. And it’s just that we’re very good at ASICs and we focus on that. By natural self-selection, customers want their own differentiator products picks us. Having more capabilities obviously makes us a more formidable competitor as against the FPGA guys or against vendor products. But we do see all that competition out there.

Got it. Congrats once again on the solid quarter, guys.

Our next question comes from Doug Freedman with RBC Capital Markets. Please proceed.

Thanks for taking my question. And if I could dig into a little bit on the $600 million in CapEx, can you give us some sense of how much capacity addition that is buying you?

Again, of the $600 million, the majority is going to the continued build out in the FBAR facility and including some of our attempt to go from 8 inch to 12 inch. So again it’s hard to tell the actual capacity add because again depending on the success of that 8 to 12.

6 to 8.

I’m sorry, 6 to 8. Sorry. I apologize. 6 to 8 conversion that we’re going through. So again I think it’s difficult to give an exact percentage. This will depend on how successful that is and how quickly that ramps.

It will be a substantial increase in our capacity. For competitive reasons, we hesitate to give you a specific on that, but it will be a fairly substantial increasing capacity that we will achieve by end of fiscal 2015 compared to where we are today.

Great. And if I could, for my follow-up, just talking about maybe some of your other businesses, there was a lot of concern in the broader semiconductor market this quarter about linearity of bookings. And maybe if you can give us some sense of what you've seen in your other businesses in terms of trends in the overall business in booking patterns, and maybe what you might expect for the quarter you're presently in.

Good question. Moving aside wireless for a second, we still have the rest of our three end markets, which are very large. The best way to describe it is bookings for those three other end markets, which is Wired largely enterprise, enterprise storage and industrial. Best description I’ll put of it is very stable. It has grown from Q3. Q4 showed a sharp growth, especially late Q3, early Q4 was a sharp ramp in bookings, increasing bookings, stabilize and remain fairly stable.

Our next question comes from John Pitzer with Credit Suisse. Please proceed.

This is Ryan Carver in for John. Appreciate you taking the questions. Not a lot of mention, I think a lot of focus on the Cupertino customer. Can you talk about what you're seeing in your large Korea customer? I think, obviously, a lot of understanding about their weakness in units, end part of this year. Are you seeing any indications, as you guys see the January month of any new flagship ramp? Andi guess maybe more broadly on that Korea customer, they've talked about potentially reducing SKUs going forward. Does that trend potentially benefit you guys as fewer SKUs are required to support maybe more territories around the world?

I’m loathe to answer that question because we usually don’t want to comment on any particular customer. I appreciate it if you accept that as basically my answer. I’ve heard about them coming down to lesser SKUs and that is true I believe from all indications I’ve seen .they’re doing all they can obviously to recover ground. And I assure you they are and they’re very big, important customer which we love dearly. But other than that, I can’t comment anything more than that.

Okay. But maybe I can ask a different way. Relative to what is a typical expectation for new product launches seasonally in the first part of a year, are you guys starting to see any indication of what is a normal seasonal trend for you guys there?

Nothing unusual about that from that Korean customer you’re talking about is well known that they do two large product launches as you know on their two flagship products of interest to us. But yeah, they do the Galaxy S series in the spring and they do the Note series in the fall. All indications and all our engagements are they’re planning to do exactly that.

Got it, great. If I could just squeeze one more in. You mentioned seeing some ASIC ramp within some of the base station customers. Can you comment a little more about the application of those ASICs? I think that there's a general understanding –

Base station you mean that I was referring to that’s helping drive our Q1 revenue in ASIC? Yeah. We have an ASIC that is pretty much in the base band of the base station. It’s basically the -- it’s a base band and nothing much more than that. But it’s unique and differentiated for that particular customer

Thank you, Operator. Thank you for participating in today's earnings call. We look forward to talking to you again when we report our first quarter fiscal year 2015 financial results.