Avago Technologies (AVGO)

Q2 2012 Earnings Call

May 22, 2012 5:00 p.m. ET

Executives

Thomas Krause – VP, Corporate Development

Hock Tan – President CEO

Doug Bettinger – SVP, CFO

Analysts

Ross Seymore - Deutsche Bank

Romit Shah – Nomura Securities

Dean – Citi

Mark Lipacis – Jefferies

Vivek Arya - Bank of America Merrill Lynch

Joanne Feeney – Longbow Research

Brendan Furlong – Miller Tabak

Ian Ing – Lazard Capital Markets

Vijay Rakesh - Sterne Agee

Chris Danely - JP Morgan

[Sean Bocky] - JP Morgan

Sanjay Devgan - Morgan Stanley

Blaine Carroll - Avian Securities

Edward Snyder – Charter Equity

Presentation

Operator

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Good day ladies and gentlemen, and welcome to the second quarter 2012 Avago Technologies earnings conference call. [Operator instructions.] I would now like to turn the presentation over to your host for today, Mr. Tom Kraus, vice president of corporate development and investor relationships. Please proceed.

Thomas Krause

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 second quarter of fiscal year 2012. If you did not receive a copy, you may obtain a copy of 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 at avagotech.com.

During the prepared comments section of this call, Hock and Doug will be providing details of our Q2 fiscal year 2012 results, background to our Q3 2012 outlook, and some commentary regarding the business environment. We will take questions after the end of our prepared comments.

In addition to the US 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 more 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?

Hock Tan

Thank you Tom. Good afternoon everyone. We’re going to start today by reviewing recent end market business highlights. Then Doug will provide a summary of our second quarter financial results.

Revenue for Q2 was $577 million, which was at the midpoint of our guidance. This was up 2.5% from Q1, but only up 3% from the same quarter last year. While results for our wireless and wireline markets were in line with expectations, our industrial revenue came in stronger than we had forecasted. Nevertheless, year over year industrial was still down 26%. In contrast, however, wireless was up a strong 26%.

As we also discussed in our last earnings call, we saw stabilization of the industrial market as we entered Q2. However, as March came around, we started to experience strong recovery in China. As I sit here today, we believe the industrial market is now on a solid path to recovery, with Asia-Pacific leading the way, but Europe and North America continuing to ladies and gentlemen somewhat.

Let me now provide more color on our end markets. Starting with wireless, to put it in perspective, the first half of our fiscal year would typically experience seasonal weakness. However, as you may recall, it was not that way in Q1 this fiscal year. In fact, wireless revenue in Q1 was robust, as we ramped up volume at a major OEM.

This held up in Q2 despite normal seasonality in the broader industry. As a result, year over year our wireless revenue grew a strong 26%, and in total revenue from wireless represented 44% of our second fiscal quarter revenues, of which approximately 3/4 were derived from smartphones.

Now looking to Q3, we do see two near term challenges to sequential seasonal growth. The first is the constraint on the availability of Qualcomm’s next generation 28 nanometer fully integrated LTE baseband, where we have been very well positioned. This constraint will limit our revenue from multiple OEMs this quarter, and could negatively impact growth in Q3 by approximately $8-12 million. Secondly, the ramp we enjoyed in Q1 and sustained in Q2 at a major OEM is now facing a significant product transition, and could impact our Q3 wireless revenue by another $10-15 million.

Based on these two factors, we expect our wireless revenue to be flat, maybe slightly down, in what would otherwise be a seasonally up quarter in Q3. Having said all that, we expect shipments for the Qualcomm’s 28 nanometer baseband to reflect pent up demand in our fiscal Q4.

We also expect completion of the product transition and ramp of the next generation product at that major OEM to drive fiscal Q4 wireless revenue growth again. And in fact to prepare for this ramp in Q2, we invested approximately $40 million in process improvements and added capacity, and we plan to invest roughly another $45 million this quarter and reposition over $15 million of inventory ahead of this ramp today.

Turning to industrial and automotive target markets, revenue here accounted for 22% of Q2 revenues, and grew 9% sequentially. But I must emphasize, this level is still 26% below the same quarter a year ago. As I mentioned earlier, during the quarter we saw the industrial market start to recover. China demand returned in Q2, up over 25% quarter-over-quarter growth, and we expect the momentum to continue in Q3, driven by resumption of investment in power generation and distribution as well as for machine tools and factory automation. Spending in high-speed transportation has also resumed, though much of this spending appears to be benefiting largely indigenous industrial companies to date.

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